<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From To
------------------ -----------------
COMMISSION FILE NUMBER 1-8722
MSC.SOFTWARE CORPORATION
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 95-2239450
- ------------------------------------------ ----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
815 COLORADO BOULEVARD
LOS ANGELES, CALIFORNIA 90041
- ------------------------------------------ ----------------------------
(Address of Principal Executive Offices) (Zip Code)
(323) 258-9111
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
THE MACNEAL-SCHWENDLER CORPORATION
---------------------------------------------------
(Former Name)
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 .
----- -----
As of August 2, 1999, the number of shares outstanding of the Registrant's
Common Stock, par value $0.01 per share, was 13,770,447.
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<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 30, 1999
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 (Unaudited) and December 31, 1998 3
Consolidated Statements of Operations (Unaudited)
Three and Six Month Periods Ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows (Unaudited)
Six Month Periods Ended June 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 6. Exhibits and Reports on Form 8-K 32
</TABLE>
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents $ 35,573,000 $ 10,822,000
Securities Available for Sale 720,000 16,481,000
Trade Accounts Receivable, Net 32,345,000 39,674,000
Deferred Tax Charges 6,864,000 6,288,000
Other Current Assets 11,335,000 7,866,000
------------- -------------
Total Current Assets 86,837,000 81,131,000
Property and Equipment, Net 8,757,000 8,895,000
Capitalized Software Costs, Net 20,392,000 21,034,000
Goodwill, Net 20,625,000 11,146,000
Other Intangible Assets, Net 38,213,000 12,850,000
Other Assets 3,433,000 3,773,000
------------- -------------
TOTAL ASSETS $ 178,257,000 $ 138,829,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 4,525,000 $ 3,159,000
Obligation to MARC Shareholders 18,082,000 -
Line of Credit - 10,800,000
Accrued and Other Liabilities 23,032,000 23,838,000
Restructuring Reserve 5,773,000 695,000
Deferred Revenue 31,061,000 20,903,000
------------- -------------
Total Current Liabilities 82,473,000 59,395,000
Deferred Income Taxes 9,372,000 5,173,000
Convertible Subordinated Debentures 58,276,000 56,574,000
Subordinated Notes Payable 11,715,000 -
Commitments and Contingencies - -
Shareholders' Equity:
Preferred Stock, $0.01 Par Value, 10,000,000 Shares Authorized;
No Shares Outstanding - -
Common Stock, $0.01 Par Value, 100,000,000 Shares Authorized;
13,770,000 and 13,711,000 Issued and Outstanding at
June 30, 1999 and December 31, 1998, Respectively 32,077,000 31,754,000
Common Stock Warrants 3,742,000 556,000
Accumulated Deficit (13,543,000) (11,404,000)
Accumulated Other Comprehensive Loss (5,855,000) (3,219,000)
------------- -------------
Total Shareholders' Equity 16,421,000 17,687,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 178,257,000 $ 138,829,000
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Software Licenses $ 20,377,000 $ 21,635,000 $ 41,366,000 $ 50,274,000
Software Maintenance and Services 13,065,000 8,044,000 22,729,000 17,175,000
------------ ------------ ------------ ------------
Total Revenues 33,442,000 29,679,000 64,095,000 67,449,000
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of Revenue 11,132,000 9,162,000 18,630,000 18,586,000
Research and Development 4,624,000 3,345,000 9,455,000 5,591,000
Selling, General and Administrative 16,228,000 15,903,000 33,873,000 33,057,000
Amortization of Goodwill and Other Intangibles 1,244,000 567,000 2,365,000 1,134,000
Restructuring Charges (Income) (400,000) - 5,497,000 -
Write-Off of Acquired In-Process Technology 4,067,000 - 4,067,000 -
------------ ------------ ------------ ------------
Total Operating Expenses 36,895,000 28,977,000 73,887,000 58,368,000
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) (3,453,000) 702,000 (9,792,000) 9,081,000
Interest Expense 1,257,000 1,118,000 2,602,000 2,233,000
Gain on Sale of Investment (10,773,000) - (10,773,000) -
Other Expense (Income), Net (422,000) (397,000) (253,000) (657,000)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 6,485,000 (19,000) (1,368,000) 7,505,000
Provision (Benefit) for Income Taxes 3,205,000 (6,000) 771,000 2,552,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,280,000 $ (13,000) $ (2,139,000) $ 4,953,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC EARNINGS (LOSS) PER SHARE $ 0.24 $ 0.00 $ (0.16) $ 0.36
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED EARNINGS (LOSS) PER SHARE $ 0.23 $ 0.00 $ (0.16) $ 0.36
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING 13,770,000 13,678,000 13,770,000 13,657,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING 17,643,000 13,678,000 13,770,000 13,657,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (2,139,000) $ 4,953,000
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By
Operating Activities:
Depreciation and Amortization of Property and Equipment 2,333,000 2,678,000
Amortization of Capitalized Software Costs 4,229,000 6,443,000
Impairment of Capitalized Software Costs 1,500,000 -
Amortization of Goodwill and Other Intangibles 2,365,000 1,134,000
Write-off of Acquired In-Process Technology 4,067,000 -
Amortization of Premiums and Discounts on Securities Available-for-Sale 148,000 35,000
Deferred Income Taxes 229,000 3,219,000
Gain on Disposal of Property and Equipment (2,000) (12,000)
Gain on Sale of Investment in LMS International (10,733,000) -
Changes in Assets and Liabilities:
Trade Accounts Receivable, Net 11,725,000 3,261,000
Other Current Assets (2,152,000) (1,374,000)
Accounts Payable 589,000 (327,000)
Accrued and Other Liabilities (3,639,000) (3,814,000)
Restructuring Reserve 5,078,000 -
Deferred Revenue 10,158,000 2,689,000
------------ ------------
Net Cash Provided By Operating Activities 23,756,000 18,885,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Securities Available-for-Sale (6,650,000) (2,139,000)
Sale of Securities Available-for-Sale 22,411,000 2,500,000
Acquisition of Property and Equipment (1,010,000) (2,988,000)
Proceeds from Sale of Investment in LMS International 12,000,000 -
Businesses Acquired, Net of Cash Received (7,647,000) -
Purchase of Software (1,099,000) (617,000)
Capitalized Internal Software Development Costs (3,933,000) (6,722,000)
Other (125,000) (242,000)
------------ ------------
Net Cash Provided By (Used In) Investing Activities 13,947,000 (10,208,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment on Line of Credit (10,800,000) -
Issuance of Common Stock 323,000 393,000
Issuance of Common Stock Warrants 148,000 556,000
Other 2,000 -
------------ ------------
Net Cash Provided By (Used In) Financing Activities (10,327,000) 949,000
------------ ------------
Translation Adjustment (2,625,000) (638,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 24,751,000 8,988,000
Cash and Cash Equivalents at Beginning of Period 10,822,000 10,846,000
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 35,573,000 $ 19,834,000
------------ ------------
------------ ------------
RECONCILIATION OF BUSINESSES ACQUIRED, NET OF CASH RECEIVED:
Fair Value of Assets Acquired $ 49,762,000 $ -
Non-Cash Financing of Purchase Price and Liabilities Assumed:
Obligation to MARC Shareholders (18,082,000) -
Issuance of Convertible Subordinated Debentures (1,700,000) -
Issuance of Subordinated Notes Payable (11,715,000) -
Issuance of Common Stock Warrants (3,038,000) -
Liabilities Assumed (7,580,000) -
------------ ------------
Cash Paid for Businesses Acquired, Net of Cash Received $ 7,647,000 $ -
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
NOTE 1 - BASIS OF PRESENTATION
As previously disclosed in a Form 8-K filed on July 1, 1999,
MSC.Software Corporation ("the Company") changed its name from The
MacNeal-Schwendler Corporation, as voted upon and approved by its
stockholders.
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 for previous
periods on a calendar year basis.
The accompanying unaudited consolidated financial statements of the Company
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and six
month periods ended June 30, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
The balance sheet as of December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Transition Report on Form 10-K for
the year ended December 31, 1998.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
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. 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES", as amended by SFAS No. 137, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF SFAS NO. 133", which is required to be adopted in all fiscal years beginning
after June 15, 2000. 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.
6
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 3 - OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Net Income (Loss) $ 3,280,000 $ (13,000) $(2,139,000) $ 4,953,000
Change in:
Accumulated Translation Adjustment (330,000) 784,000 (2,625,000) 165,000
Unrealized Gain (17,000) - (11,000) -
----------- ----------- ----------- -----------
Other Comprehensive Income (Loss) $ 2,933,000 $ 771,000 $(4,775,000) $ 5,118,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</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 4 - EARNINGS PER SHARE
Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share includes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share for the three months ended June 30, 1998 and for the six
month periods ended June 30, 1999 and 1998 excludes the effects of options,
warrants and convertible securities because the effect would be anti-dilutive.
NOTE 5 - CAPITALIZED SOFTWARE COSTS
The components of net amortized (capitalized) software costs, as it
affected earnings, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Capitalized Software Costs $(2,224,000) $(3,255,000) $(3,933,000) $(6,722,000)
Amortization of Capitalized Software Costs 2,279,000 3,131,000 4,229,000 6,443,000
Impairment of Capitalized Software Costs 1,500,000 - 1,500,000 -
----------- ----------- ----------- -----------
Net Amortized (Capitalized) Software Costs $ 1,555,000 $ (124,000) $ 1,796,000 $ (279,000)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
7
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 5 - CAPITALIZED SOFTWARE COSTS (Continued)
Amortization expense associated with capitalized software costs is reported
in cost of revenue, and capitalized software costs, net of reserves, is reported
as a reduction of research and development expense.
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 second quarter of 1999, the Company
recognized a non-cash pre-tax charge totaling $1,500,000 in cost of revenue for
the write-off of capitalized software costs representing the excess of the
carrying amount of a product over its future undiscounted cash flows.
NOTE 6 - ACCRUED AND OTHER LIABILITIES
The components of accrued and other liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Compensation and Related Expenses $ 5,754,000 $ 6,412,000
Pension and Profit Sharing 2,908,000 3,725,000
Sales Taxes Payable 1,701,000 2,896,000
Incentive Compensation 1,461,000 1,222,000
Interest Payable 1,373,000 1,332,000
Commissions Payable 1,067,000 1,226,000
Royalties Payable 524,000 1,169,000
Other 8,244,000 5,856,000
------------ ------------
Total Accrued and Other Liabilities $ 23,032,000 $ 23,838,000
------------ ------------
------------ ------------
</TABLE>
8
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 7 - BUSINESS ACQUISITIONS AND DIVESTITURES
ACQUISITION OF MARC ANALYSIS RESEARCH CORPORATION
On June 18, 1999, the Company acquired 100% of MARC Analysis Research
Corporation, a California corporation ("MARC"), pursuant to an Agreement and
Plan of Merger dated as of May 26, 1999 (the "Merger Agreement") among the
Company, MSC Holdings Co. II, a wholly-owned subsidiary of the Company (the
"Merger Sub"), MARC and the following Significant Shareholders: Dendron
Technology B.V., a Dutch corporation ("Dendron"); Fronos Technology B.V., a
Dutch corporation ("Fronos"); and Nearchos Irinarchos. Dendron and Fronos are
each owned by Mr. Irinarchos. The transaction had a two-step structure whereby
the Company purchased approximately 42% of MARC's outstanding common stock from
Dendron and Fronos pursuant to a Stock Purchase Agreement dated as of May 26,
1999 among Dendron, Fronos and the Company (the "Stock Purchase Agreement"), and
immediately thereafter, pursuant to the Merger Agreement, the Merger Sub merged
with and into MARC, with MARC being the surviving corporation and a wholly-owned
subsidiary of the Company. MARC is a software developer and supplier whose
products include MARC (a non-linear finite element analysis program for
engineering structural analysis), Mentat (a graphical user interface for MARC),
and MARC/Autoforge (a simulation program for the bulk forging industry).
The aggregate purchase price for the acquisition paid to shareholders
and holders of options of MARC was valued at approximately $36,000,000. The
Merger Agreement provided for a cash purchase price of approximately
$20,300,000 and the Stock Purchase Agreement provided for the Company to
issue a package of securities to Dendron and Fronos, including $11,000,000
principal amount of 8% subordinated notes due in 10 years, approximately
$3,236,000 principal amount of 8% subordinated notes due in two years,
$2,000,000 principal amount of the Company's 7-7/8% convertible subordinated
debentures due August 18, 2004, and five year warrants to purchase 1,400,000
shares of the Company's common stock at an exercise price of $10.00 per
share. As of June 30, 1999, the balance still owed to MARC shareholders for
the cash purchase price was approximately $18,082,000, which will be paid out
during the third quarter of 1999.
The acquisition has been accounted for as a purchase and, accordingly,
the operating results of MARC 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 MARC based upon
their approximate fair market value. The preliminary appraisal of the
acquired business included $4,067,000 of purchased in-process research and
development, which was related to two products under development. This
valuation represents the ten-year after-tax cash flow of this in-process
technology using a discount rate of 18%. 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: $4,653,000 to net tangible assets,
$29,710,000 to identified intangible assets (including $15,274,000 of
developed technology, $6,322,000 to customer list, $2,390,000 for tradename
recognition, and $1,657,000 of assembled work force), and $2,137,000 to
goodwill. Goodwill and identified intangibles are being amortized over three
to fifteen years. The allocation of the purchase price is based on a
preliminary valuation, which is subject to change, although management does
not believe the final valuation will be materially different.
9
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 7 - BUSINESS ACQUISITIONS AND DIVESTITURES (Continued)
The purchase price was determined through arms' length negotiations
between members of the Board of Directors of the Company and representatives
of MARC. The Company considered the revenues and results of operations of
MARC in recent periods, estimates of the business potential of MARC, MARC's
software offerings in the non-linear finite element analysis market segment,
and other synergies of the two companies (such as the ability to offer a full
suite of FEA products and leveraging technology and distribution channels).
In connection with the acquisition, the Company has accrued for $2,360,000 of
acquisition costs related to the integration of MARC. These charges consist
of severance costs and costs related to facility consolidations. In addition,
the Company has established a retention bonus plan valued at approximately
$1,400,000 for employees of MARC who continue their employment following the
acquisition. The bonus amount will be charged to operations over the next 12
months as earned.
The Company funded the cash portion of the purchase price out of available
cash and from proceeds of the sale of its 10% interest in LMS International.
The Company is currently investigating whether alternate financing methods would
be desirable to replenish cash.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Statements of Operations of the Company for the
six months ended June 30, 1999 and 1998, which are set forth below, give
effect to the acquisition of MARC based upon the assumptions set forth below
and in the Notes to Unaudited Pro Forma Statements of Operations. The
unaudited pro forma financial information assumes that the acquisition of
MARC was completed on January 1, 1998 for the Unaudited Pro Forma Statements
of Operations for the six months ended June 30, 1999 and 1998.
The unaudited pro forma financial information presented below is based upon
the respective historical financial statements of the Company and MARC and
should be read in conjunction with such financial statements and related notes
thereto. The Company believes that the accompanying unaudited pro forma
financial information contains all adjustments necessary to fairly present the
results of operations of the Company for the six months ended June 30, 1999 and
1998, as if the acquisition of MARC was completed on January 1, 1998.
The unaudited pro forma financial information presented does not purport
to be indicative of the financial position or operating results which would
have been achieved had the acquisition of MARC taken place at the date
indicated and should not be construed as representative of the Company's
financial position or results of operations for any future period or date.
10
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 7 - BUSINESS ACQUISITIONS AND DIVESTITURES (Continued)
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------
MARC ANALYSIS PRO FORMA
MSC.SOFTWARE RESEARCH PRO FORMA MSC.SOFTWARE
CORPORATION CORPORATION ADJUSTMENTS CORPORATION
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenue $ 64,095,000 $ 10,208,000 $ - $ 74,303,000
Operating Expenses 73,887,000 10,163,000 1,548,000 (1) 81,531,000
(4,067,000)(2)
------------ ------------ ------------ -------------
Operating Income (Loss) (9,792,000) 45,000 2,519,000 (3) (7,228,000)
Other Expense (Income), Net (8,424,000) - 787,000 (4) (7,637,000)
------------ ------------ ------------ -------------
INCOME (LOSS) BEFORE TAXES (1,368,000) 45,000 1,732,000 409,000
Tax Provision (Benefit) 771,000 122,000 (244,000)(5) 649,000
------------ ------------ ------------ -------------
NET INCOME (LOSS) $ (2,139,000) $ (77,000) $ 1,976,000 $ (240,000)
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
BASIC EARNINGS (LOSS) PER SHARE $ (0.16) $ (0.02)
------------ -------------
------------ -------------
DILUTED EARNINGS (LOSS) PER SHARE $ (0.16) $ (0.02)
------------ -------------
------------ -------------
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING 13,770,000 13,770,000
------------ -------------
------------ -------------
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING 13,770,000 13,770,000
------------ -------------
------------ -------------
SIX MONTHS ENDED JUNE 30, 1998
Revenue $ 67,449,000 $ 9,689,000 $ - $ 77,138,000
Operating Expenses 58,368,000 9,513,000 1,673,000 (1) 69,554,000
------------ ------------ ------------ -------------
Operating Income (Loss) 9,081,000 176,000 (1,673,000)(3) 7,584,000
Other Expense (Income), Net 1,576,000) - 833,000 (4) 2,409,000
------------ ------------ ------------ -------------
INCOME BEFORE TAXES 7,505,000 176,000 (2,506,000) 5,175,000
Tax Provision (Benefit) 2,552,000 173,000 (283,000)(5) 2,442,000
------------ ------------ ------------ -------------
NET INCOME (LOSS) $ 4,953,000 $ 3,000 $ (2,223,000) $ 2,733,000
------------ ------------ ------------ -------------
------------ ------------ ------------ -------------
BASIC EARNINGS (LOSS) PER SHARE $ 0.36 $ 0.20
------------ -------------
------------ -------------
DILUTED EARNINGS (LOSS) PER SHARE $ 0.36 $ 0.20
------------ -------------
------------ -------------
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING 13,657,000 13,657,000
------------ -------------
------------ -------------
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING 13,657,000 13,657,000
------------ -------------
------------ -------------
</TABLE>
11
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 7 - BUSINESS ACQUISITIONS AND DIVESTITURES (Continued)
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(1) Adjustment to reflect the additional amortization of goodwill and
other intangible assets from the MARC acquisition. The acquisition
of the net assets of MARC resulted in approximately $30,100,000 of
goodwill and other intangible assets, which are being amortized over
their estimated useful lives.
(2) Adjustment for $4,067,000 of purchased in-process research and
development, which was written off as the acquired technology had
not yet reached technological feasibility and had no future
alternative uses because it has no continuing impact.
(3) Pro forma operating income (loss) does not include any adjustment
to reflect the efficiencies and cost reductions expected to be
obtained in connection with the integration of the MARC operations
with those of the Company. The cost of facility closures and
employee reductions have been included as part of the cost of the
acquisition in accordance with EITF No. 95-3. The integration of
operations is expected to be completed within four months after
the acquisition date, after which certain efficiencies and cost
savings are expected to be realized.
(4) Adjustment to reflect the additional interest expense for the
$14,300,000 principal amount of 8% subordinated notes payable and
$2,000,000 principal amount of 7-7/8% convertible subordinated
debentures that were issued for the MARC acquisition. Adjustment
also includes the related amortization of discounts on the
subordinated notes payable and convertible subordinated debentures.
(5) Adjustment is the net tax effect of the pro forma adjustments for
the six months ended June 30, 1999 and 1998. Income taxes were
provided at a rate of 31% for the six months ended June 30, 1999
and at a rate of 34% for the six months ended June 30, 1998.
ACQUISITION OF UNIVERSAL ANALYTICS INC.
On June 24, 1999, the Company acquired 100% of Universal Analytics, Inc.
("UAI"), a California corporation. UAI is a developer and distributor of finite
element analysis software and engineering services for the engineering community
and to major manufacturers worldwide. The pro forma effect of the UAI
acquisition is immaterial to the consolidated financial statements presented
herein.
12
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 7 - BUSINESS ACQUISITIONS AND DIVESTITURES (Continued)
ACQUISITION OF KNOWLEDGE REVOLUTION INC.
In late December 1998, the Company acquired Knowledge Revolution Inc.
("KR") for approximately $19.2 million in cash. KR was 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.
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. Goodwill and identified intangibles are being amortized
over three to ten years.
SALE OF INVESTMENT IN LMS INTERNATIONAL
On June 17, 1999, the Company announced that the principal shareholders
of LMS International ("LMS") had repurchased an equity position that the
Company had held in LMS. As a result of this sale, the Company realized a
pre-tax gain of $10,733,000 on the transaction. LMS is a privately-held
company based in Leuven, Belgium.
NOTE 8 - COMMON STOCK WARRANTS
On June 18, 1999, as part of the acquisition of MARC, the Company issued
five-year warrants to purchase 1,400,000 shares of the Company's common stock
at an exercise price of $10.00 per share. The warrants were recorded at
their fair value of $3,038,000 under the Black-Scholes valuation method. See
"NOTE 7 - SIGNIFICANT BUSINESS ACQUISITIONS AND DIVESTITURES" for further
details.
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.
