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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 1998
COMMISSION FILE NUMBER 1-8722
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THE MACNEAL-SCHWENDLER CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 95-2239450
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
815 COLORADO BOULEVARD, 90041
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number including area code: (323) 258-9111
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock par value $.01 per share New York Stock Exchange
7 7/8% Convertible Subordinated Debentures
due August 18, 2004 New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: NONE
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 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. / /
As of April 5, 1999 the approximate aggregate market value of The
MacNeal-Schwendler Corporation's voting stock held by nonaffiliates was
$81,762,000.
As of April 5, 1999 there were outstanding 13,770,447 shares of Common Stock
of The MacNeal-Schwendler Corporation.
Documents incorporated by reference: None
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FORM 10K
TABLE OF CONTENTS
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Business................................................................................................... 1
Properties................................................................................................. 11
Legal Proceedings.......................................................................................... 11
Submission of Matters to a Vote of Security Holders........................................................ 11
Market for Registrant's Common Stock and Related Shareholder Matters....................................... 12
Selected Financial Data.................................................................................... 12
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13
Quantitative and Qualitative Disclosures about Market Risk................................................. 25
Financial Statements and Supplementary Data................................................................ 27
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....................... 53
Directors and Executive Officers of the Registrant......................................................... 53
Executive Compensation..................................................................................... 55
Security Ownership of Certain Beneficial Owners and Management............................................. 61
Certain Relationships and Related Transactions............................................................. 62
Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................ 63
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PART I
ITEM 1. BUSINESS.
The MacNeal-Schwendler Corporation ("MSC" or the "Company") was incorporated
in Delaware in 1994. Since its inception in 1963, MSC has been engaged in
computer-aided engineering ("CAE"), including the development and marketing of
software for use principally by engineers and designers in industry, research
laboratories and universities. In the last three years, MSC has expanded its
scope to focus on providing engineering solutions through strategic consulting,
software integration, and customization services in addition to engineering
software sales. MSC's principal software products are MSC.NASTRAN and
MSC.PATRAN.
On January 29, 1999, MSC decided to change its fiscal year from a year
beginning February 1 and ending January 31, to a calendar year. All references
to fiscal year 1998 mean the year ended December 31, 1998. Additionally, all
financial information for prior periods has been restated to coincide with the
new fiscal year, therefore any references to a fiscal year mean the twelve
months ended December 31 of that year.
In the current computer-aided manufacturing environment, designs are
simulated before manufacturing has begun. MSC.NASTRAN is a basic CAE analysis
software program that determines a product's stresses and deformations.
MSC.PATRAN is an interactive CAE environment that facilitates the use of
geometric data from popular computer-aided design ("CAD") systems such as CATIA,
Pro/ENGINEER, and Unigraphics in a variety of commercial analysis programs
including MSC.NASTRAN. MSC.Working Model is linked to popular mid-range CAD
systems such as SolidWorks, Autodesk's Mechanical Desktop, and SolidEdge, and
answers the questions "Will it break?" and "Will it work?" by providing stress
and motion analysis capabilities. CAE analysis is used to simulate the
performance of a design prior to its physical manufacture, replacing
time-consuming and costly physical testing of prototypes and permitting a
substantial increase in the number of design trade-offs and design cycles.
Mechanical simulation helps manufacturers design and build better products
faster and more efficiently. Engineers use MSC's simulation software worldwide
in several industries, including aerospace, automotive, shipbuilding, consumer
products and electronic packaging.
MSC develops educational tools designed to train users of its products as an
extension of its software business. Training seminars are conducted in local
languages on a frequent basis at the MSC Institute of Technology in Costa Mesa,
California, at MSC 's Los Angeles headquarters, at MSC's offices worldwide, and
at client sites. In addition, MSC now provides a broad range of engineering
software consulting services. A typical consulting assignment might include all
or some of the following activities:
- - design/analysis process reengineering planning, where we suggest an improved
process state and provide a roadmap of changes to be made to achieve that
improved state.
- - reengineering implementation, where we implement the recommended changes,
often introducing new software tools and analysis techniques. The software may
be our own or those of third parties. Often process change includes
integration with the customer's Product Data Management (PDM) system.
- - software customization, where we modify our software products to match
particular features of the client's process or methodology.
- - proprietary software commercialization, where we commercialize proprietary
software programs to reduce the client's support costs, increase the sources
of input for technological advance and/or increase access to the software for
the client's supply chain.
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The following is a detailed discussion of each of MSC's major CAE products:
MSC.NASTRAN
MSC.NASTRAN is a descendant of NASTRAN-TM-, a computer program owned by the
United States Government and leased to others. MSC has improved upon NASTRAN
since NASTRAN was first released in 1970 and the current capabilities and scope
of MSC.NASTRAN are substantially greater than those of NASTRAN. MSC has been
selling MSC.NASTRAN since 1971. Pursuant to a 1982 agreement with the National
Aeronautics and Space Administration, MSC acquired the perpetual rights to
commercially use those elements of NASTRAN which are embodied in MSC.NASTRAN.
See "--Intellectual Property Rights" below. However, certain of MSC's
competitors sell other variations of NASTRAN-TM-.
MSC.NASTRAN is based upon the "finite element method" (FEM) of analysis.
With FEM analysis, complex structures are divided into small elements, which
form a finite element model, which is then subjected to computer analysis.
MSC.NASTRAN is used to analyze structures in order to determine, among other
things, their strength, safety and performance characteristics. For example, in
the aerospace industry, MSC.NASTRAN is employed to determine the stress
distribution in the major parts of an aircraft, such as engines, wings, fuselage
and tail. A computer analysis could be applied to improve the design of aircraft
by suggesting the removal of material where stresses are low and the addition of
material where stresses are high, while reducing the usage of physical
prototypes and other testing. With this knowledge, aircraft can be made both
stronger and lighter. The same principles have been applied to improve the
design of jets, rockets, engines, automobiles, trucks, tires, ships, farm
equipment, heavy industrial equipment, nuclear containment vessels, helicopters,
spacecraft and other products and structures.
Because MSC.NASTRAN has been designed in a modular way, new features can be
added and obsolete features replaced without disrupting the other modules of the
system. As a result, major changes in computer hardware have been systematically
accommodated. For example, the program has been adapted to be used on a variety
of computer types, from supercomputers to PC's. MSC believes that the continued
development and maintenance of MSC.NASTRAN, together with the modular design
features of that program, have prevented, and will continue to prevent, its
obsolescence, although no assurance can be given that future changes in hardware
or breakthroughs in software design will not result in the obsolescence of the
program.
MSC.PATRAN
MSC.PATRAN provides finite element modeling, analysis data integration,
analysis simulation, and results evaluation capabilities to simulate product
performance early in the design-for-manufacture process. All of the functions of
MSC.PATRAN may be integrated, automated and tailored to the user's specific
requirements using a powerful programming command language.
MSC.PATRAN system provides three fundamental functions:
- - MSC.PATRAN CORE SOFTWARE--The core of the MSC.PATRAN software enables the
engineer to visualize the design, preprocess the design into a computer model
for engineering analysis, and postprocess the results of the analysis into a
graphical representation. The software interfaces with many popular CAD
programs and many analysis packages such as MSC.NASTRAN.
- - APPLICATION MODULES--Through a series of modules that can be added to the core
software, engineers can perform analysis on stress, thermal mechanisms and
dynamics, fluid flow, solid modeling, and fatigue. Some of these application
modules have been developed by third parties and are marketed under joint
development or marketing agreements.
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- - INTERFACES--MSC.PATRAN uses a series of interfaces that allow it to interact
with programs developed by other companies in the CAD/CAE industry. These
interfaces either involve direct links into other software or translate data
to and from other software so that it can be processed within MSC.PATRAN.
MSC.WORKING MODEL
MSC.Working Model, MSC's newest product line, was created by the acquisition
of Knowledge Revolution (see"--Mergers and Acquisitions"). The two principal
products are:
- - MSC.Working Model Motion, to simulate motion such as falling and colliding
objects, pistons, conveyor belts, rotating machinery, and other moving
mechanical systems. This simulation answers the question "Will it work?"
- - MSC.Working Model FEA, to simulate stress, deformation, and vibration. This
simulation answers the question "Will it break?"
These products run on Microsoft Windows-based PCs and are closely linked to
mid-range, desktop-based CAD programs such as SolidWorks, Auto Desk's Mechanical
Desktop, and SolidEdge.
OTHER
In addition, MSC has a variety of other products, none of which account for
more than 5% of the Company's revenue, including MSC.DYTRAN, MSC.MVISION,
MSC.SuperModel and MSC.SuperForge.
RESEARCH AND DEVELOPMENT
MSC continually expends significant amounts on the development and
maintenance of its suite of CAE software products, as well as on new product
research and development. During the years ended December 31, 1998, 1997, and
1996, approximately $25,266,000, $22,723,000, and $31,259,000, respectively, was
expended for software research and development. Of the amounts expended,
$11,600,000 in 1998, $12,545,000 in 1997, and $8,075,000 in 1996 were included
in software costs capitalized. Effective January 1, 1999 the Company has changed
the estimated useful life of its capitalized software assets from three and four
years to two and three years. The Company has always estimated the expected life
of these assets based on the release cycle of its products. The Company believes
that as software production cycles decrease, amortization periods should also
decrease in order to coincide with each version's revenue stream. The Company is
making this change prospectively.
MSC's development activities have historically involved adding new
capabilities to its family of CAE programs or converting those programs for use
on new computer platforms. These activities are intended to prevent
technological obsolescence and assure MSC's clients the maximum flexibility in
selecting computer hardware. MSC considers the feasibility, cost and the size of
the market for a MSC software program for a particular computer when determining
whether to undertake development activity to adapt the program for a particular
computer.
Maintenance of MSC software products includes system integration, quality
assurance testing, error correction, and modifications to accommodate changes to
computer system software. Given the maturity of MSC's software, most maintenance
efforts stem from continuing new developments. Maintenance costs are expensed as
incurred.
MSC has recently increased its expenditure for software development. This
increase resulted primarily from changes within the Company's product management
in staffing and staff mix related to a strategic revision in product development
activity. This shift in strategy de-emphasizes features upgrades for specific
products and promotes the development of technologies and integrated software
solutions for targeted
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customers. The Company's total development cost before software capitalization
was 20% of revenue for 1998 which remains consistent with management's target of
20% of total annual revenues.
SALES AND MARKETING
MSC markets its products through advertising in trade publications,
participation in industry trade shows and exhibits, training seminars conducted
worldwide, its existing client base through complementary marketing agreements
with computer hardware manufacturers and through the Internet. MSC uses its own
dedicated sales force as well as value added resellers ("VARs") for domestic
marketing.
Foreign marketing is generally conducted in the same manner as U.S.
marketing, the basic licensing agreements are substantially the same. Prices for
agreements originating with MSC's German subsidiary are generally stated in
German Marks and agreements originating within Japan are generally stated in
Japanese Yen. Agreements with customers in Asia-Pacific outside of Japan are
denominated in US dollars. The agreements stated in foreign currencies are
subject to currency fluctuations.
REVENUE POLICY. The Company provides a variety of licensing alternatives
for the use of its software products. MSC's software products have been
primarily offered on an annual non-cancelable, pre-paid license basis. An annual
non-cancelable, pre-paid license is set at a fixed rate for the period and
provides for payment in advance of use. Prior to October 1, 1998, license
revenue was recognized at the time of sale, while maintenance revenue,
representing approximately 15% of the revenue from a non-cancelable, pre-paid
license, was recognized ratably over the term of the maintenance period.
Effective October 1, 1998, MSC adopted the Accounting Standards Executive
Committee (AcSEC) of the American Institute of Certified Public Accountants
(AICPA) Statement of Position 98-9 pursuant to which revenue will be recognized
ratably over the life of the contract for a non-cancelable, pre-paid annual
license. In recent years, demand has also increased for paid up licenses for
engineering software products. A paid up license provides significant revenue at
the original time of sale of the product, with smaller payments for maintenance
following the time of sale. The growth of paid up licenses creates higher
earnings volatility since larger amounts of revenue are recognized at one time
instead of over a period of time. Service revenue was less than 7% of revenue in
1998. See Note 1 of Notes to Consolidated Financial Statements for additional
information with respect to the Company's revenue recognition policy.
SALES/SUPPORT OFFICES. MSC maintains North American sales and client
support offices in Los Angeles, CA; Costa Mesa, CA; San Mateo, CA; Dallas, TX;
Atlanta, GA; Dayton, OH; Detroit, MI; Boston, MA; and Seattle, WA areas. In
addition, sales and support personnel work out of numerous home offices
throughout the United States. The Los Angeles office also serves as MSC's
headquarters. Sales and/or technical support representatives who have
engineering backgrounds and experience using MSC products staff the other
offices. These representatives market MSC's products, provide training in their
use, respond to user support calls and provide solutions for CAE analysis
throughout North America.
MSC's products are marketed, distributed and supported outside of North
America through a network of foreign subsidiary offices. MSC's wholly-owned
European subsidiary headquartered in Munich, Germany, manages its own network of
wholly-owned subsidiaries in the United Kingdom, Italy, Spain, France, Norway,
and The Netherlands. Other sales offices are located in Moscow, Russia,
Fribourg, Switzerland and Brno, Czech Republic. In the Asia-Pacific, sales and
service are handled through MSC's wholly-owned subsidiary in Tokyo, Japan, with
a branch office in Osaka, Japan, as well as other sales and services offices in
Taipei, Taiwan and Beijing, People's Republic of China.
Representative arrangements are also utilized in several European and Asia
Pacific countries as well as in India, Australia, and parts of Latin America.
POST CONTRACT SUPPORT. Client service is an integral aspect of MSC's
marketing program. The Company maintains toll-free numbers and a "hot line"
service for its clients. MSC has invested in advanced "call center" technology
to improve its capabilities.
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User manuals, training and quality assurance are also essential to MSC's
marketing program. MSC's user manuals are comprehensive and updated on a regular
basis. A staff of writers and editors manage the design, writing, editing and
preparation of user manuals as well as of training materials and promotional
literature. MSC conducts formal training for clients, ranging from three-day
introductory courses to intensive courses on specialized subjects for
experienced users. On site courses for clients are provided for larger user
organizations.
MSC also hosts annual users' conferences in the United States, Europe, Asia
Pacific, Australia, and Latin America to gather data on client needs, new
engineering applications, and new trends in computing technology.
CUSTOMERS
MSC's products are marketed internationally to clients from aerospace,
automotive, other manufacturers and universities. These categories of clients
accounted for 39%, 24%, 34% and 3%, respectively, of MSC's revenues for 1998.
In 1998, foreign export sales accounted for approximately 57% of gross
revenues, most of which were attributable to Europe (32%) and Asia-Pacific
(22%). The balance was attributable to Canada and South America. The operating
margins derived from MSC's foreign export sales do not materially differ from
its domestic operations. See Notes 11 and 12 of Notes to Consolidated Financial
Statements for additional information with respect to MSC's foreign operations.
No customer accounts for more than 10% of MSC's consolidated revenues.
BACKLOG
MSC does not maintain backlog statistics for its products because software
is generally available for delivery upon execution of a licensing agreement or
contract. Backlog for consulting services work is currently not material.
INTELLECTUAL PROPERTY RIGHTS
MSC, MSC., MSC.ARIES, MSC.PATRAN, MSC.MVISION and MSC.DYTRAN are registered
trademarks of MSC. Working Model is a registered trademark of MSC's wholly-owned
subsidiary, Knowledge Revolution, Inc. NASTRAN is a registered trademark of
NASA. MSC.NASTRAN is an enhanced proprietary version of NASTRAN.
MSC.NASTRAN, MSC.NASTRAN for Windows, MSC.SuperModel, MSC.InCheck,
MSC.SuperForge, MSC.NVH Manager, MSC.DropTest, MSC.FEA, MSC.FATIGUE, MSC.Working
Knowledge, MSC.CONSTRUCT, and MSC.AMS are trademarks of MSC. Knowledge
Revolution is a trademark of MSC's subsidiary, Knowledge Revolution, Inc.
Registration on certain of these trademarks is pending. Most of MSC's trademarks
have also been registered in foreign countries. MSC believes that it could
successfully defend the use of its trademarks, whether registered or pending
registration, under federal or common law existing in the State of California.
In addition, MSC maintains federal statutory copyright protection with
respect to its software programs and products and has registered copyrights on
all documentation and manuals related to these programs and maintains trade
secret protection on its software products.
MERGERS AND ACQUISITIONS
In late December 1998, Knowledge Revolution ("KR") merged with and into a
wholly-owned subsidiary of the Company (the "KR Merger"). In the KR Merger, MSC
paid to shareholders and holders of options and warrants of KR approximately
$19,200,000 and became the sole owner of all of the
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outstanding shares of capital stock of KR. The acquisition was treated as a
purchase for accounting purposes and, accordingly, the operating results of KR
have been reflected in MSC's consolidated financial statements since the date of
acquisition. Following consummation of the KR Merger, the operations of KR
continue to be operated as the Working Knowledge division of MSC. KR is the
world's leading developer and distributor of 2D and 3D-motion simulation
software for design engineers and analysts.
The total purchase price was allocated to the assets and liabilities of KR
based on their approximate fair market value. The appraisal of the acquired
business included $6,000,000 of purchased in-process research and development,
which was related to three products under development. This valuation represents
the five-year after tax cash flow of this in-process technology using a discount
rate of 28%. The acquired technology had not yet reached technological
feasibility and had no future alternative uses. Accordingly, it was written off
at the time of the acquisition. The remaining purchase price was allocated as
follows: $800,000 to net tangible assets, $9,890,000 to identified intangible
assets, including $5,200,000 of value-added reseller distribution channel,
$4,300,000 of developed technology, and $390,000 of assembled work force, and
$2,510,000 to goodwill.
COMPETITION
MSC competes in highly competitive markets including the development and
marketing of software for use principally by engineers and designers in
industry, research laboratories, and universities. MSC believes it is a leading
supplier of software and services to the CAE markets in which it competes.
MSC believes that MSC.NASTRAN is the leading program for engineering
analysis worldwide based upon capability, functionality, international
acceptance, and sales volume and that MSC.PATRAN is the standard CAE environment
for manufacturers worldwide, based upon its enhanced usability, direct CAD
access, intelligent use of geometry, automated finite element modeling, and
completeness of analysis integration. MSC believes that MSC.Working Model Motion
is the unit volume leader for desktop-based motion simulation, based principally
on its ease of use and on its association with leading university textbook
publishers that bundle our software with their texts.
MSC must continue to offer attractive prices and performance capabilities in
order to retain existing clients and further extend its markets. See "Research
and Development" and "Marketing" above. MSC competes primarily based upon
product quality, service, price, and technological innovation.
EMPLOYEES
At December 31, 1998, MSC and its subsidiaries employed approximately 745
persons, of whom 425 were involved in technical activities, 179 in sales and
marketing and 141 in administration. Of these employees, 312 hold advanced
degrees. As part of its restructuring, MSC reduced the number of employees by
75, approximately 10% of its workforce. MSC's business is dependent in part upon
its ability to attract and retain highly skilled personnel who are in great
demand. MSC has no contracts with labor organizations and believes its relations
with its employees are good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth certain information with regard to executive
officers who are not also directors of MSC. MSC is not aware of any arrangement
or understanding between these persons and any other persons pursuant to which
the executive officers were selected as such. MSC is not aware of any family
relationships between these executive officers and any other executive officers.
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Louis A. Greco................... 51 Chief Financial Officer (March 1983-present) and Corporate Secretary
(December 1985-present).
James B. Archer.................. 50 Senior Vice President of Worldwide Product Development (February
1998-present); Vice President of Product Development (August
1997-January 1998); Director of Object Technology at IBM (1994-July
1997).
Kenneth D. Blakely............... 44 Senior Vice President, General Manager Mechanical Solutions Division
(January 1999-present); Senior Vice President of International
Operations and General Manager of Aerospace Business Unit (February
1998-December 1998); Vice President and General Manager of Aerospace
Business Unit (March 1996-January 1998); Vice President of Marketing
(January 1995-February 1996); Department Director of Production and
Support (March 1993-December 1994); Section Manager of Technical Product
Planning and Support (January 1992-February 1993); Department Director
of Product Management and Support (June 1991-December 1991); MSC.NASTRAN
Program Manager (October 1989-May 1991).
Dave Baszucki.................... 36 Vice President, General Manager Working Knowledge Division (January
1999-present); President and Founder, Knowledge Revolution Inc. (August
1989-December 1998).
Dr. Dan Bryce.................... 41 Vice President, General Manager, Engineering-e.com Division (April
1999-present); Chief Information Officer (February 1998-March 1999);
Department Director (July 1995-January 1998); Manager of Parametric
Modeling Task Force (1994-June 1995).
Richard C. Murphy................ 35 Vice President, the Americas (January 1999- present); Vice President and
General Manager of Growth Industries Business Unit (February
1997-December 1998); Vice President and General Manager of General
Manufacturing Unit (September 1996-January 1997); Department Director of
North American Sales and Support (March 1996-August 1996); Regional
Office Manager of North American Sales and Sales Support (February
1994-February 1996); Sales Representative of North American Sales and
Sales Support (April 1991-January 1994).
Masaru Tateishi.................. 53 Vice President, Asia-Pacific (February 1995-present); General Manager of
MSC Japan (March 1993-January 1995); General Manager of MSC Hong Kong
(August 1986-February 1993).
Dr. Christopher St. John......... 52 Vice President, Europe (April 1997-present); Director of European
Engineering Services (January 1995-March 1997); Manager of U.K.
Engineering Services (January 1991-December 1994).
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FORWARD LOOKING STATEMENTS
The forward-looking statements in this report, including statements
concerning projections of the Company's future results, operating profits and
earnings, 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 successful integration of Knowledge Revolution and the prospects of the
new Working Knowledge Division;
- - timely development of CAE technologies which, among other things, must
accommodate industry trends such as increasing computing power and increased
usage of workstations;
- - fluctuations of the U.S. dollar versus foreign currencies;
- - economic conditions in Asia-Pacific, Europe and the U.S.;
- - the Company's ability to reduce costs without adversely impacting revenues;
- - successful involvement of international and domestic business partners in
creating mechanical engineering solutions;
- - the Company's ability to attract, motivate and retain salespeople, programmers
and other key personnel;
- - continued demand for its products, including MSC.NASTRAN, MSC.PATRAN,
MSC.DYTRAN, MSC.MVISION, MSC.NASTRAN for Windows, MSC.InCheck, and Working
Knowledge products; and
- - Year 2000 issues.
Subsequent written and oral forward-looking statements attributable to MSC
or persons acting on its behalf are hereby expressly qualified in their entirety
by the cautionary statements in this section of this report.
RISK FACTORS
HISTORICAL RESULTS OF OPERATIONS AND FINANCIAL POSITION OF THE COMPANY ARE NOT
NECESSARILY INDICATIVE OF FUTURE FINANCIAL PERFORMANCE.
MSC derives most of its revenue from selling software products and services
to high end users of the product design markets. Our revenue growth and our
ability to match spending levels with revenue growth rates will directly impact
our future operating results. Historically, a significant portion of our revenue
has been 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. In addition, over 50% of our revenues are derived from international
markets and are denominated in foreign currencies. As a result, our financial
results could be impacted by weakened general economic conditions in various
parts of the world, differing technological advances or preferences, volatile
foreign exchange rates, and government trade restrictions in any country in
which we do business.
RISK ASSOCIATED WITH EXPENSE MANAGEMENT.
MSC plans its operating expense levels, in part, on expected revenue growth.
Our expense levels, however, are generally committed in advance and, in the near
term, we are able to change only a relatively small portion of our expenses. As
a result, our ability to convert operating outlays into expected revenue growth
at profitable margins will impact our future operating results. If our future
revenues are less than expected, our net income may be disproportionately
affected since expenses are relatively fixed.
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RISKS OF COMPETITION.
The software industry is highly competitive. The entire industry may
experience pricing and margin pressure which could adversely affect our
operating results and financial position. Our success depends on our ability to
continue to develop, enhance and market new products to meet our customers'
sophisticated needs within competitive pricing structures and in a timely
manner. Shortened product development cycles may impact product quality,
performance, reliability, ease of use, functionality, breadth and integration.
Our success also depends, in part, on our ability to (1) attract and retain
technical and other key employees who are in great demand, (2) protect the
intellectual property rights of our products, and (3) continue key relationships
with product development partners.
Some of our current and possible future competitors have greater financial,
technical, marketing and other resources than we do, and some have
well-established relationships with our current and potential customers. It is
also possible that alliances among competitors may emerge and rapidly acquire
significant market share or that competition will increase as a result of
software industry consolidation. Increased competition may result in price
reductions, reduced profitability and loss of market share, any of which could
have a material adverse effect on our business, financial condition and results
of operations.
RISKS RELATED TO STOCK MARKET VOLATILITY.
The trading price of our stock, like other software and technology stocks,
is subject to significant volatility. If our revenues or earnings fail to meet
securities analysts' expectations, there could be an immediate and significant
adverse impact on the trading price of our stock. In addition, broader market
factors unrelated to our performance may affect our stock price.
RISKS RELATED TO DEPENDENCE ON CORE PRODUCTS.
We currently earn a significant portion of our revenues from sales and
maintenance of a core group of analysis and design software derived primarily
from our MSC.NASTRAN and MSC.PATRAN products. As a result, any factor adversely
affecting sales of these core products could have a material adverse effect on
our business. Our future performance will depend upon successful development,
introduction and customer acceptance of new products or enhanced versions of our
existing products. We can give no assurance that we will continue to be
successful in marketing our current products or any new or enhanced products
that we may develop in the future. In addition, competitive pressures or other
factors may result in price erosion that could have a material adverse effect on
our business, financial condition and results of operations.
RISKS RELATED TO DEPENDENCE ON CERTAIN INDUSTRIES.
We primarily market our products to aerospace, automotive and other
industrial customers. For the year ended December 31, 1998, aerospace clients
accounted for 39% and automotive clients accounted for 24% of our revenues,
respectively. Changes in capital spending by, and cyclical trends affecting,
these customers may adversely affect our offerings to these industries. In
addition, these types of customers tend to adhere to a technology choice for
long periods (i.e., an entire development cycle). As a result, a lost
opportunity with a given customer may not again become a new opportunity for
several years.
RISKS RELATED TO INTERNATIONAL ACTIVITIES.
Revenues from foreign export sales represented approximately 57% of our
gross revenue in 1998. Risks inherent in our international business activities
include the following:
- - imposition of government controls
- - foreign exchange fluctuations, as many of our agreements originating with our
German and Japanese subsidiaries are stated in foreign currencies
9
<PAGE>
- - export license requirements
- - restrictions on the export of critical technology or other trade restrictions
- - foreign political and economic instability
- - ineffective copyright and trade secret protection under foreign law
- - changes in regulatory practices, tariffs and taxes
- - difficulties in staffing and managing international operations
- - longer accounts receivable payment cycles
- - burdens of complying with a wide variety of foreign laws and regulations
See also "Euro Conversion" in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Unfavorable economic and political conditions in the Asian markets have
recently impacted our international results. The decrease in reported revenues
from our Asia-Pacific region is due primarily to the economic turmoil the region
experienced during the past year and is not an indication of a reduction in the
Company's market share from the region. 16% of the Company's total revenue for
1998 is directly related to the Japanese market, while 6% is from the
Asia-Pacific region outside of Japan. In light of the continued economic turmoil
in the region we remain cautious about MSC's Asia-Pacific prospects. We can give
no assurance that the economic crisis and currency issues currently being
experienced in the Asian markets will not have a material adverse effect on our
future international sales and, consequently, on our business, financial
condition and results of operations.
RISKS RELATED TO CERTAIN ANTI-TAKEOVER PROVISIONS.
Certain provisions of our Certificate of Incorporation and Restated Bylaws
could make it more difficult for a third party to acquire control of us, even if
the change in control would be beneficial to stockholders. These provisions
include the following:
- - division of our board of directors into three classes, with each class serving
a staggered three-year term
- - vesting of exclusive authority in the board, the Chairman of the Board and the
president (except as otherwise required by law) to call special meetings of
stockholders
- - elimination of stockholder voting by consent
- - removal of directors for cause only
- - ability of the board to authorize the issuance of preferred stock in series
- - vesting of exclusive authority in the board to determine the size of the board
(subject to certain limited exceptions) and to fill vacancies thereon
- - advance notice requirements for stockholder proposals and nominations for
election to the board
In addition to the above provisions, we have recently adopted a new
stockholder rights plan. Such plan entitles our stockholders, if an entity
acquires more than 20% of our stock or in the event of a squeeze-out merger,(1)
to purchase either our common stock or the common stock of the merged entity at
one-half of
- ------------------------
(1) A "squeeze-out merger" is a merger transaction in which a minority interest
in a corporation is intentionally eliminated or reduced. This is often
accomplished by setting up the merger transaction to provide such holders of
minority interests with effectively no choice but to accept cash (as opposed
to interests in the continuing entity) in exchange for their shares.
10
<PAGE>
such stock's market value. Until ten days after the announcement of the
acquisition of such a 20% interest, we may redeem the rights for a nominal
amount.
ITEM 2. PROPERTIES.
MSC's offices are leased under agreements expiring at various times over the
next one to ten years. MSC's principal offices are in Los Angeles, California
and Costa Mesa, California, and include 56,690 square feet and 81,178 square
feet, respectively, under leases expiring in 2005 and 2002, respectively. As
part of its restructuring, MSC is exploring the possibility of relocating its
headquarters and combining its principal offices into one office prior to the
end of the current leases. Management believes that such a move could provide
cost savings as well as enhance productivity by having key personnel in one
office. MSC also leases its other offices throughout the United States and
internationally. See Note 15 of Notes to Consolidated Financial Statements of
this report for additional information regarding MSC's lease obligations.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the last quarter
of MSC's fiscal year ended December 31, 1998.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed for trading on the New York Stock
Exchange under symbol MNS. The following table sets forth through December 31,
1998, the high and low prices as reported on the NYSE for the period shown:
<TABLE>
<CAPTION>
SALES PRICES
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Calendar Year 1998
Fourth quarter........................................................... $ 7.25 $ 5.19
Third quarter............................................................ 9.81 5.88
Second quarter........................................................... 12.00 9.25
First quarter............................................................ 12.31 9.06
Calendar Year 1997
Fourth quarter........................................................... $ 13.13 $ 8.94
Third quarter............................................................ 13.25 10.31
Second quarter........................................................... 11.13 9.13
First quarter............................................................ 10.13 7.63
</TABLE>
As of April 5, 1999 there were 367 record holders of the Company's Common
Stock. The Company eliminated its dividend in September of 1996 and does not
anticipate paying a dividend in the foreseeable future. The price of the Common
Stock on April 5, 1999 was $5.94.
On December 30, 1998, in connection with a marketing arrangement with Kubota
Solid Technology Corporation ("KSTC"), the Company issued warrants to purchase
54,054 shares of the Company's common stock at $6.94 per share for an aggregate
exercise price of $375,000. The warrants are non-transferable, have a five-year
term and become exercisable two years after the date of issuance. The warrants
were valued using the Black-Scholes valuation method at $144,324. The exercise
price was equal to the fair market value of the common stock on the date of
purchase. The transaction was a private placement involving one offeree and one
purchaser exempt from registration under section 4(2) of the Securities Act of
1933. See Note 14 of Notes to Consolidated Financial Statements for additional
information with respect to warrants issued by the Company.
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998* 1997 1996 1995 1994**
---------- ---------- ---------- ---------- ----------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<S> <C> <C> <C> <C> <C>
Revenue.............................................. $ 125,397 $ 132,804 $ 132,081 $ 127,374 $ 90,682
Operating income (loss).............................. (10,041) 18,963 18,685 22,648 (31,059)
Net income (loss).................................... (12,979) 9,887 9,711 12,743 (33,466)
Basic earnings (loss) per share...................... (0.95) 0.73 0.72 0.97 (2.50)
Diluted earnings (loss) per share.................... (0.95) 0.73 0.72 0.90 (2.50)
Cash dividends declared per share.................... -- -- 0.22 0.48 0.64
Total assets......................................... 138,829 129,053 119,786 114,704 113,600
Convertible long-term debt........................... 56,574 56,574 56,574 56,574 56,574
</TABLE>
- ------------------------
* Reflects a reduction in revenue of $9,398,000 related to the change in how
the Company recognizes revenue, an in-process research and development
charge of $6,000,000 related to the acquisition of Knowledge Revolution,
impairment charges of $8,164,000 in cost of revenue and restructuring and
other impairment charges of $2,365,000.
** Reflects an in-process research and development charge of $35,000,000 and a
restructuring charge of $8,962,000 related to the acquisition of PDA
Engineering.
12
<PAGE>
The selected financial data for the five years ended December 31, 1998, are
derived from the Company's audited Financial Statements. The selected financial
data should be read in conjunction with Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, the Consolidated
Financial Statements of the Company and the related Notes to Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RECENT DEVELOPMENTS
ACCOUNTING CHANGES
In January 1999, the Company changed its reporting period from a January 31
fiscal year-end to a December 31 calendar year-end basis. As part of this
change, the Company elected to present restated financial results on a calendar
year-end basis for all reported prior periods.
In the fourth quarter of 1998, the Accounting Standards Executive Committee
(AcSEC) of the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 98-9 "Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain Transactions" which retained the restrictive
definition of what qualified for vendor specific objective evidence (VSOE) of
fair value for allocating a contract fee among the various elements of an
arrangement. VSOE must be known for all undelivered elements of an arrangement,
such as post-sales customer support (PCS). As permitted, the Company adopted the
provisions of SOP 98-9 effective October 1, 1998 and, accordingly, revenue on
non-cancelable and prepaid lease agreements is recognized monthly over the term
of the agreement, beginning in the fourth quarter of 1998, since the VSOE of
fair value required under SOP 97-2 to allocate the contract fee to the
undelivered PCS element of the arrangements is not available. This resulted in a
decrease in revenues that otherwise would have been recognized in the fourth
quarter since only a portion of the revenues related to annual lease agreements
was recognized. The revenue reduction was $9,398,000 compared to the amount of
revenue that would have been recognized under SOP 97-2. This revenue will be
recognized ratably over primarily the first three quarters of 1999. The effect
of this change for the fourth quarter of 1998 and subsequent periods is outlined
in the following table:
<TABLE>
<CAPTION>
CY98 Q4 CY99 Q1 CY99 Q2 CY99 Q3 CY99 Q4 BEYOND
------------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................
The Americas.................. $ (5,583,000) $ 1,665,000 $ 1,648,000 $ 1,622,000 $ 427,000 $ 221,000
Europe........................ (3,067,000) 904,000 866,000 846,000 390,000 61,000
Asia-Pacific.................. (748,000) 398,000 137,000 122,000 44,000 47,000
------------- ------------ ------------ ------------ ---------- ----------
Consolidated.................. $ (9,398,000) $ 2,967,000 $ 2,651,000 $ 2,590,000 $ 861,000 $ 329,000
------------- ------------ ------------ ------------ ---------- ----------
------------- ------------ ------------ ------------ ---------- ----------
</TABLE>
Future quarters will also reflect the deferral of revenue associated with
non-cancelable and prepaid annual lease arrangements entered into in those
quarters under SOP 98-9. Because SOP 98-9 does not permit restatements of prior
periods and because there are annual license renewals in every month of the
year, the entire effect of this change in revenue recognition will not be fully
recognized in reported revenue on a quarterly basis until the fourth quarter of
1999. The year 2000 will be the first reported year that will reflect a full
twelve months of revenue under this method of revenue recognition for annual
licenses.
