<PAGE>
================================================================================
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, 2000
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 Identification No.)
Incorporation or Organization)
815 COLORADO BOULEVARD
LOS ANGELES, CALIFORNIA 90041
-------------------------------------------- -----------------
(Address of Principal Executive Offices) (Zip Code)
(323) 258-9111
---------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
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 1, 2000, the number of shares outstanding of the
Registrant's Common Stock, par value $0.01 per share, was 14,069,853.
===============================================================================
<PAGE>
MSC.SOFTWARE CORPORATION
INDEX TO FORM 10-Q
JUNE 30, 2000
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2000 (Unaudited) and December 31, 1999 3
Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents $ 30,783,000 $ 21,735,000
Trade Accounts Receivable, Net 38,208,000 37,995,000
Deferred Tax Charges 15,368,000 15,282,000
Other Current Assets 12,162,000 7,477,000
------------ ------------
Total Current Assets 96,521,000 82,489,000
Property and Equipment, Net 10,818,000 8,585,000
Capitalized Software Costs, Net 21,414,000 20,117,000
Goodwill, Net 35,090,000 36,746,000
Other Intangible Assets, Net 32,804,000 35,534,000
Other Assets 2,993,000 3,749,000
------------ ------------
TOTAL ASSETS $199,640,000 $187,220,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 4,497,000 $ 4,692,000
Current Portion of Note Payable 3,200,000 3,200,000
Deferred Revenue 45,246,000 34,013,000
Compensation and Related Expenses 9,465,000 9,534,000
Restructuring Reserve 1,873,000 2,875,000
Other Current Liabilities 16,180,000 16,519,000
------------ ------------
Total Current Liabilities 80,461,000 70,833,000
------------ ------------
Deferred Income Taxes 16,957,000 16,957,000
Note Payable, Less Current Portion 2,933,000 4,533,000
Convertible Subordinated Debentures, Net 58,316,000 58,287,000
Subordinated Notes Payable, Net 11,957,000 11,804,000
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;
14,061,553 and 13,841,624 Issued and Outstanding at
June 30, 2000 and December 31, 1999, Respectively 34,190,000 32,451,000
Common Stock Warrants 4,428,000 4,428,000
Accumulated Deficit (3,292,000) (6,307,000)
Accumulated Other Comprehensive Loss (5,970,000) (5,426,000)
Treasury Stock, At Cost (49,000 and 49,000 Shares at June 30,
2000 and December 31, 1999, Respectively) (340,000) (340,000)
------------ ------------
Total Shareholders' Equity 29,016,000 24,806,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $199,640,000 $187,220,000
============ ============
</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,
---------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
REVENUE:
Software Licenses $ 25,941,000 $ 22,748,000 $ 49,758,000 $ 43,739,000
Software Maintenance and Services 17,500,000 10,694,000 33,030,000 20,356,000
-------------- -------------- ---------------- ------------
Total Revenue 43,441,000 33,442,000 82,788,000 64,095,000
-------------- -------------- ---------------- ------------
COST OF REVENUE:
Software Licenses 5,348,000 6,438,000 10,729,000 9,972,000
Software Maintenance and Services 5,377,000 4,713,000 11,063,000 8,677,000
-------------- -------------- ---------------- ------------
Total Cost of Revenue 10,725,000 11,151,000 21,792,000 18,649,000
-------------- -------------- ---------------- ------------
GROSS PROFIT 32,716,000 22,291,000 60,996,000 45,446,000
-------------- -------------- ---------------- ------------
OPERATING EXPENSE:
Research and Development 4,721,000 4,605,000 8,943,000 9,436,000
Selling, General and Administrative 19,977,000 16,228,000 38,401,000 33,873,000
Amortization of Goodwill and Other
Intangibles 2,721,000 1,244,000 5,396,000 2,365,000
Restructuring Charges (Income) - (400,000) - 5,497,000
Write-Off of Acquired In-Process Technology - 4,067,000 - 4,067,000
-------------- -------------- ---------------- ------------
Total Operating Expense 27,419,000 25,744,000 52,740,000 55,238,000
-------------- -------------- ---------------- ------------
OPERATING INCOME (LOSS) 5,297,000 (3,453,000) 8,256,000 (9,792,000)
-------------- -------------- ---------------- ------------
OTHER EXPENSE (INCOME):
Interest Expense 1,676,000 1,257,000 3,371,000 2,602,000
Gain on Sale of Investment - (10,773,000) - (10,773,000)
Other Expense (Income), Net 207,000 (422,000) (65,000) (253,000)
-------------- -------------- ---------------- ------------
Total Other Expense (Income), Net 1,883,000 (9,938,000) 3,306,000 (8,424,000)
-------------- -------------- ---------------- ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 3,414,000 6,485,000 4,950,000 (1,368,000)
Provision for Income Taxes 1,397,000 3,205,000 1,935,000 771,000
-------------- -------------- ---------------- ------------
NET INCOME (LOSS) $ 2,017,000 $ 3,280,000 $ 3,015,000 $ (2,139,000)
============== ============== ================ ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.14 $ 0.24 $ 0.22 $ (0.16)