During the six months ended June 30, 1999, the Company issued warrants
to KSTC valued at $148,000 to purchase 62,500 shares of the Company's common
stock at an exercise price of $8.00. The warrants were recorded at fair
value under the Black-Scholes valuation method. From March 9, 1998 through
June 30, 1999, the Company issued warrants to purchase 248,343 shares of the
Company's common stock at exercise prices which range between $6.000 per
share and $11.375 per share, for a total exercise price of $1,875,000. KSTC
has the right to purchase additional warrants with an aggregate exercise
price of $1,125,000 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.
13
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 9 - RESTRUCTURING RESERVE
On February 3, 1999, the Company announced a new organizational structure
following a re-evaluation of its business strategy. The reorganization plan
provided for a 10% reduction in the Company's worldwide workforce (a reduction
of approximately 75 positions), and the consolidation of 15 field offices.
These changes resulted in pre-tax charges of $5,897,000 during the first quarter
of 1999. The charges consisted of severance costs of $3,200,000, costs related
to facility consolidations of $2,200,000, and other charges of $497,000.
During the second quarter of 1999, as part of the acquisitions of MARC and
UAI, the Company recorded $2,566,000 of additional acquisition costs included in
the purchase price allocation related to the integration of MARC and UAI into
the Company. These charges primarily consisted of severance costs of $1,161,000
and costs related to facility consolidations of $1,405,000.
As of June 30, 1999, the restructuring liability was $5,773,000. For the
six months ended June 30, 1999, approximately $2,985,000 of these restructuring
costs had been paid out. Cash outlays are anticipated to be completed by the
end of 1999, excluding certain lease commitments that may continue through
January 2000. The Company continually evaluates the balance of the
restructuring reserve based on the remaining estimated amounts to be paid. As a
result, during the second quarter of 1999, the Company decreased the
restructuring reserve by $400,000.
The following is the activity in the restructuring reserve for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ----------------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 5,647,000 $ - $ 695,000 $ -
Charges to Expense - - 5,897,000 -
Reversal of Restructuring Costs (400,000) - (400,000) -
Acquisition Charges 2,566,000 - 2,566,000 -
Amounts Paid (2,040,000) - (2,985,000) -
----------- ---------- ----------- ----------
Balance at End of Period $ 5,773,000 $ - $ 5,773,000 $ -
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
</TABLE>
14
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 1999
NOTE 10 - SEGMENT INFORMATION
The Company operates in a single reportable segment. International
Operations consist primarily of foreign sales offices selling software developed
in the United States combined with local service revenue. The following table
summarizes the revenues of the Company's operations by geographic location:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
The Americas (1) $ 14,501,000 $ 12,663,000 $ 30,237,000 $ 32,646,000
Europe 11,376,000 9,957,000 20,154,000 20,344,000
Asia-Pacific 7,565,000 7,059,000 13,704,000 14,459,000
------------ ------------ ------------ ------------
Total Revenue $ 33,442,000 $ 29,679,000 $ 64,095,000 $ 67,449,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(1) SUBSTANTIALLY THE UNITED STATES
The following table summarizes the identifiable assets of the Company's
operations by geographic location:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Identifiable Assets:
The Americas (1) $ 137,522,000 $ 100,267,000
Europe 25,830,000 26,353,000
Asia-Pacific 11,416,000 12,209,000
------------- -------------
Total Identifiable Assets $ 174,768,000 $ 138,829,000
------------- -------------
------------- -------------
</TABLE>
(1) SUBSTANTIALLY THE UNITED STATES
The net assets of the Company's foreign subsidiaries (excluding
intercompany items) totaled $17,896,000 and $16,875,000 as of June 30, 1999 and
December 31, 1998, respectively. Long-lived assets included in these amounts
were $3,774,000 and $4,413,000 as of June 30, 1999 and December 31, 1998,
respectively.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT DEVELOPMENTS
CHANGE OF CORPORATION NAME
As previously disclosed in a Form 8-K filed on July 1, 1999,
MSC.Software Corporation ("the Company") changed its name from The
MacNeal-Schwendler Corporation, as voted upon and approved by its
stockholders.
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 basis.
In the fourth quarter of 1998, the Accounting Standards Executive Committee
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. 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES", as amended by SFAS No. 137, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE
OF SFAS NO. 133", which is required to be adopted in all fiscal years beginning
after June 15, 2000. 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.
RESTRUCTURING
On February 3, 1999, the Company announced a new organizational structure
following a re-evaluation of its business strategy. The Company now emphasizes
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 growth opportunities. The
reorganization plan provided for a 10% reduction in the Company's worldwide
workforce (a reduction of approximately 75 positions), and the consolidation of
15 field offices. These changes resulted in pre-tax charges of approximately
$5,897,000 in the first quarter of 1999. The charges consisted of severance
costs of $3,200,000, costs related to facility consolidations of $2,200,000 and
other charges of $497,000. The Company anticipates these charges will provide a
reduction in its annual operating costs.
During the second quarter of 1999, as part of the acquisitions of MARC
Analysis Research Corporation ("MARC") and Universal Analytics Inc. ("UAI"),
the Company recorded $2,566,000 of additional acquisition costs included in
the purchase price allocation related to the integration of MARC and UAI into
the Company. These charges primarily consisted of severance costs of
$1,161,000 and costs related to facility consolidations of $1,405,000.
16
<PAGE>
As of June 30, 1999, the restructuring liability was $5,773,000. For the
six months ended June 30, 1999, approximately $2,985,000 of these restructuring
costs had been paid out. Cash outlays are anticipated to be completed by the
end of 1999, excluding certain lease commitments that may continue through
January 2000. The Company continually evaluates the balance of the
restructuring reserve based on the remaining estimated amounts to be paid. As a
result, during the second quarter of 1999, the Company decreased the
restructuring reserve by $400,000.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
The Company reported revenue of $33,442,000 in the second quarter of
1999, compared to revenue of $29,679,000 for the same period in 1998, an
increase of $3,763,000, or 13%. Revenue for the second quarter of 1999
includes revenues of $1,408,000 from the acquisition of Knowledge Revolution
Inc. ("KR" or "the Working Knowledge Division") and $717,000 from the
acquisition of MARC. Software license revenue and maintenance fees account
for 95% and 95% of total reported revenue for the three months ended June 30,
1999 and 1998, respectively, with service revenue making up the difference.
For the three months ended June 30, 1999 and 1998, approximately 75% and 79%,
respectively, of the Company's software license revenue and maintenance fees
is derived from annual renewable leases and recurring maintenance fees, with
the remaining 25% and 21%, respectively, related to paid-up licenses.
The Company estimates revenue would have been $31,233,000 for the second
quarter of 1998, assuming the Company had been able to adopt SOP 98-9 on October
1, 1997. This would suggest a revenue increase of $2,209,000, or a growth rate
of 7%, when compared to the reported revenue of $33,442,000 in the second
quarter of 1999. Paid-up license revenue increased $2,228,000, other revenue
increased $228,000, and sales of third party software decreased $62,000 between
the periods, which are unaffected by the adoption of SOP 98-9. The KR revenues
include paid-up license revenues of $1,127,000. The MARC revenues include
paid-up license revenues of $241,000. The Company anticipates the same
percentage of revenue derived from paid-up licenses from KR and MARC for the
remainder of 1999.
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.
The following table illustrates revenue by geographic region and the
related growth rates between the second quarters of 1999 and 1998 in functional
currencies as reported utilizing the current revenue recognition policy and
estimated for the second quarter of 1998 as if SOP 98-9 had been applied on
October 1, 1997:
<TABLE>
<CAPTION>
GROWTH RATE
----------------------------------------
QUARTER ENDED QUARTER ENDED JUNE 30, 1999 VS.
JUNE 30, 1999 QUARTER ENDED JUNE 30, 1998
----------------- ----------------------------------------
PERCENTAGE OF WITH REVENUE
TOTAL REVENUE AS REPORTED CHANGE IN 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
The Americas 44% 17% (2%)
Europe 34% 14% 22%
Asia-Pacific 22% 2% 7%
</TABLE>
17
<PAGE>
The increase in total reported revenues is primarily due to the
acquisitions of KR and MARC in December 1998 and June 1999, respectively.
The Company estimates that the adoption of SOP 98-9 resulted in an additional
deferral of $1,554,000, or 6%, in total revenues for the three months ended
1999 compared to the same period in 1998. This decrease included a
$2,508,000, or 19%, decrease in The Americas, partially offset by increases
in Europe and Asia-Pacific of $626,000, or 8%, and $328,000, or 5%,
respectively. The acquisitions of KR and MARC caused an increase of
$2,125,000, or 7%, in total revenues for the three months ended June 30, 1999
compared to the same period in 1998. This increase included a $1,244,000, or
9%, increase in The Americas, a $526,000, or 6%, increase in Europe, and a
$355,000, or 5%, increase in Asia-Pacific. Excluding the impact due to the
adoption of SOP 98-9 and excluding the impact due to the acquisitions of KR
and MARC, total revenue increased by $84,000 for the three months ended 1999
compared to the same period in 1998. This increase included a $1,573,000, or
10%, decrease in The Americas, offset by increases in Europe and Asia-Pacific
of $1,519,000, or 16%, and $138,000, or 2%, respectively. The Americas
includes a $603,000 decrease in the Company's revenue from embedded
technology.
The Company is exposed to the impact of foreign currency fluctuations. The
following table details the positive effect of the currency rate changes on
revenue for the second quarter of 1999:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999
--------------------------------
USING EXCHANGE RATES FOR THE
QUARTER ENDED JUNE 30,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenues:
Europe $11,709,000 $11,376,000
Asia-Pacific 6,313,000 7,224,000
----------- -----------
Total Revenue $18,022,000 $18,600,000
----------- -----------
----------- -----------
Exchange Rates:
$/DM 0.56 0.54
Yen/$ 135.63 120.78
</TABLE>
Operating expenses of $36,895,000 in the second quarter of 1999 include a
write-off of acquired in-process technology, impairment charges, reversal of
restructuring costs, and ongoing operating costs necessary for the operation of
the business, and represent an increase of $7,918,000, or 27%, from the
$28,977,000 reported for the same period in 1998. Operating expenses include a
write-off of acquired in-process technology of $4,067,000, an impairment charge
of $1,500,000, and a reversal of restructuring costs of $400,000. Without these
charges, operating expenses totaled $31,728,000 in the second quarter of 1999,
an increase of $2,751,000, or 9%, from the $28,977,000 reported in the second
quarter of 1998. This increase was primarily attributable to: (1) a $470,000
increase in cost of revenue before the software impairment charge of $1,500,000
(resulting from a $852,000 decrease in amortization of capitalized software
costs; a $875,000 increase in the cost of support services due to a change in
staffing mix between sales and support resources; and a $447,000 increase in
other costs of revenue); (2) a $1,279,000 increase in net research and
development expense (a $248,000 increase in the gross research and development
investment and a $1,031,000 decrease in capitalized software costs); and (3) a
$1,002,000 increase in selling, general and administrative expense and
amortization of goodwill and other intangible assets (primarily due to a
$677,000 increase in amortization of goodwill and other intangible assets and a
$1,667,000 increase due to the acquisitions of KR and MARC, partially offset by
a $875,000 decrease due to a change in staffing mix between sales and support
resources and a $467,000 decrease in other costs).
In accordance with 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.
18
<PAGE>
Cost of revenue was $11,132,000 and $9,162,000 for the quarters ended
June 30, 1999 and 1998, respectively, or 33% and 31%, respectively, of total
revenue. Amortization of capitalized software costs decreased to $2,279,000
in the second quarter of 1999 from $3,131,000 for the same period in the
prior year, a decrease of $852,000, or 27%. Cost of revenue for the quarter
ended June 30, 1999 includes a software impairment charge of $1,500,000.
Cost of revenue, excluding amortization of capitalized software costs and the
software impairment charge, was $7,353,000 for the second quarter of 1999
compared to $6,031,000 for the same period in the prior year, an increase of
$1,322,000, or 22%. This increase was primarily due to: (1) a $875,000
increase in the cost of technical support services due to a change in
staffing mix between sales and support resources; (2) a $286,000 increase in
third party commissions; (3) a $147,000 increase in packaging costs; (4) a
$134,000 increase in software licensing costs; (4) a $109,000 increase in
other support labor and related costs; offset by (5) a $229,000 decrease in
royalty expense. The increase in labor and related costs were related to the
reallocation of sales resources to support maintenance and consulting
activities from the recent reorganization. $216,000 of these increases are
due to the KR and MARC acquisitions. Royalty expense is 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 total revenue less cost of revenue, was negatively
impacted by the increase in costs of revenue, as noted above. Gross margin was
$22,310,000, or 67% of total revenues, for the quarter ended June 30, 1999, as
compared to $20,517,000, or 69% of total revenues, for the same period in the
prior year, representing an increase of $1,793,000.
Research and development expense for the quarter ended June 30, 1999 was
$4,624,000 compared to $3,345,000 for the quarter ended June 30, 1998, an
increase of $1,279,000, or 38%. The increase is primarily due to an increase of
$248,000 in the total gross investment in research and development activities
and a decrease of $1,031,000 in the amount of research and development
expenditures capitalized under SFAS No. 86. The total gross investment in
research and development activities for the quarter ended June 30, 1999 amounted
to $6,848,000, or 20% of total revenue, compared to $6,600,000, or 22% of total
revenue, for the same period in the prior year. This increase resulted
primarily from: (1) a $71,000 increase in development labor and related costs;
and (2) the addition of $164,000 of development costs from the acquisitions of
KR and MARC. The Company's gross research and development cost was 20% of total
revenue for the quarter ended June 30, 1999.
Capitalized software development costs were $2,224,000 in the second
quarter of 1999 compared to $3,255,000 for the same period in the prior year, a
decrease of $1,031,000, or 32%. 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 and product quality, and to 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 and amortization of goodwill
and other intangibles was $17,472,000 in the second quarter of 1999 compared to
$16,470,000 for the same period in 1998, an increase of $1,002,000, or 6%. The
$1,002,000 increase was due to: (1) a $863,000 increase in sales and marketing
costs and a $337,000 increase in general and administrative costs, both
primarily due to the additional costs from the acquisitions of KR and MARC,
offset by a $875,000 decrease in selling expense due to a change in staffing
mix; and (2) a $677,000 increase in amortization of goodwill and other
intangibles, primarily from the acquisitions of KR and MARC.
As with revenue, the Company's operating expenses are impacted by foreign
currency fluctuations. The following table details the negative effect of the
currency rate changes on operating expenses for the second quarter of 1999:
19
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30, 1999
---------------------------------
USING EXCHANGE RATES FOR THE
QUARTER ENDED JUNE 30,
---------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Local Operating Expenses: (1)
Europe $ 6,373,000 $ 6,196,000
Asia-Pacific 2,976,000 3,341,000
----------- -----------
Total Local Operating Expenses $ 9,349,000 $ 9,537,000
----------- -----------
----------- -----------
Exchange Rates:
$ / DM 0.56 0.54
Yen / $ 135.63 120.78
</TABLE>
(1) DOES NOT INCLUDE UNITED STATES BASED COSTS INCURRED ON BEHALF OF
THE INTERNATIONAL OPERATIONS.
Operating income (loss), including software capitalization and
amortization, impairment charges, reversal of restructuring costs, and the
write-off of acquired in-process technology, was a loss of $3,453,000 in the
second quarter of 1999 compared to operating income of $702,000 for the same
period in the prior year. The operating loss for the three months ended
June 30, 1999 includes the effects of the Company's adoption of SOP 98-9 in the
fourth quarter of 1998, impairment charges, reversal of restructuring costs, and
the write-off of acquired in-process technology, in addition to ongoing
operating costs necessary for the operation of the business. The $4,155,000
decrease in operating income is primarily attributable to: (1) the write-off of
acquired in-process technology of $4,067,000; (2) impairment charges of
$1,500,000; (3) an increase in research and development expense of $1,279,000;
(4) an increase in selling, general and administrative expense and amortization
of goodwill and other intangibles of $1,002,000; offset by (5) an increase in
gross margin of $3,293,000 (an increase in reported revenue of $3,763,000,
partially offset by an increase in cost of revenue, excluding the impairment
charges, of $470,000); and (6) a reversal of restructuring costs of $400,000.
Without the effect of the reversal of restructuring charges, impairment charges
and write-off of acquired in-process technology, and had the Company adopted SOP
98-9 in the last quarter of 1997, the Company estimates operating income would
have been $1,714,000 and $2,115,000 for the quarters ended June 30, 1999 and
1998, respectively, a decrease of $401,000, or 19%, as shown in the following
table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Operating Income (Loss) - As Reported $(3,453,000) $ 702,000
----------- -----------
Adjustments:
Revenue Change, Net of Cost of Revenue - 1,413,000
Impairment of Capitalized Software Costs 1,500,000 -
Reversal of Restructuring Charges (400,000) -
Write-Off of Acquired In-Process Technology 4,067,000 -
----------- -----------
Total Adjustments 5,167,000 1,413,000
----------- -----------
Operating Income - As Adjusted $ 1,714,000 $ 2,115,000
----------- -----------
----------- -----------
</TABLE>
20
<PAGE>
Interest expense primarily reflects the interest on the convertible
subordinated debentures issued as part of the acquisitions of PDA Engineering
("PDA") in 1994 and MARC in June of 1999, as well as interest on the
subordinated notes payable issued as part of the acquisition of MARC.
Interest payments on the convertible subordinated debentures are due on March
15 and September 15 of each year until the debentures are converted or
redeemed. Interest payments on the subordinated notes payable are due on
January 10 and July 10 of each year.
Other income (expense) was income of $11,195,000 for the three months ended
June 30, 1999 compared to income of $397,000 for the same period in the prior
year, an increase of $10,798,000. The increase is primarily attributable to a
$10,773,000 gain from the sale of the Company's equity investment in LMS
International. Excluding this gain, other income (expense) was income of
$422,000 for the three months ended June 30, 1999, an increase of $25,000
compared to the same period in the prior year. Other income (expense) also
includes gains and losses on property, plant and equipment and other
non-operating income or expense. The Company anticipates that interest and
investment income will continue to decrease throughout 1999 from 1998 levels as
a result of the decrease in its cash balances following the acquisitions of KR,
MARC and UAI.
Net income was $3,280,000 for the quarter ended June 30, 1999 compared to a
net loss of $13,000 for the same period in the prior year, an increase of
$3,293,000. Income taxes were provided at a rate of 34% (excluding
non-deductible charges) in the second quarter of 1999 versus a benefit at a rate
of 31% (excluding non-deductible charges) in the second quarter of 1998,
resulting in an increase in the provision for income taxes of $3,211,000.
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
The Company reported revenue of $64,095,000 for the six months ended
June 30, 1999, compared to revenue of $67,449,000 for the same period in 1998, a
decrease of $3,354,000, or 5%. Revenue for the six months ended June 30, 1999
includes revenues of $2,496,000 from the acquisition of KR, which was acquired
in December of 1998, and $717,000 from the acquisition of MARC, which was
acquired in June of 1999. Revenue as reported for the six months ended June 30,
1999 was adversely affected by the change in the Company's revenue recognition
policy effective October 1, 1998. Software license revenue and maintenance fees
account for 95% and 94% of total reported revenue for the six months ended
June 30, 1999 and 1998, respectively, with service revenue making up the
difference. For the six months ended June 30, 1999 and 1998, approximately 75%
and 82%, respectively, of the Company's software license revenue and maintenance
fees is derived from annual renewable leases and recurring maintenance fees,
with the remaining 25% and 18%, respectively, related to paid-up licenses.
The Company estimates revenue would have been $58,494,000 for the six
months ended June 30, 1998, assuming the Company had been able to adopt SOP 98-9
on October 1, 1997. This would suggest a revenue increase of $5,601,000, or a
growth rate of 10%, when compared to the reported revenue of $64,095,000 for the
six months ended June 30, 1999. Paid-up license revenue increased $3,819,000,
sales of third party software decreased $243,000, and other revenue decreased
$173,000 between the periods, which are unaffected by the adoption of SOP 98-9.
The KR revenues include paid-up license revenues of $1,994,000. The MARC
revenues include paid-up license revenues of $241,000. The Company anticipates
the same percentage of revenue derived from paid-up licenses from KR and MARC
for the remainder of 1999.
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.
The following table illustrates revenue by geographic region and the
related growth rates between the six months ended June 30, 1999 and 1998 in
functional currencies as reported utilizing the current revenue recognition
policy and estimated for the six months ended June 30, 1998 as if SOP 98-9 had
been applied on October 1, 1997:
21
<PAGE>
<TABLE>
<CAPTION>
GROWTH RATE
----------------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1999 VS.