ASSET IMPAIRMENT AND RESTRUCTURING
The Company has consistently followed the policy of capitalizing software
development costs related to product development in accordance with the
guidelines established under Statement of Financial Accounting Standard (SFAS)
No. 86, "Accounting For the Costs of Computer Software to Be Sold, Leased or
Otherwise Marketed". Capitalized software costs are then amortized over a period
of time (expected
13
<PAGE>
useful life) that is estimated to equate to the term during which meaningful
revenue from the related product is expected to be recognized. Previously
capitalized product development costs and projected revenues are reviewed
quarterly to determine if any impairment in value has occurred that would
require an adjustment in the carrying value or change in expected useful lives
under the guidelines established in SFAS No. 86 and SFAS No. 121, "Accounting
for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed
of." The Company recognizes impairment losses on long lived assets when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts.
Accordingly, during the fourth quarter of 1998, the Company recognized non-cash
pre-tax charges of $7,771,000 related to the write off of the net book value of
certain previously capitalized software development costs and $393,000 of other
impairment charges recorded in cost of revenues and a non-cash pre-tax charge of
$1,670,000 recorded as part of restructuring and other impairment charges
related to the write off of previously reported goodwill from the acquisition of
Silverado Software & Consulting. Refer to Note 3 in Notes to Consolidated
Financial Statements.
On February 3, 1999 the Company announced a new organizational structure
following a re-evaluation of its business strategy. The Company will now
emphasize the expansion of the software business into new markets and
value-added integration services. The new structure is designed to better serve
the existing customer base and at the same time address expanding growth
opportunities. The reorganization plan provides for a 10% reduction in the
Company's worldwide workforce (which is approximately 75 positions), and the
consolidation of 15 field offices. These changes will result in pre-tax charges
of approximately $5,900,000 in the first quarter of 1999. The charges consist of
severance costs of $3,200,000, costs related to facility consolidations of
$2,200,000 and other charges of $500,000. The Company anticipates these charges
will provide a reduction in its annual operating costs. The restructuring
liability at December 31, 1998 represents $695,000 of severance charges for
certain employee terminations that occurred in December 1998. The restructuring
and other impairment charges for 1998 of $2,365,000 include the severance cost
and the goodwill write-off discussed above.
ACQUISITION
In late December 1998, the Company acquired all of the outstanding stock of
Knowledge Revolution (KR). KR is the world's leading developer and distributor
of 2D and 3D-motion simulation software for design engineers and analysts. This
acquisition has allowed the Company to increase its product offerings to deliver
tools and expertise to the mid-range and desktop markets. The Company acquired
KR for approximately $19,200,000 in cash and the acquisition has been accounted
for under the purchase method of accounting. The total purchase price was
allocated to the assets and liabilities of KR based on their approximate fair
market value. A significant portion of the purchase price was identified in an
independent appraisal, using proven valuation procedures and techniques, as
intangible assets. The appraisal of the acquired business included $6,000,000 of
purchased in-process research and development (IPR&D). This acquired technology
had not yet reached technological feasibility and had no alternative future
uses. Accordingly, it was written off at the time of the acquisition. The
remaining purchase price was allocated as follows: $800,000 to net tangible
assets, $4,300,000 to developed technology, $5,200,000 to their value-added
reseller network, $390,000 to their assembled work force, and $2,510,000 to
goodwill. Goodwill and identified intangibles are being amortized between three
and ten years.
On the date of its acquisition, KR's technology was classified between core
or developed technology and IPR&D. Four KR products, one released and the others
under development, were identified and their reliance on the developed
technology and IPR&D was determined. The reliance on IPR&D ranged from 0% to 90%
on these products. IPR&D was further segmented into classifications of completed
and to-be-completed based on three criteria: (1) the estimated time required to
complete the development, (2) the estimated cost to complete and (3) the
complexity involved in overcoming technological obstacles that must be resolved
during development. The completion of development at the time of acquisition
ranged
14
<PAGE>
from 39% to 72%. Management estimates the cost to complete this development
effort to be approximately $1,300,000 and the release of these products during
the second and third quarters of 1999.
These R&D valuations represent the five-year after tax cash flow of this
technology using a discount rate of 23% for developed technology and 28% for
IPR&D respectively. The discount rate is based upon the acquiring Company's
weighted average cost of capital (WACC) of 22%. This WACC was derived by
considering various factors to quantify the risk above a risk-free rate of
return of approximately 5%. The discount rate selected for the IPR&D was
determined to be significantly higher than the WACC due to the fact that the
technology had not yet reached technological feasibility as of the date of
acquisition.
In valuing both the developed technology and IPR&D, the initial focus was on
the revenue contribution generated by each of the products. Revenue estimates
were based on the following: (1) aggregate revenue growth rates for the business
as a whole, (2) individual product revenues, (3) growth rates for related
products, (4) anticipated product development and introduction schedules, (5)
product sales cycles and (6) the estimated useful life of a product's underlying
technology. The aggregate product revenue amounts were estimated and segregated
between the developed technology and IPR&D. Operating expenses were deducted
from the revenue estimates to arrive at operating income. Operating expenses
included cost of revenue, selling and marketing, and general and administrative
expenses but no non-cash charges such as depreciation and amortization. Certain
adjustments were made to operating income to derive the after-tax cash flow.
These adjustments included the calculation of an applicable tax expense and an
appropriate charge for the use of contributory assets necessary to generate
revenue and operating income associated with the subject intangible assets.
Management believes that the Company is positioned to complete development
of these KR products and expand the Company's market share in the growing
mid-range and desktop markets. However, there is risk associated with the
completion, marketing and ultimate sale of these products. There is no assurance
that any product will meet with either technological or commercial success. The
substantial delay or outright failure of these products could adversely impact
the Company's financial condition. Refer to Notes 3 and 4 in Notes to
Consolidated Financial Statements.
1998 VS. 1997
The Company reported revenue of $125,397,000 in 1998, compared to revenue of
$132,804,000 in 1997, a decrease of $7,407,000 or 6%. Revenue growth in 1998 was
adversely affected by the change in the Company's revenue recognition policy
effective October 1, 1998 and the strength of the U.S. Dollar compared to
foreign currencies in which the Company operates. Revenue in the current year
would have been approximately $127,374,000, if translated using prior year
foreign currency translation rates. Revenue would have been $134,795,000, if
recorded under previous revenue recognition policies, because the adoption of
SOP 98-9 in the fourth quarter of 1998 deferred $9,398,000 into subsequent
periods or $9,485,000, if valued using prior year foreign currency translation
rates. Software license revenue and maintenance fees account for 93% of total
reported revenue for the year ended December 31, 1998 and 96% for the year ended
December 31, 1997, with service revenue making up the difference.
Software license revenue consists of licensing fees, which are fees charged
for the right to use the Company's or a third parties' software. Maintenance and
services revenues include PCS and consulting services. PCS includes training,
telephone support, bug fixes and upgrade privileges on a when and-if available
basis. Services range from installation and basic consulting to software
modification and customization to meet specific customer needs. Software is sold
through monthly, annual or longer lease arrangements and through paid-up license
arrangements whereby the customer purchases a perpetual license for the use of
the Company's software.
15
<PAGE>
The following table illustrates revenue by geographic region and the related
growth rates in functional currencies:
<TABLE>
<CAPTION>
1998 FUNCTIONAL CURRENCY GROWTH RATE
% OF -----------------------------------------------------
TOTAL REVENUE WITH REVENUE CHANGE WITHOUT REVENUE CHANGE
--------------- ------------------------ ---------------------------
<S> <C> <C> <C>
The Americas.................... 46% (3% ) 6%
Europe.......................... 32% 8% 16%
Asia-Pacific.................... 22% (17% ) (15% )
</TABLE>
The increase in reported revenues in Europe resulted from higher volumes of
software licenses and related maintenance revenue. The decrease in reported
revenues from our Asia-Pacific region is due primarily to the economic turmoil
the region experienced during the past year and is not an indication of a
reduction in the Company's market share from the region. 16% of the Company's
total revenue for 1998 is directly related to the Japanese market, while 6% is
from the Asia-Pacific region outside of Japan. In light of the continued
economic turmoil in the region the Company remains cautious about its
Asia-Pacific prospects.
Of the 93% and 96% of the Company's revenues in 1998 and 1997, respectively,
that consisted of software license and maintenance revenue, approximately 79% in
1998 and 78% in 1997 of this revenue is derived from annual renewable leases and
recurring maintenance fees with the remaining 21% in 1998 and 22% in 1997
related to paid-up licenses.
The Company is exposed to the impact of foreign currency fluctuations. The
following table details the effect of the currency rate changes on revenue for
1998 and the risk of change in 1999. The trend exchange rate was determined by
prorating the rate change between 1997 and 1998 and is used to illustrate the
sensitivity to foreign currency fluctuations. The trend rate is for illustration
purposes only and may or may not reflect the actual translation rate in the
future period.
<TABLE>
<CAPTION>
CY 1998 CY 1998 CY 1998
USING 1997 USING 1998 USING 98/97
EXCHANGE EXCHANGE TREND
REVENUES RATES RATES EXCHANGE RATE
- -------------------------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
Europe...................................... $40,436,000 $39,875,000 $ 39,314,000
Asia-Pacific................................ 28,529,000 27,113,000 25,880,000
------------- ------------- ----------------
Total Revenue............................. $68,965,000 $66,988,000 $ 65,194,000
------------- ------------- ----------------
------------- ------------- ----------------
Exchange Rates:
$/DM...................................... 0.577 0.569 0.561
Yen/$..................................... 121.75 130.81 139.87
</TABLE>
Operating expenses of $135,438,000 in 1998 includes both restructuring and
impairment costs in addition to on-going operating costs necessary for the
operation of the business, and represents an increase of $21,597,000, or 19%
from the $113,841,000 reported in 1997. Operating expenses included
restructuring and impairment costs and other unusual items consisting of: (1) a
$8,164,000 non-cash charge included in cost of revenues, (2) a $6,000,000
in-process research and development charge, (3) restructuring and other
impairment costs of $2,365,000 and (4) a gain from the reversal of a $1,157,000
of Post Retirement Health Care liability resulting from the termination of the
Post Retirement Health Care Plan. Without these charges and the gain, operating
expenses totaled $120,066,000 in 1998, an increase of $6,225,000 or 5% from the
$113,841,000 reported in 1997. This increase was primarily attributable to: (1)
a $3,325,000 increase in cost of revenue exclusive of the $3,200,000
reclassification of post-sales customer support expense, (2) a $3,488,000
increase in research and development cost including a $2,543,000 increase in the
gross research and development investment and a $945,000 decrease in capitalized
software costs, offset by (3) a $588,000 decrease in selling, general and
administrative expenses exclusive of the $3,200,000
16
<PAGE>
reclassification of post-sales customer support expense and the gain from the
reversal of $1,157,000 of Post Retirement Health Care liability.
In accordance with the AICPA Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," cost of revenue expense includes period expenses
directly related to revenue as well as the amortization of capitalized software
costs. Research and development expense is reported net of the amount
capitalized.
Cost of revenue of $46,255,000 in 1998 includes impairment costs in addition
to on-going operating costs necessary for the operation of the business. Cost of
revenue as a percent of revenue was 37% and 24% for 1998 and 1997, respectively
or 30% and 24% exclusive of the impairment charges. Impairment costs included a
charge of $7,771,000 against capitalized software and $393,000 of other non-cash
impairment charges. Capitalized software amortization decreased slightly to
$11,974,000 in 1998 from $12,043,000 in the prior year. Cost of revenues,
excluding these impairment charges was $38,091,000 for 1998 compared to
$31,566,000 for 1997, an increase of $6,525,000 or 21%. This increase resulted
from: (1) a $3,200,000 reclassification of post-sales customer support expense
from sales and marketing in 1998 and (2) a $3,300,000 increase in labor and
related costs. During 1998, the Company reclassified $3,200,000 of sales and
marketing expense to cost of revenue for post-sales customer support costs. The
increase in labor and related costs were related to increases in staffing and
the utilization of development and sales resources to support maintenance and
consulting activities. Royalty expense is also included in cost of revenue and
paid to third parties under various agreements. The Company does not consider
any royalty expense related to individual agreements to be material.
Gross margin, which is revenue less cost of revenue, was negatively impacted
by the Company's change in its revenue recognition policy and the increase in
its costs of revenue noted above. Gross margin was $79,142,000 or 63% of
revenues for the year ended December 31, 1998 as compared to $101,238,000 or 76%
of revenues for the year ended December 31, 1997 representing a decrease of
$22,096,000.
Research and development expense for the year ended December 31, 1998 was
$13,666,000 compared to $10,178,000 for the year ended December 31, 1997
representing an increase of $3,488,000, or 34%. The increase is the result of an
increase of $2,543,000 in the total gross investment in research and development
activities and a decrease of $945,000 in the amount of research and development
expenditures capitalized under SFAS 86.
The total gross investment in research and development activities for the
year amounted to $25,266,000 or 20% of current year revenue, compared to
$22,723,000, or 17% of revenue in the prior year. The total increase in the
gross research and development investment was $2,543,000, or 11%. This increase
resulted primarily from changes within the Company's product management in
staffing and staff mix related to a strategic revision in product development
activity. This shift in strategy de-emphasizes features upgrades for specific
products and promotes the development of technologies and integrated software
solutions for targeted customers. The Company's total development cost before
software capitalization was 20% of revenue for 1998 which remains consistent
with management's target of 20% of total annual revenues.
Capitalized software development costs were $11,600,000 in 1998 compared to
$12,545,000 in 1997, a decrease of $945,000, or 8%. The amount of product
development capitalized in any given period is a function of many factors
including the number of products under development at any point in time as well
as their stage of development. The Company's product development process is
continually under review to improve efficiency, product quality, and reduce time
to market. Due to the continual change in the product development process there
can be no assurance that the level of development capitalized in future periods
will be comparable to current capitalized levels.
Selling, general, and administrative expense was $64,884,000 in 1998
compared to $69,829,000 in 1997, a decrease of 7%. The $4,945,000 decrease was
primarily due to: (1) $3,200,000 of post-sales customer
17
<PAGE>
support costs included in cost of revenue, and (2) a reduction of Post
Retirement Health Care expense of $280,000 and a gain from the reversal of a
$1,157,000 of Post Retirement Health Care liability resulting from the
termination of the Post Retirement Health Care Plan.
As with revenue, the Company's expenses are impacted by foreign currency
fluctuations. The following table details the effect of the currency rate
changes on operating expense for 1998 and the risk of change in 1999. The trend
exchange rate was determined by prorating the rate change between 1997 and 1998
and is used to illustrate the risk of foreign currency fluctuations. The trend
rate is for illustration purposes only and may or may not reflect the actual
translation rate in the future period.
<TABLE>
<CAPTION>
CY 1998 CY 1998 CY 1998
USING 1997 USING 1998 USING 98/97
EXCHANGE EXCHANGE TREND
LOCAL OPERATING EXPENSES* RATES RATES EXCHANGE RATE
- -------------------------------------------- ------------- ------------- ----------------
<S> <C> <C> <C>
Europe.................................... $25,030,000 $24,683,000 $ 24,336,000
Asia-Pacific.............................. 12,353,000 11,497,000 10,752,000
------------- ------------- ----------------
Total Local Operating Expense............... $37,383,000 $36,180,000 $ 35,088,000
------------- ------------- ----------------
------------- ------------- ----------------
Exchange Rates:
$/DM...................................... 0.577 0.569 0.561
Yen/$..................................... 121.75 130.81 139.87
</TABLE>
- ------------------------
* Does not include U.S. based cost incurred on behalf of the International
Operations.
Operating income or loss, including software capitalization and
amortization, restructuring costs and impairment charges was a loss of
$10,041,000 in 1998 compared to income of $18,963,000 in 1997. The $29,004,000
decrease in operating income is primarily attributable to the decrease in gross
margin of $22,096,000, an increase in research and development expense of
$3,488,000, offset by a decrease in selling, general and administrative expense
of $4,945,000. The 1998 operating loss includes both effects of the Company's
adoption of SOP 98-9 in the fourth quarter of 1998 that deferred $9,398,000 of
revenue into subsequent periods and restructuring and impairment costs in
addition to on-going operating costs necessary for the operation of the
business. Restructuring and impairment costs included (1) a $8,164,000 non-cash
charge included in cost of revenues, (2) a $6,000,000 in-process research and
development charge, (3) restructuring and other impairment costs of $2,365,000
and (4) a gain from the reversal of a $1,157,000 Post Retirement Health Care
liability resulting from the termination of the Post Retirement Health Care
Plan. Without the effect of adoption of SOP 98-9, these charges and the gain,
operating income, including software capitalization and amortization would have
been $14,729,000 in 1998 compared to $18,963,000 in 1997, a decrease of 22%.
Debenture interest reflects the interest on the convertible subordinated
debentures issued as part of the acquisition of PDA Engineering in 1994.
Interest payments are due on March 15 and September 15 of each year until the
debentures are converted or redeemed.
Other income was $1,322,000 in 1998 compared to income of $474,000 in 1997.
The fluctuation is primarily attributable to an increase in interest and
investment income from $940,000 in 1997 to $1,651,000 in 1998, a change in
foreign exchange gains and losses from a loss of $502,000 in 1997 to a gain of
$295,000 in 1998 and a $110,000 decrease in gains and losses on the sale of
property, plant and equipment. The Company anticipates that interest and
investment income will decrease in 1999 as a result of the decrease in cash
balances following the acquisition of Knowledge Revolution. Other income also
includes other non-operating income.
The effective tax rate for the year was a benefit of 1% compared to a
provision of 34% in 1997. The expected benefit in 1998 was reduced due to
foreign losses not benefited, and certain non-deductible charges related to the
write off of the Silverado Software & Consulting goodwill and acquired
in-process technology of Knowledge Revolution.
18
<PAGE>
Net loss was ($12,979,000) in 1998 compared to net income of $9,887,000 in
1997, a decrease of $22,866,000. The decline in net income was less than the
operating income decline due to an increase of $848,000 of other income for
1998. Net income in 1998 was unfavorably affected by fluctuations in functional
currencies used in the Company's international operations. The fluctuation of
the U.S. Dollar versus these currencies could continue to have an unfavorable
effect throughout 1999 and future years. The effect of foreign currency
translation on net income in 1998 was immaterial.
1997 VS. 1996
The Company reported revenue of $132,804,000 for 1997, compared to revenue
of $132,081,000 for 1996, a 1% increase. The 1997 revenue growth was adversely
affected by the strength of the U.S. Dollar compared to foreign currencies in
which the company operates. Revenue in the current year would have been
approximately $141,050,000 or 7% more than 1996, if valued using prior year
foreign currency translation rates. Software license revenue and maintenance
fees account for 96% of total reported revenue for 1997 and 1996, with service
revenue making up the difference.
Software revenue consists of licensing fees, which are fees charged for the
right to use the software, and maintenance fees, which provide for support and
upgrade privileges, which are generally 15% of the license fees. In accordance
with SOP 91-1, "Software Revenue Recognition" issued in 1991 revenue associated
with support and upgrade privileges was consistently deferred and recognized
over the term of the license agreement in 1997 and 1996.
The following table illustrates revenue by geographic region and the related
growth rates in functional currencies:
<TABLE>
<CAPTION>
% OF 1997 FUNCTIONAL CURRENCY
TOTAL REVENUE GROWTH RATE
--------------- ----------------------------
<S> <C> <C>
The Americas......................................... 46% 7%
Europe............................................... 28% 7%
Asia-Pacific......................................... 26% 11%
</TABLE>
The increase in reported revenues in Asia-Pacific resulted from higher
volumes of software licenses and related maintenance revenue. 17% of the
Company's total revenue in 1997 was directly related to the Japanese market,
while 9% was from the Asia-Pacific region outside of Japan.
Of the 96% of the Company's revenues in both 1997 and 1996, that consisted
of software license and maintenance revenue, approximately 78% in 1997 and 80%
in 1996 of this revenue is derived from annual renewable leases and recurring
maintenance fees with the remaining 22% in 1997 and 20% in 1996 related to
paid-up licenses.
The Company is exposed to the impact of foreign currency fluctuations. The
following table details the effect of the currency rate changes on revenue for
1997:
<TABLE>
<CAPTION>
CY 1997 CY 1997
USING 1996 USING 1997
EXCHANGE EXCHANGE
REVENUES RATES RATES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Europe......................................................... $43,235,000 $37,514,000
Asia-Pacific................................................... 37,489,000 34,964,000
------------- -------------
Total Revenue................................................ $80,724,000 $72,478,000
------------- -------------
------------- -------------
Exchange Rates:
$/DM......................................................... 0.665 0.577
Yen/$........................................................ 109.50 121.75
</TABLE>
In addition to the currency impact, 1997 revenue growth was also adversely
affected by the sale of the electromagnetic product line in July 1996, which
contributed revenues of $2,459,000 in 1996.
19
<PAGE>
Operating expense of $113,841,000 in 1997 increased by less than 1% from
$113,396,000 reported in 1996. The increase was attributable to an increase of
$11,140,000 in cost of revenue, an increase of $2,445,000 in selling, general
and administrative expense, offset by a decrease of $13,006,000 in the net cost
of research and development.
In accordance with the SFAS 86, cost of revenue expense includes period
expenses directly related to revenue as well as the amortization of capitalized
software costs. Research and development expense is reported net of the amount
capitalized.
Cost of revenue was $31,566,000 for 1997 compared to $20,426,000 for 1996,
an increase of $11,140,000, or 55%. Cost of revenue as a percent of revenue was
24% and 15% for 1997 and 1996, respectively. This increase included $4,507,000
of additional amortization of capitalized software and a $6,633,000 increase in
other costs of revenue. Capitalized software amortization increased to
$12,043,000 in 1997 from $7,536,000 in the prior year. The change in other costs
of revenue was due to: (1) a $4,166,000 increase in sales commissions to third
parties, (2) a $3,249,000 increase in labor and related costs related to
increases in staffing and the utilization of development and sales resources to
support maintenance and consulting activities, offset by (3) a $417,000 decrease
in product, packaging and delivery costs and offset by (4) a $365,000 decrease
in royalty expense. Royalty expense is also included in cost of revenue and paid
to third parties under various agreements. The Company does not consider any
royalty expense related to individual agreements to be material.
Gross margin, which is revenue less cost of revenue, was $101,238,000 or 76%
of revenues for the year ended December 31, 1997 as compared to $111,655,000 or
85% of revenues for the year ended December 31, 1996 representing a decrease of
$10,417,000. The decrease is due to the Company's increase in its costs of
revenue noted above.
Research and development expense in 1997 was $10,178,000 compared to
$23,184,000 for the year ended December 31, 1996 representing a decrease of
$13,006,000, or 56%. The decrease is the result of a decrease of $8,536,000 in
the total gross investment in research and development activities and by an
increase of $4,470,000 in the amount of research and development expenditures
capitalized under SFAS 86.
The total gross investment in research and development activities for the
year amounted to $22,723,000, or 17% of current year revenue, compared to
$31,259,000, or 24% of revenue in the prior year. The total decrease in the
gross research and development investment between the years was $8,536,000, or
27%. This decrease resulted primarily from changes within the Company's product
management in staffing and staff mix related to a strategic revision in product
development activity. This shift in strategy de-emphasizes features upgrades for
specific products and promotes the development of integrated software solutions
for targeted customers. The changes are in line with the Company's goals and
objectives for research and development.
Capitalized software development costs were $12,545,000 in 1997 compared to
$8,075,000 in 1996, an increase of $4,470,000, or 55%. The amount of product
development capitalized in any given period is a function of many factors
including the number of products under development at any point in time as well
as their stage of development. The Company's product development process is
continually under review to improve efficiency, product quality, and reduce time
to market. Due to the continual change in the product development process there
can be no assurance that the level of development capitalized in future periods
will be comparable to current capitalized levels.
Selling, general, and administrative expense in 1997 was $69,829,000
compared to $67,384,000 in 1996, an increase of less than 4%. The increase
relates primarily to expanded worldwide staffing requirements in the sales and
distribution area and was part of the change in customer focus implemented
during 1997.
20
<PAGE>
As with revenue, the Company is exposed to the impact of foreign currency
fluctuations related to expenses. The following table details the effect of the
currency rate changes on operating expense for 1997:
<TABLE>
<CAPTION>
CY 1997 CY 1997
USING 1996 USING 1997
EXCHANGE EXCHANGE
LOCAL OPERATING EXPENSES* RATES RATES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Europe....................................................... $24,648,000 $21,386,000
Asia-Pacific................................................. 15,066,000 13,550,000
------------- -------------
Total Local Operating Expense.................................. $39,714,000 $34,936,000
------------- -------------
------------- -------------
Exchange Rates:
$/DM......................................................... 0.665 0.577
Yen/$........................................................ 109.50 121.75
</TABLE>
- ------------------------
* Does not include U.S. based cost incurred on behalf of the International
Operations.
Operating income, including software capitalization and amortization was
$18,963,000 in 1997 compared to $18,685,000 in 1996, an increase of 1%. The
$278,000 increase in operating income is primarily attributable to the decrease
in research and development expense of $13,006,000 offset by a decrease in the
Company's gross margin of $10,417,000 and an increase in selling, general and
administrative expense of $2,445,000.
Debenture interest reflects the interest on the convertible subordinated
debentures issued as part of the acquisition of PDA Engineering in 1994.
Interest payments are due on March 15 and September 15 of each year until the
debentures are converted or redeemed.
Other income was $474,000 in 1997 compared to income of $157,000 in 1996.
The fluctuation is primarily attributable to an increase in interest and
investment income from $750,000 in 1996 to $940,000 in 1997 and an increase in
foreign exchange gains from a loss of $397,000 in 1996 to a loss of $502,000 in
1997. Other income also includes gains and losses on sales of assets and other
non-operating income.
The effective tax rate for the year was 34% compared to 32.5% in 1996. This
change reflects a decrease of $419,000 in income tax expense on a year to year
basis.
Net income was $9,887,000 in 1997 compared to $9,711,000 in 1996, an
increase of 2%. The increase in net income was less than the operating income
increase due to an increase in the Company's other income for 1997. Net income
in 1997 was unfavorably affected by fluctuations in functional currencies used
in the Company's international operations. The fluctuation of the U.S. Dollar
versus these currencies could continue to have an unfavorable effect in future
years. The effect of foreign currency translation on net income using the 1997
tax rate of 34% was an unfavorable variance of approximately $2,300,000 if
valued using prior year foreign currency translation rates.
COMPANY TRENDS
On February 3, 1999 the Company announced a new organizational structure
following a re-evaluation of its business strategy. The Company will now
emphasize the expansion of the software business into new markets and
value-added integration services. The new structure is designed to better serve
the existing customer base and at the same time address expanding growth
opportunities.
The new organization includes the Working Knowledge Division, the result of
the Company's acquisition of KR in December 1998. KR is the world's leading
developer and distributor of 2D and 3D-motion simulation software for design
engineers and analysts. The acquisition of KR created the Company's newest
product line, MSC.Working Model. MSC.Working Model is linked to popular
mid-range CAD systems such as SolidWorks, Autodesk's Mechanical Desktop, and
SolidEdge, and answers the questions "Will it break?" and "Will it work?" by
providing stress and motion analysis capabilities. The Company expects that
these changes to its organizational structure will allow the Company to continue
its leadership in the high-end market and deliver tools and expertise to the
mid-range and desktop markets.
21
<PAGE>
During March 1999, the Company created the Engineering-e.com group. This group
will provide a full-service engineering software and solutions marketplace on
the Internet. Additionally, Engineering-e.com will provide the e-commerce
channel for selected Company products.
OPERATING PATTERN
The change in year-end to December 31 and the adoption of SOP 98-9 in the
fourth quarter of 1998 both have a significant effect on the operating pattern
of the Company. The month of January has historically been the largest revenue
month of the year with the highest volume of renewals.
Under SOP 98-9 the Company will be recognizing its software lease revenue on
a monthly basis over the term of the licenses. This change will reduce the
volatility of the revenue stream for interim accounting periods of the Company.
In addition, because the SOP does not permit restatements of prior periods and
because there are annual license renewals in every month of the year, the entire
effect of this change in revenue recognition will not be fully recognized in
reported revenue on a quarterly basis until the fourth quarter of 1999. The year
2000 will be the first reported year that will reflect a full twelve months of
revenue under this method of revenue recognition for annual licenses.
The Company anticipates that revenue for 1999 will also be affected by
having a full-year of operations of the Working Knowledge Division, which was
created in December 1998.
Effective January 1, 1999 the Company has changed the estimated useful life
of its capitalized software assets from three and four years to two and three
years. The Company has always estimated the expected life of these assets based
on the release cycle of its products. The Company believes that as software
production cycles decrease, amortization periods should also decrease in order
to coincide with a version's revenue stream. The Company is making this change
prospectively. Due to the continual change in the product development process
there can be no assurance that the level of development capitalized in future
periods will be comparable to current capitalized levels. Therefore the effect
of this change is not determinable.
LIQUIDITY AND CAPITAL RESOURCES
Working capital needed to finance the Company's growth in the past has been
provided by cash on hand and cash flow from operations. Management believes that
cash generated from operations and the unused portion of its line of credit will
continue to provide sufficient capital for normal working capital needs in the
foreseeable future. Net cash provided by operating activities was $27,197,000
and $18,769,000 in 1998 and 1997, respectively. The Company's working capital at
December 31, 1998 was $21,736,000, compared to $39,053,000 at December 31, 1997.
Cash outlays in conjunction with the $6,595,000 restructuring charge
anticipated in the first quarter of 1999 are estimated to be $948,000. These
outlays are to be completed by the end of 1999, excluding certain lease
commitments that may continue through January 2000.
The Company expended approximately $19.2 million of cash in connection with
the acquisition of KR. The acquisition adversely affected the Company's working
capital position and its cash reserves.
At March 31, 1999, the Company had an agreement with its principal bank for
a $15,000,000 unsecured line of credit. The Company drew down on its line of
credit in the amount of $10,800,000 late in the fourth quarter of 1998 in lieu
of having to liquidate a portion of its securities held for sale portfolio. The
line of credit bears interest at the bank's prime rate of interest with an
option to fix the rate at LIBOR plus 1.9% for a period of 179 days. The interest
rate was fixed under the LIBOR option at December 31, 1998 at 7% with interest
payments due monthly. The line of credit matures in July 2000. The Company is in
violation of certain covenants under the line of credit at December 31, 1998 and
March 31, 1999. The Company is in the process of negotiating a new line of
credit agreement.
The Company issued convertible subordinated debentures in August 1994, in
connection with its PDA acquisition, in the aggregate amount of approximately
$56,608,000. The debentures bear interest at 7 7/8%
22
<PAGE>
with interest payments due semi-annually in March and September. Debenture
interest payments were made in both March 1998 and September 1998 totaling
$4,456,000. The amount of interest expense will decrease if the debentures are
converted into common stock. The debentures mature in August 2004 and are
convertible into common stock at a price of $15.15 per share.
Management expects to continue to invest a substantial portion of the
Company's revenues in the development of new computer software technologies and
products and the enhancement of certain existing products. The Company expended
a total of $25,266,000 and $22,723,000 for the year ended December 31, 1998 and
1997, respectively, on development efforts, of which $11,600,000 and
$12,545,000, respectively, 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 1998 and 1997, the Company acquired $6,003,000 and $3,993,000,
respectively, of new property and equipment. Capital expenditures included
upgrades in computer equipment in order to keep current with technological
advances and upgrades 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 used in
the development and support of its proprietary software products. Management
expects expenditures for property and equipment in 1999 and 2000 to be
consistent with those for 1998.
In 1998, the Company's Board of Directors had authorized the repurchase of
common stock in the open market for up to a total aggregate amount of
$3,000,000. The Company repurchased approximately $2,226,000 of common stock in
1998 before this authorization was rescinded.
On March 9, 1998, the Company entered into a joint-development and marketing
arrangement with Kubota Solid Technology Corporation (KSTC). This arrangement
allows KSTC to purchase warrants with an aggregate exercise price of up to
$3,000,000 to purchase shares of the Company's common stock. The exercise price
is equal to the fair market value of the common stock on the date of issuance of
the warrants. The warrants are non-transferable, have a five-year term and
become exercisable two years after the date of issuance. The arrangement also
provides KSTC with marketing rights to a specific technology being developed.
For the year ended December 31, 1998, the Company has recorded $944,000 of
service revenue related to the development effort and marketing rights provided
under the arrangement and issued warrants to KSTC valued at $556,000 to purchase
185,843 shares of the Company's common stock. The warrants were recorded at fair
value under the Black Scholes valuation method. The warrants issued have
exercise prices ranging between $6.188 per share and $11.375 per share. KSTC has
the right to purchase additional warrants with an aggregate exercise price of
$1,500,000 through December 31, 1999 under the arrangement.
The Company has no obligation under the arrangement to produce a
commercially viable product or technology or to refund any monies contributed by
KSTC.
In September 1998, the Company acquired all of the stock of Silverado
Software & Consulting, Inc., (SSC) for approximately 222,200 shares of common
stock valued at $6.9375 per share or $1,542,000, a promissory note of $331,000
due March 2000 and cash of $936,000 for a total purchase price of $2,809,000.
Net assets acquired included cash and securities available for sale of
approximately $945,000. There was no net cash outlay for the SSC acquisition
because the cash and securities available for sale received in the purchase
approximated the cash paid.
The Company sold its Electromagnetic Business Unit (EBU) to Ansoft
Corporation for $5,600,000 in July 1996, which did not result in a material
effect on earnings. The sale of the unit did not materially affect 1996 net
income compared to prior years because of the relatively small size compared to
the Company's overall operations. However, the sale did significantly improve
both the Company's cash position and its cash used in investing activities,
compared to prior years.
23
<PAGE>
During the middle of 1996, the Company eliminated its quarterly dividend in
order to reinvest more of its earnings into its operations. Dividend payments
were made on the Company's common stock in the aggregate amounts of $5,111,000
in the year ended December 31, 1996. The Company does not plan to reinstate the
payment of dividends in the foreseeable future.
IMPACT OF YEAR 2000
The Company has determined that the purchased software applications and
internally developed software applications that are used internally are Year
2000 compliant. The Company has initiated formal communications with all its
significant suppliers and large customers to determine the extent to which the
Company's internal applications and other interface systems are vulnerable to
those third parties' failure to remediate their own Year 2000 issues. The
Company has assessed that potential problems associated with embedded technology
do not represent a significant area of risk relative to Year 2000 readiness due
to the nature of Company's operations and its use of non-information technology
systems (i.e. embedded technology such as microcontrollers). The Company's
operations do not include capital-intensive equipment with embedded
microcontrollers. However, there is no guarantee that other systems or equipment
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems.
The Company expects to complete its contingency planning for the most
reasonably likely worst case scenarios by August 1999. Depending on the systems
affected, these plans could include: (1) accelerated replacement of affected
equipment or software, (2) short to medium-term use of back-up equipment and
software, (3) increased work hours for Company personnel or use of contract
personnel to correct on an accelerated schedule any Year 2000 issues which arise
or to provide manual workarounds for information systems or (4) other similar
approaches. If the Company is required to implement any of these contingency
plans, such plans could have a material adverse effect on the Company's
business, financial condition or results of operations.