============== ============== ================ ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.1 $ 0.23 $ 0.21 $ (0.16)
============== ============== ================ ============
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING 14,008,000 13,770,000 13,944,000 13,770,000
============== ============== ================ ============
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING 14,564,000 17,643,000 14,586,000 13,770,000
============== ============== ================ ============
</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,
-----------------------------
2000 1999
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 3,015,000 $ (2,139,000)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided By Operating Activities:
Depreciation and Amortization of Property and Equipment 1,983,000 2,333,000
Amortization of Capitalized Software Costs 5,352,000 4,229,000
Impairment of Capitalized Software Costs - 1,500,000
Amortization of Goodwill and Other Intangibles 5,395,000 2,365,000
Write-Off of Acquired In-Process Technology - 4,067,000
Amortization of Premiums and Discounts 182,000 148,000
Gain on Disposal of Property and Equipment (34,000) (2,000)
Gain on Sale of Investment in LMS International - (10,733,000)
Changes in Assets and Liabilities:
Trade Accounts Receivable, Net (213,000) 11,725,000
Deferred Tax Charges (86,000) 1,806,000
Other Current Assets (4,680,000) (2,170,000)
Accounts Payable (195,000) (657,000)
Deferred Revenue 11,233,000 8,276,000
Compensation and Related Expenses (69,000) 89,000
Restructuring Reserve (1,002,000) 5,078,000
Other Current Liabilities (339,000) (4,570,000)
Deferred Income Taxes - 2,411,000
------------ -----------
Net Cash Provided By Operating Activities 20,542,000 23,756,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Securities Available-for-Sale (5,000) (6,650,000)
Sale of Securities Available-for-Sale - 22,411,000
Acquisition of Property and Equipment (4,182,000) (1,010,000)
Proceeds from Sale of Investment in LMS International - 12,000,000
Cash Paid for Businesses Acquired, Net of Cash Received - (7,647,000)
Purchase of Software (582,000) (1,099,000)
Capitalized Internal Software Development Costs (6,067,000) (3,933,000)
Change in Other Assets (253,000) (125,000)
------------ -----------
Net Cash (Used In) Provided By Investing Activities (11,089,000) 13,947,000
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Note Payable (1,600,000) -
Repayment of Line of Credit - (10,800,000)
Issuance of Common Stock 1,739,000 323,000
Issuance of Common Stock Warrants - 148,000
Other 1,000 2,000
------------ -----------
Net Cash Provided By (Used In) Financing Activities 140,000 (10,327,000)
------------ -----------
TRANSLATION ADJUSTMENT (545,000) (2,625,000)
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,048,000 24,751,000
Cash and Cash Equivalents at Beginning of Period 21,735,000 10,822,000
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,783,000 $ 35,573,000
============ ============
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 and 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, 2000
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
MSC.Software Corporation ("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, 2000 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
The balance sheet as of December 31, 1999 has been derived from the
audited consolidated financial statements at that date but does not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
NOTE 2 - ACCOUNTING CHANGES
EARLY ADOPTION OF SOP 98-9 - In the fourth quarter of 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants 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, 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
was not fully recognized in reported revenue on a quarterly basis until the
fourth quarter of 1999. These quarters do not reflect revenue recorded prior to
October 1, 1998 that would have been recorded in these periods under SOP 98-9.
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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the
Financial Accounting Standards Board ("FASB") 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. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, An Amendment of SFAS No.
133". Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of these new Statements 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, 2000
NOTE 2 - ACCOUNTING CHANGES (Continued)
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements", which provides further guidance related to revenue recognition
based on interpretations and practices promulgated by the SEC. SAB 101 was to be
effective with the first fiscal quarter of fiscal years beginning after December
15, 1999 and requires companies to report any changes in revenue recognition as
a cumulative change in accounting principle at the time of implementation. In
June 2000, the SEC issued SAB 101B, "Amendment: Revenue Recognition in Financial
Statements", which delays implementation of SAB 101 until the Company's fourth
fiscal quarter of 2000. The Company is currently determining the effect, if any,
it will have on the financial statements.