JUNE 30, 1999 SIX MONTHS ENDED JUNE 30, 1998
----------------- ----------------------------------------
PERCENTAGE OF WITH REVENUE
TOTAL REVENUE AS REPORTED CHANGE IN 1998
----------------- --------------- ------------------
<S> <C> <C> <C>
The Americas 47% (7%) 7%
Europe 31% (1%) 21%
Asia-Pacific 22% (5%) 0%
</TABLE>
The increase in total reported revenues is primarily due to the adoption of
SOP 98-9 in October 1998 and the acquisitions of KR and MARC in December 1998
and June 1999, respectively. The Company estimates that the adoption of SOP
98-9 caused an increase of $8,955,000, or 15%, in total revenues for the six
months ended 1999 compared to the same period in 1998. This increase included a
$4,440,000, or 14%, increase in The Americas, a $3,692,000, or 22%, increase in
Europe, and a $823,000, or 5%, increase in Asia-Pacific. The acquisitions of KR
and MARC caused an increase of $3,213,000, or 6%, in total revenues for the six
months ended June 30, 1999 compared to the same period in 1998. This increase
included a $2,175,000, or 8%, increase in The Americas, a $593,000, or 4%,
increase in Europe, and a $445,000, or 3%, increase in Asia-Pacific. Excluding
the impact due to the adoption of SOP 98-9 and excluding the impact due to the
acquisitions of KR and MARC, total revenue increased by $2,388,000 for the six
months ended 1999 compared to the same period in 1998. This increase included a
$2,909,000, or 17%, increase in Europe, partially offset by decreases in The
Americas and Asia-Pacific of $144,000, or 1%, and $377,000, or 3%, respectively.
The Company is exposed to the impact of foreign currency fluctuations.
The following table details the positive effect of the currency rate changes
on revenue for the six months ended June 30, 1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------
USING EXCHANGE RATES FOR THE
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Revenues:
Europe $20,028,000 $20,154,000
Asia-Pacific 12,609,000 13,704,000
----------- -----------
Total Revenue $32,637,000 $33,858,000
----------- -----------
----------- -----------
Exchange Rates:
$/DM 0.56 0.56
Yen/$ 132.01 118.57
</TABLE>
Operating expenses of $73,887,000 for the six months ended June 30, 1999
include a write-off of acquired in-process technology, impairment charges,
restructuring costs and ongoing operating costs necessary for the operation
of the business, and represent an increase of $15,519,000, or 27%, from the
$58,368,000 reported for the same period in 1998. Operating expenses include
a write-off of acquired in-process technology of $4,067,000, an impairment
charge of $1,500,000, and restructuring costs of $5,497,000. Without these
charges, operating expenses totaled $62,823,000 for the six months ended June
30, 1999, an increase of $4,455,000, or 8%, from the $58,368,000 reported for
the six months ended June 30, 1998. This increase was primarily attributable
to: (1) a $1,456,000 decrease in cost of revenue before the software
impairment charge of $1,500,000 (a $2,214,000 decrease in amortization of
capitalized software costs; a $1,100,000 increase in the cost of support
services due to a change in staffing mix between sales and consulting
resources; and a $342,000 increase in other costs of revenue); (2) a
$3,864,000 increase in net research and development expense (a $1,075,000
increase in the gross research and development investment and a $2,789,000
decrease in capitalized software costs); and (3) a $2,047,000 increase in
22
<PAGE>
selling, general and administrative expense and amortization of goodwill and
other intangibles (primarily due to a $1,231,000 increase in amortization of
goodwill and other intangible assets and a $1,916,000 increase due to the
acquisitions of KR and MARC, partially offset by a $1,100,000 decrease due to a
change in staffing mix between sales and support resources).
In accordance with 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 was $18,630,000 and $18,586,000 for the six months ended
June 30, 1999 and 1998, respectively, or 29% and 28%, respectively, of total
revenue. Amortization of capitalized software costs decreased to $4,229,000
for the six months ended June 30, 1999 from $6,443,000 for the same period in
the prior year, a decrease of $2,214,000, or 34%. Cost of revenue for the
six months ended June 30, 1999 includes a software impairment charge of
$1,500,000. Cost of revenue, excluding amortization of capitalized software
costs and the software impairment charge, was $12,901,000 for the six months
ended June 30, 1999 compared to $12,143,000 for the same period in the prior
year, an increase of $758,000, or 6%. This increase was primarily due to:
(1) a $344,000 increase in third party commissions; (2) a $1,100,000 increase
in the cost of technical support services due to a change in staffing mix
between sales and support resources; (3) a $91,000 increase in training labor
and related costs; offset by (4) a $777,000 decrease in royalty expense. The
increase in labor and related costs were related to the reallocation of sales
resources to support maintenance and consulting activities from the recent
reorganization. $420,000 of these increases are due to the KR and MARC
acquisitions. Royalty expense is paid to third parties under various
agreements. The Company does not consider any royalty expense related to
individual agreements to be material. Royalty expense is expected to decline
with the replacement of a third party product by MARC products.
Gross margin, which is total 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, as noted above. Gross margin was $45,465,000,
or 71% of total revenues, for the six months ended June 30, 1999, as compared to
$48,863,000, or 72% of total revenues, for the same period in the prior year,
representing a decrease of $3,398,000.
Research and development expense for the six months ended June 30, 1999 was
$9,455,000 compared to $5,591,000 for the six months ended June 30, 1998, an
increase of $3,864,000, or 69%. The increase is primarily due to an increase of
$1,075,000 in the total gross investment in research and development activities
and a decrease of $2,789,000 in the amount of research and development
expenditures capitalized under SFAS No. 86. The total gross investment in
research and development activities for the six months ended June 30, 1999
amounted to $13,388,000, or 21% of total revenue, compared to $12,313,000, or
18% of total revenue, for the same period in the prior year. This increase
resulted primarily from: (1) a $245,000 decrease in cost offsets related to
cost sharing development agreements; (2) a $443,000 increase in development
labor and related costs; and (3) the addition of $274,000 of development costs
from the acquisitions of KR and MARC. The Company's gross research and
development cost was 21% of total revenue for the six months ended June 30,
1999.
Capitalized software development costs were $3,933,000 for the six months
ended June 30, 1999 compared to $6,722,000 for the same period in the prior
year, a decrease of $2,789,000, or 42%. 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 and product quality, and to 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 and amortization of goodwill
and other intangibles was $36,238,000 for the six months ended June 30, 1999
compared to $34,191,000 for the same period in 1998, an increase of $2,047,000,
or 6%. The $2,047,000 increase was due to: (1) a $1,655,000 increase in sales
and marketing costs, primarily due to additional sales and marketing costs from
the acquisitions of KR and MARC, offset by a $839,000 decrease in selling
expense due to a change in staffing mix; and (2) a $1,231,000 increase in
amortization of goodwill and other intangibles, primarily from the acquisitions
of KR and MARC.
23
<PAGE>
As with revenue, the Company's operating expenses are impacted by foreign
currency fluctuations. The following table details the negative effect of the
currency rate changes on operating expenses for the six months ended June 30,
1999:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------
USING EXCHANGE RATES FOR THE
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
Local Operating Expenses:(1)
Europe $11,988,000 $12,105,000
Asia-Pacific 5,059,000 5,638,000
----------- -----------
Total Local Operating Expenses $17,047,000 $17,743,000
----------- -----------
----------- -----------
Exchange Rates:
$/DM 0.56 0.56
Yen/$ 132.01 118.57
</TABLE>
(1) DOES NOT INCLUDE UNITED STATES BASED COSTS INCURRED ON BEHALF
OF THE INTERNATIONAL OPERATIONS.
Operating income (loss), including software capitalization and
amortization, impairment charges, restructuring costs and the write-off of
acquired in-process technology, was a loss of $9,792,000 for the six months
ended June 30, 1999 compared to operating income of $9,081,000 for the same
period in the prior year. The operating loss for the six months ended June 30,
1999 includes the effects of the Company's adoption of SOP 98-9 in the fourth
quarter of 1998, impairment charges, restructuring costs and the write-off of
acquired in-process technology, in addition to ongoing operating costs necessary
for the operation of the business. The $18,873,000 decrease in operating income
is primarily attributable to: (1) restructuring costs of $5,497,000; (2) the
write-off of acquired in-process technology of $4,067,000; (3) impairment
charges of $1,500,000; (4) an increase in research and development expense of
$3,864,000; (5) an increase in selling, general and administrative expense and
amortization of goodwill and other intangibles of $2,047,000; and (5) a decrease
in gross margin of $1,898,000 (a decrease in reported revenue of $3,354,000,
partially offset by a decrease in cost of revenue, excluding the impairment
charges, of $1,456,000). Without the effect of the restructuring charges,
impairment charges and write-off of acquired in-process technology, and had the
Company adopted SOP 98-9 in the last quarter of 1997, the Company estimates
operating income would have been $1,272,000 and $936,000 for the six months
ended June 30, 1999 and 1998, respectively, an increase of $336,000, or 36%, as
shown in the following table:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Operating Income (Loss) - As Reported $ (9,792,000) $ 9,081,000
------------ ------------
Adjustments:
Revenue Change, Net of Cost of Revenue - (8,145,000)
Impairment of Capitalized Software Costs 1,500,000 -
Restructuring Charges 5,497,000 -
Write-Off of Acquired In-Process Technology 4,067,000 -
------------ ------------
Total Adjustments 11,064,000 (8,145,000)
------------ ------------
Operating Income - As Adjusted $ 1,272,000 $ 936,000
------------ ------------
------------ ------------
</TABLE>
24
<PAGE>
Interest expense primarily reflects the interest on the convertible
subordinated debentures issued as part of the acquisitions of PDA in 1994 and
MARC in June of 1999, as well as interest on the subordinated notes payable
issued as part of the acquisition of MARC. Interest payments on the
convertible subordinated debentures are due on March 15 and September 15 of
each year until the debentures are converted or redeemed. Interest payments
on the subordinated notes payable are due on January 10 and July 10 of each
year.
Other income (expense) was income of $11,026,000 for the six months ended
June 30, 1999 compared to income of $657,000 for the same period in the prior
year, an increase of $10,369,000. The increase is primarily attributable to a
$10,773,000 gain from the sale of the Company's equity investment in LMS
International. Excluding this gain, other income (expense) was income of
$253,000 for the six months ended June 30, 1999, a decrease of $404,000 compared
to the same period in the prior year. This decrease is primarily attributable
to a decrease in interest and investment income of $345,000, due primarily to a
decrease in investment securities. Other income (expense) also includes gains
and losses on property, plant and equipment and other non-operating income or
expense. The Company anticipates that interest and investment income will
continue to decrease throughout 1999 from 1998 levels as a result of the
decrease in its cash balances following the acquisitions of MARC and UAI.
Net income (loss) was a loss of $2,139,000 for the six months ended
June 30, 1999 compared to net income of $4,953,000 for the same period in the
prior year, a decrease of $7,092,000. Income taxes were provided at a rate of
31% (excluding non-deductible charges) for the six months ended June 30, 1999
versus 34% (excluding non-deductible charges) for the six months ended June 30,
1998, resulting in a decrease in the provision for income taxes of $1,781,000.
COMPANY TRENDS
During June 1999, the Company acquired MARC and UAI. MARC is a software
developer and supplier whose products include MARC (a non-linear finite element
analysis program for engineering structural analysis), Mentat (a graphical user
interface for MARC), and MARC/Autoforge (a simulation program for the bulk
forging industry). UAI is a developer and distributor of finite element
analysis software and engineering services for the engineering community and to
major manufacturers worldwide.
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 is 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 the remainder of 1999 will also be
affected by having a full-year of operations of the Working Knowledge Division
and the acquisitions of MARC and UAI in June 1999.
LIQUIDITY AND CAPITAL RESOURCES
In the past, working capital needed to finance the Company's growth has
been provided by cash on hand and from cash flow from operations. Management
believes that cash generated from operations will continue to provide sufficient
capital for normal working capital needs in the foreseeable future. The Company
may engage in additional financing methods that it believes are advantageous.
Net cash provided by operating activities was $23,756,000 and $18,885,000 for
the six months ended June 30, 1999 and 1998, respectively. The Company's
working capital at June 30, 1999 was $4,364,000 compared to $21,736,000 at
December 31, 1998. Working capital at June 30, 1999 was adversely affected by
the acquisitions of MARC and UAI. As of June 30, 1999, the balance
25
<PAGE>
still owed to MARC shareholders for the cash purchase price was approximately
$18,082,000, which will be paid out during the third quarter of 1999.
During the six months ended June 30, 1999, cash outlays were $2,985,000
in conjunction with the $6,192,000 of restructuring charges taken in the last
quarter of 1998 and the first two quarters of 1999. These outlays are
anticipated to be completed by the end of 1999, excluding certain lease
commitments that may continue through January 2000.
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
Company was in violation of certain covenants under the line of credit at
December 31, 1998 and March 31, 1999. The Company repaid all of these
borrowings in May of 1999.
On August 11, 1999, the Company entered into a new Loan and Security
Agreement (the "Loan Agreement") with another bank (the "Bank"). The credit
facility includes a $15,000,000 revolving line of credit. The amount
available in excess of $5,000,000 is subject to a defined borrowing base of
outstanding trade receivables. The line carries an interest rate equal to
the Bank's prime lending rate or LIBOR plus 200 basis points. Borrowings
also invoke certain restrictive covenants. The term of the revolving
portion of the Loan Agreement expires May 31, 2001. As of August 12, 1999,
the Company had no borrowings outstanding under the Loan Agreement.
Borrowings under the Loan Agreement are secured by nearly all of Company's
goods and equipment, inventory, contract rights, and intellectual property
rights.
The Company issued convertible subordinated debentures in August 1994,
in connection with its PDA acquisition, in the aggregate amount of
approximately $56,608,000. An additional $2,000,000 principal amount of
convertible subordinated debentures were issued in June 1999 in connection
with the MARC acquisition. The debentures bear interest at 7-7/8% with
interest payments due semi-annually in March and September. A debenture
interest payment was made in March 1999 for $2,228,000. The estimated
interest payment to be paid in September 1999 is $2,284,000. 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.
The Company also issued subordinated notes payable in June 1999, in
connection with the MARC acquisition, in the aggregate principal amount of
$14,300,000. The subordinated notes payable bear interest at 8% with interest
payments due semi-annually in January and July. The interest payment to be
paid in January 2000 is $577,000. $3,300,000 of the notes payable are due in
June 2001 and the remaining $11,000,000 is due in June 2009.
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 $13,388,000 and $12,313,000 for the six months ended June 30, 1999
and 1998, respectively, on development efforts, of which $3,933,000 and
$6,722,000, 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 the six months ended June 30, 1999 and 1998, the Company acquired
$1,010,000 and $2,988,000, 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 to be
consistent with those for 1998.
COMMON STOCK WARRANTS
On June 18, 1999, as part of the acquisition of MARC, the Company issued
five-year warrants to purchase 1,400,000 shares of the Company's common stock
at an exercise price of $10.00 per share. The warrants were recorded at
their fair value of $3,038,000 under the Black-Scholes valuation method.
26
<PAGE>
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.
Through June 30, 1999, the Company has issued warrants to purchase 248,343
shares of the Company's common stock at exercise prices which range between
$6.000 per share and $11.375 per share, for a total exercise price of
$1,875,000. KSTC has the right to purchase additional warrants with an
aggregate exercise price of $1,125,000 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.
IMPACT OF YEAR 2000
Following internal examination and testing, the Company believes 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 during the third quarter of 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.
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 generally
accepted accounting principles, 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 Company does not separately track the costs related to Year
2000 compliance, but estimates that the incremental cost of the modifications to
achieve compliance is under $100,000, spread over three years (1997 through
2000). The Company estimates that approximately 90% of these costs have already
been spent.
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.
27
<PAGE>
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 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.
INFLATION
Inflation in recent years has not had a significant effect on the Company's
business.
28
<PAGE>
CAUTIONARY STATEMENT REGARDING 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 Company's dependence on certain industries;
- - The successful integration of Knowledge Revolution, MARC and UAI;
- - Timely development of Computer Aided Engineering technologies which,
among other things, must accommodate industry trends such as increasing
computing power and increased usage of workstations;
- - Fluctuations of the United States dollar versus foreign currencies;
- - Economic conditions in Asia-Pacific, Europe and the United States;
- - 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;
- - The adoption by the Company of certain anti-takeover provisions;
- - The allocation of the purchase price for the MARC acquisition is based on
a preliminary valuation, which is subject to change, although management
does not believe the final valuation will be materially different;
- - Continued demand for its products, including MSC.NASTRAN, MSC.PATRAN,
MSC.DYTRAN, MSC.MVISION, MSC.NASTRAN for Windows, MSC.InCheck,
MSC.Working Model, and MARC's products; and
- - Year 2000 issues.
Subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are hereby expressly qualified in
their entirety by the cautionary statements in this section of this report and
by the discussion of "Risk Factors" in the Company's Transition Report on Form
10-K for the year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of foreign currency fluctuations and
interest rate changes. The Company has not experienced a material change in
these market risk areas from the end of the preceding fiscal year.
29
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On June 18, 1999, as part of the acquisition of MARC Analysis
Research Corporation, the Company issued five year warrants to purchase
1,400,000 shares of the Company's common stock at an exercise price of $10.00
per share and $2,000,000 aggregate principal amount of the Company's 7-7/8%
convertible subordinated debentures (convertible into common stock at a price of
$15.15 per share). The debentures were recorded at their face value. The
warrants were recorded at their fair value of $3,038,000 under the Black-Scholes
valuation method. The transaction was a private placement involving two
offerees and two purchasers exempt from registration under Section 4(2) of the
Securities Act of 1933.
The Loan and Security Agreement imposes restrictions on the Company's
payment of cash dividends or other distributions or payments on account of or in
redemption, retirement or purchase of the Company's common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 23, 1999, the Annual Meeting of Stockholders of the Company
was held for the purpose of voting on:
(i) The election of two Directors (Class II) to the Board of
Directors;
(ii) The amendment to the Company's Certificate of Incorporation
to change the name of the Company to MSC.Software Corporation;
(iii) An amendment to the Company's 1998 Stock Option Plan that
increases the number of shares authorized to be issued under the Plan by
1,500,000 shares; and
(iv) Ratification of the appointment of Ernst & Young LLP as
independent auditors for 1999.
(b) The following matters were approved by the stockholders of the
Company. The following votes were cast with respect to each proposal:
(i) Election of two Directors (Class II) to the Board of
Directors:
<TABLE>
<CAPTION>
Shares Shares
Director Voted For Withheld
-------------------- ------------- --------------
<S> <C> <C>
Donald Glickman 11,320,737 593,570
Larry S. Barels 11,330,042 584,265
</TABLE>
The other directors whose terms continued after the Annual
Meeting are William F. Grun, Frank Perna, Jr., and George N. Riordan.
30
<PAGE>
(ii) Approval of the Amendment to the Company's Certificate of
Incorporation to change the name of the Company to MSC.Software
Corporation:
<TABLE>
<CAPTION>
Votes Cast
--------------------------------------------------------------
Broker
For Against Abstain Non-Votes
----------- ------------- ------------- ---------------
<S> <C> <C> <C>
11,517,586 379,749 16,972 -
</TABLE>
(iii) Approval of the Amendment to the Company's 1998 Stock Option
Plan that increases the number of shares authorized to be issued under
the Plan by 1,500,000:
<TABLE>
<CAPTION>
Votes Cast
--------------------------------------------------------------
Broker
For Against Abstain Non-Votes
----------- ------------- ------------- ---------------
<S> <C> <C> <C>
6,976,467 2,660,154 18,336 2,259,350
</TABLE>
(iv) Ratification of Ernst & Young LLP as Independent Auditors
for 1999:
<TABLE>
<CAPTION>
Votes Cast
-------------------------------------------
For Against Abstain
----------- ------------- -------------
<S> <C> <C>
11,886,694 13,924 13,689
</TABLE>
31
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) 2.1 Agreement and Plan of Merger dated as of May 26, 1999
by and among The MacNeal-Schwendler Corporation, MSC
Holdings Co. II, MARC Analysis Research Corporation,
Dendron Technology B.V., Fronos Technology B.V. and
Nearchos Irinarchos (filed as Exhibit 2.1 to a Current
Report on Form 8-K filed July 1, 1999 and incorporated
herein by reference).
2.2 Stock Purchase Agreement dated as of May 26, 1999 among
The MacNeal-Schwendler Corporation, Dendron Technology
B.V. and Fronos Technology B.V. (filed as Exhibit 2.2
to a Current Report on Form 8-K filed July 1, 1999 and
incorporated herein by reference).
3.1 Certificate of Incorporation of MSC.Software
Corporation, as amended.
4.1 The MacNeal-Schwendler Corporation Indenture dated as
of June 17, 1999 with Chase Manhattan Bank & Trust
Company N.A. as Trustee (filed as Exhibit 4.1 to a
Current Report on Form 8-K filed July 1, 1999 and
incorporated herein by reference).
4.2 The MacNeal-Schwendler Corporation Warrant Agreement
dated as of June 18, 1999 with The MacNeal-Schwendler
Corporation acting in the capacity of Warrant Agent
(filed as Exhibit 4.2 to a Current Report on Form 8-K
filed July 1, 1999 and incorporated herein by
reference).
10.1 * Employment Agreement Between MSC.Software Corporation
and Frank Perna, Jr.
10.2 Loan and Security Agreement Between MSC.Software
Corporation and Comerica Bank - California.
10.3 Registration Rights Agreement dated June 18, 1999 among
The MacNeal-Schwendler Corporation, Dendron Technology
B.V. and Fronos Technology B.V. (filed as Exhibit 4.3
to a Current Report on Form 8-K filed July 1, 1999 and
incorporated herein by reference).