During 1998, the Company made significant progress in its' Year 2000
compliance testing on the software that is sold to customers. The tests certify
that our currently supported products will operate and correctly process dates
over a supported date range which extends from before January 1, 2000 and
encompasses a time period reasonably suitable for the intended use of the
product. Substantially all of the Company's products licensed after January 1,
1998 are Year 2000 compliant. Compliance letters for each product containing
Year 2000 compliance details are posted at the Company's web site at URL
http://www.mscsoftware.com. The Company's policy, in accordance with GAAP, 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 assets' estimated useful lives. The incremental cost of the
modifications to achieve compliance was immaterial to operating results.
Finally, the Company is also subject to external forces that might generally
affect industry and commerce, such as utility or manufacturing company Year 2000
compliance failures and related service and production interruptions.
Furthermore, the purchasing patterns of analysts and designers may be affected
by Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. The Company does not currently have
any information about the Year 2000 status of its customers. However, these
expenditures may result in constant or reduced revenues, which could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
Based on the actions taken to date as discussed above, the Company is
reasonably certain that it has or will identify all Year 2000 issues that could
materially adversely affect its business and operations. The cost of this study
has been immaterial.
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
24
<PAGE>
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 between
January 1, 1999 and 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 Euros or the legacy currency as offered by
the payer. 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
through its wholly owned German subsidiary, 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 decrease pressure for pricing in legacy currencies in the
participating countries. However, the Company also does business in many
non-participating countries including the United Kingdom. This could lead to an
increase in cross-border competition, which could affect its allocation of
resources within Europe, and eventually the Company's labor cost.
The Company is implementing an upgrade to its management information system
which includes the ability to simultaneously record transactions in Euros,
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. Software lease and maintenance
contracts are typically renewed on an annual basis.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
INFLATION
Inflation in recent years has not had a significant effect on the Company's
business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to the impact of foreign currency fluctuations and
interest rate changes.
FOREIGN CURRENCY RISK As discussed above, international revenues are 57% of
the Company's total revenues. International sales are made mostly from the
Company's two foreign sales subsidiaries in Germany and Japan and are typically
denominated in the local currency of each country. These subsidiaries also incur
most of their expenses in the local currency. Accordingly, all foreign
subsidiaries use the local currency as their functional currency.
The Company's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arises in part
from inter-company accounts in which cash from sales of the Company's foreign
subsidiaries costs are transferred back to the United States. These
inter-company accounts are typically denominated in the functional currency of
the foreign subsidiary in order to centralize foreign exchange risk with the
parent company in the United
25
<PAGE>
States. The Company is also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. Dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected profitability. The
effect of foreign exchange rate fluctuations on the Company in 1998 was not
material.
The Company enters into forward exchange contracts to hedge certain
anticipated repayments of its inter-company debt with its foreign subsidiaries.
The forward exchange contracts do not qualify as a hedge for financial reporting
purposes and, accordingly, unrealized gains or losses based on the current
forward foreign exchange rates are reflected directly in income. At December 31,
1998, the Company had two forward exchange contracts maturing in January and
February 1999 to exchange a total of 4,000,000 Deutsche Marks for U.S. Dollars
in the amount of approximately $2,500,000. At December 31, 1997, the Company had
two forward exchange contracts maturing in January and February 1998 to exchange
a total of 4,000,000 Deutsche Marks for U.S. Dollars in the amount of
approximately $2,400,000. The unrealized gains were immaterial at December 31,
1998 and 1997.
INTEREST RATE RISK The Company's exposure to market rate risks for changes
in interest rates relate to both the Company's investment portfolio and its
outstanding borrowings under its line of credit. Refer to Note 5 of Notes to the
Consolidated Financial Statements.
The Company has not used derivative financial instruments in its investment
portfolio. The Company invests its excess cash primarily in debt instruments of
U.S. municipalities and other high-quality issuers and, by policy, limits amount
of credit exposure to any one issuer. The Company protects and preserves its
invested funds by limiting default, market and reinvestment risk. The following
table is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
FAIR MARKET VALUE FAIR MARKET VALUE
----------------- % RATE ----------------- % RATE OF
DECEMBER 31, 1998 OF RETURN DECEMBER 31, 1997 RETURN
----------------- ----------- ----------------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Municipal securities............ $ 15,782 5.8% $ 15,752 4.6%
Other debt securities........... 699 6.4% 331 5.9%
------- -------
$ 16,481 $ 16,083
------- -------
------- -------
</TABLE>
Investments in both fixed rate and floating rate interest earning
instruments carries a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, the Company's future investment income
may fall short of expectations due to changes in interest rates or the Company
may suffer losses in principal if forced to sell securities which have declined
in market value due to changes in interest rates.
The Company's line of credit is available at the variable interest rate of
prime, with an option to fix the rate at LIBOR plus 1.9% for a period of 179
days. As of December 31, 1998, the Company's balance was $10,800,000.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 10,822,000 $ 10,846,000
Securities available for sale....................... 16,481,000 16,083,000
Accounts receivable, net............................ 39,674,000 38,204,000
Deferred tax charges................................ 6,288,000 3,416,000
Other current assets................................ 7,866,000 7,073,000
------------ ------------
Total current assets............................ 81,131,000 75,622,000
Property and equipment, net........................... 8,895,000 8,526,000
Capitalized software costs, net....................... 21,034,000 27,866,000
Goodwill, net......................................... 11,146,000 10,076,000
Other intangibles, net................................ 12,850,000 4,071,000
Other assets.......................................... 3,773,000 2,892,000
------------ ------------
$138,829,000 $129,053,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 3,159,000 $ 2,066,000
Line of credit...................................... 10,800,000 --
Accrued liabilities:
Compensation and related expenses................. 6,412,000 6,135,000
Contribution to profit sharing plan............... 1,796,000 2,791,000
Restructuring reserve............................. 695,000 --
Other............................................. 14,302,000 13,947,000
Deferred income..................................... 20,903,000 10,267,000
Income taxes payable................................ 1,328,000 1,363,000
------------ ------------
Total current liabilities....................... 59,395,000 36,569,000
Deferred income taxes................................. 5,173,000 7,765,000
Convertible Subordinated Debentures................... 56,574,000 56,574,000
Commitments and contingencies
Shareholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; no shares outstanding in 1998 and
1997.............................................. -- --
Common Stock, $0.01 par value, 100,000,000 shares
authorized; 13,710,700 and 13,570,400 issued and
outstanding in 1998 and 1997, respectively........ 32,310,000 31,052,000
Retained earnings (deficit)......................... (11,404,000) 1,575,000
Other comprehensive income (loss)................... (3,219,000) (4,482,000)
------------ ------------
Total shareholders' equity...................... 17,687,000 28,145,000
------------ ------------
$138,829,000 $129,053,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
27
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Software licenses............................................. $ 89,077,000 $ 102,889,000 $ 107,000,000
Software maintenance and services............................. 36,320,000 29,915,000 25,081,000
-------------- -------------- --------------
Total revenues.............................................. 125,397,000 132,804,000 132,081,000
Operating expenses:
Cost of revenue............................................... 46,255,000 31,566,000 20,426,000
Amortization of goodwill and other intangibles................ 2,268,000 2,268,000 2,402,000
Research and development...................................... 13,666,000 10,178,000 23,184,000
Selling, general, and administrative.......................... 64,884,000 69,829,000 67,384,000
Acquired in-process technology................................ 6,000,000 -- --
Restructuring and other impairment charges.................... 2,365,000 -- --
-------------- -------------- --------------
Total operating expenses.................................... 135,438,000 113,841,000 113,396,000
Operating income (loss)......................................... (10,041,000) 18,963,000 18,685,000
Debenture interest.............................................. 4,456,000 4,456,000 4,456,000
Other income, net............................................... (1,322,000) (474,000) (157,000)
-------------- -------------- --------------
Income (loss) before income taxes............................... (13,175,000) 14,981,000 14,386,000
Provision (benefit) for income taxes............................ (196,000) 5,094,000 4,675,000
-------------- -------------- --------------
Net income (loss)............................................... $ (12,979,000) $ 9,887,000 $ 9,711,000
-------------- -------------- --------------
-------------- -------------- --------------
Basic earnings (loss) per share................................. $ (0.95) $ 0.73 $ 0.72
-------------- -------------- --------------
-------------- -------------- --------------
Diluted earnings (loss) per share............................... $ (0.95) $ 0.73 $ 0.72
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
28
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
SHARES OF RETAINED COMPREHENSIVE SHAREHOLDERS'
COMMON STOCK COMMON STOCK EARNINGS INCOME (LOSS) EQUITY
------------ ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 13,437,100 $ 30,024,000 $ (15,063,000) $ (1,393,000) $ 13,568,000
Net income........................ 9,711,000 9,711,000
Currency translation adjustment... (1,232,000) (1,232,000)
--------------
Comprehensive income.............. 8,479,000
Shares issued under Stock Option
Plans........................... 16,700 226,000 226,000
Cash dividends declared-- $.22 per
share (2,960,000) (2,960,000)
------------ ------------- -------------- -------------- --------------
Balance at December 31, 1996........ 13,453,800 30,250,000 (8,312,000) (2,625,000) 19,313,000
Net income........................ 9,887,000 9,887,000
Currency translation adjustment... (1,857,000) (1,857,000)
--------------
Comprehensive income.............. 8,030,000
Shares issued under Stock Option &
Purchase Plans.................. 116,600 802,000 802,000
------------ ------------- -------------- -------------- --------------
Balance at December 31, 1997........ 13,570,400 31,052,000 1,575,000 (4,482,000) 28,145,000
Net loss.......................... (12,979,000) (12,979,000)
Currency translation adjustment... 1,252,000 1,252,000
Unrealized investment gain........ 11,000 11,000
--------------
Comprehensive income (loss)....... (11,716,000)
Shares issued under Stock Option &
Purchase Plans.................. 168,000 1,386,000 1,386,000
Shares issued for Business
Acquired........................ 222,200 1,542,000 1,542,000
Warrants issued................... 556,000 556,000
Repurchase of Treasury Stock...... (249,900) (2,226,000) (2,226,000)
------------ ------------- -------------- -------------- --------------
Balance at December 31, 1998........ 13,710,700 $ 32,310,000 $ (11,404,000) $ (3,219,000) $ 17,687,000
------------ ------------- -------------- -------------- --------------
------------ ------------- -------------- -------------- --------------
</TABLE>
See accompanying notes.
29
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................... $(12,979,000) $ 9,887,000 $ 9,711,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation and amortization of property and equipment............. 6,026,000 5,751,000 6,356,000
Amortization of capitalized software costs.......................... 11,974,000 12,043,000 7,536,000
Impairment of capitalized software costs............................ 7,771,000 -- --
Amortization of goodwill and other intangibles...................... 2,268,000 2,269,000 2,401,000
Impairment of goodwill.............................................. 1,670,000 -- --
Acquired in-process research and development........................ 6,000,000 -- --
Amortization of premiums and discounts of securities available for
sale.............................................................. 69,000 (216,000) --
Deferred income taxes............................................... (5,465,000) 182,000 (732,000)
(Gain) loss on disposal of property and equipment................... (115,000) (68,000) (92,000)
Changes in assets and liabilities:
Accounts receivable, net............................................ (354,000) (9,581,000) 320,000
Other current assets................................................ 1,442,000 (2,809,000) 773,000
Income tax refund receivable........................................ (1,600,000) 1,600,000 --
Accounts payable.................................................... 771,000 307,000 (199,000)
Accrued liabilities................................................. (1,152,000) (149,000) 1,195,000
Deferred income..................................................... 10,211,000 272,000 759,000
Restructuring reserve............................................... 695,000 -- (1,902,000)
Income taxes payable................................................ (35,000) (719,000) 1,682,000
------------ ------------ -----------
Net cash provided by operating activities............................. 27,197,000 18,769,000 27,808,000
Cash flows from investing activities:
Purchase of securities available-for-sale........................... (6,517,000) (16,814,000) 4,934,000
Sale of securities available-for-sale............................... 6,050,000 2,000,000 --
Proceeds from sale of Electromagnetics Business Unit................ -- -- 5,600,000
Acquisition of property and equipment............................... (6,003,000) (3,993,000) (5,363,000)
Businesses acquired, net of cash received........................... (19,140,000) -- (115,000)
Capitalized software costs.......................................... (11,600,000) (12,545,000) (8,075,000)
Purchase of capitalized software.................................... (1,313,000) (182,000) --
Other............................................................... (466,000) 22,000 (380,000)
------------ ------------ -----------
Net cash used in investing activities................................. (38,989,000) (31,512,000) (3,399,000)
Cash flows from financing activities:
Warrants issued..................................................... 556,000 -- --
Line of credit...................................................... 10,800,000 -- (2,500,000)
Issuance of common stock............................................ 1,386,000 802,000 222,000
Retirement of capital stock......................................... (2,226,000) -- --
Cash dividends paid................................................. -- -- (5,111,000)
------------ ------------ -----------
Net cash provided by financing activities............................. 10,516,000 802,000 (7,389,000)
Translation adjustment................................................ 1,252,000 (1,857,000) (1,233,000)
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents.................. (24,000) (13,798,000) 15,787,000
Cash and cash equivalents at beginning of year........................ 10,846,000 24,644,000 8,857,000
------------ ------------ -----------
Cash and cash equivalents at end of year.............................. $ 10,822,000 $ 10,846,000 $24,644,000
------------ ------------ -----------
------------ ------------ -----------
Supplemental cash flow information:
Income taxes paid (refunded)........................................ $ (161,000) $ 5,813,000 $ 2,994,000
------------ ------------ -----------
------------ ------------ -----------
Debenture interest paid............................................. $ 4,456,000 $ 4,456,000 $ 4,456,000
------------ ------------ -----------
------------ ------------ -----------
Reconciliation of assets acquired and liabilities assumed:
Fair value of assets acquired....................................... $ 22,218,000 $ -- $ 309,000
Liabilities assumed................................................. 1,536,000 -- 194,000
Issuance of stock................................................... 1,542,000 -- --
------------ ------------ -----------
$ 19,140,000 $ -- $ 115,000
------------ ------------ -----------
------------ ------------ -----------
</TABLE>
See accompanying notes.
30
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS INFORMATION
BUSINESS The Company designs, produces, and markets proprietary computer
software products and provides related services for use in computer-aided
engineering. The Company's products are marketed internationally to aerospace,
automotive, and other industrial concerns, computer and electronics
manufacturers, and universities.
CHANGE IN YEAR-END In January 1999, the Company changed its reporting
period from a January 31 fiscal year basis to a December 31 calendar year basis.
As part of this change, the Company elected to present restated financial
results on a calendar year basis for all reported prior periods.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION Software license revenue consists of licensing fees,
which are fees charged for the right to use the Company's or a third parties'
software. Maintenance and services revenues include post-customer support (PCS)
and consulting services. PCS includes telephone support, bug fixes and upgrade
privileges on a when and-if available basis. Services range from installation,
training, and basic consulting to software modification and customization to
meet specific customer needs. Software is sold through monthly, annual or longer
lease arrangements and through paid-up license arrangements whereby the customer
purchases a perpetual license for the use of the Company's software.
Revenue was recognized through December 31, 1997 in accordance with the
AICPA's issued Statement of Position (SOP) 91-1 "Software Revenue Recognition."
Revenue from monthly leases of the Company's computer software products was
recognized monthly as earned. The license fee from non-cancelable, prepaid
annual leases and paid up license arrangements were recognized upon delivery of
the software, as long as the collectibility of the sales proceeds was considered
probable and there were no significant obligations, other than PCS, remaining to
be fulfilled subsequent to delivery. PCS (generally 15%) associated with a
license was deferred and recognized on a straight line basis over the period the
PCS is provided, generally one year. There were no material incremental costs
associated with PCS or upgrade privileges. Discounts on the sale of computer
software products and PCS were proportionately allocated to each element of a
sale based on the list price of each element.
As of January 1, 1998, the Company adopted SOP 97-2 "Software Revenue
Recognition," as modified by SOP 98-4 "Deferral of the Effective Date of a
Provision of SOP 97-2." SOP 97-2 as modified by SOP 98-4 provides for revenue
recognition only when there is pervasive evidence of an arrangement, delivery
has occurred, the vendor's fee is fixed or determinable, and collectibility of
the sales proceeds is considered probable. If an arrangement includes multiple
elements, the vendor must allocate the revenue to the various elements based on
vendor-specific objective evidence (VSOE) of fair value. The significant
restrictions of what qualified for VSOE were deferred under SOP 98-4 and as a
result no changes in the Company's revenue recognition policy were necessary
upon adoption of SOP 97-2 as modified by SOP 98-4.
In the fourth quarter of 1998, the Accounting Standards Executive Committee
(AcSEC) of the AICPA issued SOP 98-9 "Modification of SOP 97-2, Software Revenue
Recognition with Respect to Certain
31
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS INFORMATION
(CONTINUED)
Transactions", which retained the restrictions in SOP 97-2 related to the
definition of what qualified for VSOE of fair value for allocating a contract
fee among the various elements of a multiple element arrangement and instituted
what is known as a "residual" method. The residual method is an exception to the
requirement to have VSOE of fair value for all elements in the arrangement.
However, the residual method only allows for the calculation of a residual
amount for the delivered element (i.e., VSOE must be known for all undelivered
elements). As permitted, the Company adopted the provisions of SOP 98-9
effective October 1, 1998, the earliest time possible under published
guidelines. Accordingly, revenue on non-cancelable and prepaid lease agreements
is recognized monthly over the term of the agreement, beginning in the fourth
quarter of 1998, since the VSOE of fair value required under SOP 97-2 needed to
allocate the contract fee to the undelivered PCS element of the arrangements is
not available. This resulted in a decrease in revenues that otherwise would have
been recognized in the fourth quarter since only a portion of the revenues
related to annual lease agreements was recognized. For purposes of allocating
revenues to software licenses or maintenance revenues in the line items in the
accompanying statement of operations the Company continues to allocate 85% of
the contract to software license and 15% to maintenance.
Revenue is derived through the Company's direct sales force, a network of
value-added resellers and other sales agents. Revenue from the sale of products
to resellers is recorded upon delivery to the reseller. Revenue from the sale of
products by other sales agents and for which a commission is due the sales agent
is reported as gross revenues earned from the product sale. Commissions due to
these sales agents represent an operating expense and are recorded as commission
expense in cost of revenue. Revenue from the sale of products provided by other
suppliers and for which a royalty is due the suppliers is reported as gross
revenues earned from the product sale. Royalty due to the supplier represents an
operating expense and is recorded as royalty expense in cost of revenue.
Service and other revenues are recognized when the service is provided and
the revenue has been earned. Long term contracts are recognized using the
percentage of completion method. Service revenue and the costs associated with
service revenue are not material.
STOCK-BASED COMPENSATION The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants. The Company has also made available an Employee Stock Purchase Plan for
eligible employees. Such eligible employees are entitled semi-annually to
purchase common stock, by means of limited payroll deductions at a 10% discount
from the fair market value of the common stock as of specific dates. In 1997,
the Company adopted the disclosure only provisions of Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting For Stock-Based Compensation."
Refer to Note 14: Stock Option Plans.
CASH, CASH EQUIVALENTS AND AVAILABLE FOR SALE SECURITIES For purposes of
the consolidated statements of cash flows, the Company considers investments in
money market instruments to be cash equivalents. Marketable equity securities
and debt securities are classified as held-to-maturity or as available-for-sale.
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
At December 31, 1998 and 1997, all securities were designated as
available-for-sale. Available-for-sale securities are carried at fair value,
with the unrealized gains and losses, net of tax, reported in a separate
component of shareholders' equity. Available-for-sale securities held by the
Company are principally municipal debt securities. Unrealized
32
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS INFORMATION
(CONTINUED)
gains and losses did not have a material effect on equity at December 31, 1998
or December 31, 1997. Refer to Note 5: Financial Instruments.
ACCOUNTS RECEIVABLE Accounts receivable are reported net of allowances for
doubtful accounts. The Company's revenue is generated from customers in
diversified industries, primarily in North America, Europe and Asia-Pacific. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectations.
PROPERTY AND EQUIPMENT Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of assets, ranging from two
to five years.
CAPITALIZED SOFTWARE COSTS Capitalized software costs are comprised of
purchased software and internal software development costs. Software costs
incurred subsequent to the determination of the software product's technological
feasibility are capitalized. Capitalization ceases and amortization of
capitalized costs begins when the software product is available for general
release to clients. Capitalized product development costs and projected revenues
are reviewed quarterly to determine if any impairment in value has occurred that
would require an adjustment in the carrying value or change in expected useful
lives under the guidelines established under SFAS No. 86. Capitalized software
amortization expense is included in cost of revenue. The amortization period for
the software costs capitalized is the economic life of the related products,
typically three to four years. Refer to Note 3: Impairment of Assets and Note
20: Subsequent Events.
OTHER LONG-LIVED ASSETS In accordance with SFAS No. 121, the Company
recognizes impairment losses on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amounts. If
such assets are identified to be impaired, the impairment to be recognized is
the amount by which the carrying value of the asset exceeds the fair value of
the asset.
ADVERTISING EXPENSE The cost of advertising is expensed as incurred. The
Company incurred $1,409,000, $1,329,000, and $1,321,000 in advertising costs
during 1998, 1997, and 1996, respectively.
ROYALTIES TO THIRD PARTIES The Company has several agreements with third
parties requiring the payment of royalties for sales of third party products, or
inclusion of such products as a component of the Company's products. The Company
does not consider any royalty expense related to individual agreements to be
material.
INCOME TAXES The Company utilizes the asset and liability method of
accounting for income taxes. Provision is made in the Company's financial
statements for current income taxes payable and deferred income taxes arising
primarily from temporary differences in accounting for capitalized software
costs, undistributed earnings of international subsidiaries, depreciation
expense, deferred income and state income taxes.
EFFECT OF FOREIGN CURRENCY The Company translates the assets and
liabilities of its foreign subsidiaries at the rate of exchange in effect at the
period end. Revenues and expenses are translated using an average of exchange
rates in effect during the period. Translation adjustments are recorded as a
separate component of shareholders' equity in the consolidated balance sheets.
Transaction gains and losses other than on inter-
33
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS INFORMATION
(CONTINUED)
company accounts deemed to be of a long-term nature are included in net income
in the period in which they occur.
DERIVATIVE INSTRUMENT The Company enters into forward exchange contracts to
hedge certain anticipated repayments of its inter-company debt with its foreign
subsidiaries. The forward exchange contracts do not qualify as a hedge for
financial reporting purposes and, accordingly, unrealized gains or losses based
on the current forward foreign exchange rates are reflected directly in income.
Refer to Note 5: Financial Instruments.
EARNINGS PER SHARE Basic earnings per share exclude any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share include
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share for 1998, 1997 and 1996 exclude the effects of options,
warrants and convertible securities because the effect would be anti-dilutive.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
NOTE 2: ACCOUNTING CHANGES
EARLY ADOPTION OF SOP 98-9
The Company has adopted the provisions of SOP 98-9 in the fourth quarter of
1998 requiring vendor specific objective evidence for all undelivered elements
of a software arrangement. Accordingly, revenue on non-cancelable and prepaid
lease agreements is recognized monthly over the term of the agreement since the
Company does not have the VSOE of fair value required under SOP 97-2 to allocate
the contract fee to the undelivered PCS element of the arrangements. This
resulted in a decrease in revenues that otherwise would have been recognized in
the fourth quarter since only a portion of the revenues related to annual lease
agreements was recognized. The total amount of revenue recorded for these
agreements will be unchanged; however, revenue will be deferred into subsequent
periods.
NOTE 3: IMPAIRMENT OF ASSETS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased or Otherwise Marketed," and SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," the Company recognizes impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amounts. Accordingly, in the fourth quarter of 1998, the Company
recognized non-cash pre-tax charges totaling $9,834,000, in the fourth quarter
of 1998, on various long-lived assets described below. There were no such losses
recognized during 1997 or 1996.
34
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: IMPAIRMENT OF ASSETS (CONTINUED)
CAPITALIZED SOFTWARE
MSC.PATRAN Since the acquisition of PDA Engineering, Inc. (PDA), the
Company has attempted to correct many of the shortcomings with PATRAN but found
that a major rewrite and replacement of the underlying database management
system was necessary to correct inherent flaws with the product's basic
architecture. These flaws prevented both performance enhancements and increases
in the functionality of the product. This initiative began in late 1996 and the
result of these efforts was Version 8 of MSC.PATRAN. This major rewrite included
many changes to the underlying architecture, complete replacement of the
existing data base management system, and other programming enhancements to
improve performance, reliability, and portability to new hardware platforms,
specifically the NT operating system. The release of Version 8 was staged over
the second and third quarters of 1998 with pre-releases to select customers for
beta testing. This strategy was orchestrated to assure customer acceptance at an
early stage. PATRAN customer responses to Version 8 were very positive with the
transition from earlier versions to Version 8 occurring very quickly during the
later part of 1998. MSC.PATRAN Version 8 is now the primary source of MSC.PATRAN
revenue, with over 93% of total MSC.PATRAN revenue in the fourth quarter coming
from Version 8. With this high level of acceptance in the marketplace,
management believes the future cash flows from prior versions will be near zero
for all prior versions of MSC.PATRAN. In addition, due to the significant
changes in the technological architecture of the product, future cash flows of
Version 8 could not be considered in measuring the NRV of prior versions.
Accordingly, a $4,096,000 charge was recorded in cost of revenue in the fourth
quarter of 1998 to write-off capitalized software costs of all versions of
MSC.PATRAN prior to Version 8.
OTHER CAPITALIZED SOFTWARE The Company has launched many new products over
the last two years. The 1998 revenues from some of these products are below
original projections. As part of the change in the Company's leadership in
December 1998 and the Company's restructuring plan, discussed in Note 20, the
Company has changed its focus and will reduce its marketing efforts for certain
products. Accordingly, management has revised its future revenue projections of
these products. These revenue decreases reduce the future cash flows of six
products below their net asset value. Therefore, the Company has written off
$3,675,000 of capitalized software costs representing the excess of the carrying
amount of these products over their future cash flows and provided for $393,000
of related minimum royalty payments and software licenses for these products.
SILVERADO GOODWILL
As discussed in Note 4, $1,670,000 of excess purchase price was recorded as
goodwill in connection with the purchase of Silverado Software & Consulting,
Inc. (SSC). This premium was based in part on Silverado's past performance but
also on the potential opportunity the Company's management saw in the ability to
tap into Silverado's established customer base to expand the Company's contract
analysis and consulting business. As part of the Company's restructuring plan,
discussed in Note 20, the Company has changed its focus to emphasize the
expansion of the software business and value-added integration services as
opposed to the contract analysis business.
It has now been determined that the revenue stream from the contract
analysis business is not sufficient and is currently not projected to be
sufficient to cover the costs associated with the operation. Management
estimates that SSC will not produce sufficient revenue to cover the costs
associated with the production of the revenue. Therefore, the Company has
determined the fair value of the goodwill is zero
35
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: IMPAIRMENT OF ASSETS (CONTINUED)
and recorded a charge included in restructuring and other impairment charges to
write-off the entire amount of goodwill associated with the acquisition of SSC.
NOTE 4: ACQUISITIONS AND DIVESTITURES
In late December 1998, the Company acquired Knowledge Revolution (KR) for
approximately $19.2 million in cash. KR is the world's leading developer and
distributor of 2D and 3D-motion simulation software for design engineers and
analysts. The acquisition has been accounted for as a purchase and, accordingly,
the operating results of KR have been included in the Company's consolidated
financial statements since the date of acquisition. The total purchase price was
allocated to the assets and liabilities of KR based on their approximate fair
market value. The appraisal of the acquired business included $6,000,000 of
purchased in-process research and development, which was related to three
products under development. This valuation represents the five-year after tax
cash flow of this in-process technology using a discount rate of 28%. The
acquired technology had not yet reached technological feasibility and had no
future alternative uses. Accordingly, it was written off at the time of the
acquisition. No other portion of the impairment charges or other restructuring
charges is related to this purchase. The remaining purchase price was allocated
as follows: $800,000 to net tangible assets, $9,890,000 to identified intangible
assets, including $5,200,000 of value-added reseller distribution channel,
$4,300,000 of developed technology, and $390,000 of assembled work force, and
$2,510,000 to goodwill. Goodwill and identified intangibles are being amortized
over three to ten years. The pro forma effect of the KR acquisition as if it had
occurred on January 1,1998 and 1997, respectively is immaterial to the financial
statements presented herein.
In September 1998, the Company acquired all of the stock of SSC for total
consideration of $2,809,000 consisting of the issuance of 222,200 shares of the
Company's common stock at $6.9375 per share or $1,542,000, a promissory note of
$331,000 due March 2000 and cash of $936,000. Net assets acquired included cash
and securities available for sale of approximately $945,000. SSC is a provider
of engineering services and custom software solutions for the design and
analysis of mechanical components, electronic packaging, and civil structures.
The acquisition has been accounted for as a purchase and, accordingly, the
operating results of SSC have been included in the Company's consolidated
financial statements since the date of acquisition. The excess of the aggregate
purchase price over the fair market value of net assets acquired was
approximately $1,670,000, which was written off during 1998 due to its
impairment. Refer to Note 3: Impairment of Assets.
In July 1996, the Company sold its Electromagnetic Business Unit to Ansoft
Corporation for $5,600,000, which did not result in a material effect on
earnings.
NOTE 5: FINANCIAL INSTRUMENTS
OFF BALANCE SHEET RISK
The Company enters into forward exchange contracts to hedge certain
anticipated repayments of its inter-company debt with its foreign subsidiaries.
At December 31, 1998, the Company had two forward exchange contracts maturing in
January and February 1999 to exchange a total of 4,000,000 Deutsche Marks for
U.S. Dollars in the amount of approximately $2,500,000. At December 31, 1997,
the Company had two forward exchange contracts maturing in January and February
1998 to exchange a total of 4,000,000 Deutsche Marks for U.S. Dollars in the
amount of approximately $2,400,000. Unrealized gains or losses based on the
current forward foreign exchange rates are reflected directly in income. The
unrealized gains were immaterial at December 31, 1998 and 1997.
36
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: FINANCIAL INSTRUMENTS (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments and trade
accounts receivable. The Company maintains cash and available for sale
securities with several financial institutions. Company policy is designed to
limit exposure to any one institution.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the number of entities and the size of those entities comprising
the Company's customer base.
AVAILABLE-FOR-SALE SECURITIES The following is a summary of
available-for-sale securities:
<TABLE>
<CAPTION>
FAIR MARKET VALUE
------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
DOLLARS IN THOUSANDS
<S> <C> <C>
Municipal securities................................... $ 15,782 $ 15,752
Other debt securities.................................. 699 331
------- -------
$ 16,481 $ 16,083
------- -------
------- -------
</TABLE>
The fair market value of municipal and debt securities at December 31, 1998
and 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
FAIR MARKET VALUE
------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
DOLLARS IN THOUSANDS
<S> <C> <C>
Due in one year or less................................ $ 10,257 $ 2,868
Due after one year through three years................. 4,075 8,500
Due after three years.................................. 2,149 4,715
------- -------
$ 16,481 $ 16,083
------- -------
------- -------
</TABLE>
LINE OF CREDIT The Company has an agreement with its principal bank for a
$15,000,000 unsecured line of credit at the bank's prevailing prime rate. The
line had a balance of $10,800,000 at an interest rate of LIBOR plus 1.9% or 7.0%
at December 31, 1998 and was unused at December 31, 1997. Borrowings under the
line are subject to certain restrictive covenants. This line of credit agreement
expires July 2000. The Company is in violation of certain of these covenants at
December 31, 1998 and has not received a waiver from these covenants.
CONVERTIBLE SUBORDINATED DEBENTURES The Company issued $56,608,000 of
convertible subordinated debentures in connection with the acquisition of PDA
Engineering, Inc. in 1994. The debentures bear interest at 7 7/8% with interest
payments due semi-annually on March 15th and September 15th. The conversion
feature permits the holder to convert the debentures into shares of the
Company's Common Stock at a conversion price of $15.15 per share. The debentures
mature August 18, 2004, but are redeemable at the Company's option at any time
after August 18, 1997 upon payment of a premium. At December 31, 1998 the fair
market value of the debentures outstanding based on their quoted trading price
was approximately $52,048,000.
37
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE The carrying amounts reported in
the balance sheet for accounts receivable and accounts payable approximate their
fair value.
AVAILABLE-FOR-SALE SECURITIES The fair values for available-for-sale
securities are based on quoted market prices.
LINE OF CREDIT The carrying amount of the Company's line of credit
approximates its fair value since the line of credit carries a floating interest
rate.
CONVERTIBLE SUBORDINATED DEBENTURES The fair market value of the debentures
outstanding is based on their quoted trading price.
The carrying amounts and fair values of the Company's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------- ---------- ---------------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 10,822 $ 10,822 $ 10,846 $ 10,846
Securities available for sale..... 16,481 16,481 16,083 16,083
Accounts receivable............... 39,674 39,674 38,204 38,204
Accounts payable.................. (3,159) (3,159) (2,066) (2,066)
Line of credit.................... (10,800) (10,800) -- --
Convertible subordinated
debentures...................... (56,574) (52,048) (56,574) (56,574)
</TABLE>
NOTE 6: ACCOUNTS RECEIVABLE
The components of the Company's allowance for doubtful accounts receivable,
consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1998 1997
--------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Beginning balance........................................................ $ 1,691 $ 1,700
Amounts charged to expense............................................... 2,203 1,243
Write-downs against the reserve.......................................... (289) (1,252)
--------- ---------
Ending balance........................................................... $ 3,605 $ 1,691
--------- ---------
--------- ---------
</TABLE>
38
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Computers and other equipment......................................... $ 24,496 $ 32,558
Furniture and fixtures................................................ 2,393 1,804
Leasehold improvements................................................ 2,499 1,748
---------- ----------
29,388 36,110
Less accumulated depreciation and amortization........................ (20,493) (27,584)
---------- ----------
$ 8,895 $ 8,526
---------- ----------
---------- ----------
</TABLE>
NOTE 8: CAPITALIZED SOFTWARE COSTS
Amortization of capitalized software costs of $11,974,000, excluding
$7,771,000 of impairment charges, in 1998, $12,043,000 in 1997, and $7,536,000
in 1996 is included in cost of revenues. Costs of internally developed software
that were capitalized amounted to $11,600,000 in 1998, $12,545,000 in 1997, and
$8,075,000 in 1996. In addition, the Company purchased certain software that was
capitalized in 1998 and 1997 amounting to $1,313,000 and $182,000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
Capitalized software costs............................................ $ 70,470 $ 65,328
Less accumulated amortization......................................... (49,436) (37,462)
---------- ----------
Capitalized software costs, net....................................... $ 21,034 $ 27,866
---------- ----------
---------- ----------
</TABLE>
NOTE 9: GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill amounting to approximately $11,146,000 and $10,076,000 net of
accumulated amortization of $6,618,000 and $5,112,000 as of December 31, 1998
and 1997, respectively, arising from acquisitions is amortized on the
straight-line basis over a period of 10 years. Other intangibles amounted to
approximately $12,850,000 and $4,071,000, net of accumulated amortization of
$3,430,000 and $2,667,000 as of December 31, 1998 and 1997, respectively, and
are amortized on a straight-line basis over three to 10 years. The carrying
value of intangibles is evaluated periodically in relation to the operating
performance and the future undiscounted cash flows of the underlying business.
Adjustments are made if the sum of expected future net cash flows is less than
book value. Refer to Note 3: Impairment of Assets.