NOTE 3 - BUSINESS ACQUISITIONS
During 1999, the Company acquired the following companies: MARC
Analysis Research Corporation ("MARC") - June 1999; Universal Analytics Inc.
("UAI") - June 1999; and Computerized Structural Analysis and Research
Corporation ("CSAR") - November 1999.
The following summarized unaudited pro forma consolidated results of
operations reflects the effect of the MARC acquisition as if it had occurred on
January 1, 1999. The unaudited pro forma consolidated results of operations
presented below are not necessarily indicative of operating results which would
have been achieved had the acquisition been consummated as of January 1, 1999
and should not be construed as representative of future operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1999
----------------
<S> <C>
Revenue $ 74,303,000
Operating Expense $ 81,531,000
Net Loss $ (240,000)
Basic Loss Per Share $ (0.02)
Diluted Loss Per Share $ (0.02)
</TABLE>
The pro forma effects of the UAI and CSAR acquisitions, as if they had
occurred on January 1, 1999, are immaterial to the consolidated financial
statements presented herein.
7
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000
NOTE 4 - CAPITALIZED SOFTWARE COSTS
The components of capitalized software costs, as they affected
operating income, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2000 1999 2000 1999
------- -------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Capitalized Internal Software
Development Costs $ (3,220,000) $ (2,224,000) $ (6,067,000) $ (3,933,000)
Amortization of Capitalized
Software Costs 2,759,000 2,279,000 5,352,000 4,229,000
Impairment of Capitalized
Software Costs - 1,500,000 - 1,500,000
----------- ----------- ----------- ------------
$ (461,000) $ 1,555,000 $ (715,000) $ 1,796,000
=========== ============ =========== ===========
</TABLE>
Amortization expense associated with capitalized software costs is
reported in cost of license revenue, and capitalized internal software
development costs, net of reserves, are 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 license
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. No
such losses were recorded in 2000.
NOTE 5 - RESTRUCTURING RESERVE
During February 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
(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. 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 reduced the restructuring reserve by $400,000.
In June 1999, as part of the acquisitions of MARC and UAI, the Company
recorded $2,566,000 of additional acquisition costs related to the integration
of these entities into the Company. In accordance with Emerging Issues Task
Force Issue No. 95-3, "Recognition of Liabilities in Connection With a Purchase
Business Combination," these costs were included in the purchase price
allocations, resulting in additional goodwill. These charges consisted of
severance costs of $1,161,000 and costs related to facility consolidations of
$1,405,000.
8
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000
NOTE 5 - RESTRUCTURING RESERVE (Continued)
As of June 30, 2000, the restructuring liability was $1,873,000. During
the three months ended June 30, 2000, cash outlays related to the restructuring
liability were $398,000. The remaining outlays are anticipated to be paid by the
end of 2000, excluding certain lease commitments that may continue into 2001.
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,
----------------------- ----------------------
2000 1999 2000 1999
----- ----- ----- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance at Beginning of Period $ 2,271,000 $ 5,647,000 $ 2,875,000 $ 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 (398,000) (2,040,000) (1,002,000) (2,985,000)
----------- ----------- ----------- -----------
Balance at End of Period $ 1,873,000 $ 5,773,000 $ 1,873,000 $ 5,773,000
=========== =========== =========== ===========
</TABLE>
NOTE 6 - OTHER CURRENT LIABILITIES
The components of other current liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Income Taxes Payable $ 3,036,000 $ 2,891,000
Sales Taxes Payable 2,135,000 3,144,000
Interest Payable 2,016,000 2,092,000
Contributions to Profit Sharing Plan 1,170,000 2,031,000
Royalties Payable 1,164,000 747,000
Commissions Payable 617,000 798,000
Other Accrued Liabilities 6,042,000 4,816,000
------------ ------------
Total Other Current Liabilities $ 16,180,000 $ 16,519,000
============ ============
</TABLE>
9
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000
NOTE 7 - EARNINGS PER SHARE
The following table sets forth the computation of Basic and Diluted
Earnings (Loss) Per Share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
2000 1999 2000 1999
----- ----- ----- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NUMERATOR:
Numerator for Basic Earnings (Loss)
Per Share - Net Income (Loss) $ 2,017,000 $ 3,280,000 $ 3,015,000 $ (2,139,000)
Effect of Dilutive Securities - Interest on
7-7/8% Convertible Subordinated
Debentures, Net of Tax - (1) 774,000 - (1) - (1)
----------- ----------- ----------- ------------
Numerator for Diluted Earnings (Loss)
Per Share $ 2,017,000 $ 4,054,000 $ 3,015,000 $ (2,139,000)
=========== =========== =========== ============
DENOMINATOR:
Denominator for Basic Earnings (Loss)
Per Share - Weighted-Average
Shares Outstanding 14,008,000 13,770,000 13,944,000 13,770,000
Effect of Dilutive Securities:
Employee Stock Options, Stock
Purchase Plan and Common
Stock Warrants 556,000 26,000 642,000 - (1)
7-7/8% Convertible Subordinated
Debentures - (1) 3,847,000 - (1) - (1)
----------- ----------- ----------- ------------
Dilutive Potential Common
Shares 556,000 3,873,000 642,000 -
----------- ----------- ----------- ------------
Denominator for Diluted Earnings
(Loss) Per Share - Adjusted
Weighted-Average Shares and
Assumed Conversions 14,564,000 17,643,000 14,586,000 13,770,000
=========== =========== =========== ============
BASIC EARNINGS (LOSS) PER SHARE $ 0.14 $ 0.24 $ 0.22 $ (0.16)
=========== =========== =========== ============
DILUTED EARNINGS (LOSS) PER SHARE $ 0.14 $ 0.23 $ 0.21 $ (0.16)
=========== =========== =========== ============
</TABLE>
(1) Anti-dilutive options, warrants and debentures are excluded from
the calculation of Diluted Earnings (Loss) Per Share for the
periods indicated.