27.1 Financial Data Schedule for the Six Months Ended
June 30, 1999
27.2 Restated Financial Data Schedule for the Six Months
Ended June 30, 1998
(b) Current Report on Form 8-K filed July 1, 1999, event date: June
18, 1999 (Items 2 and 5).
</TABLE>
* DENOTES MANAGEMENT CONTRACT OR COMPENSATORY PLAN.
32
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MSC.SOFTWARE CORPORATION
(REGISTRANT)
By: /s/ LOUIS A. GRECO
-------------------------------------------------
Date: August 16, 1999 Louis A. Greco - Chief Financial Officer
------------------ (MR. GRECO IS THE PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER AND HAS BEEN DULY AUTHORIZED TO
SIGN ON BEHALF OF THE REGISTRANT)
33
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
The undersigned, being the Secretary and Chief Financial Officer of The
MacNeal-Schwendler Corporation, a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of The
MacNeal-Schwendler Corporation, resolutions were duly adopted setting forth a
proposed amendment of the Certificate of Incorporation of said corporation,
declaring said amendment to be advisable and calling a meeting of the
stockholders of said corporation for consideration thereof. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this
corporation be amended by changing "Article I. NAME." so that, as
amended, said Article shall be and read as follows:
"The name of the corporation is MSC.Software Corporation
(hereinafter referred to as the "Corporation")."
SECOND: That thereafter, pursuant to resolution of its Board of
Directors an annual meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation law of the State of Delaware at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, I hereunto sign my name and affirm that the
statements made herein are true under penalties of perjury, this 23rd day of
June, 1999.
THE MACNEAL-SCHWENDLER CORPORATION
By: /s/ Louis A. Greco
----------------------------
Name: Louis A. Greco
Title: Secretary and Chief Financial Officer
<PAGE>
CERTIFICATE OF INCORPORATION
OF
MSC ENTERPRISES, INC.
ARTICLE I. Name.
The name of the corporation is MSC Enterprises, Inc. (hereinafter
referred to as the "Corporation").
ARTICLE II. Registered Office and Agent.
The address of the registered office of the Corporation in the State of
Delaware is Incorporating Services, Ltd., 15 East North Street, Dover, County of
Kent. The name of the registered agent of the Corporation at such address is
Incorporating Services, Ltd.
ARTICLE III. Nature of Business.
The nature of the business or purposes to be conducted by the
Corporation is to engage in any lawful act or activity for which corporations
may be organized under the Delaware General Corporation Law.
ARTICLE IV. Capital Stock.
SECTION 1. Number of Authorized Shares. The total number of shares of
all classes of stock which the Corporation shall have authority to issue is
110,000,000. The Corporation shall be authorized to issue two classes of stock
to be designated, respectively, "Common Stock" and "Preferred Stock," and
referred to herein either as Common Stock or Common Shares and Preferred Stock
or Preferred Shares, respectively. The number of shares of Common Stock
authorized shall be 100,000,000 and the Common Shares shall have a par value of
$.01 per share, and the number of shares of Preferred Stock authorized shall be
10,000,000 and the Preferred Shares shall have a par value of $.01 per share.
SECTION 2. Preferred Stock. The Board of Directors is authorized,
subject to the limitations prescribed by law and the provisions of Section 1 of
this Article IV, to provide for the issuance of shares of Preferred Stock from
time to time in one or more series, and by filing any certificate of
designations required under Section 151(g) of the Delaware General Corporation
Law (or its successor statute as in effect from time to time), to fix or alter
the number of shares of any series of Preferred Stock, and to fix the powers,
designations, preferences and relative, participating, optional or other rights,
and the qualifications, limitations or restrictions granted to or imposed upon
the shares of any wholly unissued series of Preferred Stock. The authority of
the Board of Directors
<PAGE>
with respect to each series shall include, but not be limited to, the
determination of the following:
(a) the number of shares constituting and the distinctive
designation of such series;
(b) the dividend rights of the shares of such series,
including whether dividends shall be cumulative and, if so, from which
date or dates, and the relative rights of priority, if any, of payment
of dividends on shares of such series;
(c) whether such series shall have voting rights, and, if so,
the terms of such voting rights, including the number of votes per
share, the number of members of the Board of Directors or the
percentage of members of the Board of Directors each class or series of
Preferred Stock may be entitled to elect;
(d) whether such series shall have conversion rights and, if
so, the terms and conditions of such conversion, including provision
for adjustment of the conversion rate in such events as the Board of
Directors shall determine;
(e) whether or not the shares of such series shall be
redeemable and, if so, the terms and conditions of such redemption,
including the date or date upon or after which they shall be
redeemable, and the amount per share payable in case of redemption,
which amount may vary as the Board of Directors determines under
different conditions and at different redemption dates;
(f) whether such series shall have a sinking fund for the
redemption or purchase of shares of such series, and, if so, the terms
and amount of such sinking fund;
(g) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of
shares of such series; and
(h) any other relative rights, preferences and limitations of
such series.
The Board of Directors may, within the limits and restrictions stated
in any resolution or resolutions of the Board of Directors originally fixing the
number of shares constituting any series, increase or decrease (but not below
the number of shares of such Series then outstanding) the number of shares of
any such series subsequent to the issue
2
<PAGE>
of shares of that series. Preferred Shares that are redeemed, purchased or
otherwise acquired by the Corporation may be reissued except as otherwise
provided by law or the applicable certificate of designations.
ARTICLE V. Incorporator.
The name and mailing address of the incorporator is Lisa A. Gatto, 400
South Hope Street, Los Angeles, California 90071-2899.
ARTICLE VI. Board of Directors.
SECTION 1. Number of Directors. The properties, business and affairs
of the Corporation shall be managed and controlled by a Board of Directors of
not less than five (5) nor more than fifteen (15) members. The number of
directors which shall constitute the whole Board of Directors shall be eight (8)
unless and until otherwise determined in the manner provided in the Bylaws of
the Corporation. Notwithstanding any other provision of this Article VI, and
except as otherwise required by law, whenever the holders of any one or more
series of Preferred Stock or other securities of the Corporation shall have the
right, voting separately as a class, to elect one or more directors of the
Corporation, such directorship or directorships shall be in addition to the
number of directors as determined in the manner provided in the Bylaws of the
Corporation, such director or directors shall not be classified pursuant to
Section 2 of this Article VI, and, unless otherwise provided by law or by
resolution of the Board of Directors authorizing such series of Preferred Stock
or other securities of the Corporation, the filling of vacancies and other
features of any such directorship shall be governed by the terms of this
Certificate of Incorporation applicable thereto, except that, unless otherwise
provided by law or by Resolution of the Board of Directors authorizing such
series of Preferred Stock or other Securities of the Corporation, any such
director shall hold office for a term expiring at the next succeeding annual
meeting of stockholders and until such director's successor shall be elected and
qualified, or until such director's death, resignation or removal, whichever
occurs earlier.
SECTION 2. Classified Board - Two Classes. So long as and until the
number of directors as determined in the manner provided in the Bylaws of the
Corporation is less than or equal to eight (8), the directors, other than those
directors not classified pursuant to Section 1 of this Article VI, shall be
divided into two (2) classes, designated Class A and Class B, such classes to be
as nearly equal in number as possible. Each director of Class A shall hold
office for a term expiring at the next annual meeting of stockholders and until
such director's successor shall be elected and qualified, or until such
director's death, resignation or removal, whichever occurs earlier, and each
director of Class B shall hold office for a term expiring at the second annual
meeting of stockholders and until such director's successor shall be elected and
qualified, or until such director's death, resignation or removal, whichever
occurs earlier. Thereafter, at each annual meeting of stockholders, directors
shall be elected to succeed those whose terms then expire and shall hold office
for a term expiring at the second
3
<PAGE>
annual meeting of stockholders following the annual meeting of stockholders at
which each such director was elected and until such director's successor is duly
elected and qualified or until such director's earlier death, resignation or
removal.
SECTION 3. Classified Board - Three Classes. From and after such time
(hereinafter referred to as the "Board Reclassification Time") as the number of
directors as determined in the manner provided in the Bylaws of the Corporation
exceeds eight (8), the directors, other than those directors not classified
pursuant to Section 1 of this Article VI, shall be divided into three (3)
classes, designated Class I, Class II and Class III, such classes to be as
nearly equal in number as possible. Each director of Class I shall bold office
for a term expiring at the next annual meeting of stockholders and until such
director's successor is duly elected and qualified or until such director's
earlier death, resignation or removal, each director of Class II shall hold
office for a term expiring at the second annual meeting of stockholders and
until such director's successor is duly elected and qualified, or until such
director's earlier death, resignation or removal, and each director of Class III
shall hold office for a term expiring at the third annual meeting of
stockholders and until such directors successor is duly elected and qualified,
or until such director's earlier death, resignation or removal. Thereafter, at
each annual meeting of stockholders, directors shall be chosen for a term of
three years to succeed those whose terms then expire and shall hold office until
the third annual meeting of stockholders following the annual meeting of
stockholders at which each such director was elected and until such director's
successor is duly elected and qualified, or until such director's earlier death,
resignation or removal.
SECTION 4. Board Reclassification. Unless otherwise agreed to by a
two-thirds majority of the existing directors, the determination of the
selection of directors in each class at the Board Reclassification Time or upon
other changes in the number of directors shall be determined in the manner
provided in the Bylaws of the Corporation.
SECTION 5. Vacancies. Any vacancy on the Board of Directors for any
reason, whether arising through death, resignation or removal of a director or
through an increase in the number of directors of any class, shall be filled by
a majority vote of the remaining directors, although less than a quorum, or by a
sole remaining director. The term of office of any director elected to fill such
a vacancy shall, except as provided in Sections 3 and 4 of this Article VI,
expire at the expiration of the term of office of directors of the class in
which the vacancy occurred.
SECTION 6. Elections. Elections of directors need not be by written
ballot except and to the extent provided in the Bylaws of the Corporation.
SECTION 7. Stockholder Nominees. Nominations by stockholders of
persons for election to the Board of Directors shall be made only in accordance
with the procedures set forth in the Bylaws of the Corporation.
4
<PAGE>
SECTION 8. Removal. Subject to the rights of the holders of any series
of Preferred Stock then outstanding, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause.
Notwithstanding the foregoing, and except as otherwise required by law, whenever
the holders of any one or more series of Preferred Stock shall have the right,
voting separately as a class, to elect one or more directors of the Corporation,
the provisions of this Section 9 shall not apply with respect to such director
or directors.
ARTICLE VII. Bylaws.
A majority of the Board of Directors is expressly authorized to make,
alter, amend or repeal the Bylaws of the Corporation. The stockholders of the
Corporation may adopt, amend or repeal Bylaws of the Corporation.
ARTICLE VIII. Stockholder Meetings; Books
Meetings of stockholders shall be held at such time, on such date and
at such place (within or without the State of Delaware) as provided in the
Bylaws of the Corporation. Any action required or permitted to be taken by the
stockholders of the Corporation which has not been approved by a majority of the
directors of the Corporation must be taken at a duly called and noticed meeting
of stockholders and may not be taken by consent in writing. The books of the
Corporation may be kept, subject to any applicable statutory provision, outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX. Director Liability; Indemnification.
To the fullest extent permitted by the General Corporation Law of the
State of Delaware as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. The liability of a
director of the Corporation to the Corporation or its stockholders for monetary
damages shall be eliminated to the fullest extent permissible under applicable
law in the event it is determined that Delaware law does not apply. The
Corporation is authorized to provide by bylaw, agreement or otherwise for
indemnification of directors, officers, employees and agents for breach of duty
to the Corporation and its stockholders to the fullest extent permitted by
applicable law. Any repeal or modification of this Article IX shall not result
in any liability for a director with respect to any action or omission occurring
prior to such repeal or modification.
ARTICLE X. Election Re: Section 203 of The Delaware General Corporation
Law.
The Corporation hereby elects not to be governed by Section 203
(Business Combinations with Interested Stockholders) of the Delaware General
Corporation Law.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinabove
named for the purpose of forming a corporation to do business both within and
without the State of Delaware, do make and file this Certificate, hereby
declaring under penalties of perjury that it is my act and deed and that the
facts stated herein are true.
/s/ Lisa A. Gatto
-----------------------------
Lisa A. Gatto
<PAGE>
EXHIBIT 10.1
The MacNeal-Schwendler Corporation
June 23, 1999
Frank Perna, Jr.
26802 Malibu Cove Colony Drive
Malibu, CA 90265
Re: Employment as Chief Executive Officer
Dear Frank:
On behalf of the Board of Directors of The MacNeal-Schwendler
Corporation (the "Company"), I am delighted to confirm the terms of the
compensation package which will be paid to you as Chief Executive Officer
("CEO") of the Company for the 1999 fiscal year. Should the terms contained in
the following letter be satisfactory to you, please acknowledge your acceptance
and return this letter to the undersigned.
COMPENSATION. The Company hereby agrees to pay $300,000 (the "Base
Salary") to you for services to be rendered as CEO of the Company during 1999.
In addition to your Base Salary, the Company also agrees to pay an additional
amount (the "Bonus"), which will be based upon the financial performance of the
Company during 1999. The Bonus will be payable based upon two criteria: (a) the
increase in the Company's reported total revenue (the "Revenue Component") and
(b) the Company's reported earnings per share (the "EPS Component"). Any Bonus
payable to you for 1999 will be the sum of the Revenue Component and the EPS
Component. One-time gains due to sales of assets and write-offs associated with
acquisitions will be excluded from calculations of reported revenue and earnings
per share for calendar year 1999 for purposes of computing the Revenue Component
and EPS Component of the Bonus.
The Revenue Component will equal $10,000 times the percentage, rounded
to the nearest whole number, by which (x) reported revenue for calendar year
1999 exceeds (y) $129,354,000 (the "Threshold"), up to a maximum of $100,000. If
reported revenue for calendar year 1999 does not equal or exceed 101% of the
Threshold, the Revenue Component will be zero.
<PAGE>
Mr. Frank Perna, Jr., June 23, 1999 - Page 2
The EPS Component will equal the amount set forth in the following
table corresponding to the applicable earnings per share reported in calendar
year 1999:
<TABLE>
<CAPTION>
1999 Reported EPS EPS Bonus
- ----------------- ---------
<S> <C>
less than $0.57 $0
at least $0.57 but less than $0.695 $100,000 * (Reported EPS - $0.57)
-----------------------------------
$0.125
$0.695 or more $225,000
</TABLE>
Any Bonus shall be payable 50% in cash and 50% in common stock of the
Company, with such stock valued at the closing price of such stock on the New
York Stock Exchange on the Payment Date. "Payment Date" means the later of March
1, 2000 or the date that the Company receives its final audit report on its
financial statements for calendar year 1999 from its independent auditors.
In the event that a Significant Transaction occurs with respect to the
Company, the Company (acting through the Compensation Committee) reserves the
right, but shall not be obligated, to adjust or modify the formulas relating to
the computation of the Revenue Component or EPS Component. Such adjustments will
be made to appropriately adjust the formulas to take into account the effects of
the Significant Transaction on the Company's financial statements. Any
adjustments will be made in the sole discretion of the Compensation Committee. A
"Significant Transaction" is any occurrence that is determined by the
Compensation Committee to make reported revenue or earnings per share numbers
non-comparable, including, without limitation, any merger, consolidation,
purchase, sale or disposition of assets, or change in accounting policies or
procedures.
TERM OF EMPLOYMENT. It is understood that you will be an at-will
employee of the Company and that the Company may terminate your employment, with
or without cause, at any time. In the event that you cease to be employed by the
Company, you shall be entitled to receive only that portion of the Base Salary
that accrued for the period during which you were employed. No Bonus shall be
payable unless you are continuously employed by the Company as CEO through the
end of the 1999.
CONFIDENTIALITY. It is understood that the Company's trade secrets and
proprietary information and processes, as they may exist from time to time, are
confidential information and are valuable, special and unique assets of the
Company. As a condition to your continued employment, you must sign the
Company's confidentiality agreement in the form attached hereto and return a
copy of such agreement to the undersigned along with this letter.
STOCK OPTIONS. Since the time you accepted the position of CEO, you
received grants of options to purchase 300,000 shares of the Company's common
stock at then current market prices. The terms of these options are governed by
the award agreements and the 1994 and 1998 Stock Option Plans.
OTHER COMPENSATION. You will receive additional compensation from the
Company (such
<PAGE>
Mr. Frank Perna, Jr., June 23, 1999 - Page 3
as a car allowance, medical benefits, vacation etc.). The nature and amount of
these items will be determined separately by the Board of Directors of the
Company and will be granted in addition to the compensation described herein.
GOVERNING LAW. The agreements contained herein shall be deemed to have
been made, executed and delivered within the State of California, and the rights
and obligations of the parties hereunder shall be construed and enforced in
accordance with, and governed by, the laws of the State of California, without
regard to the principles of conflict of laws.
ARBITRATION. Any dispute, controversy or claim arising out of or in
respect of this letter (or its validity, interpretation or enforcement), the
employment relationship or the subject matter hereof, including but not limited
to, any claims arising under any state or federal law arising out of or relating
to your termination, shall be submitted to and settled by arbitration conducted
before a single arbitrator in Los Angeles, California in accordance with the
then in effect Labor Arbitration Rules of the American Arbitration Association.
The arbitration shall be governed by the Federal Arbitration Act (9 U.S.C.
Section Section 1-16). The arbitration of such issues, including the
determination of any amount of damages suffered, shall be final and binding upon
the parties to the maximum extent permitted by law. The arbitrator in such
action shall not be authorized to change or modify any provision of this letter.
Judgment upon the award rendered by the arbitrator may be entered by any court
having jurisdiction thereof. The arbitrator shall award reasonable expenses
(including reimbursement of the assigned arbitration costs) to the prevailing
party upon application therefor. If either party fails to proceed with
arbitration as provided herein or unsuccessfully seeks to stay such arbitration,
or fails to comply with any arbitration award, or is unsuccessful in vacating or
modifying the award pursuant to a petition or application for judicial review,
the other party shall be entitled to be awarded costs, including accounting fees
and reasonable attorneys' fees, paid or incurred by such other party in
successfully compelling such arbitration or defending against the attempt to
stay, vacate or modify such arbitration award and/or successfully defending or
enforcing the award.
Sincerely,
/s/ Donald Glickman
----------------------------
Chairman of the Compensation
Committee of the Board of Directors
Agreed and accepted:
/s/ Frank Perna, Jr.
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Frank Perna, Jr.
<PAGE>
EXHIBIT 10.2
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MSC.SOFTWARE CORPORATION
COMERICA BANK - CALIFORNIA
LOAN AND SECURITY AGREEMENT
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<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of August 11, 1999 by and
among COMERICA BANK-CALIFORNIA ("Bank") and MSC.Software Corporation
("Borrower").
RECITALS
Borrower desires to obtain credit from Bank and Bank desires to provide credit
to Borrower. This Agreement sets forth the terms on which Bank will advance
credit to Borrower, and Borrower will repay the amounts owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS SHALL
HAVE THE FOLLOWING DEFINITIONS:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to a
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by a Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means a cash advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents (including fees and expenses of
appeal), whether or not suit is brought.
"Borrower's Books" means all of a Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount equal to eighty percent (80%) of
Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close and if such day relates to any LIBOR Rate Extensions, means any such
day on which dealings in Dollar deposits are conducted by and between banks in
the London interbank market.
"Change in Control" means a transaction in which any "person" or
"group" (within the meaning of Section 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934), directly or indirectly, of a
sufficient number of shares of all classes of stock then outstanding of Borrower
ordinarily entitled to vote in the election of directors, empowering such
"person" or "group" to elect a majority of the Board of Directors of Borrower,
who did not have such power before such transaction..
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
"Committed Revolving Line" means a credit extension of Fifteen
Million Dollars ($15,000,000).
<PAGE>
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Advance, the Term Loan or any other
extension of credit by Bank for the benefit of a Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of a Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of a Borrower and its Subsidiaries, as at such
date, including all Indebtedness that is payable upon demand or within one year
from the date of determination thereof unless such Indebtedness is renewable or
extendable at the option of a Borrower or any Subsidiary to a date more than one
year from the date of determination.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Effective Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the financial statement net worth of a
Person on a consolidated basis, minus intangible assets, plus Subordinated Debt,
on a consolidated basis determined in accordance with GAAP.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of a Borrower's business that comply with all of the
representations and warranties to Bank set forth in Section 5.4; PROVIDED, that
standards of eligibility may be fixed and revised from time to time by Bank as a
consequence of any Collateral audits done pursuant to Section 6.3 in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts
shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, twenty-five
percent (25%) or more of whose Accounts the account debtor has failed to pay
within ninety (90) days of invoice date.