39
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: OTHER ACCRUED LIABILITIES
The components of the Company's other accrued liabilities, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Debenture interest payable.............................................. $ 1,325 $ 1,317
Royalties payable....................................................... 1,169 898
Commissions payable..................................................... 1,226 1,901
Consumption taxes payable............................................... 2,896 2,583
Retirement benefits..................................................... 1,929 2,396
Incentive compensation payable.......................................... 1,222 230
Other................................................................... 4,535 4,622
--------- ---------
Total................................................................... $ 14,302 $ 13,947
--------- ---------
--------- ---------
</TABLE>
NOTE 11: TAXES BASED ON INCOME
The provision (benefit) for taxes based on income (loss) consists of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Current:
Federal....................................................... $ 1,994 $ 293 $ 584
State......................................................... 489 160 422
Foreign....................................................... 2,786 4,459 3,669
--------- --------- ---------
5,269 4,912 4,675
Deferred........................................................ (5,465) 182 --
--------- --------- ---------
$ (196) $ 5,094 $ 4,675
--------- --------- ---------
--------- --------- ---------
</TABLE>
The foreign tax provision for 1998, 1997, and 1996 includes withholding
taxes of $2,075,000, $2,546,000, and $1,780,000, respectively, assessed to the
Company by foreign authorities on foreign revenues remitted to the U.S. The
Company's foreign operations realized combined taxable income (loss), including
inter-company charges and before taxes of $(4,134,000) in 1998, $2,889,000 in
1997, and $2,025,000 in 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
40
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: TAXES BASED ON INCOME (CONTINUED)
purposes. Significant components of the Company's deferred tax liabilities and
assets as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Deferred tax liabilities
Capitalized software.................................................. $ 8,406 $ 12,200
Intangible assets..................................................... 1,035 1,221
Organization Costs.................................................... 344 473
Prepaid expenses...................................................... 74 94
Other................................................................. 13 10
--------- ---------
Total deferred tax liabilities.................................... 9,872 13,998
Deferred tax assets
State taxes........................................................... 180 576
Accrued liabilities................................................... 610 374
Net operating losses.................................................. 5,692 4,945
Deferred revenue...................................................... 3,794 1,093
Foreign deferred taxes................................................ 1,788 1,782
Undistributed earnings of foreign subsidiaries........................ 868 3,006
Business credits...................................................... 1,296 1,684
Sale of business unit................................................. 32 388
Restructuring liability............................................... 458 --
Benefits and compensation............................................. 1,288 1,078
Book in excess of tax depreciation.................................... 239 164
--------- ---------
Total deferred tax assets......................................... 16,245 15,090
Valuation allowance................................................... (5,258) (5,442)
--------- ---------
Net deferred tax assets........................................... 10,987 9,648
--------- ---------
Net deferred tax (assets)/liabilities................................. $ (1,115) $ 4,350
--------- ---------
--------- ---------
</TABLE>
The balance sheet presentation of the net deferred taxes
(assets)/liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C>
Net long-term deferred tax liability..................................... $ 5,173 $ 7,766
Current deferred charges................................................. (6,288) (3,416)
--------- ---------
Net deferred tax (assets)/liabilities.................................... $ (1,115) $ 4,350
--------- ---------
--------- ---------
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $16,264,000. The federal net
operating loss carryforwards expire at various dates through the year 2012. An
acquisition by the Company in 1993 constituted an ownership change for federal
income tax purposes and as a result, the amount of net operating loss
carryforwards that may be
41
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: TAXES BASED ON INCOME (CONTINUED)
utilized in any given year may be limited. For financial reporting purposes, a
valuation allowance of $5,258,000 at December 31, 1998, $5,442,000 at December
31, 1997, and $5,800,000 at December 31, 1996 has been recognized to offset the
deferred tax assets relating to acquisition before 1996. The decrease in the
valuation allowance of $184,000 in 1998 is attributable to the utilization of
previously acquired net operating losses.
The following table reconciles the provision for taxes based on income
before taxes to the statutory federal income tax rate of 35% for the years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate..................... $ (4,611) $ 5,243 $ 5,036
Increase (decrease) related to:
State income taxes, net of federal benefits................... (156) 564 509
Amortization of goodwill...................................... 1,112 527 527
Income of Foreign Sales Corporation........................... (1,136) (1,056) (1,201)
Excludable portion of investment income....................... (271) (66) (24)
Federal and state research and development tax credits........ (631) (526) --
Benefit from net operating loss............................... (21) -- (104)
Foreign losses not benefited.................................. 3,331 -- --
Acquired in-process technology................................ 2,100 -- --
Other, net.................................................... 87 408 (68)
--------- --------- ---------
$ (196) $ 5,094 $ 4,675
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 12: INTERNATIONAL OPERATIONS
The Company operates in a single reportable segment. International
Operations consist primarily of foreign sales offices selling software developed
in the U.S. combined with local service revenue. The following tables summarize
consolidated financial information of the Company's operations by geographic
location:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Revenues:
The Americas (substantially the U.S.).................. $ 58,409 $ 60,326 $ 56,203
Europe................................................. 39,875 37,514 40,635
Asia-Pacific........................................... 27,113 34,964 35,243
---------- ---------- ----------
Consolidated........................................... $ 125,397 $ 132,804 $ 132,081
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
42
<PAGE>
THE MACNEAL-SCHWENDLER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: INTERNATIONAL OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Identifiable assets:
The Americas (substantially the U.S.).................. $ 100,267 $ 97,736 $ 87,299
Europe................................................. 26,353 19,798 21,151
Asia-Pacific........................................... 12,209 11,519 11,336
---------- ---------- ----------
Consolidated........................................... $ 138,829 $ 129,053 $ 119,786
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The net assets of the Company's foreign subsidiaries totaled $16,875,000,
$17,309,000, and $17,638,000 in 1998, 1997 and 1996, respectively, excluding
inter-company items. Long-lived assets included in these amounts were
$4,413,000, $3,499,000, and $3,405,000, in 1998, 1997 and 1996, respectively.
The taxable income of the Company's foreign subsidiaries is reported in Note 11:
Taxes Based on Income.
NOTE 13: EMPLOYEE BENEFITS
The Company contributes an amount, integrated with Social Security, to a
defined contribution plan, covering substantially all North American full-time
employees who have completed a specified term of service with the Company.
Contributions charged to expense in connection with this plan were approximately
$1,704,000 in 1998, $2,694,000 in 1997, and $2,960,000 in 1996. The plan has a
401(k) feature to permit voluntary employee contributions, which does not affect
the Company's expenses.
The Company adopted a non-qualified supplemental retirement plan during the
year ended December 31, 1995. The Company contributes an amount, integrated with
Social Security and the Company's defined contribution plan, covering certain
key employees who have completed a specified term of service with the Company.
Contributions charged to expense in connection with this plan were approximately
$58,000 in 1998, $134,000 in 1997, and $148,000 in 1996.
The Company announced the termination of its post retirement health care
plan in the third quarter of 1998. The accrued obligation of the plan totaling
$1,157,000 was recorded as a reduction to selling, general and administrative
expense in the third quarter of 1998. The plan had been established for
employees completing minimum age and years of service requirements. The plan
provided for a benefit offsetting premiums for health care coverage. The amount
of the benefit was based on a combination of the age of the participant and the
number of years of service at retirement. The gross remaining accumulated
post-retirement obligation was approximately $112,000 and $1,241,000 at December
31, 1998 and 1997, respectively. The liability at December 31, 1998 represents
the Company's obligation to reimburse certain employees for their health
insurance premiums through June 1999. The Company was recognizing past service
cost over 20 years. Total expense excluding the gain recognized on the
termination of the plan for the years ended December 31, 1998, 1997 and 1996 was
$54,000, $334,000, and $298,000, respectively.
43
<PAGE>
NOTE 14: STOCK OPTION PLANS AND WARRANTS
1983 PLAN
The 1983 MacNeal-Schwendler Incentive Stock Option Plan for Key Employees
provided for the granting of options for the purchase of up to 900,000
authorized but unissued shares of the Company's Common Stock, at option prices
of not less than the fair market value of the common shares at the date of
grant. The options become fully exercisable one year from the date of grant and
expire five years after the date of grant. The 1983 Plan expired in 1994,
therefore no additional shares are available for grant.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
--------- --------------- -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1995............... 205,645 $ 8.00-$16.13 $ 13.59
Exercised...................................... (300) $ 8.00-$ 8.00 $ 8.00
Canceled....................................... (53,345) $ 8.00-$16.13 $ 12.51
---------
Outstanding at December 31, 1996............... 152,000 $13.38-$14.25 $ 13.98
Canceled....................................... (73,400) $13.38-$14.25 $ 13.66
---------
Outstanding at December 31, 1997............... 78,600 $13.38-$14.25 $ 14.29
Canceled....................................... (78,600) $13.38-$14.25 $ 14.29
---------
Outstanding at December 31, 1998............... -- -- --
---------
---------
</TABLE>
All options outstanding were exercisable at December 31, 1997 and 1996.
1991 PLAN
The MacNeal-Schwendler 1991 Stock Option Plan, as amended, consists of two
parts--a "Key Employee Program" that allows discretionary awards of
nontransferable incentive stock options and non-qualified stock options to
officers and other key employees, and a "Non-Employee Director Program" that
provides for automatic annual grants of nontransferable, non-qualified stock
options to non-employee directors.
The "Key Employee Program" section of the 1991 Plan provides for the
granting of both incentive stock options and non-qualified options for the
purchase of up to 2,500,000 authorized but unissued shares of the Company's
common stock at the fair market value of such shares on the date the option is
granted, or for non-qualified options at such price as the Compensation
Committee may determine.
The "Non-Employee Director Program" section of the 1991 Plan provides for
automatic grants to members of the Board of Directors who are not officers or
employees of the Company or its subsidiaries. A maximum of 500,000 shares of
Company authorized but unissued common stock may be issued upon the exercise of
options under the "Non-Employee Director Program." All eligible directors will
receive annual non-discretionary grants of non-qualified stock options for the
purchase of 3,000 shares of the Company's common stock.
Options under the 1991 Plan are exercisable up to ten years from the date of
grant, subject to vesting provisions outlined at the grant date.
44
<PAGE>
NOTE 14: STOCK OPTION PLANS AND WARRANTS (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
---------- --------------- -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1995.............. 1,720,500 $8.00-$19.38 $ 13.39
Granted....................................... 626,350 $6.50-$15.88 $ 9.11
Exercised..................................... (18,000) $8.00-$15.38 $ 13.40
Canceled...................................... (137,500) $8.00-$19.38 $ 14.14
----------
Outstanding at December 31, 1996.............. 2,191,350 $6.50-$15.88 $ 12.14
Granted....................................... 107,000 $7.75-$13.06 $ 10.46
Exercised..................................... (24,600) $6.50-$11.00 $ 7.11
Canceled...................................... (196,950) $6.50-$15.38 $ 12.65
----------
Outstanding at December 31, 1997.............. 2,076,800 $6.50-$15.88 $ 12.07
Granted....................................... 1,167,350 $5.38-$11.25 $ 9.28
Exercised..................................... (64,950) $6.50-$11.00 $ 8.78
Canceled...................................... (629,750) $7.75-$15.88 $ 13.27
----------
Outstanding at December 31, 1998.............. 2,549,450 $5.38-$15.88 $ 10.58
----------
----------
</TABLE>
The number of options exercisable under the 1991 Plan at December 31, 1998,
1997, and 1996 were 1,386,150, 1,743,300, and 1,857,850, respectively.
1998 PLAN
The MacNeal-Schwendler 1998 Stock Option Plan consists of two parts--a "Key
Employee Program" that allows discretionary awards of nontransferable incentive
stock options and non-qualified stock options to officers and other key
employees, and a "Non-Employee Director Program" that provides for automatic
annual grants of nontransferable, non-qualified stock options to non-employee
directors.
The "Key Employee Program" section of the 1998 Plan provides for the
granting of both incentive stock options and non-qualified options for the
purchase of up to 940,000 authorized but unissued shares of the Company's common
stock at the fair market value of such shares on the date the option is granted,
or for non-qualified options at such price as the Compensation Committee may
determine.
The "Non-Employee Director Program" section of the 1998 Plan provides for
automatic grants to members of the Board of Directors who are not officers or
employees of the Company or its subsidiaries. A maximum of 60,000 shares of
Company authorized but unissued common stock may be issued upon the exercise of
options under the "Non-Employee Director Program." All eligible directors will
receive annual non-discretionary grants of non-qualified stock options for the
purchase of 3,000 shares of the Company's common stock. Options to be granted to
non-employee directors under the 1998 Plan would not begin until 2000.
Options under the 1998 Plan are exercisable up to ten years from the date of
grant, subject to transfer restrictions and vesting provisions outlined at the
grant date. The Plan provides that vesting may be accelerated in certain events
related to changes in control of the Company, unless the Compensation Committee,
prior to such change in control, determines otherwise. Similarly, the Plan
provides that the Compensation Committee has discretion, subject to certain
limits, to modify the terms of outstanding options. No amendment or cancellation
and re-grant, subject to permitted adjustments, shall reduce the per share
exercise price to a price less than 100% of the fair market value of the Common
Stock on the Option date of the initial Option.
45
<PAGE>
NOTE 14: STOCK OPTION PLANS AND WARRANTS (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
OPTION PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
--------- ------------- -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1997.................. -- -- --
Granted........................................... 600,000 $5.38-$9.00 $ 8.00
---------
Outstanding at December 31, 1998.................. 600,000 $5.38-$9.00 $ 8.00
---------
---------
</TABLE>
No options were exercisable under the 1998 Plan at December 31, 1998.
At December 31, 1998 and 1997, the per-share weighted-average exercise
prices of the stock options exercisable under the 1998 Plan were none and none,
under the 1991 Plan were $11.46 and $12.23, and under the 1983 Plan were none
and $14.29, respectively. Options to purchase 711,000 and 848,600 shares were
available for future grant as of December 31, 1998 and 1997, respectively. At
December 31, 1998 the weighted-average remaining contractual life for stock
options granted under the 1998 Plan, 1991 Plan, and 1983 Plan was 8, 6 years,
and none, respectively.
EMPLOYEE STOCK PURCHASE PLAN
In September 1996, the Company's Board of Directors adopted The
MacNeal-Schwendler Corporation 1996 Employee Stock Purchase Plan. This Plan was
approved by the shareholders at the 1997 annual meeting of shareholders. Under
the Plan, a maximum of 750,000 shares of the Company's common stock have been
made available for purchase by eligible employees electing to participate in the
Plan. The Plan is intended to provide participating eligible employees an
additional incentive to advance the best interests of the Company through
ownership of common stock. At January 31, 1999, a total of 143 eligible
employees elected to participate in the Plan with total payroll deductions as of
that date equal to $352,000. Purchases totaling 90,000 shares for $627,700,
48,500 shares for $406,500 and 54,100 shares for $386,600 were exercised on July
31, 1997, January 31, 1998 and July 31, 1998, respectively. There are 557,400
remaining shares eligible for purchase under the Plan as of December 31, 1998.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized in the results of operations for the stock option grants. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant date for awards in 1998, 1997, and 1996 consistent
with the provisions of SFAS No. 123, the Company's net income and basic earnings
per share would have been reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---------- --------- ---------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Net income (loss)--as reported................................. $ (12,979) $ 9,887 $ 9,711
Net income (loss)--pro forma................................... (13,371) 8,194 7,662
Basic earnings (loss) per share--as reported................... (0.95) 0.73 0.72
Basic earnings (loss) per share--pro forma..................... (0.98) 0.61 0.57
Diluted earnings (loss) per share--as reported................. (0.95) 0.73 0.72
Diluted earnings (loss) per share--pro forma................... (0.98) 0.47 0.44
</TABLE>
46
<PAGE>
NOTE 14: STOCK OPTION PLANS AND WARRANTS (CONTINUED)
Note: Diluted earnings per share are presented as equal to or less than
basic earnings per share.
Using the Black-Scholes valuation model, the per share weighted-average fair
value of stock options granted during the fiscal years ended December 31, 1998,
1997, and 1996 was $4.23, $4.37, and $4.69, respectively.
The pro forma effect on the Company's net income and basic earnings 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 1996 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 made in 1998: dividend yield of 0%;
expected volatility of 46.1%; risk-free interest rate of 7.0%. The following
weighted-average assumptions were used for grants made in 1997: dividend yield
of 0%; expected volatility of 41.9%; risk-free interest rate of 7.0%. The
following weighted average assumptions were used for grants made in 1996:
dividend yield of 0%; expected volatility of 42.0%; risk-free interest rate of
7.5%.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options, such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly subjective,
particularly the expected stock price volatility of the underlying stock.
Because changes in these subjective input assumptions can materially affect the
fair value estimate, in management's opinion the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
WARRANTS
On March 9, 1998 the Company entered into a joint-development and marketing
arrangement with Kubota Solid Technology Corporation (KSTC). This arrangement
allows KSTC to purchase warrants with an aggregate exercise price of up to
$3,000,000 to purchase shares of the Company's common stock. The exercise price
is equal to the fair market value of the common stock on the date of issuance of
the warrants. The warrants are non-transferable, have a five-year term and
become exercisable two years after the date of issuance. The arrangement also
provides KSTC with marketing rights to a specific technology being developed.
For the year ended December 31, 1998, the Company has recorded $944,000 of
service revenue related to the development effort and marketing rights provided
under the arrangement and issued warrants to KSTC valued at $556,000 to purchase
185,843 shares of the Company's common stock. The warrants were recorded at fair
value under the Black-Scholes valuation method. The warrants issued have
exercise prices ranging between $6.188 per share and $11.375 per share. KSTC has
the right to purchase additional warrants with an aggregate exercise price of
$1,500,000 through December 31, 1999 under the arrangement.
The Company has no obligation under the arrangement to produce a
commercially viable product or technology or to refund any monies contributed by
KSTC.
47
<PAGE>
NOTE 15: COMMITMENTS AND CONTINGENCIES
The Company leases facilities and equipment under various lease agreements,
which range from one to ten years, which require the following minimum annual
rental commitments:
<TABLE>
<CAPTION>
OPERATING LEASES DOLLARS IN
YEARS ENDED DECEMBER 31 THOUSANDS
- ------------------------------------------------------------------------- -------------------
<S> <C>
1999..................................................................... $ 6,543
2000..................................................................... 4,744
2001..................................................................... 3,451
2002..................................................................... 2,032
2003..................................................................... 1,745
Thereafter............................................................... 2,577
-------
$ 21,092
-------
-------
</TABLE>
The combined annual rental cost for various facilities and equipment under
operating leases approximated $6,900,000 in 1998, $5,575,000 in 1997, and
$5,289,000 in 1996. In most cases management expects that in the normal course
of business, leases will be renewed or replaced by others.
NOTE 16: ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
CURRENCY UNREALIZED
TRANSLATION INVESTMENT
ADJUSTMENTS GAIN TOTAL
----------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1995................................................. $ (1,393) $ -- $ (1,393)
Currency translation adjustment.............................................. (1,232) -- (1,232)
----------- --- ---------
Balance at December 31, 1996................................................. (2,625) -- (2,625)
Currency translation adjustment.............................................. (1,857) -- (1,857)
----------- --- ---------
Balance at December 31, 1997................................................. (4,482) -- (4,482)
Currency translation adjustment.............................................. 1,252 -- 1,252
Unrealized investment gain................................................... -- 11 11
----------- --- ---------
Balance at December 31, 1998................................................. $ (3,230) $ 11 $ (3,219)
----------- --- ---------
----------- --- ---------
</TABLE>
The Company does not provide any deferred tax benefit for translation
adjustment because the recoverability of the benefit is not anticipated in the
foreseeable future and the amount of tax associated with the unrealized gain was
immaterial.
NOTE 17: SHAREHOLDERS' EQUITY
In September 1988, the Company distributed to common shareholders one right
for each outstanding share of Common Stock. Each right entitled the holder to
purchase one-half share of Common Stock at an exercise price of $50 subject to
adjustment. The rights were attached to all Common Stock certificates and no
separate right certificate was distributed. The rights expired on September 19,
1998.
In October 1998 a new Stockholder Rights Plan was adopted. As part of this
Plan, a special type of dividend was declared on the Common Stock of the Company
distributing these rights to all stockholders of record on October 16, 1998.
These rights, which do not have any shareholder rights, including voting or
48
<PAGE>
NOTE 17: SHAREHOLDERS' EQUITY (CONTINUED)
dividend rights, will expire on October 5, 2008 unless earlier redeemed by the
Company prior to expiration at a price of $.01 per right. The rights
automatically transfer with a transfer of Common Stock until the time they
become exercisable, which happens when certain specified events occur. If the
rights become exercisable, they entitle the holders thereof to purchase stock of
the Company at a price of $35.00, subject to certain other provisions of the
plan. At December 31, 1998, approximately 13,710,713 shares of Common Stock were
reserved for issuance in connection with these rights.
The debentures issued by the Company have a feature that allows the holder
to convert the debentures to Common Stock of the Company at a conversion price
of $15.15 per share. At December 31, 1998, approximately 3,734,000 shares were
reserved for issuance upon conversion of debentures.
NOTE 18: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1998* 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Numerator:
Numerator for basic earnings (loss) per share.................... $ (12,979,000) $ 9,887,000 $ 9,711,000
Effect of dilutive securities:
Interest on 7-7/8% convertible debentures, net of tax.......... -- 2,941,000 3,008,000
-------------- ------------- -------------
Numerator for diluted earnings (loss) per share.................. $ (12,979,000) $ 12,828,000 $ 12,719,000
-------------- ------------- -------------
-------------- ------------- -------------
Denominator:
Denominator for basic earnings (loss) per share-- weighted
average shares................................................. 13,655,000 13,514,000 13,452,000
Effect of dilutive securities:
Employee stock options......................................... -- 114,000 124,000
7-7/8% convertible debentures.................................. -- 3,734,000 3,734,000
-------------- ------------- -------------
Dilutive potential common shares................................. -- 3,848,000 3,858,000
Denominator for diluted earnings (loss) per share-- adjusted
weighted average shares and assumed conversions................ 13,655,000 17,362,000 17,310,000
-------------- ------------- -------------
-------------- ------------- -------------
Basic earnings (loss) per share.................................... $ (0.95) $ 0.73 $ 0.72
Diluted earnings (loss) per share.................................. $ (0.95) $ 0.73 $ 0.72
</TABLE>
- ------------------------
* Anti-dilutive options and debentures are excluded from the 1998 calculation
of diluted earnings per share.
For additional disclosures regarding the convertible debentures and employee
stock options, Refer to Note 5: Financial Instruments and Note 14: Stock Option
Plans and Warrants.
Options to purchase 2,524,000 shares, 1,592,000 shares, and 1,771,000 shares
of common stock at $8.625 to $15.875 per share, $10.50 to $15.875 per share, and
$10.50 to $15.875 per share were outstanding during 1998, 1997, and 1996,
respectively, but were not included in the computation of diluted earnings per
share because the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be anti-dilutive.
49
<PAGE>
NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is selected quarterly financial data for the years ended
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
1ST 2ND 3RD 4TH*
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues............................................ $ 37,770 $ 29,679 $ 28,775 $ 29,173
Operating expenses, net............................. 29,391 28,977 27,351 49,719
------------- ------------- ------------- -------------
Operating income (loss)............................. 8,379 702 1,424 (20,546)
Other expense, net.................................. 855 721 395 1,163
------------- ------------- ------------- -------------
Income (loss) before income taxes................... 7,524 (19) 1,029 (21,709)
Provision for income taxes.......................... 2,558 (6) 350 (3,098)
------------- ------------- ------------- -------------
Net income (loss)................................... $ 4,966 $ (13) $ 679 $ (18,611)
Basic earnings (loss) per share..................... $ 0.36 $ 0.00 $ 0.05 $ (1.36)
Diluted earnings (loss) per share................... $ 0.33 $ 0.00 $ 0.05 $ (1.36)
Basic weighted average shares outstanding........... 13,636,000 13,678,000 13,596,000 13,711,000
Diluted weighted average shares outstanding......... 17,539,000 13,678,000 17,353,000 13,711,000
</TABLE>
- ------------------------
* Reflects a reduction in revenue of $9,398,000 related to the change in how
the Company recognizes revenue, an in-process research and development
charge of $6,000,000 related to the acquisition of Knowledge Revolution,
impairment charges of $8,164,000 in cost of revenue and restructuring and
other impairment charges of $2,365,000.
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
1ST 2ND 3RD 4TH
------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues............................................ $ 37,566 $ 31,266 $ 28,621 $ 35,351
Operating expenses, net............................. 29,665 27,723 26,591 29,862
------------- ------------- ------------- -------------
Operating income.................................... 7,901 3,543 2,030 5,489
Other expense, net.................................. 1,025 1,050 285 1,622
------------- ------------- ------------- -------------
Income before income taxes.......................... 6,876 2,493 1,745 3,867
Provision for income taxes.......................... 2,338 848 593 1,315
------------- ------------- ------------- -------------
Net income.......................................... $ 4,538 $ 1,645 $ 1,152 $ 2,552
Basic earnings per share............................ $ 0.34 $ 0.12 $ 0.08 $ 0.19
Diluted earnings per share.......................... $ 0.31 $ 0.12 $ 0.08 $ 0.19
Basic weighted average shares outstanding 13,459,000 13,466,000 13,561,000 13,570,000
Diluted weighted average shares outstanding......... 17,263,000 17,313,000 17,501,000 17,416,000
</TABLE>
Note: Diluted earnings per share are presented as equal to or less than basic
earnings per share.
NOTE 20: SUBSEQUENT EVENTS (UNAUDITED)
RESTRUCTURING CHARGE
On February 3, 1999, the Company announced a new organizational structure.
This change is the result of a re-evaluation of the Company's business strategy.
This strategy shift emphasizes the expansion of the software business into new
markets and value-added integration services. The new structure is designed to
better service the existing customer base and at the same time address growth
opportunities. The reorganization plan provides for a 10% reduction in the
Company's worldwide workforce or the
50
<PAGE>
NOTE 20: SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
elimination of approximately 75 positions and the consolidation of 15 field
offices. These changes will result in pre-tax charges of approximately
$5,900,000 in the first quarter of 1999. The charges consist of severance costs
and costs related to facility closures that will provide a reduction in the
Company's annual infrastructure operating costs.
Cash outlays are anticipated to be completed by the end of 1999, excluding
certain lease commitments that may continue through January 2000. The Company
will continue to evaluate its cost structure and adjust its organization to
reflect changing business environments around the world.
CHANGE IN ESTIMATE
Effective January 1, 1999 the Company has changed the estimated useful life
of its capitalized software assets from three and four years to two and three
years. The Company has always estimated the expected life of these assets based
on the release cycle of its products. The Company believes that as software
production cycles decrease, amortization periods should also decrease in order
to coincide with version's revenue stream. Refer to Note 3: Impairment of
Assets.
The Company is making this change prospectively. Due to the continual change
in the product development process there can be no assurance that the level of
development capitalized in future periods will be comparable to current
capitalized levels. Therefore the effect of this change is not determinable.
51
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of The MacNeal-Schwendler Corporation
We have audited the accompanying consolidated balance sheets of The
MacNeal-Schwendler Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The
MacNeal-Schwendler Corporation at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Los Angeles, California
March 18, 1999
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
NOMINEES FOR DIRECTORS
The following table sets forth certain information regarding the directors
in Class II who are nominees for election to the Board of Directors for a
three-year term.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE LAST FIVE YEARS SINCE
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
Donald Glickman.................. 66 General Partner, J.F. Lehman and Company, a private equity 1998
investment firm (1993 to present). Mr. Glickman currently serves
as Chairman of Elgar Electronics (1998 to present), and a
director of Burke Industries (1997 to present), Monroe Muffler
Brake Inc. (1984 to present), General Aluminum (1988 to present)
and Massachusetts Mutual Corporate Investors (1992 to present).
Larry S. Barels.................. 50 Principal, Pacific Capital Resources, Mr. Barels' private 1998
consulting practice (1996 to present). Chairman, Software.com,
Inc., a privately held company that develops internet and
intranet-based messaging server software (1995 to 1997). Chairman
and CEO, Wavefront Technologies, a company involved in digital
image manipulation and computer animation (1985 to 1995). Mr.
Barels is currently a director of Miramar Systems (1990 to
present).
</TABLE>
CONTINUING DIRECTORS
The following table sets forth certain information, furnished to the Company
by the respective persons named below, about the directors who comprise Class I
and Class III of the Company's Board of Directors.
Thomas Curry resigned from the Board as of April 2, 1999 in order to pursue
other opportunities. The Nominating Committee is currently searching for
candidates to fill the vacancy created by Mr. Curry's resignation. Once a
suitable candidate has been qualified and appointed, he or she will serve the
remainder of Mr. Curry's term as a Class I director and until a successor is
elected and qualified.
53
<PAGE>
The following Class III directors are currently serving until the 2000
Annual Meeting and until their respective successors are elected and qualified:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE LAST FIVE YEARS SINCE
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
George N. Riordan................ 65 Former Chairman of the Board of the Company (February 1, 1997 to 1983
December 14, 1998). Mr. Riordan is also Managing Director, George
Riordan & Co., investment bankers (February 1991 to present) and
is a director of Pancho's Mexican Buffet, Inc. (1993 to present).
Mr. Riordan was previously a director of Lewis Galoob Toys, Inc.
(1994 to 1996).
William F. Grun.................. 51 President and Chief Operating Officer, Optum Software, a 1997
privately held supply chain software company (1996 to present).
Mr. Grun previously served in various senior management positions
for AlliedSignal Inc. (1989 to 1996), including
President-Aerospace Systems and Equipment, President--
AirResearch Los Angeles Division and Vice President
Operations--AlliedSignal Aerospace Company.
</TABLE>
The following Class I director is currently serving until the 2001 Annual
Meeting and until his successor is elected and qualified:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE LAST FIVE YEARS SINCE
- --------------------------------- --- ----------------------------------------------------------------- -------
<S> <C> <C> <C>
Frank Perna...................... 61 Chairman and Chief Executive Officer (December 14, 1998 to 1994
present) of the Company. Chairman and Chief Executive Officer,
EOS, a privately held provider of power supplies for electrical
equipment and notebook computers (1994 to 1998). Mr. Perna also
serves as a director of Durand Inc., a privately held Internet
software company, Software.com, Inc., a privately held company
that develops internet and intranet-based messaging server
software and Intellisys, a privately held electronics
distributor. Mr. Perna previously served as director of PDA
Engineering (1990 to 1994) and was a member of the Board of
Directors of PDA Engineering at the time it was acquired by the
Company.
</TABLE>
Other information regarding the Company's executive officers is included
under the caption 'Executive Officers of the Registrant" in Part I, Item 1.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based on a review of forms filed, director Donald Glickman and former
director Paul MacCready each filed one late report on Form 4. The Company
believes that other SEC filings of its officers, directors and ten percent
stockholders complied with the requirements of Section 16 of the Securities and
Exchange Act during 1998.
54
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(1)
------------------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) ($)(3) OPTIONS(#)(4) ($)(5)
- ----------------------------------- --------- --------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank Perna(6) .................... 1998 14,808 0 87,930 278,000 0
Chairman and Chief Executive 1997 0 0 48,925 3,000 0
Officer 1996 0 0 38,800 3,000 0
Thomas C. Curry(6) ................ 1998 292,500 82,500 0 175,000 35,580
former Chief Executive Officer 1997 275,000 0 0 0 51,272
and President 1996 267,997 46,680 0 120,000 50,025
Louis A. Greco .................... 1998 203,750 73,100 0 105,000 23,747
Chief Financial Officer 1997 195,000 0 0 0 35,272
1996 195,000 35,362 0 25,000 35,426
James B. Archer ................... 1998 224,375 27,500 0 115,000 5,469
Senior Vice President 1997 73,333 27,500 0 30,000 0
1996 0 0 0 0 0
Kenneth D. Blakely ................ 1998 191,000 65,000 0 115,000 22,047
Senior Vice President 1997 146,667 0 0 0 25,605
1996 146,311 18,935 0 25,000 25,688
George N. Riordan(6) .............. 1998 200,000 0 0 128,000 0
former Chairman 1997 175,000 0 6,200 3,000 0
1996 0 0 42,725 3,000 0
</TABLE>
- ------------------------
NOTES TO SUMMARY COMPENSATION TABLE:
(1) The Company did not make any payments or awards that would be classifiable
under the "Restricted Stock Award" and "LTIP Payout" columns otherwise
required to be included in the Table by the applicable Securities and
Exchange Commission ("SEC") disclosure rules.
(2) Annual bonus amounts were paid in the fiscal years indicated, but were
accrued and earned in relation to performance during the previous fiscal
year. For example, bonuses shown for 1998 were paid in March 1998 but relate
to performance for the 1997 fiscal year.
(3) The amounts included in this column for each of the named executive officers
do not include the value of certain perquisites which in the aggregate did
not exceed the lower of $50,000 or 10% of each named executive's aggregate
fiscal 1996, 1997 or 1998 salary and bonus compensation. The Other Annual
Compensation earned by George N. Riordan and Frank Perna relates to
compensation received as a member of the Board of Directors and consulting
fees.
(4) Unless otherwise noted, represents shares of stock underlying options
granted under The MacNeal-Schwendler Corporation 1991 Stock Option Plan, as
amended (the "1991 Plan") and the 1998 Plan. There were no individual grants
of stock options in tandem with stock appreciation rights ("SAR's") or
freestanding SAR's made during the years ended December 31, 1996, 1997 or
1998 to the above-named executive officers.
(5) Unless otherwise noted, the amounts shown constitute Company contributions
on behalf of the named individuals to (a) The MacNeal-Schwendler Corporation
Profit Sharing Plan ("PSP") and (b) The
55
<PAGE>
MacNeal-Schwendler Corporation Supplemental Retirement and Deferred
Compensation Plan ("SERP") in the following amounts: Thomas C. Curry: 1998:
$12,580 to PSP, $23,000 to SERP; 1997: $18,772 to PSP, $32,500 to SERP;
1996: $18,926 to PSP, $31,099 to SERP; Louis A. Greco: 1998: $12,580 to PSP,
$11,167 to SERP; 1997: $18,772 to PSP, $16,500 to SERP; 1996: $18,926 to
PSP, $16,500 to SERP; Kenneth D. Blakely: 1998: $12,580 to PSP, $9,467 to
SERP; 1997: $14,972 to PSP, $10,633 to SERP; 1996: $12,176 to PSP, $13,512
to SERP; James B. Archer: 1998: $3,281 to PSP, $2,188 to SERP.
(6) Thomas C. Curry was removed as President and Chief Executive Officer on
December 14, 1998 and remained employed by the Company until January 31,
1999. George Riordan resigned from his position as Chairman of the Board on
December 14, 1998. Frank Perna was elected to succeed George Riordan as
Chairman of the Board and Thomas Curry as Chief Executive Officer. Mr.
Riordan will continue as director of the Company; Mr. Curry resigned from
the Board as of April 2, 1999.