10
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000
NOTE 8 - SEGMENT INFORMATION
The Company operates in a single reportable segment. International
Operations consists 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,
------------------------ ----------------------
2000 1999 2000 1999
----- ----- ----- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
The Americas (1) $ 18,501,000 $ 14,714,000 $ 35,755,000 $ 30,450,000
Asia-Pacific 12,958,000 7,475,000 23,537,000 13,614,000
Europe 11,982,000 11,253,000 23,496,000 20,031,000
------------ ------------ ------------ ------------
Total Revenue $ 43,441,000 $ 33,442,000 $ 82,788,000 $ 64,095,000
============= ============ ============ ============
</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,
2000 1999
---------- ------------
(Unaudited)
<S> <C> <C>
Identifiable Assets:
The Americas (1) $ 148,455,000 $ 141,890,000
Europe 28,792,000 27,638,000
Asia-Pacific 22,393,000 17,692,000
------------- -------------
Total Identifiable Assets $ 199,640,000 $ 187,220,000
============= =============
</TABLE>
(1) Substantially the United States
The net assets of the Company's foreign subsidiaries (excluding
intercompany items) totaled $26,175,000 and $22,725,000 as of June 30, 2000 and
December 31, 1999, respectively. Long-lived assets included in these amounts
were $5,792,000 and $5,709,000 as of June 30, 2000 and December 31, 1999,
respectively.
11
<PAGE>
MSC.SOFTWARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2000
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2000 1999 2000 1999
----- ----- ----- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income (Loss) $ 2,017,000 $ 3,280,000 $ 3,015,000 $ (2,139,000)
Change in Accumulated Translation
Adjustment 410,000 (330,000) (545,000) (2,625,000)
Change in Unrealized Gain (Loss) on
Securities Available-for-Sale (15,000) (17,000) 1,000 (11,000)
----------- ------------ ------------ -------------
Comprehensive Income (Loss) $ 2,412,000 $ 2,933,000 $ 2,471,000 $ (4,775,000)
============ ============ ============ =============
</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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
BUSINESS
MSC.Software Corporation ("MSC" or "the Company") designs, produces and
markets proprietary computer software products and provides related services for
use in computer-aided engineering. The Company's products are marketed
internationally to aerospace, automotive and other industrial concerns, computer
and electronics manufacturers, and universities.
RECENT DEVELOPMENTS
BUSINESS ACQUISITIONS
During 1999, MSC acquired the following companies: MARC Analysis
Research Corporation ("MARC") - June 1999; Universal Analytics Inc. ("UAI") -
June 1999; and Computerized Structural Analysis and Research Corporation
("CSAR") - November 1999.
MSC.VISUALNASTRAN
In March 2000, MSC announced the creation of MSC.VISUALNASTRAN, which
is now the overall name for all of MSC's software. The new name serves several
functions: (1) it leverages the "Nastran" name; (2) it unifies MSC's current set
of software into one integrated, scalable family of software to address
simulation needs in several markets; (3) it finalizes the integration of
Knowledge Revolution and MARC software products into MSC's product line; and (4)
it provides a framework for the future direction of our software products.
We anticipate several benefits from this: (1) a logical structure that
shows where all of our software fits and how they interrelate in function,
intended market, and pricing; (2) removing the confusion that currently exists
when discussing our products; (3) leveraging promotional efforts for all
software from all divisions; and (4) MSC will be able to define a pricing
structure that allows customers to move easily between our product families and
find the right price/functionality point.