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
<PAGE>
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States and is not supported
by one or more letters of credit in an amount and of a tenor, and issued by a
financial institution, acceptable to Bank, except for Eligible Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any agency or subdivision thereof;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to such
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to such Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates of such account debtor, whose total obligations to
Borrower exceed twenty percent (20%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably determines
to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor does not have its principal place of business in the United
States and that Bank approves on a case-by-case basis.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services (other than trade payables),
(b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means:
(a) Copyrights, Trademarks and Patents;
<PAGE>
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
"Interest Period" means for each LIBOR Rate Extension, a period
of approximately one, two, three or six months as Borrower may elect, PROVIDED
that the last day of an Interest Period for a LIBOR Rate Extension shall be
determined in accordance with the practices of the LIBOR interbank market as
from time to time in effect, PROVIDED, FURTHER, in the case of Advances such
period shall expire not later than the Revolving Maturity Date and in the case
of the Term Loan such period shall expire not later than the Term Maturity Date.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate
Extension, the rate of interest per annum determined by Bank to be the per annum
rate of interest at which deposits in United States Dollars are offered to Bank
in the London interbank market in which Bank customarily participates at 11:00
a.m. (local time in such interbank market) two (2) Business Days before the
first day of such Interest Period for a period approximately equal to such
Interest Period and in an amount approximately equal to the amount of such
Credit Extension.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate
Extension, a rate per annum (rounded upwards, if necessary, to the nearest 1/100
of 1%) equal to (i) the LIBOR Base Rate for such Interest Period divided by (ii)
1 minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advances" means any Advances or a portion thereof, on
which interest is payable based on the LIBOR Rate in accordance with the terms
hereof.
"LIBOR Rate Extensions" means any LIBOR Rate Advances or any
portion of the Term Loan bearing interest at a rate based on the LIBOR Rate.
<PAGE>
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all loans, advances, debts, liabilities and
obligations for monetary amounts owing by Borrower to Bank, whether due or to
become due, matured or unmatured, liquidated or unliquidated, contingent or
non-contingent, and all covenants and duties regarding such amounts, of any kind
or nature, present or future, whether or not evidenced by any note, agreement or
other instrument, including those arising under any of the Loan Documents. This
term includes, without limitation, all principal, interest (including interest
that accrues after the commencement against Borrower or any Subsidiary of
Borrower under the Bankruptcy Code), fees, including, without limitation, any
and all closing fees, prepayment fees, commitment fees, advisory fees, and
attorneys' fees and any and all other fees, expenses, costs or other amounts
chargeable to Borrower under any of the Loan Documents.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Periodic Payments" means all interest payments and other
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank under this Agreement.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed
in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness secured by a lien described in clause (c)
of the defined term "Permitted Liens", provided the amount of such
Indebtedness shall not exceed the cost of the Equipment acquired with the
proceeds of such Indebtedness; and
(e) Extensions, renewals, modifications, amendments and
restatements of any of the items of permitted Indebtedness (a) through (d)
above, provided that the principal amount thereof is not increased or the
terms thereof are not modified to impose materially more burdensome terms
upon Borrower.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
<PAGE>
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having rating of at least A-2 or P-2 from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., (iii) certificates of
deposit maturing no more than one (1) year from the date of investment therein
issued by Bank, (iv) Bank's money market accounts, and (v) money market accounts
listed on the Schedule and as disclosed to Bank in writing from time to time.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in the
Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price or lease of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment; and
(d) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by Bank, as its "prime rate" or "reference rate," whether or
not such announced rate is the lowest rate available from Bank.
"Prime Rate Advances" means any Advances or any portion thereof,
on which interest is payable based on the Prime Rate in accordance with the
terms hereof.
"Prime Rate Extensions" means any Prime Rate Advances or any
portion of the Term Loan bearing interest at a rate based on the Prime Rate.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the cash, cash-equivalents, net trade receivables and
marketable securities not classified as long term investments, of Borrower and
its Subsidiaries determined in accordance with GAAP.
"Regulatory Change" means a change after the date hereof, in, or
of the interpretation of, laws or regulations applicable to Bank.
"Reserve Requirement" means, for any Interest Period, the average
maximum rate at which reserves (including any marginal, supplemental or
emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency liabilities" (as such term is used in
Regulation D) by member banks of the Federal Reserve System. Without limiting
the effect of the foregoing, the Reserve Requirement shall reflect any other
reserves required to be maintained by Bank by reason of any Regulatory Change
against (i) any category of liabilities which includes deposits by reference to
which the LIBOR Rate is to be determined as provided in the definition of "LIBOR
Base Rate" or (ii) any category of extensions of credit or other assets which
include Advances.
<PAGE>
"Responsible Officer" means any of the Chief Executive Officer,
the Chief Operating Officer and the Chief Financial Officer of Borrower.
"Revolving Maturity Date" means May 31, 2001.
"Revolving Facility" means the facility under which Borrower may
request Bank to make Advances, as specified in Section 2.1.1 hereof.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by a Borrower that is
subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank.
"Subsidiary" means any corporation, limited liability company or
partnership in which (i) any general partnership interest or (ii) more than 50%
of the equity of which by the terms thereof ordinary voting power to elect the
Board of Directors, managers or trustees of the entity shall, at the time as of
which any determination is being made, be owned by Borrower, either directly or
through one or more Subsidiaries.
"Term Facility" means the facility under which Borrower may
request Bank to make the Term Loan, as specified in Section 2.1.2 hereof.
"Term Loan" means the term loan in the amount of Five Million
Dollars ($5,000,000) pursuant to the provisions of Section 2.1.2.
"Term Maturity Date" means the earlier of (i) the date that is
thirty (30) months from the date of funding of the Term Loan or (ii) February
28, 2002.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks.
<PAGE>
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT.
2.1.1 REVOLVING ADVANCES.
(a) Subject to and upon the terms and conditions of this
Agreement, Borrower may request, and Bank agrees to make, Advances in an
aggregate outstanding amount not to exceed the Committed Revolving Line;
provided that any time the outstanding Advances exceed Five Million Dollars
($5,000,000), Borrower may request, and Bank agrees to make, Advances in an
aggregate outstanding amount not to exceed the lesser of the Committed
Revolving Line or the Borrowing Base; provided further, however, that from
and after the date that Borrower maintains a ratio of Senior Liabilities to
EBITDA of not more than 2.0 to 1.0 for two (2) consecutive fiscal quarters
(as such ratio is calculated under Section 6.13 hereof) and for so long as
Borrower remains in compliance with Sections 6.9 through 6.14 hereof,
Borrower may request, and Bank agrees to make, Advances, in an aggregate
amount not to exceed the Committed Revolving Line without reference to the
Borrowing Base. Subject to the terms and conditions of this Agreement,
amounts borrowed pursuant to this Section 2.1.1 may be repaid and reborrowed
at any time prior to the Revolving Maturity Date, at which time all Advances
under this Section 2.1.1 shall be immediately due and payable.
If at any time the availability of Advances hereunder is subject to the
Borrowing Base, the outstanding Advances under this Section 2.1.1 exceed the
lesser of the Borrowing Base or the Committed Revolving Line, Borrower shall
immediately pay Bank, in cash, the amount of such excess.
(b) Whenever Borrower desires an Advance, Borrower will
notify Bank by facsimile transmission or telephone no later than 11:00 a.m.
California time, on the Business Day that a Prime Rate Advance is to be made,
and 11:00 a.m. California time on the Business Day that is three (3) Business
Days prior to the Business Day on which a LIBOR Rate Advance is made. Each
such notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B-1 hereto. Bank is authorized to make
Advances under this Agreement, based upon instructions received from a
Responsible Officer or a designee of a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled
to rely on any telephonic notice given by a person who Bank reasonably
believes to be a Responsible Officer or a designee thereof, and Borrower
shall indemnify and hold Bank harmless for any damages or loss suffered by
Bank as a result of such reliance. Bank will credit the amount of Advances
made under this Section 2.1.1 to Borrower's deposit account, as specified by
such Borrower.
Each such notice shall specify:
(i) the date such Advance is to be made, which shall be a
Business Day;
(ii) the amount of such Advance;
(iii) whether such Advance is to be a Prime Rate Advance or
a LIBOR Rate Advance; and
(iv) if the Advance is to be a LIBOR Rate Advance, the
Interest Period for such Advance.
Each written request for an Advance, and each confirmation
of a telephone request for such an Advance, shall be in substantially the form
of EXHIBIT B-1 hereto executed by Borrower.
PRIME RATE ADVANCES. The outstanding principal balance of each Prime Rate
Advance shall bear interest until principal is due (computed daily on the basis
of a 360 day year and actual days elapsed), at a floating rate per annum equal
to the Prime Rate. Borrower shall pay the entire outstanding principal amount of
each Prime Rate Advance on the Revolving Maturity Date.
LIBOR RATE ADVANCES. Each LIBOR Rate Advance shall be in an amount of not less
than One Million Dollars ($1,000,000). The outstanding principal balance of each
LIBOR Rate Advance shall bear interest until principal is due (computed daily on
the basis of a 360 day year and actual
<PAGE>
days elapsed) at a rate per annum equal to the LIBOR Rate plus 200 basis points
for such LIBOR Rate Advance. The entire outstanding principal amount of each
LIBOR Rate Advance shall be due and payable on the earlier of (i) the last day
of the LIBOR Rate Interest Period for such LIBOR Rate Advance if not converted
or continued pursuant to Section 2.5(a), and (ii) on the Revolving Maturity
Date.
(e) PREPAYMENT OF THE ADVANCES. Borrower may at any time
prepay any Prime Rate Advance or any LIBOR Rate Advance, in full or in part.
Each partial prepayment for a LIBOR Rate Advance shall be in an amount not
less than One Hundred Thousand Dollars ($100,000). Each prepayment shall be
made upon the irrevocable written or telephone notice of Borrower received by
Bank not later than 10:00 a.m. California time on the date of the prepayment
of a Prime Rate Advance, and not less than three (3) Business Days prior to
the date of the prepayment of a LIBOR Rate Advance. The notice of prepayment
shall specify the date of the prepayment, the amount of the prepayment, and
the Advance or Advances prepaid. Each prepayment of a LIBOR Rate Advance
shall be accompanied by the payment of accrued interest on the amount prepaid
and any amount required by Section 2.6.
2.1.2 TERM LOAN.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make one term loan to Borrower by August 30, 1999
in an aggregate amount of Five Million Dollars ($5,000,000). The Term Loan
shall be payable in thirty (30) equal monthly installments in the amount of
One Hundred Sixty Six Thousand Six Hundred Sixty Seven Dollars ($166,667),
plus all accrued interest, beginning on the day one (1) month after funding
of the Term Loan, and continuing on the same day of each month thereafter
through the Term Loan Maturity Date, at which time all amounts due under this
Section 2.1.2 and any other amounts relating to the Term Loan shall be
immediately due and payable.
(b) When Borrower desires the Term Loan, Borrower will notify
Bank by facsimile transmission in the form of EXHIBIT B-1 hereto no later
than 11:00 a.m. California time on the Business Day that is three (3)
Business Days prior to the Business Day on which the Term Loan is to be made.
Bank will credit the amount of the Term Loan to Borrower's deposit account,
as specified by such Borrower.
The notice shall specify:
(i) the date the Term Loan is to be made, which shall be a
Business Day;
(ii) the portion of the Term Loan that is to be a Prime Rate
Extension and a LIBOR Rate Extension; and
(iii) if any portion of the Term Loan is to be a LIBOR Rate
Extension, the Interest Period for such LIBOR Rate Extension.
<PAGE>
(c) PRIME RATE EXTENSIONS. The outstanding principal balance
of each portion of the Term Loan that is a Prime Rate Extension shall bear
interest until principal is due (computed daily on the basis of a 360 day
year and actual days elapsed), at a floating rate per annum equal to the
Prime Rate.
(d) LIBOR RATE EXTENSIONS. Each LIBOR Rate Extension shall be
in an amount of not less than One Million Dollars ($1,000,000). The
outstanding principal balance of each portion of the Term Loan that is a
LIBOR Rate Extension shall bear interest until principal is due (computed
daily on the basis of a 360 day year and actual days elapsed) at a rate per
annum equal to the LIBOR Rate plus 225 basis points for such LIBOR Rate
Extension. The entire outstanding principal amount of each LIBOR Rate
Extension shall be due and payable on the earlier of (i) the last day of the
LIBOR Rate Interest Period for such LIBOR Rate Extension, if not converted or
continued pursuant to Section 2.5(a), and (ii) on the Term Maturity Date.
(e) PREPAYMENT OF THE TERM LOAN. Borrower may at any time
prepay any Prime Rate Extension or any LIBOR Rate Extension, in full or in
part. Each partial prepayment for a LIBOR Rate Extension shall be in an
amount not less than One Hundred Thousand Dollars ($100,000). Each prepayment
shall be made upon the irrevocable written or telephone notice of Borrower
received by Bank not later than 10:00 a.m. California time on the date of the
prepayment of a Prime Rate Extension, and not less than three (3) Business
Days prior to the date of the prepayment of a LIBOR Rate Extension. The
notice of prepayment shall specify the date of the prepayment, the amount of
the prepayment, and the Credit Extension or Credit Extensions prepaid. Each
prepayment of a LIBOR Rate Extension shall be accompanied by the payment of
accrued interest on the amount prepaid and any amount required by Section 2.6.
2.2. INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATES. Except as set forth in Section 2.2(b),
any Credit Extensions shall bear interest, on the average daily balance
thereof, at the rates specified in Sections 2.1.1 and 2.1.2 hereof.
(b) DEFAULT RATE. All Obligations shall bear interest after
notice from Bank of the imposition of such default rate, from and after the
occurrence and during the continuance of an Event of Default, at a rate equal
to three (3) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default.
(c) PAYMENTS. Accrued interest shall be due and payable in
arrears upon the earlier of (i) with respect to LIBOR Rate Extensions, the
end of the applicable Interest Period or (ii) with respect to LIBOR Rate
Extensions, any payment of principal or (iii) the last Business Day of each
calendar month. Bank shall automatically charge such interest and all
Periodic Payments against Borrower's deposit account held at Bank or against
the Committed Revolving Line, in which case those amounts shall thereafter
accrue interest at the rate then applicable hereunder. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable
hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of the day the Prime Rate is changed, by
an amount equal to such change in the Prime Rate. All interest chargeable
under the Loan Documents shall be computed on the basis of a three hundred
sixty (360) day year for the actual number of days elapsed.
2.3. CREDITING PAYMENTS. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer
of funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or
unless and until such check or other item of payment is honored when
presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by Bank after 2:00 p.m.
California time shall be deemed to have been received by Bank as of the
opening of business on the immediately following Business Day. Whenever any
payment to Bank under the Loan Documents would otherwise be due (except by
reason of acceleration) on a date that is not a Business Day, such payment
shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of
such extension.
2.4. FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEES. On account of the Revolving Facility,
Borrower shall pay to Bank a fee equal to 0.375 percent per annum of the
difference between the Revolving Committed Line and the average daily
outstanding
<PAGE>
balance in a fiscal quarter under the Revolving Committed Line, which fee shall
be payable within five (5) days of the last day of such fiscal quarter. On
account of the Term Facility, Borrower shall pay Bank a fee equal to Twenty Five
Thousand Dollars ($25,000), which fee shall be payable as a condition to
Borrower's requesting the Term Loan.
(b) BANK EXPENSES. On the Closing Date, an amount equal to
the Bank Expenses (including reasonable attorneys' fees and expenses)
incurred in connection with the preparation and negotiation of the Loan
Documents and, after the Closing date, all Bank Expenses, including
reasonable attorneys' fees and expenses incurred in the enforcement of this
Agreement, as and when they become due.
2.5. CONVERSION/CONTINUATION OF EXTENSIONS.
(a) Borrower may from time to time submit in writing a
request that Prime Rate Extensions be converted to LIBOR Rate Extensions or
that any existing LIBOR Rate Extensions continue for an additional Interest
Period. Such request shall specify the amount of the Prime Rate Extensions
which will constitute LIBOR Rate Extensions (subject to the limits set forth
below) and the Interest Period to be applicable to such LIBOR Rate
Extensions. Each written request for a conversion to a LIBOR Rate Extension
or a continuation of a LIBOR Rate Extension shall be substantially in the
form of a Libor Rate Conversion/Continuation Certificate as set forth on
EXHIBIT B-2, which shall be duly executed by a Responsible Officer. Subject
to the terms and conditions contained herein, three (3) Business Days after
Bank's receipt of such a request from Borrower, such Prime Rate Extensions
shall be converted to LIBOR Rate Extensions or such LIBOR Rate Extensions
shall continue, as the case may be provided that:
(i) no Event of Default or event which with notice or
passage of time or both would constitute an Event of Default exists;
(ii) no party hereto shall have sent any notice of
termination of the Agreement;
(iii) Borrower shall have complied with such reasonable
and customary procedures as Bank has established from time to time for
Borrower's requests for LIBOR Rate Extensions; and
(iv) the amount of a LIBOR Rate Extension shall be
$1,000,000 or such greater amount which is an integral multiple of $500,000.
Any request by Borrower to convert Prime Rate Extensions to LIBOR Rate
Extensions or continue any existing LIBOR Rate Extensions shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Bank shall not be
required to purchase United States Dollar deposits in the London interbank
market or other applicable LIBOR Rate market to fund any LIBOR Rate Extensions,
but the provisions hereof shall be deemed to apply as if Bank had purchased such
deposits to fund the LIBOR Rate Extensions.
<PAGE>
(b) Any LIBOR Rate Extensions shall automatically convert to
Prime Rate Extensions upon the last day of the applicable Interest Period,
unless Bank has received and approved a complete and proper request to
continue such LIBOR Rate Extension at least three (3) Business Days prior to
such last day in accordance with the terms hereof. Any LIBOR Rate Extensions
shall, at Bank's option, convert to Prime Rate Extensions on the last day of
the applicable Interest Period in the event that an Event of Default shall
exist.
2.6. ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR RATE EXTENSIONS.
(a) If for any reason (including voluntary or mandatory
prepayment or acceleration), Bank receives all or part of the principal
amount of a LIBOR Rate Extension prior to the last day of the Interest Period
for such LIBOR Rate Extension, Borrower shall on demand by Bank, pay Bank the
amount (if any) by which (i) the additional interest which would have been
payable on the amount so received had it not been received until the last day
of such Interest Period or term exceeds (ii) the interest which would have
been recoverable by Bank by placing the amount so received on deposit in the
London Dollar interbank markets for a period starting on the date on which it
was so received and ending on the last day of such Interest Period. Bank's
determination as to such amount shall be conclusive absent manifest error.
(b) Borrower shall pay to Bank, upon demand by Bank, from
time to time such amounts as Bank may reasonably determine to be necessary to
compensate it for any costs incurred by Bank that Bank determines are
attributable to its making or maintaining of any amount receivable by Bank
hereunder in respect of any Credit Extensions relating thereto (such
increases in costs and reductions in amounts receivable being herein called
"Additional Costs"), in each case resulting from any Regulatory Change that:
(i) changes the basis of taxation of any amounts
payable to Bank under this Agreement in respect of any Credit Extensions
(other than changes which affect taxes measured by or imposed on the overall
net income of Bank by the jurisdiction in which Bank has its principal office
or its lending office); or
(ii) imposes or modifies any reserve, special deposit or
similar requirements relating to any extensions of credit or other assets of,
or any deposits with or other liabilities of Bank (including any Credit
Extensions or any deposits referred to in the definition of "LIBOR Base Rate"
other than those reflected in the calculation of the Reserve Requirement); or
(iii) imposes any other material condition affecting this
Agreement (or any of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of the Agreement
that will entitle Bank to compensation pursuant to this section as promptly as
practicable after it obtains knowledge thereof and determines to request such
compensation; provided that Borrower shall not be liable for any Additional
Costs which relate to a period more than 90 days prior to the giving of such
notices by Bank. Bank will furnish Borrower with a statement setting forth the
basis and a reasonably detailed calculation of the amount of each request by
Bank for compensation under this Section 2.6. Determinations and allocations by
Bank for purposes of this Section 2.6 of the effect of any Regulatory Change on
its costs of maintaining its obligations to make Credit Extensions or of making
or maintaining Credit Extensions or on amounts receivable by it in respect of
Credit Extensions, and of the additional amounts required to compensate Bank in
respect of any Additional Costs, shall be conclusive absent manifest error.
(c) Borrower shall pay to Bank, upon the request of Bank,
such amount or amounts as shall be sufficient (in the sole good faith opinion
of Bank) to compensate it for any reasonable loss, costs or expense incurred
by it as a result of any failure by Borrower to borrow a LIBOR Rate Extension
on the date for such borrowing specified in the relevant notice of borrowing
hereunder.
(d) If Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty regarding
capital adequacy, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by Bank (or its applicable lending office) with any respect or
directive regarding capital adequacy (whether or not having the force of law)
of any such authority, central bank or comparable agency, has or would have
the effect of reducing the rate of return on capital of Bank or any person or
entity controlling Bank (a "Parent") as a consequence of its obligations
hereunder to a level below that which Bank (or its Parent) could have
achieved but for such adoption, change or compliance (taking into
consideration its policies with respect to capital adequacy) by an amount
deemed by Bank to be material, then from time to time, within 15 days after
demand by Bank, Borrower shall pay to Bank such additional amount or amounts
as will compensate Bank for such reduction, other than amounts which relate
to a period more than 90 days prior to the making of such demand by Bank. A
statement of Bank claiming
<PAGE>
compensation under this Section and setting forth the additional
amount or amounts to be paid to it hereunder shall be conclusive absent manifest
error.