OPTION GRANT TABLE
The following table presents additional information concerning the stock
options shown in the Summary Compensation Table and granted to the named
executive officers for fiscal year 1998:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED GRANT DATE
OPTIONS TO EMPLOYEES IN EXERCISE PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1)(2) FISCAL YEAR 1998 ($/SH)(3) DATE VALUE($)
- ----------------------------- ------------------ ------------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Frank Perna.................. 3,000(4) 0.2% 9.750 1/02/03 9,480(5)
125,000(6) 7.5% 6.375 9/14/08 396,250(7)
75,000(8) 4.5% 5.375 12/14/08 200,250(7)
75,000(9) 4.5% 5.375 12/14/08 200,250(7)
Thomas C. Curry.............. 50,000(10)(11) 3.0% 9.875 1/31/04 232,500(7)
125,000(10)(12) 7.5% 9.000 1/31/04 558,750(7)
Louis A. Greco............... 30,000(11) 1.8% 9.875 1/14/08 139,500(7)
75,000(12) 4.5% 9.000 7/15/08 335,250(7)
James B. Archer.............. 40,000(11) 2.4% 9.875 1/14/08 186,000(7)
75,000(12) 4.5% 9.000 7/15/08 335,250(7)
Kenneth D. Blakely........... 40,000(11) 2.4% 9.875 1/14/08 186,000(7)
75,000(12) 4.5% 9.000 7/15/08 335,250(7)
George N. Riordan............ 3,000(4) 0.2% 9.750 1/2/03 9,480(5)
125,000(10)(13) 7.5% 9.000 1/31/04 558,750(7)
</TABLE>
- ------------------------
NOTES TO OPTION GRANT TABLE:
(1) During 1998, options were granted pursuant to the 1991 Plan and the 1998
Plan. Options under the 1991 Plan and the 1998 Plan are nontransferable
other than by will or the laws of descent and distribution or, in the case
of the 1991 Plan, certain exceptions under Rule 16b-3 of the Securities
Exchange Act of 1934. Options under the 1991 Plan are exercisable only
during an optionee's term of employment, and for three months after
termination of employment if as a result of permanent disability or
retirement or resignation approved by the Board. Options under the 1998
Plan are generally exercisable for three months after resignation, twelve
months after death or disability and either three or twelve months
(depending on the nature of the option) after retirement. Both plans
provide that vesting may be accelerated in certain events related to
changes in control of the
56
<PAGE>
Company, unless the Compensation Committee, prior to such change in
control, determines otherwise. The 1991 Plan provides that the Compensation
Committee has discretion, subject to certain limits, to modify the terms of
outstanding options and to regrant and reprice options. Both plans are
administered by the Compensation Committee of the Board.
(2) The 1991 Plan provides, under certain circumstances, for the grant of
"reload options" if an optionee uses already-owned shares of Common Stock
to pay for the exercise of any options. The reload provision permits the
grantee the right to purchase the same number of shares of the Company's
Common Stock as the grantee used to exercise any options at an exercise
price equal to the fair market value of a share of Common Stock on the date
of exercise of the initial option to which the reload relates. The 1998
Plan contains no such provision.
(3) Options were granted at an exercise price equal to the fair market value on
the date of grant.
(4) Represents grant to the non-employee director of nonqualified stock options
to purchase shares of Common Stock granted on January 2, 1998 under the
1991 Plan. The options vested on January 2, 1999. These grants are not
utilized in computing the percent of total options granted to employees in
1998.
(5) Grant Date Present Value determined under Black-Scholes Valuation Method.
The estimated values under the Black-Scholes model are based on the
following assumptions: the risk-free rate of return is 7.0%, the expected
dividend yield is 0, the expected volatility is 0.419 and the expected term
is five years. The actual value, if any, an executive may realize will
depend on the excess of the stock price over the exercise price on the date
the option is exercised. Therefore, there is no assurance that the value
realized by an executive will be at or near the value estimated by the
Black-Scholes model.
(6) Represents grant to the employee of non-qualified stock options to purchase
shares of Common Stock granted on September 14, 1998 under the 1998 Plan
that are exercisable in installments, with 25% of the options becoming
exercisable one year after the date of grant and with an additional 25% of
the options becoming exercisable on each successive anniversary date. Full
vesting will occur on the fourth anniversary date. These grants are not
utilized in computing the percent of total options granted to employees in
1998.
(7) Grant Date Present Value determined under Black-Scholes Valuation Method.
The estimated values under the Black-Scholes model are based on the
following assumptions: the risk-free rate of return is 7.0%, the expected
dividend yield is 0, the expected volatility is 0.461 and the expected term
is ten years. The actual value, if any, an executive may realize will
depend on the excess of the stock price over the exercise price on the date
the option is exercised. Therefore, there is no assurance that the value
realized by an executive will be at or near the value estimated by the
Black-Scholes model.
(8) Represents grant to employee of non-qualified stock options to purchase
shares of Common Stock granted on December 14, 1998 under the 1991 Plan
that are exercisable in installments, with 25% of the options becoming
exercisable one year after the date of grant and with an additional 25% of
the options becoming exercisable on each successive anniversary date. Full
vesting will occur on the fourth anniversary date.
(9) Represents grant to employee of non-qualified stock options to purchase
shares of Common Stock granted on December 14, 1998 under the 1998 Plan
that are exercisable in installments, with 25% of the options becoming
exercisable one year after the date of grant and with an additional 25% of
the options becoming exercisable on each successive anniversary date. Full
vesting will occur on the fourth anniversary date.
(10) As part of the Separation Agreements with Thomas Curry and George Riordan,
a portion of these options were cancelled as of January 31, 1999 and
further modified as more fully described in "Severance Plans and Other
Information" below.
57
<PAGE>
(11) Represents nonqualified stock options to purchase shares of Common Stock
granted on January 14, 1998 under the 1991 Plan that are exercisable in
installments, with 25% of the options becoming exercisable one year after
the date of grant and with an additional 25% of the options becoming
exercisable on each successive anniversary date, with full vesting
occurring on the fourth anniversary date.
(12) Represents grant to employee of non-qualified stock options to purchase
shares of Common Stock granted on July 15, 1998 under the 1991 Plan that
are exercisable in installments, with 25% of the options becoming
exercisable one year after the date of grant and with an additional 25% of
the options becoming exercisable on each successive anniversary date. Full
vesting will occur on the fourth anniversary date.
(13) Represents grant to employee of non-qualified stock options to purchase
shares of Common Stock granted on July 15, 1998 under the 1998 Plan that
are exercisable in installments, with 25% of the options becoming
exercisable one year after the date of grant and with an additional 25% of
the options becoming exercisable on each successive anniversary date. Full
vesting will occur on the fourth anniversary date.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table shows information for the named executive officers,
concerning:
(1) exercises of stock options during 1998; and
(2) the amount and values of unexercised stock options as of December 31,
1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
SHARES ACQUIRED ON -------------------------- ----------------------------
NAME EXERCISE(#) VALUE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- ------------------- ----------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank Perna.................. 0 0 18,000 278,000 0 321,875
Thomas C. Curry.............. 0 0 320,000 210,000(2) 0 0
Louis A. Greco............... 0 0 135,000 125,000(2) 5,000 0
James B. Archer.............. 0 0 15,000 130,000 0 0
Kenneth D. Blakely........... 0 0 52,250 128,750 5,000 0
George N. Riordan............ 0 0 20,000 128,000 0 0
</TABLE>
- ------------------------
NOTES TO OPTION EXERCISE TABLE:
(1) Based on the closing price of the Company's common stock on December 31,
1998 ($7.000 per share) minus the exercise price of "in-the-money" options.
(2) As part of the Separation Agreements with Thomas Curry and George Riordan, a
portion of these options were cancelled as of January 31, 1999 and further
modified as more fully described in "Severance Plans and Other Information"
below.
58
<PAGE>
SEVERANCE PLANS AND OTHER INFORMATION
The Company has entered into severance agreements with each of the named
executive officers and other key employees. These severance agreements provide
that, if the Company or the employee terminates the employee's employment with
the Company (other than as a result of death or disability) for any reason
within two years after a change of control(1) of the Company, the employee will
receive a severance payment. The severance payments will be reduced to the
extent any payment is not deductible by the Company for federal income tax
purposes. The severance agreements are automatically renewed annually unless the
Company gives written notice that it does not wish to extend them. In addition,
the agreements will continue in effect for three years after a change in control
of the Company.
- - PERNA, GRECO, BLAKELY & ARCHER. The severance payment for Frank Perna, Louis
Greco, Kenneth Blakely and James Archer will be a cash payment of two and
one-half times the average of the cash compensation received by the employee
over the last five years.
- - OTHER KEY EMPLOYEES. Some key employees with severance agreements who have
been employed by the Company for at least five years will receive a severance
payment at least equal to the average of the employee's total cash
compensation over the last five years, increasing ratably to a maximum of two
times the average of the last five years of such employee's total cash
compensation if the employee was employed for ten years or more. Others will
receive two and a half times the average of the cash compensation received by
the employee over the last five years regardless of the length of service. A
total of 127 employees have severance agreements with the Company.
SEPARATION AND TERMINATION AGREEMENTS WITH THOMAS CURRY. In connection with
Thomas Curry's employment with the Company, the Company entered into a
Separation Agreement with Mr. Curry which provided for certain payments to Mr.
Curry upon a termination of employment. Mr. Curry was removed as President and
Chief Executive Officer on December 14, 1998 and his employment terminated
effective January 31, 1999. Under the terms of the Separation Agreement, the
Company will continue to pay Mr. Curry his base salary until July 31, 2000. The
Company will also continue Mr. Curry's participation in the Company's health
benefit plans for up to eighteen months after the termination date and reimburse
Mr. Curry's outplacement fees (up to $35,000). The Separation Agreement also
required the Company to amend 70,000 options previously granted to Mr. Curry
under the 1991 Plan to allow (1) full vesting as of January 31, 1999 and (2)
exercise of those options until January 31, 2000. In recognition of Mr. Curry's
contributions and in consideration of his agreement to remain as an employee of
the Company through January 31, 1999, the Company agreed to provide additional
benefits to Mr. Curry in a Termination and General Release Agreement. Under the
terms of the Termination and General Release Agreement, the Company (1)
permitted Mr. Curry to make his full 401(k) contribution for 1998, (2) continued
to cover Mr. Curry under the Company's insurance policies for activities related
to his employment as an officer of the Company, (3) vested 105,000 of Mr.
Curry's 210,000 outstanding options effective January 31, 1999 and
- ------------------------
(1) Under the severance agreements, a change in control is defined to include
the following transactions unless approved by a majority of the Board of
Directors:
(a) any person or group becomes the beneficial owner of 20% or more of the
combined voting power of the Company's then outstanding securities;
(b) the election in a contest for election of a majority of the Board who
were not directors prior to such contest;
(c) the stockholders approve the dissolution or liquidation of the Company;
(d) the stockholders approve a merger, consolidation or other reorganization
of the Company, as a result of which less than 50% of the outstanding
voting securities of the resulting entity are owned by former
stockholders of the Company, or
(e) the stockholders approve the sale of all or substantially all of the
assets of the Company to a person or entity which is not a subsidiary of
the Company.
59
<PAGE>
cancelled the remainder and (4) extended the exercise date of such vested
options through January 31, 2004.
GEORGE RIORDAN. Mr. Riordan resigned from his position as Chairman of the
Board on December 14, 1998. In recognition of Mr. Riordan's contributions to the
Company and in consideration of his agreement to remain as an employee of the
Company until January 31, 1999, the Company agreed to provide additional
benefits to Mr. Riordan in a Termination and General Release Agreement. Under
the terms of the Termination and General Release Agreement, the Company (1) paid
a lump sum of $100,000 to Mr. Riordan on January 31, 1999, (2) vested 62,500 of
Mr. Riordan's 125,000 outstanding options effective January 31, 1999 and
cancelled the remainder and (3) extended the exercise date of such vested
options through January 31, 2004. On February 4, 1999, in connection with Mr.
Riordan's employment as an outside director, the Company entered into a new
severance agreement with Mr. Riordan in the same form that is in effect for the
other outside directors of the Company. The new severance agreement provides
that, if either party terminates Mr. Riordan's employment with the Company
(other than as a result of death or disability) for any reason within two years
after a change of control of the Company, Mr. Riordan will receive a cash
severance payment of two and one-half times the annualized compensation received
by Mr. Riordan for his services as a director during the last year. The
severance payment may be and will be reduced to the extent any payment is not
deductible by the Company for federal income tax purposes. The severance
agreement is automatically renewed annually unless the Company gives written
notice that it does not wish to extend.
DIRECTORS' COMPENSATION
Directors who are also employees or officers of the Company do not receive
any additional compensation for their service on the Board. Currently,
non-employee directors receive a $15,000 annual retainer plus $5,000 per year
for each committee chair. Directors also receive $2,500 for each Board meeting
they attend and $1,500 for each committee meeting they attend. In addition,
non-employee directors are reimbursed for all expenses incurred in connection
with attendance at meetings of the Board and the performance of Board duties.
For his services as Chairman of the Board during 1998, George Riordan received
$200,000 plus medical benefits.
Directors who are not officers or employees of the Company are eligible to
participate in the Non-Employee Director Program. Under this program, directors
receive a grant of options to purchase 10,000 shares of common stock of the
Company upon election to the Board. On April 14, 1998, upon their appointment to
the Board, Larry Barels and Donald Glickman each received a grant of 10,000
options at an exercise price of $11.00. In addition, directors receive an annual
grant of options to purchase 3,000 shares of common stock on the first business
day of each calendar year. On January 2, 1998, Frank Perna received 3,000
options to purchase common stock of the Company at an exercise price of $9.75.
All of the options granted under the program become exercisable 12 months after
the date of grant and expire on the fifth anniversary of the grant date.
The Company has entered into consulting agreements with certain former
directors who served on the Board during 1998. Under the terms of the consulting
agreements, the Company will pay $12,500 per year plus reasonable travel
expenses to each of Harold Harrigian, Arthur Reidel, Dale Myers and Paul
MacCready in exchange for consulting services to be provided on various Company
matters. The agreements with Messrs. Harrigian, Reidel, Myers and MacCready will
expire in 2005, 2001, 2002 and 2001 respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Former directors Paul MacCready, Dale Myers, and current directors William
Grun, Donald Glickman, Larry Barels and Frank Perna each served as members of
the Compensation Committee at various times during 1998. Frank Perna became an
officer of the Company on December 14, 1998, and as of that
60
<PAGE>
date, ceased to serve on the Compensation Committee. None of the other members
or former members of the Compensation Committee are officers or employees, or
former officers or employees, of the Company or any of its subsidiaries. No
interlocking relationship exists between the members of the Board or
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth as of March 31, 1999 the names, addresses,
and holdings of those persons known to the Company to be beneficial owners of
more than 5% of its common stock, the names and holdings of each director and
each nominee for director, the names and holdings of each executive officer
named in the Summary Compensation Table ("named executive officers") and the
holdings of all executive officers and directors as a group:
<TABLE>
<CAPTION>
AMOUNT BENEFICIALLY
OWNED AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS(2)
- ------------------------------------------------------------ ---------------------- -------------------
<S> <C> <C>
David L. Babson and Company ................................ 1,341,000(3) 9.7%
Incorporated
One Memorial Drive
Cambridge, MA 02142
Royce & Associates, Inc. ................................... 1,253,813(4) 9.1%
1414 Avenue of the Americas
New York, NY 10019
Richard H. MacNeal ......................................... 1,161,143(5) 8.5%
501 Highland Dr.
La Canada, CA 91011
The TCW Group, Inc. ........................................ 815,200(6) 5.9%
865 South Figueroa Street
Los Angeles, CA 90017
Larry S. Barels ............................................ 10,000 *
Donald Glickman ............................................ 14,000 *
William F. Grun ............................................ 13,000 *
Frank Perna ................................................ 34,452 *
Thomas C. Curry(7) ......................................... 443,007 3.1%
Louis A. Greco ............................................. 169,773 1.2%
James B. Archer ............................................ 25,000 *
Kenneth D. Blakely ......................................... 67,582 *
George N. Riordan .......................................... 93,600 *
All directors and executive officers as a group 948,848(8) 6.5%
(12 persons)..............................................
</TABLE>
- ------------------------
NOTES TO STOCK OWNERSHIP TABLE:
* Holdings represent less than 1% of all shares outstanding.
(1) Except as provided with respect to certain shares held in trust with the
person's spouse and as otherwise provided under state community property
laws, beneficial ownership is direct (and includes shares held pursuant to
The MacNeal-Schwendler Corporation Profit Sharing Plan and the Employee
Stock Purchase Plan), and the person indicated has sole voting and
investment power over the shares of Common Stock indicated. The amounts
shown in this column include shares issuable upon
61
<PAGE>
(i) conversion of the Company's 7 7/8% Convertible Subordinated Debentures
due 2004 (the "Debentures") or (ii) exercise of options which are
exercisable on or within 60 days of March 31, 1999, in the following
amounts: Thomas C. Curry, 426,721; Frank Perna, 21,452; George N. Riordan,
90,100; Kenneth D. Blakely, 62,250; Louis A. Greco, 142,500; James B.
Archer, 25,000; Larry S. Barels, 10,000; Donald Glickman, 10,000; and
William F. Grun, 13,000.
(2) All expressions of percent of class held assume that the Debentures and
options, if any, of the particular person or group in question, and no
others, have been exercised.
(3) Based upon information set forth in a Schedule 13G filed under the
Securities Exchange Act of 1934 by David L. Babson and Company Incorporated
("DLB") in January 1999. DLB, in its capacity as investment adviser, may be
deemed the beneficial owner of 1,341,000 shares of Common Stock which are
owned by numerous investment counseling clients.
(4) Based upon information set forth in a Schedule 13G filed under the
Securities Exchange Act of 1934 by Royce & Associates, Inc., Royce
Management Company and Charles M. Royce in February 1999. These entities
are filing as a group. Royce & Associates, Inc. has sole voting and
investment power with respect to 1,253,813 shares of Common Stock; Royce
Management Company has sole voting and investment power with respect to
75,700 shares of Common Stock; and Charles Royce may be deemed to be a
controlling person of these entities. Mr. Royce does not own any shares
outside of these entities, and disclaims beneficial ownership of the shares
held by Royce & Associates, Inc. and Royce Management Company.
(5) Based upon a Form 4, dated September 10, 1996, which was filed by the
Company on behalf of Richard MacNeal before he retired from the Company.
(6) Based upon information set forth in a Schedule 13G/A filed under the
Securities Exchange Act of 1934 by The TCW Group, Inc. ("TCW") and Robert
Day in February 1999. TCW has shared voting and investment power with
respect to 815,200 shares of Common Stock. Robert Day is also listed on
such 13G/A as having shared voting and investment power with respect to
815,200 shares, as an "individual who may be deemed to control The TCW
Group, Inc. and other entities which hold the Common Stock of the issuer."
(7) Thomas C. Curry was removed as President and Chief Executive Officer on
December 14, 1998 and remained employed by the Company until January 31,
1999. Mr. Curry resigned from the Board as of April 2, 1999 in order to
pursue other opportunities.
(8) Includes 862,000 shares issuable upon exercise of options granted the
directors and executive officers of the Company which are exercisable on or
within 60 days of March 31, 1999. See footnote 1 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
62
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
ITEM 14(A)1. FINANCIAL STATEMENTS.
The following consolidated financial statements of The MacNeal-Schwendler
Corporation and subsidiaries as included in its annual report are included in
Item 8.
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1998
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998
Consolidated Statements of Shareholders' Equity for each of the three years
in the period ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors
ITEM 14(A)2. FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule of The MacNeal-Schwendler
Corporation and subsidiaries is included in this Item 14:
Schedule II--Valuation and qualifying accounts
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.
63
<PAGE>
SCHEDULE II
THE MACNEAL-SCHWENDLER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING
OF CHARGES ENDING
PERIOD TO EXPENSE DEDUCTIONS BALANCE
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Year ended December 31, 1996...................................... $ 2,586 158 1,044 $ 1,700
Year ended December 31, 1997...................................... $ 1,700 1,243 1,252 $ 1,691
Year ended December 31, 1998...................................... $ 1,691 2,203 289 $ 3,605
RESTRUCTURING RESERVE:
Year ended December 31, 1998...................................... $ -- 695 -- $ 695
</TABLE>
64
<PAGE>
ITEM 14(A)3. EXHIBITS.
The following exhibits are included in this Report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
2.1 Agreement and Plan of Merger dated as of December 22, 1998 by and among The MacNeal-Schwendler Corporation, MSC
Holdings Co., Knowledge Revolution and Paul Baszucki, as shareholder representative (filed as Exhibit 2.1 to a
Current Report on Form 8-K filed January 4, 1999 and incorporated herein by reference).
3.1 Certificate of Incorporation of The MacNeal-Schwendler Corporation (filed as Exhibit 3.1 to The MacNeal-Schwendler
Corporation's Registration of Securities on Form 8-B filed on September 23, 1994, and incorporated herein by
reference).
3.2 Restated Bylaws of The MacNeal-Schwendler Corporation (filed as Exhibit 3.2 to The MacNeal-Schwendler Corporation's
Annual Report on Form 10-K filed for the fiscal year ended January 31, 1996, and incorporated herein by reference).
3.3 Certificate of Designations of Junior Participating Preferred Stock (filed as Exhibit 2.2 to The MacNeal-Schwendler
Corporation's Registration Statement on Form 8-A filed October 13, 1998 and incorporated herein by reference).
4.1 Rights Agreement dated as of October 5, 1998 between The MacNeal-Schwendler Corporation and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, including the Form of Right Certificate (Exhibit A), the Summary of Rights to
Purchase Junior Participating Preferred Stock (Exhibit B) and the Form of Certificate of Designations of Junior
Participating Preferred Stock (Exhibit C) (filed as Exhibit 2.1 to The MacNeal-Schwendler Corporation's
Registration Statement on Form 8-A filed October 13, 1998 and incorporated herein by reference).
4.2 Indenture, dated as of August 18, 1994, between The MacNeal-Schwendler Corporation and Chemical Trust Company of
California, as trustee (filed as part of The MacNeal-Schwendler Corporation's Registration Statement on Form S-3
(No. 33-83174), and incorporated herein by reference).
4.3 First Supplemental Indenture, dated September 22, 1994, between The MacNeal-Schwendler Corporation and Chemical
Trust Company of California, as trustee (filed as Exhibit 4.2 of The MacNeal-Schwendler Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1994, and incorporated herein by reference).
4.4 Second Supplemental Indenture, dated December 14, 1994, between The MacNeal-Schwendler Corporation and Chemical
Trust Company of California, as trustee (filed as Exhibit 4.3 of The MacNeal-Schwendler Corporation's Quarterly
Report on Form 10-Q for the quarterly period ended October 31, 1994, and incorporated herein by reference).
10.1 Form of Agreement for use of MSC.NASTRAN, as modified to September 1991 (filed as Exhibit 10.1 to The
MacNeal-Schwendler Corporation's Annual Report on Form 10-K filed for the fiscal year ended January 31, 1992, and
incorporated herein by reference).
10.2 Agreement, dated October 22, 1982, between The MacNeal-Schwendler Corporation and NASA (filed as Exhibit 10.2 to
The MacNeal-Schwendler Corporation's Registration Statement on Form S-1, File No. 2-82719, and incorporated herein
by reference).
10.3 Agreement of Lease, dated July 31, 1980, between The MacNeal-Schwendler Corporation and Frank De Pietro (filed as
Exhibit 10.3 to The MacNeal-Schwendler Corporation's Registration Statement on Form S-1, File No. 2-82719, and
incorporated herein by reference).
10.4* 1983 Incentive Stock Option Plan for Key Employees, as amended to January 31, 1989 (filed as Exhibit 10.4 to The
MacNeal-Schwendler Corporation's Annual Report on Form 10-K filed for the year ended January 31, 1989, and
incorporated herein by reference).
</TABLE>
65
<PAGE>
ITEM 14(A)3. EXHIBITS. (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ----------
<C> <S>
10.5 Form of Indemnification Agreement between The MacNeal-Schwendler Corporation and directors, officers and agents
thereof (filed as Exhibit 10.5 to The MacNeal-Schwendler Corporation's Annual Report on Form 10-K filed for the
year ended January 31, 1989, and incorporated herein by reference).
10.6(a)** Form of Severance Agreement between The MacNeal-Schwendler Corporation and executive officers thereof.
10.6(b)** Form of Severance Agreement between The MacNeal-Schwendler Corporation and key employees.
10.7* Amendment 1991-1 to 1983 Incentive Stock Option Plan for Key Employees (filed as Annex A to The MacNeal-Schwendler
Corporation's Annual Proxy Statement for the Annual Meeting of Shareholders held on June 12, 1991, and incorporated
herein by reference).
10.8* Amendment 1992-1 to 1983 Incentive Stock Option Plan for Key Employees (filed as part of the Annual Proxy Statement
for The MacNeal-Schwendler Corporation's Annual Meeting of Shareholders held on June 10, 1992, and incorporated
herein by reference).
10.9* 1991 Stock Option Plan (filed as Annex A to The MacNeal-Schwendler Corporation's Annual Proxy Statement for the
Annual Meeting of Shareholders held on June 10, 1992, and incorporated herein by reference).
10.10* 1991 Stock Option Plan Amendment (filed as part of the Company's definitive Proxy Statement for the Annual Meeting
of Shareholders on June 14, 1995, and incorporated herein by reference).
10.11* 1998 Stock Option Plan (filed as Annex A to The MacNeal-Schwendler Corporation's Annual Proxy Statement for the
Annual Meeting of Shareholders held on June 10, 1999, and incorporated herein by reference).
10.12** Separation Agreement with Thomas Curry.
10.13** Termination and General Release Agreement with Thomas Curry.
10.14** Termination and General Release Agreement with George Riordan.
10.15** Form of Director Change in Control Agreement.
10.16** Business Loan Agreement between The MacNeal-Schwendler Corporation and Union Bank of California, N.A.
21** Material Subsidiaries of the Registrant.
23** Consent of Ernst & Young LLP, Independent Auditors.
27** Financial Data Schedule for the year ended December 31, 1998.
27.1** Restated Financial Data Schedule for the year ended December 31, 1997.
27.2** Restated Financial Data Schedule for the year ended December 31, 1996.
</TABLE>
- ------------------------
* Denotes compensatory plan.
** Indicates filed herewith.
ITEM 14(B). REPORTS ON FORM 8-K.
None.
66
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(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.
<TABLE>
<S> <C> <C>
THE MACNEAL-SCHWENDLER CORPORATION
By: /s/ FRANK PERNA, JR.
------------------------------------------
Frank Perna, Jr.
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Dated: April 29, 1999
</TABLE>
<PAGE>
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 date indicated.
<TABLE>
<S> <C> <C>
By: /s/ FRANK PERNA, JR.
-----------------------------------------
Frank Perna, Jr.
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Dated: April 27, 1999
By: /s/ LOUIS A. GRECO
-----------------------------------------
Louis A. Greco
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
Dated: April 24, 1999
By: /s/ LARRY S. BARELS
-----------------------------------------
Larry S. Barels
DIRECTOR
Dated: April 24, 1999
By: /s/ DONALD GLICKMAN
-----------------------------------------
Donald Glickman
DIRECTOR
Dated: April 27, 1999
By: /s/ WILLIAM F. GRUN
-----------------------------------------
William F. Grun
DIRECTOR
Dated: April 26, 1999
By: /s/ GEORGE N. RIORDAN
-----------------------------------------
George N. Riordan
DIRECTOR
Dated: April 27, 1999
</TABLE>
<PAGE>
FORM OF EXECUTIVE SEVERANCE AGREEMENT
Date:
[NAME]
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, CA 90041-1777
Dear [NAME]
The MacNeal-Schwendler Corporation (the "Company") considers the establishment
and maintenance of sound and vital management to be essential to protecting and
enhancing the best interests of the Company and its stockholders. The Company
also considers it essential to the best interests of the Company and its
stockholders that its key management personnel be encouraged to remain with the
Company and continue to devote full attention to the Company's business in the
event an effort is made to obtain control of the Company through a tender offer
or otherwise. In this connection, the Company recognizes that the possibility
of a change in control and the uncertainty and questions which it may raise
among management may result in the departure or distraction of key management
personnel to the detriment of the Company and its stockholders. Although no
such change in control is currently anticipated, the board of directors of the
Company has determined that appropriate steps should be taken to reinforce and
encourage the continued attention and dedication of key members of the Company's
management to their assigned duties without distraction in the face of the
potentially disturbing circumstances arising from the possibility of a change in
control of the Company.
The board recognizes that your contributions to the past and future growth and
success of the Company have been substantial. Should the Company receive any
proposal from a third person concerning a possible business combination with, or
acquisition of equity securities of, the Company, the board believes it
imperative that the Company and the board be able to rely upon you to continue
in your position, and that the Company be able to receive and rely upon your
advice, if so requested, as to the best interests of the Company and its
stockholders without concern that you might be distracted by the personal
uncertainties and risks created by such a proposal. Should the Company receive
any such proposals, in addition to your regular duties, you may be called upon
to assist in the assessment of such proposals, advise management and the board
as to whether such proposals would be in the best interests of the Company and
its stockholders, and to take such actions as the board might determine to be
appropriate.
Accordingly, to assure the Company that it will have your continued undivided
attention and services and the availability of your advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control
<PAGE>
of the Company, and to induce you to remain in the employ of the Company, and
for other good and valuable consideration, this letter agreement (the
"Agreement") sets forth benefits which the Company agrees will be provided to
you in the event of a change in control of the Company (as defined below)
prior to the expiration of this Agreement and while you are still an employee
of the Company.
1. CHANGE IN CONTROL. A "Change in Control" of Company means and shall be
deemed to have occurred if and when: (i) within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, any person or group becomes a beneficial
owner, directly or indirectly, of securities of Company representing 20% or more
of the combined voting power of Company's then outstanding securities; (ii)
individuals who were members of the board of directors of Company immediately
prior to a meeting of the stockholders of Company involving a contest for the
election of directors shall not constitute a majority of the board of directors
following such election; (iii) the stockholders of Company approve the
dissolution or liquidation of Company; (iv) the stockholders of Company approve
an agreement to merge or consolidate, or otherwise reorganize, with or into one
or more entities which are not subsidiaries, as a result of which less than 50%
of the outstanding voting securities of the surviving or resulting entity are,
or are to be, owned by former stockholders of Company (excluding from the term
"former stockholders" a stockholder who is, or as a result of the transaction in
question becomes, an "affiliate," as that term is used in the Securities
Exchange Act of 1934 and the rules promulgated thereunder, of any party to such
merger, consolidation or reorganization); or (v) the stockholders of Company
approve the sale of substantially all of Company's business and/or assets to a
person or entity which is not a subsidiary; PROVIDED, HOWEVER, that no Change in
Control of Company shall be deemed to have occurred if the transaction giving
rise thereto was approved by a majority of the board of directors who were in
office immediately prior to such transaction.
2. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL. If, within two
years following a Change in Control of Company, Company terminates Employee's
employment for any reason, or if Employee terminates his employment with Company
for any reason other than death or disability, Company shall pay Employee a lump
sum amount equal to 2.5 times Employee's "base amount" as defined below. Such
amount shall be payable within 10 days after such termination of employment.
3. ESTABLISHMENT OF TRUST; FUNDING OF TRUST UPON CHANGE IN CONTROL.
(a) Company shall establish, as soon as practicable, a trust for the purpose
of holding assets to make any payments that may be required under the
terms of this Agreement. Such trust, which may be a sub-trust of a
larger trust, shall be revocable prior to a Change in Control but shall
become irrevocable upon a Change in Control. Such trust shall be a
grantor trust under which the income is taxable to the Company and no
contributions or income are taxable to the Employee until funds are
distributed to him.
(b) The trust described herein shall be initially funded with a contribution
of $1.00. Within 10 days following a Change in Control of Company,
Company shall transfer to the trust sufficient funds to cover the maximum
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<PAGE>
payment which could become payable to Employee under this Agreement in
the event Employee's employment with Company is terminated within two
years following the Change in Control.
4. PARACHUTE PAYMENTS.
(a) Notwithstanding anything in this Agreement to the contrary, any
"parachute payments" to be made to or for the benefit of Employee,
whether pursuant to this Agreement or otherwise, shall be modified to the
extent necessary so that the requirements of either subparagraph (i) or
(ii) below are satisfied:
(i) the aggregate of "present value" of all "parachute payments"
payable to or for the benefit of Employee, whether pursuant to
this Agreement or otherwise, shall be less than three times
Employee's "base amount"; or
(ii) each "parachute payment" payable to or for the benefit of
Employee, whether pursuant to this Agreement or otherwise, shall
be in an amount which does not exceed the "reasonable
compensation" allocable to such "parachute payment."
(b) Notwithstanding anything in any other section of this Agreement to the
contrary, no "illegal parachute payments" shall be made to or for the
benefit of Employee.
(c) For purposes of this section:
(i) The term "base amount" shall have the meaning ascribed to it under
Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code");
(ii) the term "illegal parachute payment" shall mean a payment
described in Section 280G(b)(2)(B) of the Code;
(iii) the term "parachute payment" shall have the meaning ascribed in
Section 280G(b)(2)(A) of the Code, without regard to Section
280G(b)(2)(A)(ii) of the Code but with regard to Section
280G(b)(4)(A);
(iv) "present value" shall be determined in accordance with Section
280G(d)(4) of the Code;
(v) the term "reasonable compensation" shall have the meaning ascribed
to it under Section 280G(b)(4)(B) of the Code (for personal
services actually rendered before the date of the Change in
Control of Company; and
(vi) the portion of the "base amount" and the amount of "reasonable
compensation" allocable to any "parachute payment" shall be
determined in accordance with Section 280G(b)(3) of the Code and
Section 280G(b)(4)(B) of the Code, respectively.
-3-
<PAGE>
(d) In the event the amount of any "parachute payments" which would be
payable to or for the benefit of Employee without regard to this section
must be modified to comply with this section, Employee shall direct which
"parachute payments" are to be waived or modified; provided, however,
that no change in timing of the payments shall be made without the
consent of Company.
(e) Payment of amounts pursuant to this Agreement shall not, unless directed
by Employee, be delayed pending determination of the status of a payment
as a "parachute payment" or "illegal parachute payment" by the Internal
Revenue Service, court or similar body of competent jurisdiction.
(f) This section shall be interpreted so as to avoid the imposition of excise
taxes on Employee under Section 4999 of the Code or the disallowance of a
deduction to Company pursuant to Section 280G(a) of the Code.
5. TERM OF AGREEMENT. This Agreement shall be effective until December
31, 1999. Either party may, in its sole discretion and for any reason,
provide written notice of termination (effective as of the then applicable
expiration date) to the other party no later than 60 days before the
expiration date of this Agreement. If written notice is not so provided,
this Agreement shall be automatically extended for an additional period of 12
months past the expiration date. This Agreement shall continue to be
automatically extended for an additional 12 months at the end of such
12-month period and each succeeding 12-month period unless notices are given
in the manner described in this section. The foregoing notwithstanding, in
the event of a Change of Control the term of this Agreement will
automatically be extended for an additional three years past the expiration
date then in effect.
6. SUCCESSORS. The rights and obligations of Company under this Agreement
shall inure to the benefit of and shall be binding upon the successors and
assigns of Company.
7. GOVERNING LAW. This Agreement is made and entered into in the State of
California, and the laws of California shall govern its validity and
interpretation and the performance by the parties hereto of their respective
duties and obligations hereunder.
8. AMENDMENT OF AGREEMENT. This Agreement may be amended or modified only
by an instrument in writing executed by all of the parties hereto.