There are four product families within MSC.visualNastran:
- VISUALNASTRAN ENTERPRISE - Software for dedicated analysts at
major manufacturers to simulate a wide variety of mechanical
conditions. This family includes Mechanical Solutions' core
products (Nastran, Patran, Marc, Dytran, Mvision, and Fatigue)
as well as the automotive and aerospace vertical applications.
This software links to other enterprise software such as CAD,
PDM, test software, and other CAE software.
- VISUALNASTRAN PROFESSIONAL - Software for multi-disciplinary
engineers at large or small companies that perform simulation
on occasion, though this is not their primary task. This
family includes our new Ultima product, MSC.Nastran for
Windows, and new integrated products whose functionality and
ease of use will be targeted to these engineers.
- VISUALNASTRAN DESKTOP - Software for design engineers at large
or small companies who need to verify design concepts. This
family includes the current Working Knowledge products and
will also include others to be defined.
- E.VISUALNASTRAN - Software from the other three families that
runs across the web in an Internet Application Services
Provider model that is similar to data centers.
The MSC.visualNastran framework provides a structure for positioning
all of our software, current and future. There will be some overlap in
capabilities and price, and other families may be defined later.
13
<PAGE>
ENGINEERING-E.COM
MSC is concentrating on becoming more Internet focused by continuing to
make its products Web-enabled and through the launch of a new division and web
portal, Engineering-e.com. This division leverages the core strengths,
competencies and infrastructure of MSC to create the engineers' marketplace on
the web.
MSC.LINUX
In January 2000, the MSC.Linux division was created to support Linux
products and services. MSC.Linux will leverage MSC`s strengths in software
technology development, professional services, and hardware/software
partnerships. The division will initially provide MSC`s global customer base
with cost-effective Linux-based applications of MSC`s current products and
infrastructure.
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.
14
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
NET INCOME - Consolidated net income was $2,017,000, or $0.14 per
diluted share, in 2000 compared to $3,280,000, or $0.23 per diluted share, in
1999.
REVENUE - MSC reported revenue of $43,441,000 in 2000 compared to
$33,442,000 in 1999, an increase of $9,999,000, or 30%. The acquisitions of
MARC, UAI and CSAR accounted for revenues of $5,408,000 in 2000 compared to
$717,000 in 1999, an increase of $4,691,000, or 14% of reported revenues, during
the period. These acquisitions were all accounted for under the purchase method
of accounting, so the corresponding revenue in 1999 was only from their
respective acquisition dates. Software license revenue and maintenance fees
accounted for 92% and 95% of total reported revenue for 2000 and 1999,
respectively, with service revenue making up the difference. For 2000 and 1999,
approximately 77% and 69%, respectively, of MSC's software license revenue and
maintenance fees was derived from annual renewable leases and recurring
maintenance fees, with the remaining 23% and 31%, respectively, related to
paid-up licenses. Non-recurring revenues, which are unaffected by the adoption
of SOP 98-9, decreased $417,000, including: paid-up license revenue, excluding
paid-up license revenue from acquisitions, decreased $2,110,000; consulting
services revenue increased $1,655,000; embedded technology license revenue
increased $32,000; and other software services revenue increased $6,000. Revenue
for 2000 and 1999 from the acquisitions of MARC, UAI and CSAR included paid-up
license revenue of $1,848,000 and $331,000, respectively, an increase of
$1,517,000. MSC anticipates the same percentage of revenue derived from paid-up
licenses from MARC, UAI and CSAR for the remainder of 2000.
As permitted, MSC adopted the provisions of SOP 98-9 effective October
1, 1998 and, accordingly, revenue on non-cancelable, pre-paid annual lease
agreements is recognized monthly over the term of the agreement, beginning in
the fourth quarter of 1998, as compared to only deferring the fee related to
maintenance for licenses sold before October 1, 1998. Due to the adoption of SOP
98-9, it is difficult to make comparisons of revenues between the second
quarters of 2000 and 1999. Revenue as reported in the second quarter of 1999 was
adversely affected by the change in MSC's revenue recognition policy.
Software license revenue consists of licensing fees, which are fees
charged for the right to use MSC's or a third parties' software. 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 MSC's software. Maintenance and services revenues include PCS, consulting
and training services. PCS includes 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 and training.
The following table illustrates revenue by geographic region and the
related growth rates between 2000 and 1999 in functional currencies as reported
utilizing the current revenue recognition policy adopted on October 1, 1998 for
2000 and estimated for 1999 as if the policy had been adopted on October 1,
1997:
<TABLE>
<CAPTION>
GROWTH RATE
------------------------------------------
THREE MONTHS ENDED JUNE 30, 2000 VS.