(e) If at any time Bank, in its sole and absolute discretion,
determines that: (i) the amount of the LIBOR Rate Extensions for periods
equal to the corresponding Interest Periods or any other period are not
available to Bank in the offshore currency interbank markets, or (ii) the
LIBOR Rate does not accurately reflect the cost to Bank of lending the LIBOR
Rate Extension, then Bank shall promptly give notice thereof to Borrower, and
upon the giving of such notice Bank's obligation to make the LIBOR Rate
Extensions shall be suspended until such conditions no longer exist, unless
Bank and Borrower agree in writing to a different interest rate applicable to
LIBOR Rate Extensions. If it shall become unlawful for Bank to continue to
fund or maintain any LIBOR Rate Extensions, upon demand by Bank, Borrower
shall prepay the LIBOR Rate Extensions in full with accrued interest thereon
(including, without limitation, any amount payable in connection with such
prepayment pursuant to Section 2.6(a)).
2.7. TERM. This Agreement shall become effective on the Closing Date
and, subject to Section 12.7, shall continue in full force and effect for so
long as any Obligations are outstanding. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make Credit Extensions
under this Agreement immediately and without notice upon the occurrence and
during the continuance of an Event of Default. Notwithstanding termination,
Bank's Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.
3. CONDITIONS OF CREDIT EXTENSIONS.
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The obligation of
Bank to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory
to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) a financing statement (Form UCC-1);
(d) an intellectual property security agreement;
(e) an agreement to provide insurance;
(f) an audit of the Collateral of Borrower;
(g) landlord consents;
(h) an opinion of Borrower's counsel;
(i) and such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension,
is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1;
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Payment/Advance Form and on the effective date of each Credit Extension
as though made at and as of each such date, except those representations and
warranties that expressly relate to an earlier date, in which case such
representations and warranties shall be true and correct in all material
respects as of such earlier date, and no Event of Default shall have occurred
and be continuing, or would result from such Credit Extension. The making of
each Credit Extension shall be deemed to be a representation and warranty by
Borrower on the date of such Credit Extension as to the accuracy of the facts
referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
of its covenants and duties under the Loan Documents. Such security interest
shall constitute a valid, first priority security interest in the presently
existing Collateral, and will constitute a valid, first priority security
interest in Collateral acquired after the date hereof, subject to Permitted
Liens. Notwithstanding anything herein to the contrary, in no event shall the
Collateral include, and Borrower shall not be deemed to have granted a
security interest in (i) any of Borrower's rights or interests in any
license, contract or agreement to which Borrower is a party
<PAGE>
or any of its rights or interests thereunder to the extent, but only to the
extent, that such a grant would, under the terms of such license, contract or
agreement or otherwise, result in a breach of the terms of, or constitute a
default under any license, contract or agreement to which Borrower is a party
(other than to the extent that any such term would be rendered ineffective
pursuant to Section 9-318(4) of the Code or any other applicable law (including
the Bankruptcy Code) or principles of equity); PROVIDED that immediately upon
the ineffectiveness, lapse or termination of any such provision, the Collateral
shall include, and Borrower shall be deemed to have granted a security interest
in, all such rights and interests as if such provision had never been in effect.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees, or
agents) shall have the right at Borrower' expense (not to exceed $3,000 per
annum, as long as an Event of Default has not occurred and is continuing)
upon reasonable prior notice, from time to time during Borrower's usual
business hours, to inspect Borrower's Books and to make copies thereof and to
check, test, and audit and appraise the Collateral in order to verify
Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower is a corporation duly
existing under the laws of the State of Delaware and qualified and licensed
to do business in any state in which the conduct of its business or its
ownership of property requires that it be so qualified in which the failure
to so qualify could reasonably be expected to have a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Certificate of Incorporation or Bylaws, nor
will they constitute an event of default under any material agreement to
which Borrower is a party or by which Borrower is bound. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could reasonably be expected to have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and marketable title to the
Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ACCOUNTS. The Accounts are bona fide existing obligations.
The property giving rise to such Accounts has been delivered to the account
debtor or to the account debtor's agent for immediate shipment or downloading
to and unconditional acceptance (subject to warranties) by the account debtor.
5.5 MERCHANTABLE INVENTORY. All Inventory (except work-in-process) is in
all material respects of good and marketable quality, free from all material
defects, except for Inventory for which adequate reserves have been made.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in the
Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.7 INTELLECTUAL PROPERTY COLLATERAL. Borrower is the owner or licensee
of the Intellectual Property Collateral, except for non-exclusive licenses
granted by Borrower to its customers in the ordinary course of business. Each
of the Patents is valid and enforceable, and no part of the Intellectual
Property Collateral has been judged invalid or unenforceable, in whole or in
part, and to Borrower's knowledge, no claim has been made that any part of
the Intellectual Property Collateral violates the rights of any third party,
which violation could reasonably be expected to
<PAGE>
have a Material Adverse Effect. Except as set forth in the Schedule, no part of
the Intellectual Property Collateral is subject to any agreement restricting the
transfer thereof or the grant of a security interest therein. The Copyrights,
Patents and Trademarks listed on the Exhibits to the Intellectual Property
Security Agreement constitute all of the intellectual property necessary to
sell, license or distribute all of Borrower's products in the ordinary course of
business. The Schedule lists all of the material licenses, contracts and
agreements as to which Borrower's rights are excluded from the Collateral
pursuant to Section 4.1.
5.8 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
reasonably be expected to have a Material Adverse Effect or a material
adverse effect on Borrower's interest or Bank's security interest in the
Collateral. Borrower does not have knowledge of any such pending or
threatened actions or proceedings.
5.9 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated
financial statements related to Borrower and its Subsidiaries that are
delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended.
There has not been a material adverse change in the consolidated financial
condition of Borrower since the date of the most recent of such financial
statements submitted to Bank, other than as set forth in the Schedule.
5.10 SOLVENCY, PAYMENT OF DEBTS. Borrower is solvent and able to pay its
debts (including trade debts) as they mature.
5.11 REGULATORY COMPLIANCE. Borrower has met the minimum funding
requirements of ERISA with respect to any employee benefit plans subject to
ERISA. No event has occurred resulting from Borrower's failure to comply with
ERISA that is reasonably likely to result in Borrower's incurring any
liability that could have a Material Adverse Effect. Borrower is not an
"investment company" within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of any regulations promulgated
by the Board of Governors of the Federal Reserve System). Borrower has
complied with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable
to it, violation of which could reasonably be expected to have a Material
Adverse Effect.
5.12 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets
has ever been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators, in the disposal of, or to produce, store,
handle, treat, release, or transport, any hazardous waste or hazardous
substance other than in accordance with applicable law; to the best of
Borrower's knowledge, none of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site,
or a candidate for closure pursuant to any environmental protection statute;
no lien arising under any environmental protection statute has attached to
any revenues or to any real or personal property owned by Borrower; and
Borrower has not received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower resulting
in the releasing, or otherwise disposing of hazardous waste or hazardous
substances into the environment.
5.13 TAXES. Borrower has filed or caused to be filed all tax returns
required to be filed, and has paid, or has made adequate provision for the
payment of, all taxes reflected therein, except for taxes which are being
contested in good faith by appropriate proceedings and reserved against (to
the extent required by GAAP) by Borrower.
5.14 SUBSIDIARIES. Borrower does not own any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.15 GOVERNMENT CONSENTS. Borrower has obtained all material consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all governmental authorities that
<PAGE>
are necessary for the continued operation of Borrower's business as currently
conducted, the failure to obtain which could reasonably be expected to have a
Material Adverse Effect.
5.16 YEAR 2000. Borrower has reviewed the areas within its operations and
business which could be adversely affected by, and has developed or is
developing a program to address on a timely basis, the Year 2000 Problem.
Based on such review and program, the Year 2000 Problem is not expected to
have a Material Adverse Effect upon its financial condition, operations or
business as now conducted. "Year 2000 Problem" means the possibility that any
computer applications or equipment used by Borrower may be unable to
recognize and properly perform date sensitive functions involving certain
dates prior to and any dates on or after December 31, 1999.
5.17 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates
or statements not misleading.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its material
Subsidiaries' corporate existence in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so
qualify could reasonably by expected to have a Material Adverse Effect.
Borrower shall maintain, and shall cause each of its Subsidiaries to maintain
in force all licenses, approvals and agreements, the loss of which could
reasonably by expected to have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could reasonably by expected to have a Material Adverse Effect or a
material adverse effect on the Collateral or the priority of Bank's Lien on
the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver
to Bank: (a) as soon as available, but in any event within thirty (30) days
after the end of each month, company prepared consolidated and consolidating
income statements for Borrower covering its operations during such period, in
reasonable detail and in a form substantially similar to those delivered to
Bank prior to the Closing Date and certified by a Responsible Officer; (b) as
soon as available, but in any event within forty five (45) days after the end
of each fiscal quarter, a company prepared consolidated and consolidating
balance sheet, income statement and statement of cash flows for Borrower
covering its operations during such period in reasonable detail and in a form
substantially similar to those delivered to Bank prior to the Closing Date
and certified by a Responsible Officer; (c) as soon as available, but in any
event within ninety (90) days after the end of each fiscal year, audited
financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank (each of the "Big 5" accounting firms is acceptable),
which financial statements shall reflect no material adverse changes from the
financial statements prepared by Borrower and delivered to Bank; (d) as soon
as available, but in any event within five (5) days after filing, copies of
the reports filed by Borrower on Form 10-Q and 10-K with the Securities and
Exchange Commission; (e) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary
that could result in damages or costs to Borrower or any Subsidiary of Two
Hundred Fifty Thousand Dollars ($250,000) or more; (f) as soon as available,
but in any case within thirty (30) days after the first day of each fiscal
year, Borrower's business plan, including operating budget, for such year;
(g) within twenty-five (25) days of the last day of each fiscal quarter, a
report signed by Borrower, in form reasonably acceptable to Bank, listing any
applications or registrations that Borrower has
<PAGE>
made or filed in respect to any Patents, Copyrights or Trademarks and the status
of any outstanding applications or registrations, as well as any material change
in Borrower's intellectual property, including but not limited to any subsequent
ownership right of Borrower in or to any Trademark, Patent or Copyright not
specified in Exhibits A, B, and C of the Intellectual Property Security
Agreement delivered to Bank by Borrower in connection with this Agreement; and
(h) such budgets, sales projections, operating plans or other financial
information (including any filings, documents or reports submitted to the
Securities and Exchange Commission) regularly prepared by Borrower as Bank may
reasonably request from time to time. Borrower shall deliver to Bank with the
quarterly financial statements a Compliance Certificate signed by a Responsible
Officer in substantially the form of EXHIBIT D hereto. Within fifteen (15) days
of the last day of each month in which the Advances are subject under Section
2.1.1 to a Borrowing Base, Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of EXHIBIT
C hereto, together a company-prepared balance sheet covering Borrower's domestic
operations and agings of Borrower's accounts payable and accounts receivable, in
each case in form and substance reasonably satisfactory to Bank and certified by
a Responsible Officer.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects except for Inventory for
which adequate reserves have been made. Returns and allowances, if any, as
between Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than One
Hundred Thousand Dollars ($100,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to make,
due and timely payment or deposit of all material federal, state, and local
taxes, assessments, or contributions required of it by law, and will execute
and deliver to Bank, on demand, appropriate certificates attesting to the
payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments
and withholding taxes required of it by applicable laws, including, but not
limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Bank
with proof satisfactory to Bank indicating that Borrower or a Subsidiary has
made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is contested
in good faith by appropriate proceedings and is reserved against (to the
extent required by GAAP) by Borrower.
6.6 INSURANCE. Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to
Borrower's. All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Bank. All
such policies of property insurance shall contain a Bank's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional
loss payee thereof and all liability insurance policies shall show the Bank
as an additional insured, and shall specify that the insurer must give at
least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower shall deliver to Bank certified copies
of such policies of insurance and evidence of the payments of all premiums
therefor. After the occurrence and during the continuance of an Event of
Default, all proceeds payable under any such policy that are not used to
repair or replace the property insured shall, at the option of Bank, be
payable to Bank to be applied on account of the Obligations.
6.7 YEAR 2000 COMPLIANCE. Borrower shall perform all acts reasonably
necessary to ensure that Borrower and its Subsidiaries become Year 2000
Compliant in a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all Borrower's
<PAGE>
systems and adopting a detailed plan, with itemized budget, for the
remediation, monitoring and testing of such systems. As used in this
paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business operations or financial condition of such entity,
will properly perform date sensitive functions before, during and after the
year 2000. Borrower shall immediately upon request, provide to Bank such
certifications or other evidence of Borrower's compliance with the terms of
this paragraph as Bank may from time to time reasonably require.
6.8 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
(a) Borrower shall register or cause to be registered on an
expedited basis (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable, those intellectual property rights listed on Exhibits A, B and C
to the Intellectual Property Security Agreement delivered to Bank by Borrower
in connection with this Agreement within thirty (30) days of the date of this
Agreement. Borrower shall, on an expedited basis, register or cause to be
registered with the United States Patent and Trademark Office or the United
States Copyright Office, as applicable, and notify Bank of, all registerable
intellectual property rights which constitute or give rise to more than five
percent (5%) of Borrower's gross income in any given month which Borrower has
developed as of the date of this Agreement but heretofore failed to register
and give Bank notice thereof. Borrower shall register or cause to be
registered with the United States Patent and Trademark Office or the United
States Copyright Office, as applicable, and notify Bank of those additional
intellectual property rights which constitute or give rise to more than five
percent (5%) of Borrower's gross income in any given month which are
developed or acquired by Borrower from time to time in connection with any
product prior to the sale or licensing of such product to any third party and
prior to Borrower's use of such product (including without limitation major
revisions or additions to the intellectual property rights listed on such
Exhibits A, B and C) and shall give Bank notice thereof.
(b) Borrower shall execute and deliver such additional instruments
and documents from time to time as Bank shall reasonably request to perfect
Bank's security interest in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain the validity
and enforceability of the Trademarks, Patents and Copyrights, (ii) use its
best efforts to detect infringements of the Trademarks, Patents and
Copyrights and promptly advise Bank in writing of material infringements
detected and (iii) not allow any material Trademarks, Patents or Copyrights
to be abandoned, forfeited or dedicated to the public without the written
consent of Bank, which shall not be unreasonably withheld.
(d) Bank may audit Borrower's Intellectual Property Collateral to
confirm compliance with this Section 0, provided such audit may not occur
more often than once per year, unless an Event of Default has occurred and is
continuing. Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section 6.8 to take but which Borrower fails to take, after fifteen (15)
days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise
of its rights under this Section 6.8.
6.9 QUICK RATIO. Borrower shall maintain, as of the last day of each
fiscal quarter, a Quick Ratio of not less than 1.5 to 1.0. "Quick Ratio"
means the ratio of Quick Assets to Current Liabilities, excluding deferred
revenue, but including Advances under the Revolving Facility.
6.10 FIXED CHARGE COVERAGE RATIO. Beginning December 31, 1999, Borrower
shall maintain, as of the last day of each fiscal quarter, a Fixed Charge
Ratio of not less than 1.10 to 1.00. Beginning June 30, 2000, Borrower shall
maintain, as of the last day of each fiscal quarter, a Fixed Charge Ratio of
not less than 1.25 to 1.00. "Fixed Charge Ratio" means the ratio of (x)
earnings before interest, taxes, depreciation and amortization on a rolling
four quarters basis to (y) the amount of scheduled principal payments on the
current portion of long term debt (including scheduled principal payments
made on Subordinated Debt) plus interest, taxes, software capitalized and
capital expenditures (net of financing) during such rolling four quarters.
6.11 TOTAL LIABILITIES-EFFECTIVE TANGIBLE NET WORTH. Beginning March 31,
2000, Borrower shall maintain, as of the last day of each fiscal quarter, a
ratio of Total Liabilities less Subordinated Debt and deferred revenue to
Effective Tangible Net Worth of not more than 2.50 to 1.00.
6.12 PROFITABILITY. Borrower shall not suffer a loss in more than one
fiscal quarter during any fiscal year. Borrower shall be profitable before
and after taxes on an annual basis.
<PAGE>
6.13 SENIOR LIABILITIES-EBIDTA. Borrower shall maintain, as of the last
day of each fiscal quarter, a ratio of (i) Total Liabilities, excluding
deferred revenue and Subordinated Debt, to (ii) earnings before interest,
taxes, depreciation and amortization on a rolling four quarters basis of not
more than 4.5 to 1.0 as of June 30, 1999, not more than 3.25 to 1.0 as of
September 30, 1999, and not more than 2.0 to 1.0 as of December 31, 1999.
This Section 6.13 shall cease to be effective on March 31, 2000.
6.14 EFFECTIVE TANGIBLE NET WORTH. Borrower shall maintain a minimum
Effective Tangible Net Worth, as follows:
<TABLE>
<CAPTION>
Measurement Date Minimum Effective Tangible Net Worth
---------------- ------------------------------------
<S> <C>
June 30, 1999 $2,000,000
September 30, 1999 $6,500,000
December 31, 1999 and the end of $15,000,000 plus 75% of Borrower's net
each fiscal quarter thereafter income per quarter and 100% of the net
proceeds received from the sale or
issuance of equity securities.
</TABLE>
6.15 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further
action as may reasonably be requested by Bank to effect the purposes of this
Agreement.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Credit Extensions,
Borrower will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than: (i) Transfers of Inventory
in the ordinary course of business; (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment or Equipment no
longer useful in Borrower's or such Subsidiary's business; (iv) Transfers from
Borrower to its Subsidiaries with a value of up to $250,000 per annum; or (v)
Transfers from any Subsidiary to Borrower or any Subsidiary.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related
thereto (or incidental thereto), or suffer a Change in Control. Borrower will
not, without thirty (30) days prior written notification to Bank, relocate
its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all
or substantially all of the capital stock or property of another Person,
except for the acquisition of Computerized Structural Analysis & Research
Corporation in accordance with the terms of the agreement presented to Bank
prior to the Closing Date.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien with
respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any cash dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any
capital stock, or otherwise Transfer any assets to any Affiliates; provided
Borrower may repurchase stock from employees and former employees in
accordance with the terms of repurchase or similar agreements between
Borrower and such
<PAGE>
persons for so long as an Event of Default has not occurred and is continuing or
would not exist after giving effect to such repurchase.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's
business, upon fair and reasonable terms that are no less favorable to
Borrower than would be obtained in an arm's length transaction with a
nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, if an Event
of Default exists at the time of such payment or would exist after giving
effect to such payment, or make any payment on any Subordinated Debt except
in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 INVENTORY AND EQUIPMENT. Store the Inventory or Equipment with a
bailee, warehouseman, or similar party unless Bank has received a pledge of
the warehouse receipt covering such Inventory or Equipment. Except for that
sold in the ordinary course of business and except for such other locations
as Bank may approve in writing, Borrower shall keep the Inventory and
Equipment only at the location set forth in Section 10 hereof or Schedule
7.10 hereto, and such other locations of which Borrower gives Bank prior
written notice and as to which Borrower signs and files a financing statement
where needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" within the meaning of
the Investment Company Act of 1940, or become principally engaged in, or
undertake as one of its important activities, the business of extending
credit for the purpose of purchasing or carrying margin stock, or use the
proceeds of any Credit Extension for such purpose. Fail to meet the minimum
funding requirements of ERISA, permit a Prohibited Transaction, as defined in
ERISA, to occur, fail to comply with the Federal Fair Labor Standards Act or
violate any law or regulation, which violation could have a Material Adverse
Effect or a material adverse effect on the Collateral or the priority of
Bank's Lien on the Collateral, or permit any of its Subsidiaries to do any of
the foregoing.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or any
interest on, any Advances when due and payable; or fails to pay any of the
other Obligations not constituting principal or interest, (including without
limitation, Bank Expenses in accordance with the terms hereof) within thirty
(30) days of receipt by Borrower of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower violates any of the covenants
contained in Article 7 of this Agreement, or fails or neglects to perform,
keep, or observe any obligations under Article 6 or any other material term,
provision, condition, covenant, or agreement contained in this Agreement, in
any of the Loan Documents, or in any other present or future agreement
between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within twenty (20) days after Borrower receives notice
thereof or any officer of Borrower becomes aware thereof (provided that no
Credit Extensions will be required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a Material Adverse Effect,
or if Bank reasonably determines that Borrower is likely to fail to comply
with any of the financial covenants set forth in Sections 6.9 through 6.14 as
of the immediately ended quarter or the next occurring measurement date;
8.4 ATTACHMENT. If any portion of Borrower's assets with a value in
excess of $250,000 is attached, seized, subjected to a writ or distress
warrant, or is levied upon, or comes into the possession of any trustee,
receiver or person acting in a similar capacity and such attachment, seizure,
writ or
<PAGE>
distress warrant or levy has not been removed, discharged or rescinded within
thirty (30) days, or if Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any material part
of its business affairs, or if a judgment or other claim in excess of
$250,000 becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment in excess of
$250,000 is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within thirty (30) days after Borrower receives notice
thereof, provided that none of the foregoing shall constitute an Event of
Default where such action or event is stayed or an adequate bond has been
posted pending a good faith contest by Borrower (provided that no Credit
Extensions will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is
commenced against Borrower and is not dismissed or stayed within sixty (60)
days (provided that no Credit Extensions will be made prior to the dismissal
of such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of Indebtedness in an amount in excess of Five Hundred Thousand
Dollars ($500,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If a Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under this
Agreement;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money in an
amount, individually or in the aggregate, of at least Five Hundred Thousand
Dollars ($500,000) shall be rendered against a Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days (provided that no
Credit Extensions will be made prior to the satisfaction or stay of such
judgment);
8.9 MISREPRESENTATIONS. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set
forth herein or in any certificate delivered to Bank as of the date such
representation or warranty was made by any Responsible Officer pursuant to
this Agreement or to induce Bank to enter into this Agreement or any other
Loan Document.