9. ARBITRATION. Any dispute, controversy, or claim arising out of or
relating to this Agreement or breach thereof, shall be submitted to arbitration
in accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitration
may be entered in any court in the State of California, or in any other court of
competent jurisdiction. In reaching his or her decision, the arbitrator shall
have no authority to ignore, change, modify, add to or delete from any provision
of this Agreement, but instead is limited to interpreting this Agreement. In
the case of any
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<PAGE>
arbitration or subsequent judicial proceeding arising after a Change in
Control, the Employee shall be awarded his or her costs, including attorneys'
fees.
10. NOTICES. Any notice or communications required or permitted to be given
to the parties hereto shall be delivered personally or be sent by United States
registered or certified mail, postage prepaid and return receipt requested, and
addressed or delivered as follows, or at such other address as the party
addressed may have substituted by notice pursuant to this section:
(a) If to Company:
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, CA 90041-1777
Attention: President
(b) If to Employee:
11. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein and there shall be deemed substituted such other provision
as will most nearly accomplish the intent of the parties to the extent permitted
by the applicable law. In case this Agreement, or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision thereof shall not as a consequence be deemed to be invalid, illegal or
unenforceable in any other governmental jurisdiction or subdivision thereof.
12. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
The parties have executed this Agreement as of the date first written above.
Employee The MacNeal-Schwendler Corporation
_________________________ By________________________________
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<PAGE>
FORM OF MARKETING & SALES/TECHNICAL SEVERANCE AGREEMENT
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, California 90041
Dear [NAME]:
The MacNeal-Schwendler Corporation (the "Company") considers the establishment
and maintenance of sound and vital management to be essential to protecting and
enhancing the best interests of the Company and its stockholders. The Company
also considers it essential to the best interests of the Company and its
stockholders that its key management, technical and marketing personnel be
encouraged to remain with the Company and continue to devote full attention to
the Company's business in the event an effort is made to obtain control of the
Company through a tender offer or otherwise. In this connection, the Company
recognizes that the possibility of a change in control and the uncertainty and
questions which it may raise among management, technical and marketing personnel
may result in the departure or distraction of key management, technical and
marketing personnel to the detriment of the Company and its stockholders.
Although no such change in control is currently anticipated, the board of
directors of the Company has determined that appropriate steps should be taken
to reinforce and encourage the continued attention and dedication of key members
of the Company's management, technical and marketing personnel to their assigned
duties without distraction in the face of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company.
The board recognizes that your contributions to the past and future growth and
success of the Company have been substantial. Should the Company receive any
proposal from a third person concerning a possible business combination with, or
acquisition of equity securities of, the Company, the board believes it
imperative that the Company and the board be able to rely upon you to continue
in your position, and that the Company be able to receive and rely upon your
advice, if so requested, as to the best interests of the Company and its
stockholders without concern that you might be distracted by the personal
uncertainties and risks created by such a proposal. Should the Company receive
any such proposals, in addition to your regular duties, you may be called upon
to assist in the assessment of such proposals, advise management and the board
as to whether such proposals would be in the best interests of the
<PAGE>
Company and its stockholders, and to take such actions as the board might
determine to be appropriate.
Accordingly, to assure the Company that it will have your continued undivided
attention and services and the availability of your advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control of the Company, and to induce you to remain in the employ of the
Company, and for other good and valuable consideration, this letter agreement
(the "Agreement") sets forth benefits which the Company agrees will be provided
to you in the event of a change in control of the Company (as defined below)
prior to the expiration of this Agreement and while you are still an employee of
the Company.
1. CHANGE IN CONTROL. A "Change in Control" of Company means and shall be
deemed to have occurred if and when: (i) within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, any person or group becomes a beneficial
owner, directly or indirectly, of securities of Company representing 20% or more
of the combined voting power of Company's then outstanding securities; (ii)
individuals who were members of the board of directors of Company immediately
prior to a meeting of the stockholders of Company involving a contest for the
election of directors shall not constitute a majority of the board of directors
following such election; (iii) the stockholders of Company approve the
dissolution or liquidation of Company; (iv) the stockholders of Company approve
an agreement to merge or consolidate, or otherwise reorganize, with or into one
or more entities which are not subsidiaries, as a result of which less than 50%
of the outstanding voting securities of the surviving or resulting entity are,
or are to be, owned by former stockholders of Company (excluding from the term
"former stockholders" a stockholder who is, or as a result of the transaction in
question becomes, an "affiliate," as that term is used in the Securities
Exchange Act of 1934 and the rules promulgated thereunder, of any party to such
merger, consolidation or reorganization); or (v) the stockholders of Company
approve the sale of substantially all of Company's business and/or assets to a
person or entity which is not a subsidiary; PROVIDED, HOWEVER, that no Change in
Control of Company shall be deemed to have occurred if the transaction giving
rise thereto was approved by a majority of the board of directors who were in
office immediately prior to such transaction.
2. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL. If, within two
years following a Change in Control of Company, Company terminates Employee's
employment for any reason, or if Employee terminates his employment with Company
for any reason other than death or disability, Company shall pay Employee a lump
sum amount equal to 1.0 times Employee's "base amount" as defined below, if
Employee has reached the fifth but not the tenth anniversary of his date of
employment with Company at the time of his termination, increasing by 0.2 each
such anniversary thereafter until it shall equal 2.0 times Employee's "base
amount" when Employee has reached the tenth anniversary of his date of
employment. Such amount shall be payable within 10 days after such termination
of employment.
3. ESTABLISHMENT OF TRUST; FUNDING OF TRUST UPON CHANGE IN CONTROL.
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<PAGE>
(a) Company shall establish, as soon as practicable, a trust for the purpose
of holding assets to make any payments that may be required under the
terms of this Agreement. Such trust, which may be a sub-trust of a
larger trust, shall be revocable prior to a Change in Control but shall
become irrevocable upon a Change in Control. Such trust shall be a
grantor trust under which the income is taxable to the Company and no
contributions or income are taxable to the Employee until funds are
distributed to him.
(b) The trust described herein shall be initially funded with a contribution
of $1.00. Within 10 days following a Change in Control of Company,
Company shall transfer to the trust sufficient funds to cover the maximum
payment which could become payable to Employee under this Agreement in
the event Employee's employment with Company is terminated within two
years following the Change in Control.
4. PARACHUTE PAYMENTS.
(a) Notwithstanding anything in this Agreement to the contrary, any
"parachute payments" to be made to or for the benefit of Employee,
whether pursuant to this Agreement or otherwise, shall be modified to the
extent necessary so that the requirements of either subparagraph (i) or
(ii) below are satisfied:
(i) the aggregate of "present value" of all "parachute payments"
payable to or for the benefit of Employee, whether pursuant to
this Agreement or otherwise, shall be less than three times
Employee's "base amount"; or
(ii) each "parachute payment" payable to or for the benefit of
Employee, whether pursuant to this Agreement or otherwise, shall
be in an amount which does not exceed the "reasonable
compensation" allocable to such "parachute payment."
(b) Notwithstanding anything in any other section of this Agreement to the
contrary, no "illegal parachute payments" shall be made to or for the
benefit of Employee.
(c) For purposes of this section:
(i) The term "base amount" shall have the meaning ascribed to it under
Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code");
(ii) the term "illegal parachute payment" shall mean a payment
described in Section 280G(b)(2)(B) of the Code;
(iii) the term "parachute payment" shall have the meaning ascribed in
Section 280G(b)(2)(A) of the Code, without regard to Section
280G(b)(2)(A)(ii) of the Code but with regard to Section
280G(b)(4)(A);
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<PAGE>
(iv) "present value" shall be determined in accordance with Section
280G(d)(4) of the Code;
(v) the term "reasonable compensation" shall have the meaning ascribed
to it under Section 280G(b)(4)(B) of the Code (for personal
services actually rendered before the date of the Change in
Control of Company; and
(vi) the portion of the "base amount" and the amount of "reasonable
compensation" allocable to any "parachute payment" shall be
determined in accordance with Section 280G(b)(3) of the Code and
Section 280G(b)(4)(B) of the Code, respectively.
(d) In the event the amount of any "parachute payments" which would be
payable to or for the benefit of Employee without regard to this section
must be modified to comply with this section, Employee shall direct which
"parachute payments" are to be waived or modified; provided, however,
that no change in timing of the payments shall be made without the
consent of the Company.
(e) Payment of amounts pursuant to this Agreement shall not, unless directed
by Employee, be delayed pending determination of the status of a payment
as a "parachute payment" or "illegal parachute payment" by the Internal
Revenue Service, court or similar body of competent jurisdiction.
(f) This section shall be interpreted so as to avoid the imposition of excise
taxes on Employee under Section 4999 of the Code or the disallowance of a
deduction to Company pursuant to Section 280G(a) of the Code.
5. TERM OF AGREEMENT. This Agreement shall be effective until December
31, 1999. Either party may, in its sole discretion and for any reason,
provide written notice of termination (effective as of the then applicable
expiration date) to the other party no later than 60 days before the
expiration date of this Agreement. If written notice is not so provided,
this Agreement shall be automatically extended for an additional period of 12
months past the expiration date. This Agreement shall continue to be
automatically extended for an additional 12 months at the end of such
12-month period and each succeeding 12-month period unless notices are given
in the manner described in this section. The foregoing notwithstanding, in
the event of a Change of Control the term of this Agreement will
automatically be extended for an additional three years past the expiration
date then in effect.
6. SUCCESSORS. The rights and obligations of Company under this Agreement
shall inure to the benefit of and shall be binding upon the successors and
assigns of Company.
7. GOVERNING LAW. This Agreement is made and entered into in the State of
California, and the laws of California shall govern its validity and
interpretation and the performance by the parties hereto of their respective
duties and obligations hereunder.
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<PAGE>
8. AMENDMENT OF AGREEMENT. This Agreement may be amended or modified
only by an instrument in writing executed by all of the parties hereto.
9. ARBITRATION. Any dispute, controversy, or claim arising out of or
relating to this Agreement or breach thereof, shall be submitted to arbitration
in accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitration
may be entered in any court in the State of California, or in any other court of
competent jurisdiction. In reaching his or her decision, the arbitrator shall
have no authority to ignore, change, modify, add to or delete from any provision
of this Agreement, but instead is limited to interpreting this Agreement. In
the case of any arbitration or subsequent judicial proceeding arising after a
Change in Control, the Employee shall be awarded his or her costs, including
attorneys' fees.
10. NOTICES. Any notice or communications required or permitted to be given
to the parties hereto shall be delivered personally or be sent by United States
registered or certified mail, postage prepaid and return receipt requested, and
addressed or delivered as follows, or at such other address as the party
addressed may have substituted by notice pursuant to this section:
(a) If to Company:
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, California 90041-1777
Attention: President
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<PAGE>
(b) If to Employee:
11. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein and there shall be deemed substituted such other provision
as will most nearly accomplish the intent of the parties to the extent permitted
by the applicable law. In case this Agreement, or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision thereof shall not as a consequence be deemed to be invalid, illegal or
unenforceable in any other governmental jurisdiction or subdivision thereof.
12. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
The parties have executed this Agreement as of the date first written above.
Employee The MacNeal-Schwendler Corporation
_________________________ By_________________________________
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<PAGE>
EXHIBIT 10.12
SEPARATION AGREEMENT
The parties to this Separation Agreement ("Agreement") are the following:
1. The MacNeal-Schwendler Corporation ("MSC") and
2. Thomas C. Curry ("Curry").
Whereas MSC desires to employ Curry as its President and Chief
Executive Officer;
Whereas Curry desires to be so employed with MSC;
Whereas both parties desire to set forth in advance their respective
rights and obligations upon the termination of their employment relationship,
the parties agree as follows:
1. Curry hereby acknowledges and agrees that he is an "at will"
employee who is employed for an indefinite term. Accordingly, either he or
MSC can terminate the employment relationship at any time for any or no
reason without liability except for the obligations and rights expressly set
forth in this Agreement.
2. If Curry resigns his position, dies or otherwise terminates the
employment relationship, he shall be entitled to his pro rata share of his
base salary then in effect through the last day of his employment plus any
accrued but unused vacation. Curry's resignation shall be effective on the
date he gives notice unless the parties agree otherwise. Curry shall not be
entitled to any other compensation or benefits from MSC except as statutorily
required by law, such as COBRA rights.
3. If MSC terminates Curry for "cause," Curry shall be entitled to his
pro rata share of his base salary then in effect through the last day of his
employment plus any accrued but unused vacation. Curry shall not be
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<PAGE>
entitled to any other compensation or benefits from MSC except as statutorily
required by law, such as COBRA rights.
4. For the purposes of this Agreement, "cause" for termination shall
include any reason that would constitute "cause" under California law. It
shall also include, but not be limited to, dishonesty, fraud, theft,
embezzlement, conviction of a misdemeanor involving moral turpitude or of any
felony, failure to perform duties in a manner satisfactory to the Board of
Directors after being advised in writing of a performance deficiency,
unauthorized absence from work for a period of five or more consecutive work
days, violation of Company policy or procedure, inability to perform the
essential functions of the job for a period of 180 days due to any physical
or mental disability, competing with the MSC while in its employ, or
violation of the terms of the Employment Service/Non-Disclosure Agreement
signed by Curry upon his employment as President and Chief Operating Officer.
5. If MSC terminates Curry for reasons other than cause, MSC shall
provide Curry with the following compensation and benefits:
(a) MSC will continue to pay Curry the base salary he was receiving
at the time of termination for a period of eighteen (18) months from the
effective date of the termination as determined by MSC (the "Termination
Date"). These salary continuation payments shall be made in the form of
regular semi-monthly payroll payments with appropriate withholdings and
authorized deductions that were in effect at the time of the termination
and/or as required by law.
(b) If Curry elects to exercise his rights under COBRA to continue
the medical benefits provided under the MSC medical plan in which he was
participating, MSC shall continue to pay the same amount towards the
premium as it paid towards the premium immediately prior to the
Termination Date to continue Curry's medical coverage under MSC's then
current medical plan for a period not to exceed eighteen (18) months
after the Termination Date. Other than MSC's payment of the premium,
Curry shall be subject to all the terms and conditions of MSC's medical
plan that are applicable to
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<PAGE>
MSC's other executives. MSC's obligation under this subparagraph shall
terminate immediately upon Curry's commencing employment with another
employer and becoming eligible to participate in the medical plan
offered by the new employer or if Curry becomes otherwise ineligible for
continuance of medical insurance coverage under COBRA. Curry agrees to
notify MSC in writing immediately of the fact that he has accepted new
employment and to provide MSC with a copy of his new employer's medical
insurance.
(c) MSC will continue Curry's participation in its then-current
Company Automobile Benefits Program (which is currently described in MSC
Program No. 8.1.4.) for a period not to exceed eighteen (18) months from
the Termination Date. Curry's continued participation in that program
during the eighteen (18) month period shall be subject to all the terms
and conditions of that program which are then in effect and applicable
to other MSC executives participating in that program.
(d) The 70,000 non-qualified stock options granted under the
special stock option agreement dated January 11, 1995, if not already
vested, shall become fully vested as of the Termination Date and Curry
may exercise those options for a period of twelve (12) months from the
Termination Date. Curry shall remain subject to all other terms and
conditions of the special stock option agreement. Curry's rights under
any and all other employee stock option plans shall be cancelled in
accordance with the terms of those plans.
(c) MSC shall pay, directly to the service provider, reasonable
job search/out placement fees actually incurred by Curry in his efforts
to secure new employment, but in no event shall the total amount of such
fees exceed $35,000.
6. Curry's entitlement to the compensation and benefits described in
Paragraph 5 (a) - (e) is expressly conditioned upon his execution, at the
time of his termination, of MSC's then-current Separation Non-Disclosure
Agreement and the execution of a general release of MSC, its directors,
officers, employees, attorneys, insurers and affiliated entities from any and
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<PAGE>
all liability. If Curry fails to sign either the Separation Non-Disclosure
Agreement or the general release, he shall be entitled to nothing under this
Agreement other than what he would receive upon his resignation pursuant to
Paragraph 2 plus two (2) weeks severance pay. Moreover, if Curry subsequently
violates the terms of the Separation Non-Disclosure Agreement, he shall
immediately forfeit any rights to the benefits set forth in Paragraph 5 (a) -
(e) and shall immediately repay to MSC any and all compensation and the cost
of any and all benefits already received pursuant to Paragraph 5 (a) - (e).
7. The parties acknowledge and agree that the compensation and benefits
described in Paragraph 5 (a) - (e) (or, in the alternative, Paragraph 6) are
the sole and exclusive relief to which Curry shall be entitled if he is
terminated without cause. Accordingly, Curry shall not be entitled to any other
fringe benefits, bonuses, payments, compensation, severance pay or
participation in any other MSC programs or plans then in existence except as
expressly set forth in Paragraph 5 (a) - (e).
8. The parties acknowledge and agree that the compensation and benefits
set forth in Paragraph 5 (a) - (e) (or, in the alternative, Paragraph 6)
shall be the limitation of MSC's liability in connection with any termination
of Curry's employment under this Agreement. Accordingly, if MSC terminates
Curry for cause and it is later determined that cause did not exist, MSC's
liability shall be limited to the compensation and its cost of the benefits
described in Paragraph 5 (a) - (e).
9. This Agreement sets forth the entire agreement between MSC and Curry
with respect to Curry's term of employment and the termination of that
employment. No express or implied modification, alteration or termination of
this Agreement shall be valid except if it is made in writing and executed by
the Chairman of the Board of Directors of MSC. Accordingly, this Agreement
supersedes any and all previous or concurrent arrangements and agreements,
written or oral, expressed or implied, if any, which may have existed between
MSC and Curry, including but not limited to the "Agreement Re: Change in
Control" dated April 14, 1994.
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<PAGE>
10. If any provision of this Agreement is illegal and unenforceable in
whole or in part, the remainder of this Agreement shall remain enforceable to
the extent permitted by law.
11. The parties agree that any lawsuit or action filed in connection
with Curry's employment, this Agreement and/or the termination of Curry's
employment shall be filed in California Superior court for the County of Los
Angeles. Moreover, all disputes arising out of or relating to Curry's
employment with MSC, or to enforce or interpret this Agreement, shall be
resolved by way of a reference procedure, as described in Code of Civil
Procedure Section 638, et seq. Both parties agree to waive any right to a
jury trial. The scope of this clause is to be broadly construed, so as to
include both contract, tort and statutory causes of action of whatever
description. In the event of such a dispute, the parties shall jointly
appoint a Referee, and, in the event that no referee can be agreed upon, then
the parties shall apply to the Judicial Arbitration and Mediation Service for
a list of seven available referees, and each party shall be entitled to
strike names from the list, alternating between them and beginning with
Curry, until only one name remains, and that person shall be designated the
referee. The cost of the reference procedure shall be evenly divided between
the parties, but the referee may, at the conclusion of the reference
procedure, allocate the reference costs as he or she deems appropriate.
Notwithstanding Code of Civil Procedure Section 643, the referee may render
his or her decision within sixty (60) days after the close of proceedings,
but, in the event that no decision is rendered after that time, the referee
shall nonetheless not lose jurisdiction over the matter, and shall render a
decision as soon thereafter as is practicable.
/s/ Richard H. MacNeal
________________________________________
For The MacNeal-Schwendler Corporation
/s/ Thomas C. Curry
________________________________________
Thomas C. Curry
Page 5
<PAGE>
[LOGO] THE MACNEAL-SCHWENDLER CORPORATION
815 Colorado Boulevard - Los Angeles, California 90041-1777
Tel: (323) 258-9111 - Fax: (323) 259-3838
TERMINATION AND GENERAL RELEASE AGREEMENT
In consideration of the covenants undertaken and releases contained in
this General Release Agreement (the "Agreement"), and for other good and
valuable consideration, receipt of which is hereby acknowledged, The
MacNeal-Schwendler Corporation (the "Company") and Thomas C. Curry ("Curry")
agree as follows:
1. Curry's employment as President and Chief Executive Officer of the
Company and as an officer, employee or director (if applicable) with any
subsidiaries of the Company is to be terminated effective January 31, 1999. All
employment obligations, accruals, benefits, payments, and other obligations
(except as expressly provided in paragraph 2 below) shall cease as of that date;
provided, that nothing herein shall affect Curry's relationship with the Company
as a member of the Company's Board of Directors pursuant to arrangements which
are to be deemed outside the scope of this Agreement. Curry acknowledges receipt
of full payment of salary and accrued vacation through January 31, 1999, as
required by previous obligations and by law. Curry shall have the option to
convert and continue health insurance coverage as provided under federal law
(COBRA) and Section 5(b) of the Separation Agreement between Company and Curry
(the "Separation Agreement"). Curry will be entitled to his full contribution
under the Company's 401(K) retirement plan in accordance with the Company's
normal practices for 1998. Following the date of this Agreement, Curry shall
continue to be covered by the Company's officers and other liability insurance
policies as in effect from time to time for all his activities and capacities
relating to the Company prior to the date hereof, and shall continue to be
covered by the Company's liability insurance policies applicable to directors.
Any statutory, common law and contractual rights of Curry to be indemnified,
held harmless, defended or reimbursed by or on behalf of the Company or its
affiliates or contractors with respect to his activities and capacities relating
to the Company shall not be terminated or released by this Agreement and shall
continue to be applicable to him.
2. This Agreement does not modify or supersede the terms and conditions
of the Separation Agreement other than deleting paragraph 5(d) therein and
replacing it with the treatment of Curry's options as described in this
paragraph and on Schedule A attached hereto. Other than paragraph 5(d), the
terms and provisions of that Separation Agreement shall continue and Curry's
termination shall be deemed to be by MSC without cause, covered by Section 5
thereof. Any and all stock options held by Curry will be
<PAGE>
treated as provided on Schedule A hereto; and to the extent the terms of
these options as provided on Schedule A are modified to be different from the
terms contained in the Stock Option Agreements that they were issued under,
the terms contained in Schedule A shall control and the Stock Option
Agreements are hereby modified to conform to Schedule A (including, but not
limited to, with respect to vesting, exercisability, cancellation and option
termination date). However, Curry and the Company agree that Curry will not
be granted any "Reload Options" as such term is defined in the Stock Option
Agreements. Curry and the Company agree that the Change in Control Agreement
between Curry and the Company dated as of February 7, 1995, a copy of which
is attached as Schedule B, is hereby terminated.
3. Except for those obligations expressly set forth in this Agreement,
and except for future obligations arising under the Separation Agreement and
agreements relating to the stock options referenced on Schedule A, Curry hereby
acknowledges full and complete satisfaction of and releases and discharges and
covenants not to sue the Company, its subsidiaries, parent and affiliated
corporations, past and present, and each of them, as well as its and their
directors, officers, shareholders, representatives, assignees, successors,
agents and Curry's, past and present, and each of them (individually and
collectively, "Releasees") from and with respect to any and all claims, wages,
agreements, obligations, demands and causes of action, known or unknown,
suspected or unsuspected, of any nature whatsoever arising out of or in any way
related to any transactions, occurrences, statements, acts or omissions
occurring on or prior to the date of this Agreement and relating to Curry's
relationships or capacities with the Company (individually and collectively the
"Claims") whether based on contract, tort, statute or any other source. Such
Claims include but are not limited to those arising out of or in any way
connected with Curry's employment relationship with the Company, or termination
thereof, such as and without limiting the generality of the foregoing, any Claim
for employment, wages, severance pay, stock option, bonus or similar benefit,
sick leave, pension, retirement, vacation pay, life insurance, health, medical
or disability insurance or any other fringe benefit, workers' compensation or
disability, and any claim under Title VII of the Civil Rights Act of 1964, the
Age Discrimination in Employment Act, the Americans with Disabilities Act, the
Family and Medical Leave Act, the California Fair Employment and Housing Act,
the California Family Rights Act, or any other federal, state or local law,
regulation or ordinance. If by operation of law there are any Claims which are
not deemed fully discharged and satisfied by the releases herein, then the value
of the above consideration shall be credited and applied against any liability
or debt to Curry which the Company may have pursuant to any such unreleased
Claim(s); provided, that such credit shall not exceed 90% of the amount of the
full value of the above consideration.
4. The parties intend the releases of this Agreement to be as
comprehensive as permitted by law, and to be effective as a bar to every Claim,
demand and cause of action stated above, whether known or unknown, suspected or
unsuspected, even if Curry later discovers additional or different claims or
facts which if known at the time of executing this Agreement may have affected
this settlement. Curry hereby expressly
2
<PAGE>
waives any rights and benefits conferred by SECTION 1542 of the CALIFORNIA
CIVIL CODE, with provides that, "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME
OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
HIS SETTLEMENT WITH THE DEBTOR."
5. Curry expressly acknowledges and agrees that, by entering into this
Agreement, Curry is waiving any and all rights or claims that he may have
arising under the Age Discrimination in Employment Act of 1967, as amended,
which have arisen on or before the date of execution of this Agreement. In
furtherance of this intention, Curry expressly acknowledges and agrees that:
(a) In return for this Agreement, Curry will receive
compensation and consideration beyond that to which Curry was already
entitled to receive before entering into this Agreement;
(b) Curry has been advised by the Company, and is hereby
advised in writing by this Agreement, to consult with an attorney
before signing this Agreement;
(c) Curry was given a copy of this Agreement on January 31,
1999, and informed that Curry has up to twenty one (21) calendar days
within which to consider it, although Curry may sign and return it
sooner if Curry wishes to do so; and
(d) Curry has been informed, and is hereby informed, that
Curry has seven (7) days following his signature of the Agreement, in
which to revoke this Agreement. Such revocation must be in writing and
hand-delivered to the Company during or at the end of the seven-day
period. If there is no such revocation, this Agreement shall become
binding and effective upon expiration of the seven-day period.
6. If any provision of this Agreement or its application is held
invalid, the invalidity shall not affect other provisions or applications of the
Agreement which can be given effect without the invalid provisions or
application and, therefore, the provisions of this Agreement are declared to be
severable. This Agreement may be modified only by a writing signed by the
parties. Curry agrees to keep the terms of this Agreement confidential.
7. Any dispute or controversy between Curry, on the one hand, and the
Company (or any other Releasee), on the other hand, in any way arising out of,
related to, or connected in any way with this Agreement or any subject matter
related thereto shall be resolved in accordance with the Separation Agreement.
3
<PAGE>
The undersigned acknowledge that they have carefully read this
Agreement, and that they fully understand its terms. They understand that it
includes a full and final release and settlement of all Claims of any kind which
Curry may have against the Company or other Releasees, as of the date of
signing, whether or not such claims are currently known or suspected, and they
voluntarily sign it with such understanding.
EXECUTED this 15th day of Feb. 1999, at Pasadena,
California.
/s/ Thomas C. Curry
- ---------------------------------
Thomas C. Curry
The MacNeal-Schwendler Corporation
By: /s/ Frank Perna
- ----------------------------------
Frank Perna
Its: Chairman of the Board
4
<PAGE>
SCHEDULE A FOR THOMAS C. CURRY
<TABLE>
<CAPTION>
Unvested Unvested Exercisable Exercisable
Originally Prior to After Prior to After Termination
No. Option Date Granted Price Vested Cancelled 1/31/99 1/31/1999* 1/31/99 1/31/99 Date of Option
<S> <C> <C> <C> <C> <C>
1483 12/7/94 60,000 $11.000 60,000 0 -- -- 60,000 60,000 1/31/04
1504 1/1/95 70,000 $10.375 70,000 0 -- -- 70,000 70,000 1/31/04
1270 12/06/95 5,000 $15.375 5,000 0 -- -- 5,000 5.000 1/31/04
1575 12/06/95 100,000 $15.375 75,000 0 25,000 12,500 75,000 87,500 1/31/04
1588 3/27/96 100,000 $13.750 100,000 0 -- -- 100,000 100,000 1/31/04
1601 12/11/96 20,000 $ 8.250 10,000 0 10,000 5,000 10,000 15,000 1/31/04
2257 1/14/98 50,000 $ 9.875 -- 0 50,000 25,000 -- 62,500 1/31/04
2288 1/15/98 125,000 $ 9.000 -- 0 125,000 62,500 -- 62,500 1/31/04
Total 530,000 320,000 0 210,000 105,000 320,000 425,000
</TABLE>
*These options will be cancelled as of January 31, 1999.
<PAGE>
SCHEDULE B
CHANGE IN CONTROL AGREEMENT
<PAGE>
[LOGO]
THE MACNEAL-SCHWENDLER CORPORATION
815 Colorado Boulevard Los Angeles, California 90041-1777
Tel: (213) 258-9111 - TWX: 910 321-2492 - Telex 4720462 - Fax: (213) 259-3838
February 7, 1995
Mr. Thomas C. Curry
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, California 90041
Dear Mr. Curry:
The MacNeal-Schwendler Corporation (the "Company") considers the
establishment and maintenance of sound and vital management to be essential
to protecting and enhancing the best interests of the Company and its
stockholders. The Company also considers it essential to the best interest of
the Company and its stockholders that its key management personnel be
encouraged to remain with the Company and continue to devote full attention
to the Company's business in the event an effort is made to obtain control of
the Company through a tender offer or otherwise. In this connection, the
Company recognizes that the possibility of a change in control and the
uncertainty and questions which it may raise among management may result in
the departure or distraction of key management personnel to the detriment of
the Company and its stockholders. Although no such change in control is
currently anticipated, the board of directors of the Company has determined
that appropriate steps should be taken to reinforce and encourage the
continued attention and dedication of key members of the Company's management
to their assigned duties without distraction in the face of the potentially
disturbing circumstances arising from the possibility of a change in control
of the Company.
The board recognizes that your contributions to the past and future growth
and success of the Company have been substantial. Should the Company receive
any proposal from a third person concerning a possible business combination
with, or acquisition of equity securities of, the Company, the board believes
it is imperative that the Company and the board be able to rely upon you to
continue in your position, and that the Company be able to receive and rely
upon your advice, if so requested, as to the best interests of the Company
and its stockholders without concern that you might be distracted by the
personal uncertainties and risks created by such a proposal. Should the
Company receive any such proposals, in addition to your regular duties, you
may be called upon to assist in the assessment of such proposals, advise
management and the board as to whether such proposals would be in the best
interests of the Company and its stockholders, and to take such actions as
the board might determine to be appropriate.
<PAGE>
Accordingly, to assure the Company that it will have your continued undivided
attention and services and the availability of your advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control of the Company, and to induce you to remain in the employ of the
Company, and for other good and valuable consideration, this letter
agreement (the "Agreement") sets forth benefits which the Company agrees
will be provided to you in the event of a change in control of the Company
(as defined below) prior to the expiration of this Agreement and while you are
still an employee of the Company.
1. CHANGE IN CONTROL. A "Change in Control" of Company means and shall be
deemed to have occurred if and when: (i) within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, any person or group becomes a
beneficial owner, directly or indirectly, of securities of Company
representing 20% or more of the combined voting power of Company's then
outstanding securities; (ii) individuals who were members of the board of
directors of Company immediately prior to a meeting of the stockholders of
Company involving a contest for the election of directors shall not
constitute a majority of the board of directors following such election;
(iii) the stockholders of Company approve the dissolution or liquidation of
Company; (iv) the stockholders of Company approve an agreement to merge or
consolidate, or otherwise reorganize, with or into one or more entities which
are not subsidiaries, as a result of which less than 50% of the outstanding
voting securities of the surviving or resulting entity are, or are to be,
owned by former stockholders of Company (excluding from the term "former
stockholders" a stockholder who is, or as a result of the transaction in
question becomes, an "affiliate," as that term is used in the Securities
Exchange Act of 1934 and the rules promulgated thereunder, of any party to
such merger, consolidation or reorganization); or (v) the stockholders of
Company approve the sale of substantially all of Company's business and/or
assets to a person or entity which is not a subsidiary; PROVIDED, HOWEVER,
that no Change in Control of Company shall be deemed to have occurred if the
transaction giving rise thereto was approved by a majority of the board of
directors who were in office immediately prior to such transaction.
2. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL. If, within two
years following a Change in Control of Company, Company terminates Employee's
employment for any reason, or if Employee terminates his employment with
Company for any reason other than death or disability, Company shall pay
Employee a lump sum amount equal to 2.5 times Employee's "base amount" as
defined below. Such amount shall be payable within 10 days after such
termination of employment.
3. ESTABLISHMENT OF TRUST: FUNDING OF TRUST UPON CHANGE IN CONTROL.
(a) Company shall establish, as soon as practicable, a trust for the
purpose of holding assets to make any payments that may be required
under the terms of this agreement. Such trust, which may be a sub-trust
of a larger
-2-
<PAGE>
trust, shall be revocable prior to a Change in Control but shall become
irrevocable upon a Change in Control. Such trust shall be a grantor trust
under which the income is taxable to the Company and no contributions or
income are taxable to the Employee until funds are distributed to him.
(b) The trust described herein shall be initially funded with a contribution
of $1.00. Within 10 days following a Change in Control of Company,
Company shall transfer to the trust sufficient funds to cover the
maximum payment which could become payable to Employee under this
Agreement in the event Employee's employment with Company is terminated
within two years following the Change in Control.
4. PARACHUTE PAYMENTS.
(a) Notwithstanding anything in this Agreement to the contrary, any
"parachute payments" to be made to or for the benefit of Employee,
whether pursuant to this Agreement or otherwise, shall be modified to
the extent necessary so that the requirements of either subparagraph (i)
or (ii) before are satisfied:
(i) the aggregate of "present value" of all "parachute payments"
payable to or for the benefit of Employee, whether pursuant to
this Agreement or otherwise, shall be less than three times
Employee's "base amount"; or
(ii) each "parachute payment" payable to or for the benefit of
Employee, whether pursuant to this Agreement or otherwise, shall
be in an amount which does not exceed the "reasonable
compensation" allocable to such "parachute payment."
(b) Notwithstanding anything in any other section of this Agreement to the
contrary, no "illegal parachute payments" shall be made to or for the
benefit of Employee.
(c) For purposes of this section:
(i) The term "base amount" shall have the meaning ascribed to it under
Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code");
(ii) the term "illegal parachute payment" shall mean a payment
described in Section 280G(b)(2)(B) of the Code;
(iii) the term "parachute payment" shall have the meaning ascribed in
Section 280G(b)(2)(A) of the Code, without regard to Section
280G(b)(2)(A)(ii) of the Code but with regard to Section
280G(b)(4)(A);
-3-
<PAGE>
7. GOVERNING LAW. This Agreement is made and entered into in the State of
California, and the laws of California shall govern its validity and
interpretation and the performance by the parties hereto of their respective
duties and obligations hereunder.
8. AMENDMENT OF AGREEMENT. This Agreement may be amended or modified only
by an instrument in writing executed by all of the parties hereto.
9. ARBITRATION. Any dispute, controversy, or claim arising out of or
relating to this Agreement or breach thereof, shall be submitted to
arbitration in accordance with the Voluntary Labor Arbitration Rules of the
American Arbitration Association. Judgment upon the award rendered by the
arbitration may be entered in any court in the State of California, or in any
other court of competent jurisdiction. In reach his or her decision, the
arbitrator shall have no authority to ignore, change, modify, add to or
delete from any provision of this Agreement, but instead is limited to
interpreting this Agreement. In the case of any arbitration or subsequent
judicial proceeding arising after a Change in Control, the Employee shall be
awarded his or her costs, including attorneys' fees.