THREE MONTHS THREE MONTHS ENDED JUNE 30, 1999
ENDED ------------------------------------------
JUNE 30, 2000
-------------- IF SOP 98-9 HAD
PERCENTAGE OF BEEN ADOPTED ON
TOTAL REVENUE AS REPORTED OCTOBER 1, 1997
-------------- ----------- ---------------
<S> <C> <C> <C>
The Americas 43% 26% 9%
Asia-Pacific 30% 73% 69%
Europe 27% 6% 6%
Total 100% 30% 21%
</TABLE>
15
<PAGE>
The increase in reported revenues for all regions was due to increases
from core business revenue and from the acquisitions of MARC, UAI and CSAR.
These acquisitions accounted for revenue increases in The Americas of $900,000,
or 6%, in Asia-Pacific of $2,606,000, or 35%, and in Europe of $1,185,000, or
11%.
Revenue growth in 2000 was also impacted from unfavorable foreign
currency translation rates for the German Deutsche Mark and favorable foreign
currency translation rates for the Japanese Yen. Revenue in the current quarter
would have been approximately $43,880,000 if translated using the prior year's
foreign currency translation rates. MSC's international operations in Europe and
Asia-Pacific are sales organizations with high gross profit margins, which is
due to these operations having minimal software development expenses. As a
result, MSC is exposed to the effects of foreign currency fluctuations of the
United States Dollar versus the Japanese Yen and the German Deutsche Mark. The
following table details the effect of the currency rate changes on revenue for
2000 and the risk of change in 2000. The trend exchange rate was determined by
prorating the rate change between 1999 and 2000 and is used to illustrate the
sensitivity to foreign currency fluctuations. The trend rate is for illustration
purposes only and may or may not reflect the actual translation rate in future
periods.
<TABLE>
<CAPTION>
2000 2000 2000 USING
USING 1999 USING 2000 1999/2000 TREND
EXCHANGE RATES EXCHANGE RATES EXCHANGE RATE
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
The Americas $ 18,501,000 $ 18,501,000 $ 18,501,000
Asia-Pacific (1) 11,814,000 12,958,000 14,454,000
Europe 13,565,000 11,982,000 10,399,000
------------ ------------ ------------
Total Revenue $ 43,880,000 $ 43,441,000 $ 43,354,000
============= ============= ============
Exchange Rates:
$ / DM 0.5410 0.4778 0.4146
Yen / $ 120.78 106.56 92.34
</TABLE>
(1) Includes revenue denominated in United States Dollars of $3,245,000.
COST OF REVENUE - In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed", cost of revenue expense includes period
expenses directly related to revenue as well as the amortization of capitalized
software costs.
Cost of Revenue - Software Licenses ("COR-LIC") - COR-LIC was
$5,348,000, or 21% of license revenues, for 2000 compared to $6,438,000, or 28%
of license revenues, for the prior year. COR-LIC for 2000 and 1999 included
software amortization of $2,759,000 and $2,279,000, respectively. Cost of
revenue for 1999 also included a software impairment charge of $1,500,000.
COR-LIC, excluding amortization of capitalized software costs and the software
impairment charge, was $2,589,000, or 10% of license revenues, for 2000,
compared to $2,659,000, or 12% of license revenues, for the prior year. This
percent decrease was due to a $345,000 decrease in third party commissions, or
2% of license revenues, due to a decreased usage of agent resellers in the
Asia-Pacific region, a $253,000 decrease in other COR-LIC costs, or 1% of
license revenues, offset by a $588,000 increase in royalty expense, or 3% of
license revenues, which was due to MARC royalties. Royalty expense is paid to
third parties under various agreements. MSC does not consider any royalty
expense related to individual agreements to be material.
Cost of Revenue - Maintenance and Services ("COR-M&S") - COR-M&S was
$5,377,000, or 31% of maintenance and services revenues, for 2000 compared to
$4,713,000, or 44% of maintenance and services revenues, for the prior year.
Cost increases included: (1) a $450,000 increase in the cost of technical
support services; (2) a $117,000 increase in the use of training consultants to
conduct seminars; and (3) a $97,000 increase in consulting costs. These cost
increases did not increase commensurate with the increases in revenue, which
caused the decrease in COR-M&S as a percent of maintenance and services revenue.
16
<PAGE>
GROSS PROFIT - Gross profit, which is total revenue less cost of
revenue, was $32,716,000, or 75% of total revenue, for 2000, an increase of
$10,425,000 as compared to a gross profit of $22,291,000, or 67% of total
revenue, for 1999. This percent increase was due to the percent decreases in
COR-LIC and COR-M&S.