9. BANK'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement, by
any of the other Loan Documents, or otherwise, immediately due and payable
(provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without
any action by Bank);
(b) Cease advancing money or extending credit to or for the benefit
of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Make such payments and do such acts as Bank considers necessary
or reasonable to protect its security interest in the Collateral. Borrower
agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Borrower authorizes Bank
to enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge, or lien which in Bank's
determination appears to be prior or superior to its security interest and to
pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter
into possession of such premises and to occupy the same, without charge, in
order to exercise any of Bank's rights or remedies provided herein, at law,
in equity, or otherwise;
(e) Set off and apply to the Obligations any and all (i) balances
and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing
to or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein)
the Collateral. Bank is hereby granted a license or other right, solely
pursuant
<PAGE>
to the provisions of this Section 9.1, to use, without charge, Borrower's
labels, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks, service marks, and advertising matter, or any property of a
similar nature, as it pertains to the Collateral, in completing production of,
advertising for sale, and selling any Collateral and, in connection with Bank's
exercise of its rights under this Section 9.1, Borrower's rights under all
licenses and all franchise agreements shall inure to Bank's benefit except to
the extent such license would result in a breach of such agreement;
(g) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the
Obligations in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Borrower hereby irrevocably appoints Bank (and
any of Bank's designated officers, or employees) as Borrower's true and
lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) if an Event
of Default has occurred and is continuing, endorse Borrower's name on any
checks or other forms of payment or security that may come into Bank's
possession; (c) if an Event of Default has occurred and is continuing, sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against account debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to account debtors; (d) if an Event of
Default has occurred and is continuing, dispose of any Collateral; (e) if an
Event of Default has occurred and is continuing, make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance;
and (f) if an Event of Default has occurred and is continuing, settle and
adjust disputes and claims respecting the accounts directly with account
debtors, for amounts and upon terms which Bank determines to be reasonable;
provided Bank may exercise such power of attorney to sign the name of
Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as
Borrower's attorney in fact, and each and every one of Bank's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. If an Event of Default has occurred and is
continuing, Bank may notify any Person owing funds to a Borrower of Bank's
security interest in such funds and verify the amount of such Account. After
the occurrence and during the continuance of an Event of Default, Borrower
shall collect all amounts owing to Borrower for Bank, receive in trust all
payments as Bank's trustee, and immediately deliver such payments to Bank in
their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 BANK EXPENSES. If a Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves
under the Revolving Facility as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so
paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided, and shall be secured by the Collateral. Any
payments made by Bank shall not constitute an agreement by Bank to make
similar payments in the future or a waiver by Bank of any Event of Default
under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. Except as provided under the Code,
Bank shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
<PAGE>
value thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other person whomsoever.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one
right or remedy shall be deemed an election, and no waiver by Bank of any
Event of Default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election, or acquiescence by it. No
waiver by Bank shall be effective unless made in a written document signed on
behalf of Bank and then shall be effective only in the specific instance and
for the specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of
any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be
liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower: MSC.Software Corporation
815 Colorado Boulevard
Los Angeles, CA 90041
Attn: Mr. Lou A. Greco
FAX: (323) 259-4969
If to Bank: Comerica Bank-California
10900 Wilshire Boulevard
Los Angeles, CA 90024
Attn: Mr. David Galst
FAX: (310) 824-6714
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Borrower and Bank hereby submit to the jurisdiction of the
state and Federal courts located in the County of Los Angeles and the County of
Santa Clara, State of California. BORROWER AND BANK HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS.
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank
shall have the
<PAGE>
right without the consent of or notice to Borrower to sell, transfer, negotiate,
or grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold harmless
Bank and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement; and (b) all
losses or Bank Expenses in any way suffered, incurred, or paid by Bank as a
result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities
described in Section 12.2 shall survive until all applicable statute of
limitations periods with respect to actions that may be brought against Bank
have run.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
MSC.SOFTWARE CORPORATION
By: /s/ Louis A. Greco
---------------------------------------
Title: Chief Financial Officer
-------------------------------------
COMERICA BANK-CALIFORNIA
By: /s/ David Galst
---------------------------------------
Title: Vice President
------------------------------------
<PAGE>
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) Any and all goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and
all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing, wherever located;
(b) Any and all inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing;
(c) Any and all contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications,
license agreements, franchise agreements, blueprints, drawings, purchase
orders, customer lists, route lists, infringements, claims, computer
programs, computer discs, computer tapes, literature, reports, catalogs,
design rights, income tax refunds, payments of insurance and rights to
payment of any kind, but excluding real estate leases;
(d) Any and all now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(e) Any and all documents, cash, deposit accounts, securities, financial
assets, securities entitlements, letters of credit, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing;
(f) Any and all copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter
acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now owned
or hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE>
EXHIBIT B-1
ADVANCE REQUEST FORM
The undersigned hereby certifies as follows:
I, ________________________, am the duly elected and acting _________________
of MSC.Software. This Advance Request Form is delivered on behalf of Borrower
to Comerica Bank-California, pursuant to that certain Loan and Security
Agreement between the undersigned and other Borrower and Comerica
Bank-California dated August 11, 1999 (the "Agreement"). The terms used
herein which are defined in the Agreement have the same meaning herein as
ascribed to them therein.
Borrower hereby requests on __________________, 19______ an Advance (the
"Advance") as follows:
(a) The date on which the Advance is to be made is _________,____.
(b) The amount of the Advance is to be ___________________
($____________), in the form of a Prime Rate Advance of $__________________;
and/or a LIBOR Rate Advance of $____________ for an Interest Period of
__________________ months.
All representations and warranties of Borrower and stated in the Agreement are
true and correct in all material respects as of the date of this request for an
Advance; provided, however, that those representations and warranties expressly
referring to another date shall be true and correct in all material respects as
of such date.
IN WITNESS WHEREOF, this Advance Request Form is executed by the undersigned as
of this ______ day of __________________, ______.
MSC.SOFTWARE CORPORATION
By:
---------------------------------------
Title:
------------------------------------
<PAGE>
EXHIBIT B-2
LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I, ____________________, am the duly elected and acting ____________________ of
MSC.Software ("Borrower").
This certificate is delivered on behalf of Borrower to Bank, pursuant to
Section 2 of that certain Loan and Security Agreement between the undersigned
and other Borrower and Bank (the "Agreement"). The terms used in this LIBOR
Rate Conversion/Continuation Certificate which are defined in the Agreement
have the same meaning herein as ascribed to them therein.
Borrower hereby requests on _________________, _______ a LIBOR Rate Extension
(the "Extension") as follows:
(a) ___ (i) A rate conversion of an existing Prime Rate
Extension from a Prime Rate Extension to a LIBOR Rate
Extension; or
___ (ii) A continuation of an existing LIBOR Rate Extension as a
LIBOR Rate Extension.
[CHECK (i) OR (ii) ABOVE]
(b) The date on which the Extension is to be made is
_____________________, ____
(c) The amount of the Extension is to be ___________________
($____________), for an Interest Period of ____________ month(s).
All representations and warranties of Borrower stated in the Agreement are
true and correct in all material respects as of the date of this request for
a loan; provided, however, that those representations and warranties
expressly referring to another date shall be true and correct in all material
respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate is
executed by the undersigned as of this _____________ day of____________________,
_____.
MSC.SOFTWARE CORPORATION
By:
---------------------------------------
Title:
------------------------------------
FOR INTERNAL BANK USE ONLY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
____%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Borrower: MSC.Software Corporation Bank: Comerica Bank- California
Commitment Amount: $15,000,000
- --------------------------------------------------------------------------------
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ___ $_________
2. Additions (please explain on reverse) $_________
3. TOTAL ACCOUNTS RECEIVABLE $_________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $_________
5. Balance of 25% over 90 day accounts $_________
6. Concentration Limits $_________
7. Foreign Accounts $_________
8. U.S. Governmental Accounts $_________
9. Contra Accounts $_________
10. Demo Accounts $_________
11. Intercompany/Employee Accounts $_________
12. Other (please explain on reverse) $_________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________
14. Eligible Accounts (#3 minus #13) $_________
15. LOAN VALUE OF ACCOUNTS (80% of #14) $_________
BALANCES
16. Maximum Loan Amount $_________
17. Total Funds Available (Lesser of #15 or $_________
#16)
18. Present balance owing on Line of Credit $_________
19. RESERVE POSITION (#17 minus #18) $_________
</TABLE>
THE UNDERSIGNED REPRESENTS AND WARRANTS THAT THE FOREGOING IS TRUE, COMPLETE AND
CORRECT, AND THAT THE INFORMATION REFLECTED IN THIS BORROWING BASE CERTIFICATE
COMPLIES WITH THE REPRESENTATIONS AND WARRANTIES SET FORTH IN THE LOAN AND
SECURITY AGREEMENT BETWEEN THE UNDERSIGNED AND COMERICA BANK-CALIFORNIA.
COMMENTS:
MSC.Software Corporation
By:
---------------------------------------
Authorized Signer
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: COMERICA BANK-CALIFORNIA
FROM: MSC.Software Corporation
The undersigned authorized officer, on behalf of MSC.Software Corporation hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending _________________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof; provided, however that those representations and
warranties expressly referring to another date shall be true and correct as of
such date. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly income statements Monthly within 30 Yes No
Quarterly balance sheet, income Quarterly within 45 Yes No
statement and statement of cash flows days
Annual (CPA Audited) FYE within 90 days Yes No
10K and 10Q Within 5 days Yes No
Domestic balance sheet, A/R & A/P Monthly within 15 Yes No
Agings days (when
applicable)
A/R Audit Initial and Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.50:1.00 _____:1.00 Yes No
Maximum Senior Liabilities-EBITDA 1 _____:1.0 Yes No
Maximum Debt-ETNW 2.50:1.00 2 _______ Yes No
Minimum Profitability $1.00 3 $_______ Yes No
Minimum Fixed Charge Coverage 1.10:1.00 4 _____:1.00 Yes No
Minimum Effective TNW 5
</TABLE>
1 4.5:1.0 on 6/30/99; 3.25:1.0 on 9/30/99; 2.0:1.0 on 12/31/99. Terminates on
3/31/2000.
2 Beginning March 31, 2000.
3 Profitable Annually; no more than 1 quarter of losses.
4 Beginning December 31, 1999 on Quarterly Basis, increasing to 1.25:1.00 as
of June 30, 2000 and thereafter.
5 $2,000,000 on 6/30/99; $6,500,000 on 9/30/99; $15,000,000 on 12/31/99 to be
increased by 75% of net income plus 100% of equity proceeds received
thereafter.
-----------------------------------
BANK USE ONLY
COMMENTS REGARDING EXCEPTIONS: See
Attached
Received by:
---------------------
Sincerely, AUTHORIZED SIGNER
- ----------------------------------- Date:
SIGNATURE ----------------------------
Verified:
- ----------------------------------- ------------------------
TITLE AUTHORIZED SIGNER
- ----------------------------------- Date:
DATE ----------------------------
Compliance Status: Yes No
-----------------------------------
<PAGE>
SCHEDULE OF EXCEPTIONS
<PAGE>
SCHEDULE 1.1a
PERMITTED INDEBTEDNESS
1. Notes Payable - Former Silverado Investors $ 300,000
2. Notes Payable - Former Marc Investors $ 14,300,000
3. 7 Convertible Subordinated Debentures due 2004 $ 58,556,271
4. Company intends to issue additional 7 Convertible $ 7,943,729 Subordinated
Debentures due 2004
<PAGE>
SCHEDULE 1.1b
PERMITTED INVESTMENTS
1. Union Bank of California N.A.
Business Trust Division
HighMark Money Market - U.S. Government Obligation Funds
2. Salomon Smith Barney
Money Market Account
<PAGE>
SCHEDULE 1.1c
PERMITTED LIENS
1. Financing Statement 97462988 filed with the Office of the Secretary of State
of Massachusetts on April 22, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett Packard Company Finance & Remark as secured
party.
2. Financing Statement 99608248 filed with the Office of the Secretary of State
of Massachusetts on February 4, 1999, disclosing The MacNeal-Schwendler
Corporation as debtor and Leasetec Systems Credit as secured party.
3. Financing Statement 9521460830 filed with the Office of the Secretary of
State of California on July 31, 1995, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company as secured party (expires July
31, 2000).
4. Financing Statement 9711360309 filed with the Office of the Secretary of
State of California on April 21, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on April 22, 2002).
5. Financing Statement 9711360313 filed with the Office of the Secretary of
State of California on April 21, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on April 22, 2002).
6. Financing Statement 9711360385 filed with the Office of the Secretary of
State of California on April 21, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on April 22, 2002).
7. Financing Statement 9711360193 filed with the Office of the Secretary of
State of California on April 24, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on April 24, 2002).
8. Financing Statement 9717160276 filed with the Office of the Secretary of
State of California on July 17, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 17, 2002).
9. Financing Statement 97121760428 filed with the Office of the Secretary of
State of California on July 29, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 29, 2002).
<PAGE>
10. Financing Statement 9726160456 filed with the Office of the Secretary of
State of California on September 15, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on September 16, 2002).
11. Financing Statement 9728960847 filed with the Office of the Secretary of
State of California on October 10, 1997, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on October 10, 2002).
12. Financing Statement 9809860722 filed with the Office of the Secretary of
State of California on April 8, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on April 8, 2003).
13. Financing Statement 9818460520 filed with the Office of the Secretary of
State of California on July 1, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 1, 2003).
14. Financing Statement 9819660362 filed with the Office of the Secretary of
State of California on July 13, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 13, 2003).
15. Financing Statement 9821161157 filed with the Office of the Secretary of
State of California on July 29, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 29, 2003).
16. Financing Statement 9821161200 filed with the Office of the Secretary of
State of California on July 29, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 29, 2003).
17. Financing Statement 9821161209 filed with the Office of the Secretary of
State of California on July 29, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 29, 2003).
18. Financing Statement 9821161216 filed with the Office of the Secretary of
State of California on July 29, 1998, disclosing The MacNeal-Schwendler
Corporation as debtor and Hewlett-Packard Company Finance & Remark as secured
party (expires on July 29, 2003).
<PAGE>
19. Filing Number D262580 filed with the Office of the Secretary of State of
Michigan on July 29, 1997, disclosing The MacNeal-Schwendler Corporation as
debtor and Hewlett-Packard Co. as secured party.
20. Filing Number D279629 filed with the Office of the Secretary of State of
Michigan on September 15, 1997, disclosing The MacNeal-Schwendler Corporation as
debtor and Hewlett-Packard Co. as secured party.
21. Filing Number D392960 filed with the Office of the Secretary of State of
Michigan on July 1, 1998, disclosing The MacNeal-Schwendler Corporation as
debtor and Hewlett-Packard Co. as secured party.
<PAGE>
SCHEDULE 5.6
NAMES
1. The MacNeal-Schwendler Corporation
<PAGE>
SCHEDULE 5.7
INTELLECTUAL PROPERTY
MSC has license agreements (for components of MSC/NASTRAN, MSC/PATRAN,
MSC/DYTRAN and MSC/INVISION) with the following third parties:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
THIRD PARTY CONTRACT BEGIN DATE LICENSED PRODUCT(S)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Apple Computer 11/03/98 QuickTime (on-line documentation)
- -----------------------------------------------------------------------------------------------
AEA (Harwell Laboratories) 11/18/89 Math Kernels (MSC/NASTRAN only)
- -----------------------------------------------------------------------------------------------
Advanced Visual Systems 10/02/97 AVS/Express
- -----------------------------------------------------------------------------------------------
Adobe Technology 11/24/97 FrameMaker, Frame Viewer
- -----------------------------------------------------------------------------------------------
Adobe Software 11/24/98 Adobe Fonts (on-line documentation)
- -----------------------------------------------------------------------------------------------
Automotive Analytics, Inc. 01/02/97 TED
- -----------------------------------------------------------------------------------------------
Battelle Memorial 08/30/90 MIL-KDBK-5 databanks
- -----------------------------------------------------------------------------------------------
BEQE Ltd. 09/01/91 PAT/DYNA
- -----------------------------------------------------------------------------------------------
Blue Ridge Numerics 04/19/96 CF Design
- -----------------------------------------------------------------------------------------------
The Boeing Company 08/08/97 BCSLIB_EXT
- -----------------------------------------------------------------------------------------------
The Boeing Company 09/17/97 A502
- -----------------------------------------------------------------------------------------------
CADSI 06/27/91 DADS
- -----------------------------------------------------------------------------------------------
Cimplex 11/12/90 2 D Variational Curve Editor
- -----------------------------------------------------------------------------------------------
Computer Generation Int'l 02/18/97 HView Widget Package
- -----------------------------------------------------------------------------------------------
Computervision 06/30/92 CV-DORS
- -----------------------------------------------------------------------------------------------
Dassault Systemes 10/11/91 CATEXpres and CATIA
- -----------------------------------------------------------------------------------------------
DataFocus, Inc. 12/22/95 NuTCRACKER
- -----------------------------------------------------------------------------------------------
Enterprise Software, Inc. 08/04/86 FEMAP
- -----------------------------------------------------------------------------------------------
FE Design 11/02/97 Shape & Topology
- -----------------------------------------------------------------------------------------------
Globetrotter 05/17/94 FLEXlm
- -----------------------------------------------------------------------------------------------
Geometric Software Services 03/27/98 AFR
- -----------------------------------------------------------------------------------------------
Geometric Software Services 11/30/97 PARACIS LIB
- -----------------------------------------------------------------------------------------------
Harrow Software 06/30/96 Formula Graphics
- -----------------------------------------------------------------------------------------------
Hibbitt, Karlssen & Sorenson 10/02/92 ABAQUS
- -----------------------------------------------------------------------------------------------
Hummingbird 08/01/98 EXCEED
- -----------------------------------------------------------------------------------------------
IBM 03/10/93 ILU-Preconditioners
- -----------------------------------------------------------------------------------------------
Information Indexing 03/31/95 CenBASE/Materials
- -----------------------------------------------------------------------------------------------
INRIA 01/14/98 GHS3D
- -----------------------------------------------------------------------------------------------
Inprise (aka: Borland) 06/20/90 Interbase Runtime Software
- -----------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
INTECO 05/23/95 Library B (Interative Solvers)
- -----------------------------------------------------------------------------------------------
Intelligent Light 0228/91 DAA
- -----------------------------------------------------------------------------------------------
Interleaf 09/13/93 WorldView
- -----------------------------------------------------------------------------------------------
Intergraph 08/17/98 OLE for D&M (patent license)
- -----------------------------------------------------------------------------------------------
ITI 01/01/94 Step AP203
- -----------------------------------------------------------------------------------------------
KL Group 12/07/97 Electra Chart Runtime Libraries
- -----------------------------------------------------------------------------------------------
John Klintworth 11/30/93 Laminate Modeler
- -----------------------------------------------------------------------------------------------
Materials Sciences Corp. 09/15/94 MIL-HDBK-17 databanks
- -----------------------------------------------------------------------------------------------
McIntosh Structural Dynamics 05/01/97 N5KQ
- -----------------------------------------------------------------------------------------------
MDI 05/30/86 ADAM-KINESTATOCS
- -----------------------------------------------------------------------------------------------
Moldflow Corp. 04/12/94 MoldFlow Interface Modules
- -----------------------------------------------------------------------------------------------
NASA 05/xx/73 NASTRAN
- -----------------------------------------------------------------------------------------------
nCode 08/16/94 FE-Fatigue
- -----------------------------------------------------------------------------------------------
NewCode 10/10/94 Memory Tuning System
- -----------------------------------------------------------------------------------------------
Open Software Foundation 08/24/89 OSF/Motif and various shareware
packages
- -----------------------------------------------------------------------------------------------
Ove Arup & Partners 02/29/96 DCODE
- -----------------------------------------------------------------------------------------------
Penton Publishing 10/31/94 Materials Selector
- -----------------------------------------------------------------------------------------------
Phar Lap Software 04/18/88 Runtime libraries
- -----------------------------------------------------------------------------------------------
PKWare 01/11/95 PKSFX
- -----------------------------------------------------------------------------------------------
Samtech 03/22/93 SAMCEF Interface
- -----------------------------------------------------------------------------------------------
Samtech 08/22/93 MECANO
- -----------------------------------------------------------------------------------------------
SCO (Santa Cruz Operations) 03/11/98 SCO/XENIX
- -----------------------------------------------------------------------------------------------
SFE GmbH 05/11/98 AKUSMOD
- -----------------------------------------------------------------------------------------------
STI 05/09/94 Space Ware IMC
- -----------------------------------------------------------------------------------------------
Spatial Technologies 03/21/95 ACIS (3D Toolkit)
- -----------------------------------------------------------------------------------------------
Unigraphics Corp. 02/22/90 PARASOLID
- -----------------------------------------------------------------------------------------------
Unigraphics Corp. 08/xx/99 Open Toolkit
- -----------------------------------------------------------------------------------------------
VR&D 11/01/88 DOT
- -----------------------------------------------------------------------------------------------
UDRI 09/13/90 AFML-TR-77-151, AFWAL-7R-81-4172
- -----------------------------------------------------------------------------------------------
University of Minnesota 12/31/97 METIS
- -----------------------------------------------------------------------------------------------
Visual Kinematics 0226/91 FOCUS and Vistools
- -----------------------------------------------------------------------------------------------
William Andrew, Inc. 02/28/94 Plastics Materials Properties Databanks
- -----------------------------------------------------------------------------------------------
ZONA Technology 01/17/91 ZONA 51
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- - MSC cannot grant a security interest in the above products, but the
majority of the agreements are transferable with the consent of licensee,
which shall not be unreasonably withheld.