10. NOTICES. Any notice or communications required or permitted to be given
to the parties hereto shall be delivered personally or be sent by United
States registered or certified mail, postage prepaid and return receipt
requested, and addressed or delivered as follows, or at such other address as
the party addressed may have substituted by notice pursuant to this section:
(a) If to Company:
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, CA 90041-1777
Attention: President
(b) If to Employee:
Thomas C. Curry
9992 Center Drive
Villa Park, California 92667
11. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein and there shall be deemed substituted such other
provision as will most nearly accomplish the intent of the parties to the
extent permitted by the applicable law. In case this Agreement, or any one or
more of the provisions hereof, shall be held to be invalid, illegal or
unenforceable within any
-4-
<PAGE>
governmental jurisdiction or subdivision thereof, the Agreement or any such
provision thereof shall not as a consequence be deemed to be invalid, illegal
or unenforceable in any other governmental jurisdiction or subdivision
thereof.
12. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of
which shall together constitute one and the same Agreement.
The parties have executed this Agreement as of the date first written above.
Employee The MacNeal-Schwendler Corporation
/s/ Thomas C. Curry By /s/ Richard H. MacNeal
- ----------------------------- --------------------------------
Thomas C. Curry Richard H. MacNeal
Chairman
-5-
<PAGE>
[The MacNeal-Schwendler Corporation Letterhead]
TERMINATION AND GENERAL RELEASE AGREEMENT
In consideration of the covenants undertaken and releases contained
in this Termination and General Release Agreement (the "Agreement"), and for
other good and valuable consideration, receipt of which is hereby
acknowledged, The MacNeal-Schwendler Corporation ("the Company") and George
N. Riordan ("Riordan") agree as follows:
1. Riordan's employment with the Company and his status as an
officer, employee or director (if applicable) with any subsidiaries of the
Company is to be terminated effective January 31, 1999. All employment
obligations, accruals, benefits, payments, and other obligations (except as
expressly provided in paragraph 2 below) shall cease as of that date;
provided, that nothing herein shall affect Riordan's relationship with the
Company as a member of the Company's Board of Directors pursuant to
arrangements which are to be deemed outside the scope of this Agreement.
Riordan acknowledges receipt of full payment of salary and all other
applicable benefits through January 31, 1999, as required by previous
obligations and by law. Riordan shall have the option to convert and continue
health insurance coverage as provided under federal law (COBRA).
2. (a) Any and all stock options held by Riordan will be treated as
provided on Schedule A hereto; and to the extent the terms of these options
as provided on Schedule A are modified to be different from the terms
contained in the Stock Option Agreements that they were issued under, the
terms contained in Schedule A shall control and the Stock Option Agreements
are hereby modified to conform to Schedule A (including, but not limited to,
with respect to vesting, exercisability, cancellation and option termination
date). However, Riordan and the Company agree that Riordan will not be
granted any "Reload Options" as such term is defined in the Stock Option
Agreements.
(b) Riordan shall receive a one-time payment of $100,000 on
January 31, 1999 with appropriate withholdings and authorized
deductions as in effect at the time of termination.
(c) Riordan and the Company agree that the Change in Control
Agreement between Riordan and the Company dated as of November 16,
1998, a copy of which is attached as Schedule B, is hereby terminated.
<PAGE>
(d) If Riordan elects to exercise his rights under COBRA to
continue the medical benefits provided under the Company medical plan
in which he was participating, the Company shall continue to pay the
same amount towards the premium as it paid towards the premium
immediately prior to the termination to continue Riordan's medical
coverage for a period not to exceed 12 months after the termination
date. Other than the Company's payment to Riordan of the premium,
Riordan shall be subject to all of the terms and conditions of the
Company's medical plan that are applicable to the Company's other
employees. The Company's obligation under this subparagraph (e) shall
terminate immediately upon Riordan's commencing employment with another
employer and becoming eligible to participate in the medical plan
offered by the new employer or if Riordan becomes otherwise ineligible
for continuance of medical insurance coverage under COBRA. Riordan
agrees to notify the Company in writing immediately of the fact that he
has accepted new employment and to provide the Company with a copy of
his new employer's medical insurance.
(e) The Company will continue Riordan's participation in its
current Company Automobile Benefits Program until April 30, 1999.
Riordan's continued participation in that program through April 30,
1999 will be subject to all the terms and conditions of that program
which are in effect and applicable to other Company executives
participating in that program.
(f) Riordan's entitlement to the compensation and benefits
described in this Agreement is expressly conditioned upon his execution
of the Company's current Separation Non-Disclosure Agreement.
3. Except for those obligations expressly set forth in this
Agreement, indemnification under existing charter documents or contracts for
third party claims relating to Riordan's activities and capacities relating
to the Company prior to the date hereof, and future obligations arising under
the agreements relating to the stock options referenced on Schedule A,
Riordan hereby acknowledges full and complete satisfaction of and releases
and discharges and covenants not to sue the Company, its subsidiaries, parent
and affiliated corporations, past and present, and each of them, as well as
its and their directors, officers, shareholders, representatives, assignees,
successors, agents and Riordan's, past and present, and each of them
(individually and collectively, "Releasees") from and with respect to any and
all claims, wages, agreements, obligations, demands and causes of action,
known or unknown, suspected or unsuspected, of any nature whatsoever arising
out of or in any way related to any transactions, occurrences, statements,
acts or omissions occurring on or prior to the date of this Agreement
(individually and collectively the "Claims") whether based on contract, tort,
statute or any other source. Such Claims include but are not limited to those
arising out of or in any way connected with Riordan's employment relationship
with the Company, or termination thereof, such as and without limiting the
generality of the foregoing, any Claim for employment, wages, severance pay,
vacation pay, stock option, bonus or similar benefit, sick leave, pension,
retirement, vacation pay, life insurance, health, medical or disability
insurance or
2
<PAGE>
any other fringe benefit, workers' compensation or disability, and any claim
under Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act, the Americans with Disabilities Act, the Family and Medical
Leave Act, the California Fair Employment and Housing Act, the California
Family Rights Act, or any other federal, state or local law, regulation or
ordinance. If by operation of law there are any Claims which are not deemed
fully discharged and satisfied by the releases herein, then the value of the
above consideration shall be credited and applied against any liability or
debt to Riordan which the Company may have pursuant to any such unreleased
Claim(s); provided, that such credit shall not exceed 90% of the amount of
the full value of the above consideration.
4. The parties intend the releases of this Agreement to be as
comprehensive as permitted by law, and to be effective as a bar to every
Claim, demand and cause of action stated above, whether known or unknown,
suspected or unsuspected, even if Riordan later discovers additional or
different claims or facts which if known at the time of executing this
Agreement may have affected this settlement. Riordan hereby expressly waives
any rights and benefits conferred by Section 1542 of the California Civil
Code, with provides that, "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH
THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
HIS SETTLEMENT WITH THE DEBTOR."
5. Riordan expressly acknowledges and agrees that, by entering into
this Agreement, Riordan is waiving any and all rights or claims that he may
have arising under the Age Discrimination in Employment Act of 1967, as
amended, which have arisen on or before the date of execution of this
Agreement. In furtherance of this intention, Riordan expressly acknowledges
and agrees that:
(a) In return for this Agreement, Riordan will receive
compensation and consideration beyond that to which Riordan was already
entitled to receive before entering into this Agreement;
(b) Riordan has been advised by the Company, and is hereby
advised in writing by this Agreement, to consult with an attorney
before signing this Agreement;
(c) Riordan was given a copy of this Agreement on February 17,
1999, and informed that Riordan has up to twenty one (21) calendar days
within which to consider it, although Riordan may sign and return it
sooner if Riordan wishes to do so; and
(d) Riordan has been informed, and is hereby informed, that
Riordan has seven (7) days following his signature of the Agreement, in
which to revoke this Agreement and return the payment made pursuant to
Section 2(b) hereof.
3
<PAGE>
Such revocation must be in writing and hand-delivered to the Company
during or at the end of the seven-day period. If there is no such
revocation, this Agreement shall become binding and effective upon
expiration of the seven-day period.
6. If any provision of this Agreement or its application is held
invalid, the invalidity shall not affect other provisions or applications of
the Agreement which can be given effect without the invalid provisions or
application and, therefore, the provisions of this Agreement are declared to
be severable. This Agreement may be modified only by a writing signed by the
parties. Riordan agrees to keep the terms of this Agreement confidential.
7. Any dispute or controversy between Riordan, on the one hand, and
the Company (or any other Releasee), on the other hand, in any way arising
out of, related to, or connected in any way with this Agreement or any
subject matter related thereto, and otherwise cognizable in a court, shall
instead be resolved through final and binding arbitration in Los Angeles,
California, pursuant to California Civil Procedure Code ss.ss. 1282-1284.2,
with the exception of Sections 1283 and 1283.05.
The undersigned acknowledge that they have carefully read this
Agreement, and that they fully understand its terms. They understand that it
includes a full and final release and settlement of all Claims of any kind
which Riordan may have against the Company or other Releasees, as of the date
of signing, whether or not such claims are currently known or suspected, and
they voluntarily sign it with such understanding.
EXECUTED this 4th day of March 1999, at Los Angeles, California.
/s/ George N. Riordan
______________________________
George N. Riordan
The MacNeal-Schwendler Corporation
/s/ Frank Perna
By: ________________________________
Frank Perna
Its: Chairman of the Board and Chief Executive Officer
4
<PAGE>
SCHEDULE A FOR GEORGE N. RIORDAN
<TABLE>
<CAPTION>
Unvested Unvested Exercisable Exercisable
Originally Prior to After Prior to After Termination
No. Option Date Granted Price Vested 1/31/99 1/31/1999* 1/31/99 1/31/99 Date of Option
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1503 1/3/95 2,000 $10.500 2,000 - - 2,000 2,000 1/3/00
1512 3/15/95 10,000 $12.500 10,000 - - 10,000 10,000 3/15/00
1587 1/2/96 3,000 $15.875 3,000 - - 3,000 3,000 1/2/01
1594 1/2/97 3,000 $7.750 3,000 - - 3,000 3,000 1/2/02
1908 1/2/98 3,000 $9.750 3,000 - - 3,000 3,000 1/2/03
2298 7/15/98 125,000 $9.000 - 125,000 62,500 - 62,500 1/31/04
Total 146,000 21,000 125,000 62,500 21,000 83,500
</TABLE>
*These options will be cancelled as of January 31, 1999.
<PAGE>
SCHEDULE B
CHANGE IN CONTROL AGREEMENT
<PAGE>
[The MacNeal-Schwendler Corporation Letterhead]
November 16, 1998
Mr. George N. Riordan
c/o The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, California 90041-1777
Re: CHANGE IN CONTROL AGREEMENT
Dear Mr. Riordan:
The MacNeal-Schwendler Corporation (the "Company") considers the
establishment and maintenance of sound and vital management to be essential
to protecting and enhancing the best interests of the Company and its
stockholders. The Company also considers it essential to the best interests
of the Company and its stockholders that its key management personnel be
encouraged to remain with the Company and continue to devote full attention
to the Company's business in the event an effort is made to obtain control of
the Company through a tender offer or otherwise. In this connection, the
Company recognizes that the possibility of a change in control and the
uncertainty and questions which it may raise may result in the departure or
distraction of key management personnel to the detriment of the Company and
its stockholders. Although no such change in control is currently
anticipated, the board of directors of the Company has determined that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of key members of the Company's management to their
assigned duties without distraction in the face of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company.
The Board recognizes that your contributions to the past and future
growth and success of the Company have been substantial. Should the Company
receive any proposal from a third person concerning a possible business
combination with, or acquisition of equity securities of, the Company, the board
believes it imperative that the Company and the board be able to rely upon you
to continue in your position, and that the Company be able to receive and rely
upon your advice, if so requested, as to the best interests of the Company and
its stockholders without concern that you might be distracted by the personal
uncertainties and risks created by such a proposal. Should the Company receive
any such proposals, in addition to your regular duties, you may be called upon
to assist in the assessment of such proposals, advise management as to whether
such proposals would be in the best interests of the Company and its
stockholders, and to take such actions as the Board might determine to be
appropriate.
1
<PAGE>
Accordingly, to assure the Company that it will have your continued
undivided attention and services and the availability of your advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control of the Company, and to induce you to remain in the employ of the
Company, and for other good and valuable consideration, this letter agreement
(the "Agreement") sets forth benefits which the Company agrees will be provided
to you in the event of a Change in Control (as defined below) of the Company
prior to the expiration of this Agreement and while you are still an employee of
the Company.
1. CHANGE IN CONTROL. A "Change in Control" of the Company means and shall
be deemed to have occurred if and when: (i) within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, any person or group becomes a beneficial
owner, directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding securities;
(ii) individuals who were members of the board of directors of the Company
immediately prior to a meeting of the stockholders of the Company involving a
contest for the election of directors shall not constitute a majority of the
board of directors following such election; (iii) the stockholders of the
Company approve the dissolution or liquidation of the Company; (iv) the
stockholders of the Company approve an agreement to merge or consolidate, or
otherwise reorganize, with or into one or more entities which are not
subsidiaries, as a result of which less than 50% of the outstanding voting
securities of the surviving or resulting entity are, or are to be, owned by
former stockholders of the Company (excluding from the term "former
stockholders" a stockholder who is, or as a result of the transaction in
question becomes, an "affiliate," as that term is used in the Securities
Exchange Act of 1934 and the rules promulgated thereunder, of any party to such
merger, consolidation or reorganization); or (v) the stockholders of the Company
approve the sale of substantially all of the Company's business and/or assets to
a person or entity which is not a subsidiary; PROVIDED, HOWEVER, that no Change
in Control of the Company shall be deemed to have occurred if the transaction
giving rise thereto was approved by a majority of the board of directors who
were in office immediately prior to such transaction.
2. TERMINATION OF EMPLOYMENT FOLLOWING A CHANGE IN CONTROL. If, within two
years following a Change in Control of the Company, Company terminates
Employee's employment for any reason, or if Employee terminates his employment
with the Company for any reason other than death or disability, the Company
shall pay Employee a lump sum amount equal to 2.5 times Employee's "base amount"
as defined below. Such amount shall be payable within 10 days after such
termination of employment.
3. ESTABLISHMENT OF TRUST; FUNDING OF TRUST UPON CHANGE IN CONTROL.
(a) The Company shall establish, as soon as practicable, a
trust for the purpose of holding assets to make any payments that may be
required under the terms of this Agreement. Such trust, which may be a
sub-trust of a larger trust, shall be revocable prior to a Change in Control
but shall become irrevocable upon a Change in Control. Such trust shall be a
grantor trust under which the income is taxable to the Company and no
contributions or income are taxable to the Employee until funds are
distributed to him.
2
<PAGE>
(b) The trust described herein shall be initially funded
with a contribution of $1.00. Within 10 days following a Change in Control
of the Company, the Company shall transfer to the trust sufficient funds to
cover the maximum payment which could become payable to Employee under this
Agreement in the event Employee's employment with Company is terminated
within two years following the Change in Control.
4. PARACHUTE PAYMENTS.
(a) Notwithstanding anything in this Agreement to the contrary,
any "parachute payments" to be made to or for the benefit of Employee, whether
pursuant to this Agreement or otherwise, shall be modified to the extent
necessary so that the requirements of either subparagraph (i) or (ii) below are
satisfied (whichever results in the greater aggregate payments):
(i) the aggregate of "present value" of all "parachute
payments" payable to or for the benefit of Employee, whether pursuant
to this Agreement or otherwise, shall be less than three times
Employee's "base amount"; or
(ii) each "parachute payment" payable to or for the benefit of
Employee, whether pursuant to this Agreement or otherwise, shall be in an
amount which does not exceed the "reasonable compensation" allocable to
such "parachute payment."
(b) Notwithstanding anything in any other section of this
Agreement to the contrary, no "illegal parachute payments" shall be made to or
for the benefit of Employee.
(c) For purposes of this section:
(i) The term "base amount" shall have the meaning ascribed to
it under Section 280G(b)(3) of the Internal Revenue Code of 1986, as
amended (the "Code");
(ii) the term "illegal parachute payment" shall mean a payment
described in Section 280G(b)(2)(B) of the Code;
(iii) the term "parachute payment" shall have the meaning
ascribed in Section 280G(b)(2)(A) of the Code, without regard to Section
280G(b)(2)(A)(ii) of the Code but with regard to Section 280G(b)(4)(A);
(iv) "present value" shall be determined in accordance with
Section 280G(d)(4) of the Code;
(v) the term "reasonable compensation" shall have the meaning
ascribed to it under Section 280G(b)(4)(B) of the Code (for personal
services actually rendered before the date of the Change in Control of
the Company); and
3
<PAGE>
(vi) the portion of the "base amount" and the amount of
"reasonable compensation" allocable to any "parachute payment" shall be
determined in accordance with Section 280G(b)(3) of the Code and Section
280G(b)(4)(B) of the Code, respectively.
(d) In the event the amount of any "parachute payments" which
would be payable to or for the benefit of Employee without regard to this
section must be modified to comply with this section, Employee shall direct
which "parachute payments" are to be waived or modified; provided, however, that
no change in timing of the payments shall be made without the consent of the
Company.
(e) Payment of amounts pursuant to this Agreement shall not,
unless directed by Employee, be delayed pending determination of the status
of a payment as a "parachute payment" or "illegal parachute payment" by the
Internal Revenue Service, court or similar body of competent jurisdiction.
(f) This section shall be interpreted so as to avoid the
imposition of excise taxes on Employee under Section 4999 of the Code or the
disallowance of a deduction to the Company pursuant to Section 280G(a) of the
Code.
5. TERM OF AGREEMENT. This Agreement shall be effective until December
31, 1999. Either party may, in its sole discretion and for any reason,
provide written notice of termination (effective as of the then applicable
expiration date) to the other party no later than 60 days before the
expiration date of this Agreement. If written notice is not so provided,
this Agreement shall be automatically extended for an additional period of 12
months past the expiration date. This Agreement shall continue to be
automatically extended for an additional 12 months at the end of such
12-month period and each succeeding 12-month period unless notices are given
in the manner described in this section. The foregoing notwithstanding, in
the event of a Change of Control the term of this Agreement will
automatically be extended for an additional three years past the expiration
date then in effect.
6. SUCCESSORS. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company.
7. GOVERNING LAW. This Agreement is made and entered into in the State of
California, and the laws of California shall govern its validity and
interpretation and the performance by the parties hereto of their respective
duties and obligations hereunder.
8. AMENDMENT OF AGREEMENT. This Agreement may be amended or modified only
by an instrument in writing executed by all of the parties hereto.
9. ARBITRATION. Any dispute, controversy, or claim arising out of or
relating to this Agreement or breach thereof, shall be submitted to arbitration
in accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitration
may be entered in any court in the State of California, or in any other court of
competent jurisdiction. In reaching his or her decision, the arbitrator shall
have no
4
<PAGE>
authority to ignore, change, modify, add to or delete from any provision of
this Agreement, but instead is limited to interpreting this Agreement. In
the case of any arbitration or subsequent judicial proceeding arising after a
Change in Control, the Employee shall be awarded his costs, including
attorneys' fees.
10. NOTICES. Any notice or communications required or permitted to be given
to the parties hereto shall be delivered personally or be sent by United States
registered or certified mail, postage prepaid and return receipt requested, and
addressed or delivered as follows, or at such other address as the party
addressed may have substituted by notice pursuant to this section:
(a) If to the Company:
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, CA 90041-1777
Attention: President
(b) If to Employee:
Mr. George N. Riordan
2225 Robles Avenue
San Marino, CA 91108
11. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein and there shall be deemed substituted such other provision
as will most nearly accomplish the intent of the parties to the extent permitted
by the applicable law. In case this Agreement, or any one or more of the
provisions hereof, shall be held to be invalid, illegal or unenforceable within
any governmental jurisdiction or subdivision thereof, the Agreement or any such
provision thereof shall not as a consequence be deemed to be invalid, illegal or
unenforceable in any other governmental jurisdiction or subdivision thereof.
12. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
The parties have executed this Agreement as of the date first written above.
Employee The MacNeal-Schwendler Corporation
/s/ George N. Riordan /s/ Thomas C. Curry
______________________________ By ______________________________
George N. Riordan Thomas C. Curry,
President & CEO
5
<PAGE>
[The MacNeal-Schwendler Corporation Letterhead]
[Date]
[Name of Director]
[Address of Director]
Re: OUTSIDE DIRECTOR CHANGE IN CONTROL AGREEMENT
Dear Mr._________:
The MacNeal-Schwendler Corporation (the "Company") considers the
establishment and maintenance of sound and vital management to be essential
to protecting and enhancing the best interests of the Company and its
stockholders. The Company also considers it essential to the best interests
of the Company and its stockholders that its outside directors be encouraged
to remain with the Company and continue to devote the necessary attention to
the Company's business in the event an effort is made to obtain control of
the Company through a tender offer or otherwise. In this connection, the
Company recognizes that the possibility of a change in control and the
uncertainty and questions which it may raise may result in the departure or
distraction of key directors to the detriment of the Company and its
stockholders. Although no such change in control is currently anticipated,
the board of directors of the Company has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of the outside directors to their duties without distraction in
the face of the potentially disturbing circumstances arising from the
possibility of a change in control of the Company.
The Board recognizes that your contributions to the past and future
growth and success of the Company have been substantial. Should the Company
receive any proposal from a third person concerning a possible business
combination with, or acquisition of equity securities of, the Company, the board
believes it imperative that the Company and the board be able to rely upon you
to continue as a director of the Company, and that the Company be able to
receive and rely upon your advice, if so requested, as to the best interests of
the Company and its stockholders without concern that you might be distracted by
the personal uncertainties and risks created by such a proposal. Should the
Company receive any such proposals, in addition to your regular duties, you may
be called upon to assist in the assessment of such proposals, advise the full
board as to whether such proposals would be in the best interests of the Company
and its stockholders, and to take such actions as the full board might determine
to be appropriate.
1
<PAGE>
Accordingly, to assure the Company that it will have your continued
undivided attention and services and the availability of your advice and counsel
notwithstanding the possibility, threat or occurrence of a bid to take over
control of the Company, and to induce you to remain as a director of the
Company, and for other good and valuable consideration, this letter agreement
(the "Agreement") sets forth benefits which the Company agrees will be provided
to you in the event of a Change in Control (as defined below) of the Company
prior to the expiration of this Agreement and while you are still a director of
the Company.
1. CHANGE IN CONTROL. A "Change in Control" of the Company means and shall
be deemed to have occurred if and when: (i) within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, any person or group becomes a beneficial
owner, directly or indirectly, of securities of the Company representing 20% or
more of the combined voting power of the Company's then outstanding securities;
(ii) individuals who were members of the board of directors of the Company
immediately prior to a meeting of the stockholders of the Company involving a
contest for the election of directors shall not constitute a majority of the
board of directors following such election; (iii) the stockholders of the
Company approve the dissolution or liquidation of the Company; (iv) the
stockholders of the Company approve an agreement to merge or consolidate, or
otherwise reorganize, with or into one or more entities which are not
subsidiaries, as a result of which less than 50% of the outstanding voting
securities of the surviving or resulting entity are, or are to be, owned by
former stockholders of the Company (excluding from the term "former
stockholders" a stockholder who is, or as a result of the transaction in
question becomes, an "affiliate," as that term is used in the Securities
Exchange Act of 1934 and the rules promulgated thereunder, of any party to such
merger, consolidation or reorganization); or (v) the stockholders of the Company
approve the sale of substantially all of the Company's business and/or assets to
a person or entity which is not a subsidiary; PROVIDED, HOWEVER, that no Change
in Control of the Company shall be deemed to have occurred if the transaction
giving rise thereto was approved by a majority of the board of directors who
were in office immediately prior to such transaction.
2. REMOVAL FOLLOWING A CHANGE IN CONTROL.
(a) If, within two years following a Change in Control of the
Company, you are removed as a director for any reason, or if you resign as a
director of the Company for any reason other than death or disability, the
Company shall pay you a lump sum amount equal to 2.5 times your "annualized
payments" as defined below. Such amount shall be payable within 10 days after
the date on which you resign or are removed (such date being referred to
hereinafter as the "Termination Date").
(b) As used herein, subject to Section 4 below, the term
"annualized payments" means the amount paid to you by the Company for your
services as a director of the Company (including, without limitation, any
annual retainer, board meeting attendance fee, committee meeting attendance
fee and chairperson's fee but excluding the value of any stock option grants)
for the one-year period ending on the Termination Date; provided, that if
your services as a director commenced less than one year prior to the
Termination Date, the annualized payments shall be calculated assuming the
following: (i) you were paid any retainer fees as a director for the full
one-year period prior to the Termination Date; (ii) you attended all
2
<PAGE>
board meetings held during such one-year period other than those board
meetings that were held while you were actually a director and that you did
not attend; (iii) you were a member (and chairperson, if applicable) of each
committee of which you were actually a member (or chairperson) on the
Termination Date; and (iv) you attended all committee meetings held during
such one-year period other than those committee meetings that were held while
you were actually a committee member and that you did not attend.
3. ESTABLISHMENT OF TRUST; FUNDING OF TRUST UPON CHANGE IN CONTROL.
(a) The Company shall establish, as soon as practicable, a
trust for the purpose of holding assets to make any payments that may be
required under the terms of this Agreement. Such trust, which may be a
sub-trust of a larger trust, shall be revocable prior to a Change in Control
but shall become irrevocable upon a Change in Control. Such trust shall be a
grantor trust under which the income is taxable to the Company and no
contributions or income are taxable to you until funds are distributed to you.
(b) The trust described herein shall be initially funded
with a contribution of $1.00. Within 10 days following a Change in Control
of the Company, the Company shall transfer to the trust sufficient funds to
cover the maximum payment which could become payable to you under this
Agreement in the event you resign or are removed as a director of the
Company within two years following the Change in Control.
4. PARACHUTE PAYMENTS.
(a) Notwithstanding anything in this Agreement to the
contrary, any "parachute payments" to be made to you or for your benefit,
whether pursuant to this Agreement or otherwise, shall be modified to the
extent necessary so that the requirements of either subparagraph (i) or (ii)
below are satisfied (whichever results in the greater aggregate payments):
(i) the aggregate of "present value" of all "parachute
payments" payable to you or for your benefit, whether pursuant to
this Agreement or otherwise, shall be less than three times your
"base amount"; or
(ii) each "parachute payment" payable to you or for your
benefit, whether pursuant to this Agreement or otherwise, shall be in an
amount which does not exceed the "reasonable compensation" allocable to
such "parachute payment."
(b) Notwithstanding anything in any other section of this
Agreement to the contrary, no "illegal parachute payments" shall be made to you
or for your benefit.
(c) For purposes of this section:
(i) The term "base amount" shall have the meaning ascribed to
it under Section 280G(b)(3) of the Internal Revenue code of 1986, as
amended (the "Code");
3
<PAGE>
(ii) the term "illegal parachute payment" shall mean a payment
described in Section 280G(b)(2)(B) of the Code;
(iii) the term "parachute payment" shall have the meaning
ascribed in Section 280G(b)(2)(A) of the Code, without regard to Section
280G(b)(2)(A)(ii) of the Code but with regard to Section 280G(b)(4)(A);
(iv) "present value" shall be determined in accordance with
Section 280G(d)(4) of the Code;
(v) the term "reasonable compensation" shall have the meaning
ascribed to it under Section 280G(b)(4)(B) of the Code (for personal
services actually rendered before the date of the Change in Control of
the Company); and
(vi) the portion of the "base amount" and the amount of
"reasonable compensation" allocable to any "parachute payment" shall be
determined in accordance with Section 280G(b)(3) of the Code and Section
280G(b)(4)(B) of the Code, respectively.
(d) In the event the amount of any "parachute payments" which
would be payable to or for your benefit without regard to this section must be
modified to comply with this section, you shall direct which "parachute
payments" are to be waived or modified; provided, however, that no change in
timing of the payments shall be made without the consent of the Company.
(e) Payment of amounts pursuant to this Agreement shall not,
unless directed by you, be delayed pending determination of the status of a
payment as a "parachute payment" or "illegal parachute payment" by the
Internal Revenue Service, court or similar body of competent jurisdiction.
(f) This section shall be interpreted so as to avoid the
imposition of excise taxes on you under Section 4999 of the Code or the
disallowance of a deduction to the Company pursuant to Section 280G(a) of the
Code.
5. TERM OF AGREEMENT. This Agreement shall be effective until December 31,
1999 but shall be terminated earlier upon your departure from the Board prior to
a Change in Control. Either party may, in its sole discretion and for any
reason, provide written notice of termination (effective as of the then
applicable expiration date) to the other party no later than 60 days before the
expiration date of this Agreement. If written notice is not so provided, this
Agreement shall be automatically extended for an additional period of 12 months
past the expiration date. This Agreement shall continue to be automatically
extended for an additional 12 months at the end of such 12-month period and each
succeeding 12-month period unless notices are given in the manner described in
this section. The foregoing notwithstanding, in the event of a Change of
Control the term of this Agreement will automatically be extended for an
additional three years past the expiration date then in effect.
4
<PAGE>
6. SUCCESSORS. The rights and obligations of the Company under this
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of the Company.
7. GOVERNING LAW. This Agreement is made and entered into in the State of
California, and the laws of California shall govern its validity and
interpretation and the performance by the parties hereto of their respective
duties and obligations hereunder.
8. AMENDMENT OF AGREEMENT. This Agreement may be amended or modified only
by an instrument in writing executed by all of the parties hereto.
9. ARBITRATION. Any dispute, controversy, or claim arising out of or
relating to this Agreement or breach thereof, shall be submitted to arbitration
in accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association. Judgment upon the award rendered by the arbitration
may be entered in any court in the State of California, or in any other court of
competent jurisdiction. In reaching his or her decision, the arbitrator shall
have no authority to ignore, change, modify, add to or delete from any provision
of this Agreement, but instead is limited to interpreting this Agreement. In
the case of any arbitration or subsequent judicial proceeding arising after a
Change in Control, you shall be award your costs, including attorneys' fees.
10. NOTICES. Any notice or communications required or permitted to be given
to the parties hereto shall be delivered personally or be sent by United States
registered or certified mail, postage prepaid and return receipt requested, and
addressed or delivered as follows, or at such other address as the party
addressed may have substituted by notice pursuant to this section:
(a) If to the Company:
The MacNeal-Schwendler Corporation
815 Colorado Boulevard
Los Angeles, CA 90041-1777
Attention: President
(b) If to ____________________:
_______________________________
_______________________________
_______________________________
Attention: ______________________
11. SEVERABILITY. In case any one or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Agreement, but this Agreement shall
be construed as if such invalid, illegal or unenforceable provision had never
been contained herein and there shall be deemed substituted such other provision
as will most nearly accomplish the intent of the parties to the extent permitted
by the applicable law. In case this Agreement, or any one or more of the
provisions hereof, shall be held to be invalid, illegal or
5
<PAGE>
unenforceable within any governmental jurisdiction or subdivision thereof,
the Agreement or any such provision thereof shall not as a consequence be
deemed to be invalid, illegal or unenforceable in any other governmental
jurisdiction or subdivision thereof.
12. COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
The parties have executed this Agreement as of the date first written above.
The MacNeal-Schwendler Corporation
______________________________ By ________________________________
[Name]
6
<PAGE>
[LOGO]
COMMERCIAL PORTFOLIO ADMINISTRATION
BUSINESS LOAN AGREEMENT
This Business Loan Agreement (this "Agreement") is entered into as of the
date set forth below between Union Bank of California, N.A. ("Bank") and the
undersigned ("Borrower") with respect to each and every extension of credit
(whether one or more, collectively referred to as the "Loan") from Bank to
Borrower. In consideration of the Loan. Bank and Borrower agree to the
following terms and conditions.
1. THE LOAN
1.1 THE NOTE. The Loan is evidenced by one or more promissory notes or
other evidences of indebtedness, including each amendment, extension,
renewal or replacement thereof, which are incorporated herein by this
reference (whether one or more, collectively referred to as the "Note").
- Wherever "N/A" appears in a blank in this Agreement, it means the
Subsection in which it appears is deemed deleted from this Agreement.
1.2 REVOLVING LOAN CLEAN-UP PERIOD. For any portion of the Loan which
is a revolving loan, at least N/A consecutive days during each 12 month
period the principal amount outstanding under such revolving loan must be
zero.
1.3 TERM LOAN AVAILABILITY PERIOD. For any portion of the Loan which
is a term loan, loan proceeds shall be available for disbursement from
N/A through N/A only.
1.4 FEE. Borrower shall pay to Bank a fee of $ N/A.
1.5 COLLATERAL. The payment and performance of all obligations of
Borrower under the Loan Documents is and shall be during the term of the
Loan secured by a perfected security interest in such real or personal
property collateral as is required by Bank and each security interest
shall rank in first priority unless otherwise specified in writing by Bank.
1.6 GUARANTY. The payment and performance of all obligations of
Borrower under the Loan Documents are and shall be during the term of the
Loan guaranteed by: N/A
1.7 SUBORDINATION. Certain other obligations of Borrower, namely those
certain 7 7/8% Convertible Subordinated Debentures due 2004, are junior in
payment to Bank debt and other obligations of Borrower as described in the
Indenture document dated August 18, 1994 and all subsequent Supplemental
Indentures amending that document.
2. CONDITIONS TO AVAILABILITY OF THE LOAN. Before Bank is obligated to
disburse all or any portion of the Loan, Bank must have received (a) the Note
and every other document required by Bank in connection with the Loan, each
of which must be in form and substance satisfactory to Bank (together with
this Agreement, referred to as the "Loan Documents"), (b) confirmation of the
perfection of its security interest in any collateral for the Loan, and (c)
payment of any fee required in connection with the Loan.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants (and
each request for a disbursement of the proceeds of the Loan shall be deemed a
representation and warranty made on the date of such request) that:
3.1 Borrower is an individual or Borrower is duly organized and
existing under the laws of the state of its organization and is duly
qualified to conduct business in each jurisdiction in which its business
is conducted;
3.2 The execution, delivery and performance of the Loan Documents
executed by Borrower are within Borrower's power, have been duly
authorized, are legal, valid and binding obligations of Borrower, and
are not in conflict with the terms of any charter, bylaw, or other
organization papers of Borrower or with any law, indenture, agreement
or undertaking to which Borrower is a party or by which Borrower is bound
or affected;
3.3 All financial statements and other financial information submitted
by Borrower to Bank are true and correct in all material respects, and
there has been no material adverse change in Borrower's financial
condition since the date of the latest of such financial statement;
3.4 Borrower is properly licensed and in good standing in each state in
which Borrower is doing business, and Borrower has complied with all
laws and regulations affecting Borrower, including without limitation,
each applicable fictitious business name statute;
3.5 There is no event which is, or with notice or lapse of time or both
would be, and Event of Default (as defined in Article 6);
445 South Figuesoa Street, Floor 16, Los Angeles,
California 90071-1655
P.O. Box 3100, Los Angeles, California 90051-1100
213 236 7806 Fax 213 236 7635
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<PAGE>
3.6 Borrower is not engaged in the business of extending credit for the
purpose of, and no part of the Loan will be used, directly or
indirectly, for purchasing or carrying margin stock within the meaning of
Federal Reserve Board Regulation U; and
3.7 Borrower is not aware of any fact, occurrence or circumstance which
Borrower has not disclosed to Bank in writing which has, or could
reasonably be expected to have, a material adverse effect on Borrower's
ability to repay the Loan or perform its obligations under the Loan
Documents.
4. COVENANTS. Borrower agrees, so long as the Loan or any commitment to
make any advance under the Loan is outstanding and until full and final
payment of all sums outstanding under any Loan Document, that Borrower will:
4.1 MAINTAIN:
(a) Working Capital equal to at least $ N/A . As used herein.