OPERATING EXPENSES - Operating expenses, other than cost of revenue,
were $27,419,000 for 2000 compared to $25,744,000 for the prior year, an
increase of $1,675,000, or 7%. Operating expenses for 1999 included a reversal
of restructuring charges of $400,000. Without the reversal of restructuring
charges in 1999, operating expenses would have totaled $26,144,000 for 1999
compared to $27,419,000 for 2000, an increase of $1,275,000, or 5%. This
increase resulted from additional development and selling costs from the
acquisitions of MARC, UAI and CSAR, the creation of Engineering-e.com in the
second quarter of 1999, and the creation of the MSC.Linux division in January
2000.
RESEARCH AND DEVELOPMENT - In accordance with SFAS No. 86, research and
development expense is reported net of the amount capitalized. Research and
development expense for 2000 was $4,721,000 compared to $4,605,000 for 1999, an
increase of $116,000, or 3%. The increase was due to a $1,112,000 increase in
the total gross investment in research and development activities, which was
partially offset by an increase of $996,000 in the amount of research and
development expenditures capitalized under SFAS No. 86.
The total gross investment in research and development activities for
2000 was $7,941,000, or 18% of total revenue, compared to $6,829,000, or 20% of
total revenue, for the prior year. The increase in research and development
expense resulted from additional development costs from the acquisitions of
MARC, UAI and CSAR. This level of investment was in accordance with management's
expectations.
Capitalized software development costs were $3,220,000 for 2000
compared to $2,224,000 for the prior year, an increase of $996,000. 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. MSC'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 - Selling, general and
administrative expenses were $19,977,000, or 46% of total revenue, for 2000
compared to $16,228,000, or 49% of total revenue, for 1999, an increase of
$3,749,000, or 23%. The increase in expense resulted from additional selling
costs totaling $2,788,000 from the acquisition of MARC, primarily in the
Asia-Pacific region, the creation of the MSC.Linux division in January 2000, and
increased product marketing costs. The remaining increase of $961,000 in general
and administrative expense was due to: (1) a $400,000 reduction of bad debt
expense from the second quarter of 1999; (2) a $130,000 increase from the
creation of Engineering-e.com in the second quarter of 1999; (3) a $120,000
increase in internally used software licenses; and (4) a $311,000 increase in
other general and administrative expenses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES - Amortization of
goodwill and other intangibles was $2,721,000 for 2000 compared to $1,244,000
for 1999, an increase of $1,477,000. The increase was due to the acquisitions of
MARC, UAI and CSAR. The amount of amortization of goodwill and other intangibles
in 2000 is expected to continue at the same level as the second quarter of 2000,
excluding the impact of any new acquisitions.
As with revenue, MSC's expenses are impacted by foreign currency
fluctuations. The following table details the effect of the currency rate
changes on total operating expense for 2000 and the risk of change in 2000. The
trend exchange rate was determined by prorating the rate change between 1999 and
2000 and is used to illustrate the sensitivity to foreign currency fluctuations.
The trend rate is for illustration purposes only and may or may not reflect the
actual translation rate in the future period.
17
<PAGE>
<TABLE>
<CAPTION>
2000 2000 2000 USING
USING 1999 USING 2000 1999/2000 TREND
EXCHANGE RATES EXCHANGE RATES EXCHANGE RATE
--------------- -------------- ---------------
<S> <C> <C> <C>
Total Operating Expense:
The Americas $ 26,101,000 $ 26,101,000 $ 26,101,000
Europe 7,321,000 6,466,000 5,611,000
Asia-Pacific 4,921,000 5,577,000 6,434,000
------------- ------------- -------------
Total Operating Expense $ 38,343,000 $ 38,144,000 $ 38,146,000
============= ============= =============
Exchange Rates:
$ / DM 0.5410 0.4778 0.4146
Yen / $ 120.78 106.56 92.34
</TABLE>
OPERATING INCOME (LOSS) - Operating income was $5,297,000 for 2000
compared to an operating loss of ($3,453,000) for 1999, an increase of
$8,750,000. Operating income (loss) for 2000 and 1999 included the effects of
MSC's adoption of SOP 98-9 in the fourth quarter of 1998, in addition to ongoing
operating costs necessary for the operation of the business. The operating loss
for 1999 also included impairment charges, a reversal of restructuring costs,
and the write-off of acquired in-process technology. Without the effects of the
reversal of restructuring charges, impairment charges and write-off of acquired
in-process technology, operating income would have been $5,297,000 and
$1,714,000 for 2000 and 1999, respectively, an increase of $3,538,000.