- - MSC's hardware partners provide MSC with loaner equipment and software for
use in development and support activities. Title to this equipment and
software remains with the partner.
- - MSC products will contain run-time library codes, belonging to the hardware
platform manufacturers, if required for operation on the given computer
system. All such codes remain the property of the hardware manufacturer.
<PAGE>
SCHEDULE 5.8
LITIGATION
NONE
<PAGE>
SCHEDULE 5.9
MATERIAL ADVERSE CHANGE
IN FINANCIAL STATEMENTS
NONE
<PAGE>
SCHEDULE 7.10
LOCATIONS OF INVENTORY
AND EQUIPMENT
MSC.Software Corporation
90000 Chelmsford Street
Lowell, MA 01851
MSC.Software Corporation
2975 Redhill Avenue
Costa Mesa, CA 92626
MSC.Software Corporation
26899 Northwestern #400
Southfield, MI 48037
<PAGE>
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of August
11, 1999 by and between Comerica Bank-California ("Bank") and MSC.Software
Corporation., a Delaware corporation ("Grantor").
RECITALS
A. Bank has agreed to make certain advances of money and to extend certain
other financial accommodation to Grantor (the "Loans") in the amounts and manner
set forth in that certain Loan and Security Agreement by and between Bank and
Grantor (as the same may be amended, modified or supplemented from time to time,
the "Loan Agreement"; capitalized terms used herein are used as defined in the
Loan Agreement). Bank is willing to make the Loans to Grantor, but only upon the
condition, among others, that Grantor shall grant to Bank a security interest in
certain Copyrights, Trademarks and Patents to secure the obligations of Grantor
under the Loan Agreement.
B. Pursuant to the terms of the Loan Agreement, Grantor has granted to Bank
a security interest in all of Grantor's right, title and interest, whether
presently existing or hereafter acquired, in, to and under all of the
Collateral.
NOW, THEREFORE, Grantor agrees as follows:
AGREEMENT
To secure its obligations under the Loan Agreement and other obligations
owing to Bank from time to time, Grantor grants and pledges to Bank a security
interest in all of Grantor's right, title and interest in, to and under certain
property (including without limitation those Copyrights, Patents and Trademarks
listed on Schedules A, B and C hereto), and including without limitation all
proceeds thereof (such as, by way of example but not by way of limitation,
license royalties and proceeds of infringement suits), the right to sue for
past, present and future infringements, all rights corresponding thereto
throughout the world and all re-issues, divisions continuations, renewals,
extensions and continuations-in-part thereof (the "Intellectual Property
Collateral").
This security interest is granted in conjunction with the security interest
granted to Bank under the Loan Agreement. The rights and remedies of Bank with
respect to the security interest granted hereby are in addition to those set
forth in the Loan Agreement and the other Loan Documents, and those which are
now or hereafter available to Bank as a matter of law or equity. Each right,
power and remedy of Bank provided for herein or in the Loan Agreement or any of
the Loan Documents, or now or hereafter existing at law or in equity shall be
cumulative and concurrent and shall be in addition to every right, power or
remedy provided for herein and the exercise by Bank of any one or more of the
rights, powers or remedies provided for in this Intellectual Property Security
Agreement, the Loan Agreement or any of the other Loan Documents, or now or
hereafter existing at law or in equity, shall not preclude the simultaneous or
later exercise by any person, including Bank, of any or all other rights, powers
or remedies.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
ADDRESS OF GRANTOR: MSC.SOFTWARE CORPORATION
815 Colorado Blvd.
Los Angeles, CA 90041 By: /s/ Louis A. Greco
------------------
Attn: Mr. Lou Greco Title: Chief Financial Officer
-----------------------
BANK:
ADDRESS OF BANK: COMERICA BANK-CALIFORNIA
10900 Wilshire Blvd.
Los Angeles, CA 90024 By: /s/ David Galst
---------------
Attn: Mr. David Galst Title: Vice President
--------------
<PAGE>
EXHIBIT A
Copyrights
MSC.Software Corporation has copyright applications pending for the following
products:
MSC/NASTRAN
MSC/PATRAN
MSC/DYTRAN
MSC/MVISION
MSC.Software Corporation has the following copyrights registered with the United
States Copyright Office:
<TABLE>
<CAPTION>
Title of Work: Number
<S> <C>
MSC/NASTRAN Numerical Methods User's Guide TX-4-122-699
Version 68
MSC/NASTRAN Release Notes TX 4-086-208
Version 68
MSC/CASE TX 1 678 211
NVH_Manager TXu 672-362
SubSystem - Modeler; SubSystem - Template TXu 670-776
The MacNeal-Schwendler Corporation: TX - 2 332 521
The First Twenty Years
PROBE: A computer Implementation of the p-Version TXu 196-340
of the Finite Element Method
MACE TX 1 752 523
MSC/mod TX 2 353 128
MSC/CASE TX 1 678 211
MSC/CAL TX 2 132 881
MSC/CEL TX 2-422-984
MSC/AutoFEM TX 1 974 358
PISCES ELK Program, User Manuals TX 2 066 001
ADCAD2 User's Manual TX 2 399 000
<PAGE>
<CAPTION>
MSC/NASTRAN Common Questions and Answers TX 4-026-594
Second Edition, Version 68
MSC/NASTRAN: Common Questions & Answers TX 3-838-796
For Version 67.5
MSC/NASTRAN Bibliography Second Edition TX 4-046-273
MSC/NASTRAN Bibliography TX 3-838-795
MSC/NASTRAN Geometry Evaluator TX 4-119-779
Developer's Guide
MSC/Nastran Aerolastic Analysis User's Guide, TX 3-662-961
version 68
MSC/NASTRAN Design Sensitivity and Optimization TX 4-018-132
User's Guide, Version 68
User's Guide: MSC/NASTRAN Design Sensitivity TX 3-838-793
and Optimization (V.67)
Handbook for Structural Optimization TX 3 641 824
(MSC/NASTRAN V.66)
User's Guide: MSC/NASTRAN Numerical Methods TX 3-838-789
(V.67)
Handbook for Numerical Methods TX 3 641 825
(MSC/NASTRAN V.65)
MSC/NASTRAN DMAP Module Dictionary TX 4-122-074
Version 68
Handbook for Non-Linear Analysis TX 3-838-843
(Based on Version 67)
Getting Started with MSC/NASTRAN User's Guide TX 3-852-596
Users Manual - MSC/NASTRAN Version 67 TX 3 663 368
Users Manual (MSC/NASTRAN V.66) TX 3 682 218
MSC/NASTRAN Users Manual TX 3-685-660
(MSC/NASTRAN V. 66A) Vol. 1
MSC/NASTRAN Handbook for Superelement Analysis TX 2-384-134
MSC/NASTRAN Aeroelastic Supplement TX 2 392 005
<PAGE>
<CAPTION>
MSC/NASTRAN Linear Static Analysis User's Guide TX 4-122-747
Version 68
MSC/NASTRAN Handbook for Linear Analysis TX 2-443-605
MSC/NASTRAN Handbook for Dynamic Analysis TX 2 326 640
MSC/NASTRAN Thermal Analysis User's Guide TX 4-121-462
Version 68
MSC/NASTRAN Handbook for Thermal Analysis TX 2 326 641
Introduction to MSC/NASTRAN Version 67 TX 3 730 982
Introduction to Finite Element Analysis TXu 230 999
and Nastran Utilization
MSC/NASTRAN Installation and Operation X 4-085-401
Instructions SUN (Solaris) Version 68
MSC/NASTRAN Installation and Operation TX 4-085-400
Instructions CRAY (UNICOS)
MSC/NASTRAN Installation and Operation TX 4-119-490
Instructions CONVEX (ConvexOS) Version 68
MSC/NASTRAN Installation and Operation TX 4-119-491
Instructions HP 9000 (HP-UX) Version 68
MSC/NASTRAN Installation and Operation TX 4-119-494
Instructions IBM RISC System/6000 V. 68
MSC/NASTRAN Installation and Operation TX 4-119-492
Instructions SUN (SunOS) Version 68
MSC/NASTRAN Installation and Operation TX 4-119-495
MSC/NASTRAN Installation and Operation TX 4-119-496
Instructions Digital Alpha (OSF/1) Version 68
MSC/NASTRAN Application Manual, Sections 7.6 TX 4-112-410
& 7.7 Intel 386/486 (SCO UNIX) Version 67.5
MSC/NASTRAN Application Manual, Sections 7.6 TX 4-095-550
& 7.7 HITACHI (HI-OSF/1-MJ) Version 67.5
MSC/NASTRAN Release Notes for Version 67.5 TX 3 641 823
MSC/NSTRAN V. 67.5 TX 3 641 821
Installation Procedure for Convex
<PAGE>
<CAPTION>
MSC/NASTRAN V. 67.5 TX 3 679 607
Installation Procedure for CRAY (UNICOS)
MSC/NASTRAN V. 67.5 TX 3-838-792
Installation Procedure for DEC VAX (VMS)
MSC/NASTRAN V. 67R2 TX 3-838-790
MSC/NASTRAN V. 67.5 TX 3-838-794
Installation procedure for HP9000 (HP-UX)
MSC/NASTRAN, V. 67.5 TX 3 641 822
Installation Procedure for IBM RISC System 6000
MSC/NASTRAN V. 67.5 TX 3 679 606
Installation Procedure for IBM (MVS/XA)
MSC/NASTRAN V. 67.5 TX 3-838-791
Installation Procedure for SGI (IRIX)
MSC/NASTRAN V. 67.5 TX 3 679 608
Installation Procedure for Sun
MSR-48 MSGMESH USER'S GUIDE A 791247
MSC/NASTRAN APPLICATION MANUAL A 404717
[MSR-35, Jerrard A. Joseph,
Editor, November 1972]
MSC/NASTRAN APPLICATION MANUAL A 550535
MSR-35 Update Documentation,
Edition 73.1-C, 3/20/73
MSC/NASTRAN APPLICATION MANUAL A 550534
MSR-35 Update Documentation,
Edition 73.2-C, 5/1/73
MSC/NASTRAN APPLICATION MANUAL A 550533
MSR-35 Update Documentation,
Edition 73.3-C, 7/1/73
MSC/NSTRAN APPLICATION MANUAL A 550532
MSR-35 Update Documentation,
Edition 73.4-C, 8/1/73
MSC/NASTRAN APPLICATION MANUAL A 550531
MSR-35 Update Documentation,
Edition 73.5-C, 9/1/73
MSC/NASTRAN APPLICATION MANUAL A 550536
MSR-35 Update Documentation,
Edition 73.6-I, 10/10/73
<PAGE>
<CAPTION>
MSC/NASTRAN APPLICATION MANUAL A 550537
MSR-35 Update Documentation,
Edition 73.1-I, 3/20/73
MSC/NASTRAN APPLICATION MANUAL A 550538
MSR-35 Update Documentation,
Edition 73.5-I, 9/1/73
MSC/NASTRAN APPLICATION MANUAL A 550539
MSC/NASTRAN APPLICATION MANUAL A 550540
MSR-35 Update Documentation,
Edition 73.3-I, 7/1/73
MSC/NSTRAN APPLICATION MANUAL A 550541
MSR-35 Update Documentation,
Edition 73.2-I, 5/1/73
MSC/NASTRAN APPLICATION MANUAL A 550542
MSR-35 Update Documentation,
Edition 73.6-C 10/10/73
MSC/NASTRAN APPLICATION MANUAL FOR A 657365
UNIVAC 1100 SERIES
MSR-35 January 1974
MSC/CDC NASTRAN APPLICATION MANUAL A 657366
Update Documentation 74.5 9/1/74
MSC/CDC NASTRAN APPLICATION MANUAL A 657367
Update Documentation 74.4 6/20/74
MSC/CDC NASTRAN APPLICATION MANUAL A 657368
Update Documentation 74.3 4/20/74
MSC/NASTRAN APPLICATION MANUAL A 657369
Update Documentation 74.2-C 3/10/74
MSC/NASTRAN APPLICATION MANUAL A 657370
Update Documentation 74.1-C 1/10/74
MSC/IBM NASTRAN APPLICATION MANUAL A 657371
Update Documentation 74.5 9/1/74
MSC/IBM NASTRAN APPLICATION MANUAL A 657372
Update Documentation 74.4 6/20/74
MSC/IBM NASTRAN APPLICATION MANUAL A 657373
Update Documentation 74.3 4/20/74
<PAGE>
<CAPTION>
MSC/NASTRAN APPLICATION MANUAL A 657374
Update Documentation 74.2-I 3/10/74
MSC/NASTRAN APPLICATION MANUAL A 657375
Update Documentation 74.1-I 1/10/74
MSC/UNIVAC NASTRAN APPLICATION A 657376
MANUAL
Update Documentation 74.5 9/1/74
MSC/UNIVAC NASTRAN APPLICATION A 657577
MANUAL
Update Documentation 74.4 6/20/74
MSC/UNIVAC NASTRAN APPLICATION A 657378
MANUAL
Update Documentation 74.3 4/20/74
MSC/NASTRAN APPLICATION MANUAL A657379
MANUAL
Update Documentation 74.2-U 3/10/74
MSC/UNIVAC NASTRAN APPLICATION A 767282
MANUAL
{Update Documentation 75.1]
MSC/UNIVAC NASTRAN APPLICATION A 791243
MANUAL - 1975 Update Series
[Update Documentation 75.2]
MSC/IBM NASTRAN APPLICATION MANUAL A 791244
Update Series
[Update Documentation 75.2]
MSC/IBM NASTRAN APPLICATION MANUAL A 791245
Update Series
[Update Documentation 75.1]
MSC/CDC NASTRAN APPLICATION MANUAL A 791246
Update Series
[Update Documentation 75.1]
MSC/CDC 7600 NASTRAN APPLICATION A 791248
MANUAL - 1975 Update Series
MSC/CDC/6000 NASTRAN APPLICATION A 791249
MANUAL - 1975 Update Series
[Update Documentation 75-2]
<PAGE>
<CAPTION>
MSC/NSTRAN APPLICATION MANUAL A 792761
FOR CDC 7000 SERIES
MSC/XL Users Manual (Version 2.0) TX 3-848-552
MSC/XL Users Manual Version 1 TX 3 658 655
Concept Solids, Version 4.0.1 TX 3 402 882
MSC/WORLD TX 4-096-538
Version 2
MSC/WORLD TX4-087-159
Version 1
MSC/WORLD TX 4-096-537
Volume IV
MSC/WORLD TX 4-087-167
Volume IV2
MSC/WORLD TX 3-797-302
Volume IV1
MSC/WORLD X 3 674 930
Volume III #3
MSC/WORLD TX 3 674 928
Volume III #2
MSC/WORLD TX 3 674 765
Volume III #1
MSC/WORLD TX 3 674 767
Volume II #2
MSC/WORLD TX 3 674 766
Volume II #1
MSC/WORLD TX 3 674 931
Volume 1 #2
MSC/WORLD TX 3 674 929
MSC/MATE TX 1 701 129
MSC/pal 2 TX 1 715 660
</TABLE>
<PAGE>
EXHIBIT B
Patents
MSC.Software Corporation has a patent application pending for Distributed
Application Queuing Service Method and Application.
PDA Engineering, Inc. has filed a transfer application to assign seven patents
to MSC.Software Corporation, a copy of the application is attached hereto.
<PAGE>
EXHIBIT C
Trademarks
MSC.Software Corporation has the following trademarks:
<TABLE>
<CAPTION>
Name Class Registration Number Registration Date
<S> <C> <C> <C>
EU
NASTRAN 09, 16, 42 000184085 April 1, 1996
DYTRAN 09, 16, 42 000184044 April 1, 1996
PATRAN 09, 16, 42 000184143 April 1, 1996
MSC/NASTRAN 09, 16, 42 000190777 April 3, 1996
MSC 09, 16, 42 000183947 April 1, 1996
Benelux
DYTRAN 09 577807 May 24, 1995
NASTRAN 09 577809 May 24, 1995
MSC 09 497449 June 5, 1991
France
MSC 09, 16 1704054 June 19, 1991
NASTRAN 09 95/573020 May 24, 1995
MSC/DYTRAN 09, 16 95/401110 Jan. 14, 1992
Germany
MSC 09 395,21,871 Sept. 23, 1997
MSC/DYTRAN 09, 16 204687 July 19, 1993
MSC/NASTRAN 09, 16 2040688 July 19, 1993
Russian Federation
MSC/MVISION 09 171998 Dec. 26, 1996
MSC/NASTRAN 09 166397 Dec. 26, 1996
Australia
MSC 16 559782 July 16, 1991
MSC 09 559781 July 16, 1991
Canada
MSC 09, 16, 42 319,655 Oct. 17, 1986
Ireland
MSC 09 172678 May 24, 1995
U. K.
MSC 09 1303974 March 14, 1987
MSC 16 1303976 March 14, 1987
<PAGE>
<CAPTION>
MSC 35 1303977 March 14, 1987
MSC 41 1303978 March 14, 1987
MSC 42 1303979 March 14, 1987
<PAGE>
<CAPTION>
Israel
MSC 09 98884 May 28, 1995
Italy
MSC 09, 16 612894 Dec. 29, 1993
Taiwan
(local class #)
MSC 08 26939 Oct. 16, 1987
MSC 72 391789 Feb. 16, 1988
MSC 56 381345 Nov. 1, 1987
(Note: renewal registration for all three marks has been filed)
Spain
MSC 09 1986989 March 5, 1996
Republic of Korea (South Korea)
(local class #)
MSC 52 249451 Sept. 16, 1992
MSC/DYTRAN 39 286482 March 10, 1994
United States
MSC 16 1,324,421 March 12, 1985
MSC 42 1,341,607 June 11, 1985
MSC 09 1,571,643 Dec. 19, 1989
MSC 09 2,075,622 July 1, 1997
MSC/ 16 1,324,419 March 12, 1985
MSC/ 09 1,330,631 April 16, 1985
MSC.cel 09 1,525,384 Feb. 21, 1989
MSC/DYTRAN 09 1,856,660 Oct. 4, 1994
MSC/MVISION 09 2,075,722 July 1, 1997
MSC/PATRAN 09 2,075,723 July 1, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. trademarks for obsolete products which are still in active use
MSC/ARIES 09 1,964,963 April 2, 1996
MSC.pal 09 1,367,412 Oct. 29, 1996
MSC/PISCES 09 1,647,975 June 18, 1991
MSC/XL 09 2,021,105 Dec. 3, 1996
MSC/XL 09 1,571,709 Dec. 19, 1989
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 35,573
<SECURITIES> 720
<RECEIVABLES> 36,109
<ALLOWANCES> (3,764)
<INVENTORY> 0
<CURRENT-ASSETS> 86,837
<PP&E> 33,190
<DEPRECIATION> (24,433)
<TOTAL-ASSETS> 178,257
<CURRENT-LIABILITIES> 82,473
<BONDS> 69,991
0
0
<COMMON> 32,077
<OTHER-SE> (15,656)
<TOTAL-LIABILITY-AND-EQUITY> 178,257
<SALES> 0
<TOTAL-REVENUES> 64,095
<CGS> 18,630
<TOTAL-COSTS> 73,887
<OTHER-EXPENSES> (8,424)
<LOSS-PROVISION> 482
<INTEREST-EXPENSE> 2,602
<INCOME-PRETAX> (1,368)
<INCOME-TAX> 771
<INCOME-CONTINUING> (2,139)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,139)
<EPS-BASIC> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 19,834
<SECURITIES> 15,722
<RECEIVABLES> 36,627
<ALLOWANCES> (1,684)
<INVENTORY> 0
<CURRENT-ASSETS> 82,365
<PP&E> 38,811
<DEPRECIATION> (29,963)
<TOTAL-ASSETS> 136,087
<CURRENT-LIABILITIES> 35,117
<BONDS> 56,574
0
0
<COMMON> 31,445
<OTHER-SE> 1,967
<TOTAL-LIABILITY-AND-EQUITY> 136,087
<SALES> 0
<TOTAL-REVENUES> 67,449
<CGS> 18,586
<TOTAL-COSTS> 58,368
<OTHER-EXPENSES> 1,576
<LOSS-PROVISION> 451
<INTEREST-EXPENSE> 2,233
<INCOME-PRETAX> 7,505
<INCOME-TAX> 2,552
<INCOME-CONTINUING> 4,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,953
<EPS-BASIC> 0.36
<EPS-DILUTED> 0.36
</TABLE>