"Working Capital" means the excess of current assets over current
liabilities;
(b) A ratio of current assets to current liabilities of at least
1.25 :1.00;
(c) A quick ratio of cash, accounts receivable and marketable
securities to current liabilities of at least N/A :1.00;
(d) Tangible Net Worth of at least $25,000,000.00 (As used herein
"Tangible Net Worth" means net worth increased by indebtedness of
Borrower subordinated to Bank or junior in payment to Bank debt and
decreased by patents, licenses, trademarks, trade names, goodwill
and other similar intangible assets, including capitalized software
costs, organizational expenses, and monies due from affiliates
including officers, shareholders and directors);
(e) A ratio of total liabilities to Tangible Net Worth of not
greater than 1.75:1.00 (As used herein "Total Liabilities" means
gross liabilities as per GAAP less any indebtedness of Borrower
subordinated to Bank or junior in payment to Bank debt. "Tangible
Net Worth" means net worth increased by indebtedness of Borrower
subordinated to Bank or junior in payment to Bank debt and
decreased by patents, licenses, trademarks, trade names, goodwill
and similar other intangible assets including capitalized software
costs, organizational expenses and monies due from affiliates
(including officers, shareholders and directors);
(f) A profit after taxes of not less than $ N/A , to be measured
as of the end of each fiscal N/A of Borrower for the N/A period
immediately preceding the date of measurement;
(g) A ratio of Cash Flow to Debt Service of at lease N/A :1.00.
Compliance with this subsection to be measured as of the end of
each fiscal N/A of Borrower. (As used herein, "Cash Flow" means net
profit after taxes, to which depreciation, amortization and other
non-cash expenses are added for the N/A month period immediately
preceding the date of calculation, and "Debt Service" means that
portion of long-term liabilities and capital leases coming due
within ___ months after the date of calculation); and
(h) No operating losses for any two (2) consecutive quarters.
All accounting terms used in this Agreement shall have the definitions given
them by generally accepted accounting principles, unless otherwise defined
herein.
4.2 Give written notice to Bank within 15 days of the following:
(a) Any litigation or arbitration proceeding affecting Borrower
where the amount in controversy is $ N/A or more;
(b) Any material dispute which may exist between Borrower and any
government regulatory body or law enforcement body;
(c) Any Event of Default of any event which, upon notice, or lapse
of time, or both, would become an Event of Default;
(d) Any other matter which has resulted or is likely to result in
a material adverse change in Borrower's financial condition or
operation; and
(e) Any change in Borrower's name or the location of Borrower's
principal place of business, or the location of any collateral for
the Loan, or the establishment of any new place of business or the
discontinuance of any existing place of business.
4.3 Furnish to Bank an income statement, balance sheet, and statement of
retained earnings, with supportive schedules ("Financial Statement"),
and any other financial information requested by Bank, prepared in
accordance with generally accepted accounting principles and in a form
satisfactory to Bank as follows:
(a) Within 45 days after the close of each quarter, except for the
final (month/quarter) of each fiscal year, Borrower's Financial
Statement as of the close of such period;
(b) Within 120 days after the close of each fiscal year, a copy of
Borrower's annual Financial Statement prepared by a certified
public accountant on an audited basis. Any independent certified
public accountant who prepares Borrower's Financial Statement shall
be selected by Borrower and reasonably satisfactory to Bank;
(c) Within N/A days after the close of each fiscal year, a copy of
each guarantor's annual Financial Statement;
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<PAGE>
(d) If any portion of the Loan is a Borrowing Base Loan, within
N/A days after each calendar month end, a copy of Borrower's
monthly accounts receivable and accounts payable agings, and a
certification of compliance with the borrowing base in the
Borrowing Base Addendum attached hereto, executed by Borrower,
which certificate shall accurately report Borrower's Accounts,
Eligible Accounts, Inventory, and Eligible Inventory; and
(e) Promptly upon request, any other financial information
requested by Bank.
4.4 Furnish to Bank, on Bank's request, a copy of Borrower's and each
guarantor's most recently filed federal income tax return with all
accompanying schedules.
4.5 Pay or reimburse Bank for all costs, expenses and fees incurred by
Bank in preparing and documenting this Agreement and the Loan and all
amendments and modifications thereof, including but not limited to all
filing and recording fees, costs of appraisals, insurance and attorney's
fees, including the reasonable estimate of the allocated costs and
expenses of in-house legal counsel and staff.
4.6 Maintain and preserve Borrower's existence, present form of
business and all rights, privileges and franchises necessary or
desirable in the normal course of its business, and keep all of
Borrower's properties in good working order and condition.
4.7 Maintain and keep in force insurance with companies acceptable to
Bank and in such amounts and types, including without limitation fire
and public liability insurance, as is usual in the business carried on
by Borrower, or as Bank may reasonably request. Such insurance polices
must be in form and substance satisfactory to Bank.
4.8 Maintain adequate books, accounts and records and prepare all
financial statements required hereunder in accordance with generally
accepted accounting principles, and in compliance with the regulations
of any governmental regulatory body having jurisdiction over Borrower or
Borrower's business and permit employees or agents of Bank at any
reasonable time to inspect Borrower's assets and properties, and to
examine or audit Borrower's books, accounts and records and make copies
and memoranda thereof.
4.9 At all times comply with, or cause to be complied with, all laws,
statutes, rules, regulations, orders and directions of any governmental
authority having jurisdiction over Borrower or Borrower's business, and
all material agreements to which Borrower is a party.
4.10 Except as provided in this Agreement, or in the ordinary course of
its business as currently conducted, not make any loans or advances,
become a guarantor or surety, pledge its credit or properties in any
manner, or extend credit.
4.11 Not purchase the debt or equity of another person or entity except
for savings accounts and certificates of deposit of Bank, direct U.S.
Government obligations and commercial paper issued by corporations with
top ratings of Moody's or Standard & Poor's, provided that all such
permitted investments shall mature within one year of purchase.
4.12 Not create, assume or suffer to exist any mortgage, encumbrance,
security interest, pledge or lien ("Lien") on Borrower's real or
personal property, whether now owned or hereafter acquired, or upon the
income or profits thereof except the following: (a) Liens in favor of
Bank, (b) Liens for taxes or other items not delinquent or contested in
good faith, or (c) other Liens which do not exceed in the aggregate
$ N/A at any one time.
4.13 Not sell or discount any account receivable or evidence of
indebtedness, except to Bank, not borrow any money or become
contingently liable for money borrowed, except pursuant to agreements
made with Bank.
4.14 Neither liquidate, dissolve, enter into any consolidation, merger,
partnership, or other combination; nor convey, sell or lease all or the
greater part of its assets or business; nor purchase or lease all or the
greater part of the assets or business of another.
4.15 Not engage in any business activities or operations substantially
different from or unrelated to present business activities and
operations.
4.16 Not, in any single fiscal year of Borrower, expand or incur
obligations of more than $ N/A.
4.17 Not, in any single fiscal year of Borrower, enter into any lease of
real or personal property which would cause Borrower's aggregate annual
obligations under all such real and personal property leases to exceed
$ N/A.
4.18 Borrower will promptly, upon demand by Bank, take such further
action and execute all such additional documents and instruments in
connection with this Agreement as Bank in its reasonable discretion
deems necessary, and promptly supply Bank with such other information
concerning its affairs as Bank may request from time to time.
5. EVENTS OF DEFAULT. The occurrence of any of the following events ("Events
of Default") shall terminate any obligation on the part of Bank to make or
continue the Loan and automatically, unless otherwise provided under the Loan
Documents, shall make all sums of interest and principal and any other
amounts owing under the Loan immediately due and payable, without notice of
default, presentment or demand for payment, protest or notice of nonpayment
or dishonor, or any other notices or demands:
5.1 Borrower shall default in the due and punctual payment of the
principal of or the interest on the Note or any of the Loan Documents;
5.2 Any default shall occur under the Note;
5.3 Borrower shall default in the due performance or observance of any
covenant or condition of the Loan Document;
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<PAGE>
5.4 Any guaranty or subordination agreement required hereunder is
breached or becomes ineffective, or any guarantor or subordinating
creditor dies or disavows or attempts to revoke or terminate such
guaranty or subordination agreement; or
6. MISCELLANEOUS.
6.1 The rights, powers and remedies given to Bank hereunder shall be
cumulative and not alternative and shall be in addition to all rights,
powers, and remedies given to Bank by law against Borrower or any other
person, including but not limited to Bank's rights of setoff or banker's
lien.
6.2 Any forbearance or failure or delay by Bank in exercising any
right, power or remedy hereunder shall not be deemed a waiver thereof
and any single or partial exercise of any right, power or remedy shall
not preclude the further exercise thereof. No waiver shall be effective
unless it is in writing and signed by an officer of Bank.
6.3 The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assignees of Borrower,
and any assignment by Borrower without Bank's consent shall be null and
void.
6.4 This Agreement and all other agreements and instruments required by
Bank in connection herewith shall be governed by and construed according
to the laws of the State of California.
6.5 Should any one or more provisions of this Agreement be determined to
be illegal or unenforceable, all other provisions nevertheless shall be
effective. In the event of any conflict between the provisions of this
Agreement and the provisions of any note or reimbursement agreement
evidencing any indebtedness hereunder, the provisions of such note or
reimbursement agreement shall prevail.
6.6 Except for documents and instruments specifically referenced
herein, this Agreement constitutes the entire agreement between Bank and
Borrower regarding the Loan and and all prior communications, verbal or
written, between Borrower and Bank shall be of no further effect or
evidentiary value.
6.7 The section and subsection headings herein are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
6.8 This Agreement may be amended only in writing signed by all parties
hereto.
6.9 Borrower and Bank may execute one or more counterparts to this
Agreement, each of which shall be deemed an original, but taken together
shall be one and the same instrument.
6.10 Any notices or other communications provided for or allowed
hereunder shall be effective only when given by one of the following
methods and addressed to the respective party at its address given with
the signatures at the end of this Agreement and shall be considered to
have been validly given: (a) upon delivery, if delivered personally;
(b) upon receipt, if mailed, first class postage prepaid, with the
United States Postal Service; (c) on the next business day if sent by
overnight courier service of recognized standing; and (d) upon
telephoned confirmation of receipt, if telecopied.
7. ADDITIONAL PROVISIONS. The following additional provision, if any,
are hereby made part of this Agreement:
The following additional provisions, if any, are hereby made a part of this
Agreement:
7.1 Borrower shall pay to Bank a non-refundable fee to be payable in
arrears on the last day of each calendar quarter and on maturity date,
and to be computed at a rate per annum equal to 1.25% on the average
daily unused amount on this line of credit during such quarter.
7.2 If anything within this agreement is in conflict with any prior
agreement with Borrower or any Guarantor, then this agreement
supersedes such prior agreement(s).
THIS AGREEMENT is executed on behalf of the parties as of October 4, 1996.
<TABLE>
<S> <C>
Union Bank of California, N.A. ("Bank") The MacNeal Schwendler Corporation ("Borrower)
By: /s/ Kerry Turner By: /s/ Thomas C. Curry
------------------------------------ ------------------------------------
Kerry Turner Title: President & CEO
Title: Vice President
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Address where notices to Bank are to be sent: Address where notices to Borrower are to be sent:
Los Angeles Headquarters Banking Office The MacNeal Schwendler Corp.
446 South Figueroa Street 815 W. Colorado Blvd.
Los Angeles, CA 90071 Los Angeles, CA 90041
Attn: Kerry Turner Attn: Thomas C. Curry, President
Fax Number: (213) 236-4031 Fax Number: (213) 259-4969
Telephone No.: (213) 236-7780 Telephone No.: (213) 259-3841
</TABLE>
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<PAGE>
FIRST AMENDMENT
TO THE BUSINESS LOAN AGREEMENT
THIS FIRST AMENDMENT TO THE BUSINESS LOAN AGREEMENT [this "First Amendment"]
dated as of February 21, 1997, is made and entered into by and between THE
MACNEAL-SCHWENDLER CORPORATION, a Delaware Corporation ("Borrower"), and
UNION BANK OF CALIFORNIA, N.A. ("Bank").
RECITALS:
A. Borrower and Bank are parties to that certain Business Loan Agreement
dated October 4, 1996, (the "Agreement"), pursuant to which Bank agreed to
extend credit to borrower.
B. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this First Amendment.
AGREEMENT
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a) Section 1.4 Fee of the Agreement is hereby amended by substituting
"The borrower shall pay to Bank a non-refundable commitment fee of .15%,
payable up-front."
(b) Section 4.1(b) A ratio of current assets to current liabilities of
the Agreement is hereby amended by substituting the rate of "N/A:1.0" for the
rate of "1.25:1.00."
(c) Section 4.1(c) A quick ratio of the Agreement is hereby amended by
substituting the ratio of "1.25:1.00" for the ratio "N/A:1.00";
(d) Section 4.1(d) Tangible net Worth of the Agreement is hereby
amended by substituting "at least $25,000,000.00 on January 31, 1997 to be
increased annually by 40% of each year's net income" for "at least
$25,000,000.00."
(e) Section 4.1(e) A ratio of total liabilities to Tangible Net Worth
of the Agreement is hereby amended by substituting the ratio of "2.25:1.00"
for the ratio "1.75:1.00"
(f) Section 4.12(c) of the Agreement is hereby amended by substituting
"(c) equipment leases in the normal course of business" for "(c) other Liens
which do not exceed in the aggregate $N/A at any one time."
(g) Section 4.14 of the Agreement is hereby amended in its entirety as
follows: "Neither liquidate, dissolve, enter into any consolidation, merger,
partnership, or other combination; nor convey, sell or lease all or the
greater part of its assets or business."
(h) Section 4.19 of the Agreement is hereby added in its entirety as
follows: "Not use any portion of the Loan for hostile or unfriendly
acquisition of another company or its operations.
(i) Section 4.20 of the Agreement is hereby added in its entirety as
follows: "On any acquisition over $3,000,000.00, a pro-forma compliance
certificate will be provided to Bank before the acquisition is finalized
certifying that the acquisition will not cause a default under the existing
covenants and that it complies to all Bank requirements.
(j) Section 7.1 Rate per annum of the Agreement is hereby amended by
substituting ".30%" for "1.25%."
- 1 -
<PAGE>
3. This FIRST Amendment shall become effective as of the date hereof
when, and only when, Bank shall have received all of the following, in form
and substance satisfactory to Bank:
(a) The counterpart of this FIRST Amendment, duly executed by
Borrower;
(b) The $15,000,000.00 Note, duly executed by Borrower;
(c) The $22,500.00 fee in connection with this FIRST Amendment; and,
(d) Such other documents, instruments or agreements as Bank may
reasonably deem necessary.
4. RATIFICATION. Except as specifically amended hereinabove, the
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in the
Agreement, as may be amended hereby, is hereby reaffirmed as of the
date hereof, each as if set forth herein;
(b) The execution, delivery and performance of the FIRST Amendment
and any other instruments or documents in connection herewith are
within Borrower's power, have been duly authorized, are legal, valid
and binding obligations of Borrower, and are not in conflict with the
terms of any charter, bylaw, or other organization papers of Borrower
or with any law, indenture, agreement or undertaking to which Borrower
is a party or by which Borrower is bound or affected;
(c) No event has occurred and is continuing or would result from
this FIRST Amendment which constitutes or would constitute an Event of
Default under the Agreement.
6. GOVERNING LAW. This FIRST Amendment and all other instruments or
documents in connection herewith shall be governed by and construed according
to the laws of the State of California.
7. COUNTERPARTS. This FIRST Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
THE MACNEAL-SCHWENDLER CORPORATION UNION BANK OF CALIFORNIA, N.A.
By: /s/ Louis A. Greco By: /s/ Kerry Turner
------------------------------ ----------------------------
Title: CFO Title: VP
--------------------------- -------------------------
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<PAGE>
UNION
BANK OF
CALIFORNIA
SECOND AMENDMENT
TO THE BUSINESS LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (this "Second Amendment") dated as of
April 21, 1998, is made and entered into by and between THE
MACNEAL-SCHWENDLER CORPORATION, a Delaware Corporation ("Borrower"), and
UNION BANK OF CALIFORNIA, N.A. ("Bank").
RECITALS:
A. Borrower and Bank are parties to that certain Business Loan Agreement
dated October 4, 1996 (the "Agreement") and that certain First Amendment
dated February 21, 1997 (the "First Amendment"), pursuant to which Bank
agreed to extend credit to Borrower.
B. Borrower and Bank desire to amend the Agreement subject to the terms and
conditions of this Second Amendment.
AGREEMENT:
In consideration of the above recitals and of the mutual covenants and
conditions contained herein, Borrower and Bank agree as follows:
1. DEFINED TERMS. Initially capitalized terms used herein which are not
otherwise defined shall have the meanings assigned thereto in the Agreement.
2. AMENDMENTS TO THE AGREEMENT.
(a)Section 4.1(d) Tangible Net Worth of the Agreement is hereby amended
by substituting "at least $30,000,000 on January 31, 1998 to be increased
annually by 40% of each year's net income" for "at least $25,000,000 on
January 31, 1997 to be increased annually by 40% of each year's net income."
3. EFFECTIVENESS OF THE SECOND AMENDMENT. This SECOND Amendment shall
become effective as of the date hereof when, and only when, Bank shall have
received all of the following, in form and substance satisfactory to Bank:
(a) The counterpart of this SECOND Amendment, duly executed by Borrower;
(b) The $15,000,000 Note, duly executed by Borrower;
(c) The $22,500 fee in connection with this SECOND Amendment; and,
(d) Such other documents, instruments or agreements as Bank may
reasonably deem necessary.
4. RATIFICATION. Except as specifically amended hereinabove, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed.
5. REPRESENTATION AND WARRANTIES. Borrower represents and warrants as
follows:
(a) Each of the representations and warranties contained in the
Agreement, as may be amended hereby, is hereby reaffirmed as of the date
hereof, each as if set forth herein;
(b) The execution, delivery and performance of the SECOND Amendment and
any other instruments or documents in connection herewith are within
Borrower's power, have been duly authorized, are legal, valid and binding
obligations of Borrower, and are not in conflict with the terms of any
charter, bylaw, or other organization papers of Borrower or with any law,
indenture, agreement or undertaking to which Borrower is a party or by which
Borrower is bound or affected;
<PAGE>
(c) No event has occurred and is continuing or would result from this
SECOND Amendment which constitutes or would constitute an Event of Default
under the Agreement.
6. GOVERNING LAW. This SECOND Amendment and all other instruments or
documents in connection herewith shall be governed by and construed according
to the laws of the State of California.
7. COUNTERPARTS. This SECOND Amendment may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
WITNESS the due execution hereof as of the date first above written.
THE MACNEAL-SCHWENDLER CORPORATION UNION BANK OF CALIFORNIA, N.A.
By: /s/ Thomas C. Curry By: [ILLEGIBLE]
------------------------------ --------------------------
Title: President Title: Vice President
--------------------------- ------------------------
<PAGE>
UNION
BANK OF
CALIFORNIA
PROMISSORY NOTE
(BASE RATE)
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
Borrower Name THE MACNEAL-SCHWENDLER CORPORATION
- --------------------------------------------------------------------------------------------------------------------
Borrower Address Office 21061 Loan Number 5624724538 0080-00-0-000
815 COLORADO BLVD -------------------------------------------------------------
LOS ANGELES, CA 90041-1777 Maturity Date JULY 3, 2000 Amount $15,000,000.00
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
$15,000,000.00 Date APRIL 6, 1998
FOR VALUE RECEIVED, on JULY 3, 2000, the undersigned ("Debtor") promises to
pay to the order of UNION BANK OF CALIFORNIA, N.A. ("Bank"), as indicated
below, the principal sum of FIFTEEN MILLION AND NO/100 Dollars
($15,000,000.00), or so much thereof as is disbursed, together with interest
on the balance of such principal from time to time outstanding, at the per
annum rate or rates and at the times set forth below.
1. INTEREST PAYMENTS. Debtor shall pay interest on the 3RD day of each MONTH
(commencing MAY 3, 1998). Should interest not be paid when due, it shall
become part of the principal and bear interest as herein provided. All
computations of interest under this note shall be made on the basis of a year
of 360 days, for actual days elapsed.
a. BASE INTEREST RATE. At Debtor's option, amounts outstanding hereunder
in minimum amounts of at least $100,000.00 shall bear interest at a rate,
based on an index selected by Debtor, which is 1.90% per annum in excess of
Bank's LIBOR-Rate for the Interest Period selected by Debtor, acceptable to
Bank.
No Base Interest Rate may be changed, altered or otherwise modified
until the expiration of the Interest Period selected by Debtor. The
exercise of interest rate options by Debtor shall be as recorded in
Bank's records, which records shall be prima facie evidence of the
amount borrowed under either interest option and the interest rate;
provided, however, that failure of Bank to make any such notation in its
records shall not discharge Debtor from its obligations to repay in full
with interest all amounts borrowed. In no event shall any Interest
Period extend beyond the maturity date of this note.
To exercise this option, Debtor may, from time to time with respect
to principal outstanding on which a Base Interest Rate is not accruing,
and on the expiration of any Interest Period with respect to principal
outstanding on which a Base Interest Rate has been accruing, select an
index offered by Bank for a Base Interest Rate Loan and an Interest
Period by telephoning an authorized lending officer of Bank located at
the banking office identified below prior to 10:00 a.m., Pacific time,
on any Business Day and advising that officer of the selected index, the
Interest Period and the Origination Date selected (which Origination
Date, for a Base Interest Rate Loan based on the LIBOR-Rate, shall
follow the date of such selection by no more than two (2) Business
Days).
Bank will mail a written confirmation of the terms of the selection
to Debtor promptly after the selection is made. Failure to send such
confirmation shall not affect Bank's rights to collect interest at the
rate selected. If, on the date of the selection, the index selected is
unavailable for any reason, the selection shall be void. Bank reserves
the right to fund the principal from any source of funds notwithstanding
any Base Interest Rate selected by Debtor.
b. VARIABLE INTEREST RATE. All principal outstanding hereunder which
is not bearing interest at a Base Interest Rate shall bear interest at a
rate per annum equal to the Reference Rate, which rate shall vary as
and when the Reference Rate changes.
At any time prior to the maturity of this note, subject to the
provisions of paragraph 4, below, of this note, Debtor may borrow, repay
and reborrow hereon so long as the total outstanding at any one time
does not exceed the principal amount of this note. Debtor shall pay all
amounts due under this note in lawful money of the United States at
Bank's LOS ANGELES HEADQUARTERS COMMERCIAL BANKING Office, or such other
office as may be designated by Bank, from time to time.
- 1 -
<PAGE>
2. LATE PAYMENTS. If any payment required by the terms of this note shall
remain unpaid ten days after same is due, at the option of Bank, Debtor shall
pay a fee of $100 to Bank.
3. INTEREST RATE FOLLOWING DEFAULT. In the event of default, at the option
of Bank, and, to the extent permitted by law, interest shall be payable on
the outstanding principal under this note at a per annum rate equal to five
percent (5%) in excess of the interest rate specified in paragraph 1.b,
above, calculated from the date of default until all amounts payable under
this note are paid in full.
4. PREPAYMENT.
a. Amounts outstanding under this note bearing interest at a rate
based on the Reference Rate may be prepaid in whole or in part at any
time, without penalty or premium. Debtor may prepay amounts
outstanding under this note bearing interest at a Base Interest Rate
in whole or in part provided Debtor has given Bank not less than five
(5) Business Days prior written notice of Debtor's intention to make
such prepayment and pays to Bank the liquidated damages due as a
result. Liquidated Damages shall also be paid, if Bank, for any other
reason, including acceleration or foreclosure, receives all or any
portion of principal bearing interest at a Base Interest Rate prior
to its scheduled payment date. Liquidated Damages shall be an amount
equal to the present value of the product of: (i) the difference (but
not less than zero) between (a) the Base Interest Rate applicable to
the principal amount which is being prepaid, and (b) the return which
Bank could obtain if it used the amount of such prepayment of
principal to purchase at bid price regularly quoted securities issued
by the United States having a maturity date most closely coinciding
with the relevant Base Rate Maturity Date and such securities were
held by Bank until the relevant Base Rate Maturity Date ("Yield
Rate"); (ii) a fraction, the numerator of which is the number of days
in the period between the date of prepayment and the relevant Base
Rate Maturity Date and the denominator of which is 360; and (iii) the
amount of the principal so prepaid (except in the event that
principal payment are required and have been made as scheduled under
the terms of the Base Interest Rate Loan being prepaid, then an
amount equal to the lesser of (A) the amount prepaid or (B) 50% of
the sum of (1) the amount prepaid and (2) the amount of principal
scheduled under the terms of the Base Interest Rate Loan being
prepaid to be outstanding at the relevant Base Rate Maturity Date).
Present value under this note is determined by discounting the above
product to present value using the Yield Rate as the annual discount
factor.
b. In no event shall Bank be obligated to make any payment or refund
to Debtor, nor shall Debtor be entitled to any setoff or other claim
against Bank, should the return which Bank could obtain under this
prepayment formula exceed the interest that Bank would have received
if no prepayment had occurred. All prepayments shall include payment
of accrued interest on the principal amount so prepaid and shall be
applied to payment of interest before application to principal. A
determination by Bank as to the prepayment fee amount, if any, shall
be conclusive.
c. Bank shall provide Debtor a statement of the amount payable on
account of prepayment. Debtor acknowledges that (i) Bank establishes
a Base Interest Rate upon the understanding that it apply to the Base
Interest Rate Loan for the entire Interest Period, and (ii) any
prepayment may result in Bank incurring additional costs, expenses or
liabilities; and Debtor agrees to pay these liquidated damages as a
reasonable estimate of the costs, expenses and liabilities of Bank
associated with such prepayment.
5. DEFAULT AND ACCELERATION OF TIME FOR PAYMENT. Default shall include, but
not be limited to, any of the following: (a) the failure of Debtor to make
any payment required under this note when due; (b) any breach,
misrepresentation or other default by Debtor, any guarantor, co-maker,
endorser, or any person or entity other than Debtor providing security for
this note (hereinafter individually and collectively referred to as the
"Obligor") under any security agreement, guaranty or other agreement between
Bank and any Obligor; (c) the insolvency of any Obligor or the failure of any
Obligor generally to pay such Obligor's debts as such debts become due; (d)
the commencement as to any Obligor of any voluntary or involuntary proceeding
under any laws relating to bankruptcy, insolvency, reorganization,
arrangement, debt adjustment or debtor relief; (e) the assignment by any
Obligor for the benefit of such Obligor's creditors; (f) the appointment, or
commencement of any proceeding for the appointment of a receiver, trustee,
custodian or similar official for all or substantially all of any Obligor's
property; (g) the commencement of any proceeding for the dissolution or
liquidation of any Obligor; (h) the termination of existence or death of any
Obligor; (i) the revocation of any guaranty or subordination agreement given
in connection with this note; (j) the failure of any Obligor to comply with
any order, judgement, injunction, decree, writ or demand of any court or
other public authority; (k) the filing or recording against any Obligor, or
the property of any Obligor, of any notice of levy, notice to withhold, or
other legal process for taxes other than property taxes; (l) the default by
any Obligor personally liable for amounts owed hereunder on any obligation
concerning the borrowing of money; (m) the issuance against any Obligor, or
the property of any Obligor, of any writ of attachment, execution, or other
judicial lien; or (n) the deterioration of the financial condition of any
Obligor which results in Bank deeming itself, in good faith, insecure. Upon
the occurrence of any such default, Bank, in its discretion, may cease to
advance funds hereunder and may declare all obligations under this note
immediately due and payable; however, upon the occurrence of an event of
default under d, e, f, or g, all principal and interest shall automatically
become immediately due and payable.
6. ADDITIONAL AGREEMENTS OF DEBTOR. If any amounts owing under this note
are not paid when due, Debtor promises to pay all costs and expenses,
including reasonable attorneys' fees, incurred by Bank in the collection or
enforcement of this note. Debtor and any endorsers of this note, for the
maximum period of time and the full extent permitted by law, (a) waive
diligence, presentment, demand, notice of nonpayment, protest, notice of
protest, and notice of every kind; (b) waive the right to assert the defense
of any statute of limitations to any debt or obligation hereunder; and (c)
consent to renewals and extensions of time for the payment of any amounts
due under this note. If this note is signed by more than one party, the term
"Debtor" includes each of the undersigned and any successors in interest
thereof; all of whose liability shall be joint and several. Any married
person who signs this note agrees that recourse may be had against the
separate property of that person for any obligations hereunder. The receipt
of any check or other item of payment by Bank, at its option, shall not be
consent a payment on account until such check or other item of payment is
honored when presented for payment at the drawee bank. Bank may delay the
credit of such payment based upon Bank's schedule of funds availability, and
interest under this note shall accrue until the funds are deemed collected.
In any action brought under or arising out of this note, Debtor and any
Obligor, including their successors and assigns, hereby consent to the
jurisdiction of any competent court within the State of
- 2 -
<PAGE>
California, as provided in any alternative dispute resolution agreement
executed between Debtor and Bank, and consent to service of process by any
means authorized by said state's law. The term "Bank" includes, without
limitation, any holder of this note. This note shall be construed in
accordance with and governed by the laws of the State of California. This
note hereby incorporates any alternative dispute resolution agreement
previously, concurrently or hereafter executed between Debtor and Bank.
7. DEFINITIONS. As used herein, the following terms shall have the meanings
respectively set forth below: "BASE INTEREST RATE" means a rate of interest
based on the LIBOR-Rate. "BASE INTEREST RATE LOAN" means amounts outstanding
under this note that bear interest at a Base Interest Rate. "BASE RATE
MATURITY DATE" means the last day of the Interest Period with respect to
principal outstanding under a Base Interest Rate Loan. "BUSINESS DAY" means a
day on which bank is open for business for the funding of corporate loans,
and, with respect to the rate of interest based on the LIBOR Rate, on which
dealings in U.S. dollar deposits outside of the United States may be carried
on by Bank. "INTEREST PERIOD" means with respect to funds bearing interest
at a rate based on the LIBOR Rate, any calendar period of one, three, six,
nine or twelve months. In determining an Interest Period, a month means a
period that starts on one Business Day in a month and ends on and includes the
day preceding the numerically corresponding day in the next month. For any
month in which there is no such numerically corresponding day, then as to
that month, such day shall be deemed to be the last calendar day of such
month. Any Interest Period which would otherwise and on a non-Business Day
shall end on the next succeeding Business Day unless that is the first day of
a month, in which event such Interest Period shall end on the next preceding
Business Day. "LIBOR RATE" means a per annum rate of interest (rounded
upward, if necessary, to the nearest 1/100 of 1%) at which dollar deposits, in
immediately available funds and in lawful money of the United States would be
offered to Bank, outside of the United States, for a term coinciding with the
Interest Period selected by debtor and for an amount equal to the amount of
principal covered by Debtor's interest rate selection, plus Bank's costs,
including the costs, if any, of reserve requirements. "ORIGINATION DATE"
means the first day of the Interest Period. "REFERENCE RATE" means the rate
announced by Bank from time to time at its corporate headquarters as its
Reference Rate. The Reference Rate is an index rate determined by Bank from
time to time as a means of pricing certain extensions of credit and is
neither directly tied to any external rate of interest or index nor
necessarily the lowest rate of interest charged by Bank at any given time.
THE MACNEAL SCHWENDLER CORPORATION
By /s/ Thomas C. Curry
-------------------------------
Title President
----------------------------
- 3 -
<PAGE>
EXHIBIT 21
MATERIAL SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OR
COUNTRY OF PERCENTAGE OF
SUBSIDIARY INCORPORATION OWNERSHIP
<S> <C> <C>
Aries Technology, Inc. Delaware 100%
Knowledge Revolution, Inc. California 100%
MSC Japan, Ltd. Japan 100%
MSC Italia Italy 100%
MSC, Ltd. Hong Kong 100%
MacNeal-Schwendler France France 100%
MSC BV The Netherlands 100%
MSC Ltd. U.K. 100%
MSC GmbH Germany 100%
MSC Iberica, S.A. Spain 100%
MSC Foreign Sales Corp. California 100%
PDA Engineering California 100%
Silverado Software & Consulting Inc. California 100%
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-93416, 33-51744, 33-65239, 333-12189 and 333-62187) pertaining
to the 1983 Incentive Stock Option Plan for Key Employees, the 1991 Stock Option
Plan of The MacNeal-Schwendler Corporation, The MacNeal-Schwendler Corporation
1996 Employee Stock Purchase Plan and the 1998 Stock Option Plan of The
MacNeal-Schwendler Corporation and in the related Prospectuses of our report
dated March 18, 1999, with respect to the consolidated financial statements and
schedule of The MacNeal-Schwendler Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Los Angeles, California
April 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000717238
<NAME> MACNEAL SCHWENDLER CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,822
<SECURITIES> 16,481
<RECEIVABLES> 43,279
<ALLOWANCES> 3,605
<INVENTORY> 0
<CURRENT-ASSETS> 81,131
<PP&E> 29,308
<DEPRECIATION> 20,493
<TOTAL-ASSETS> 138,829
<CURRENT-LIABILITIES> 48,595
<BONDS> 56,574
0
0
<COMMON> 32,310
<OTHER-SE> (14,623)
<TOTAL-LIABILITY-AND-EQUITY> 138,829
<SALES> 0
<TOTAL-REVENUES> 125,397
<CGS> 46,255
<TOTAL-COSTS> 135,438
<OTHER-EXPENSES> (1,322)
<LOSS-PROVISION> 1,558
<INTEREST-EXPENSE> 4,456
<INCOME-PRETAX> (13,175)
<INCOME-TAX> (196)
<INCOME-CONTINUING> (12,979)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,979)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000717238
<NAME> MACNEAL SCHWENDLER CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,846
<SECURITIES> 16,083
<RECEIVABLES> 39,895
<ALLOWANCES> 1,691
<INVENTORY> 0
<CURRENT-ASSETS> 75,622
<PP&E> 36,110
<DEPRECIATION> 27,584
<TOTAL-ASSETS> 129,053
<CURRENT-LIABILITIES> 36,569
<BONDS> 56,574
0
0
<COMMON> 31,052
<OTHER-SE> (2,907)
<TOTAL-LIABILITY-AND-EQUITY> 129,053
<SALES> 0
<TOTAL-REVENUES> 132,804
<CGS> 31,566
<TOTAL-COSTS> 113,841
<OTHER-EXPENSES> (474)
<LOSS-PROVISION> 694
<INTEREST-EXPENSE> 4,456
<INCOME-PRETAX> 14,981
<INCOME-TAX> 5,094
<INCOME-CONTINUING> 9,887
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,887
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0000717238
<NAME> MACNEAL SCHWENDLER CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,645
<SECURITIES> 1,052
<RECEIVABLES> 30,323
<ALLOWANCES> 1,700
<INVENTORY> 0
<CURRENT-ASSETS> 63,056
<PP&E> 33,146
<DEPRECIATION> 22,930
<TOTAL-ASSETS> 119,786
<CURRENT-LIABILITIES> 36,858
<BONDS> 56,574
0
0
<COMMON> 30,250
<OTHER-SE> (10,937)
<TOTAL-LIABILITY-AND-EQUITY> 119,786
<SALES> 0
<TOTAL-REVENUES> 132,081
<CGS> 20,426
<TOTAL-COSTS> 113,396
<OTHER-EXPENSES> (157)
<LOSS-PROVISION> 382
<INTEREST-EXPENSE> 4,456
<INCOME-PRETAX> 14,386
<INCOME-TAX> 4,675
<INCOME-CONTINUING> 9,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,711
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
</TABLE>