OTHER EXPENSE (INCOME) - Total other expense was $1,883,000 for 2000
compared to income of ($9,938,000) for 1999, a decrease of $11,831,000. The
decrease was due to a $10,773,000 gain from the sale of an equity investment.
Excluding this gain, other expense was $835,000 for 1999, which represents an
increase of $1,048,000 compared to the $1,883,000 of other expense for 2000.
This increase was due to increases in interest expense and currency losses,
partially offset by an increase in investment income.
Interest expense was $1,676,000 for 2000 compared to $1,257,000 for the
prior year, an increase of $419,000, or 33%. The increase in interest expense
was attributable to increased debt levels as a result of acquisitions. Interest
expense reflects the interest on the convertible subordinated debentures issued
as part of the acquisitions of PDA Engineering in 1994 and MARC in June 1999, as
well as interest on the subordinated notes payable issued as part of the
acquisition of MARC and interest on the note payable taken out as part of the
CSAR acquisition in November 1999. For financial statement purposes, the
convertible subordinated debentures and subordinated notes payable were issued
with a discount. Such discount is amortized over the terms of the convertible
subordinated debentures and subordinated notes payable and treated as additional
interest expense. As a result, reported interest will be higher than the cash
amount of interest that will actually be paid to the holders of the convertible
subordinated debentures and subordinated notes payable.
Other expense (income) was expense of $207,000 for 2000 compared to
income of ($422,000) for 1999, a decrease of $629,000. The decrease is due to an
increase of $756,000 in foreign currency exchange losses, partially offset by an
increase in interest and investment income. Other expense (income) also includes
gains and losses on property and equipment and other non-operating income or
expense.
PROVISION FOR INCOME TAXES - The estimated effective tax rate is 39%
for 2000 and was 44% in 1999. The difference between the Company's effective
rate and the 34.0% statutory federal rate resulted from state income taxes
and non-deductible goodwill charges from MSC's acquisitions during 1999, as
well as tax benefits gained from the Company's foreign sales corporation. The
difference between the effective tax rate for 2000 and 1999 is due to the
write-off of acquired in-process technology in 1999.
18
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
NET INCOME (LOSS) - Consolidated net income was $3,015,000, or $0.21
per diluted share, in 2000 compared to a net loss of ($2,139,000), or ($0.16)
per diluted share, in 1999.
REVENUE - MSC reported revenue of $82,788,000 in 2000 compared to
$64,095,000 in 1999, an increase of $18,693,000, or 29%. The acquisitions of
MARC, UAI and CSAR accounted for revenues of $9,661,000 in 2000 compared to
$717,000 in 1999, an increase of $8,944,000, or 14% of reported revenue, during
the period. These acquisitions were all accounted for under the purchase method
of accounting, so the corresponding revenue in 1999 was only from their
respective acquisition dates. Software license revenue and maintenance fees
account for 93% and 94% of total reported revenue for 2000 and 1999,
respectively, with service revenue making up the difference. For 2000 and 1999,
approximately 77% and 71%, respectively, of MSC's software license revenue and
maintenance fees is derived from annual renewable leases and recurring
maintenance fees, with the remaining 23% and 29%, respectively, related to
paid-up licenses. Non-recurring revenues, which are unaffected by the adoption
of SOP 98-9, increased $666,000, including: paid-up license revenue, excluding
paid-up license revenue from acquisitions, decreased $4,013,000; consulting
services revenue increased $2,326,000; other software services revenue decreased
$90,000; and embedded technology license revenue decreased $253,000. Revenue for
2000 from the acquisitions of MARC, UAI and CSAR included paid-up license
revenue of $2,851,000 and $331,000, respectively, an increase of $2,520,000. MSC
anticipates the same percentage of revenue derived from paid-up licenses from
MARC, UAI and CSAR for the remainder of 2000.
As permitted, MSC adopted the provisions of SOP 98-9 effective October
1, 1998 and, accordingly, revenue on non-cancelable, pre-paid annual lease
agreements is recognized monthly over the term of the agreement, beginning in
the fourth quarter of 1998, as compared to only deferring the fee related to
maintenance for licenses sold before October 1, 1998. Due to the adoption of SOP
98-9, it is difficult to make comparisons of revenues between the six month
periods ended June 30, 2000 and 1999. Revenue as reported in 1999 was adversely
affected by the change in MSC's revenue recognition policy.
The following table illustrates revenue by geographic region and the
related growth rates between 2000 and 1999 in functional currencies as reported
utilizing the current revenue recognition policy adopted on October 1, 1998 for
2000 and estimated for 1999 as if the policy had been adopted on October 1,
1997:
<TABLE>
<CAPTION>
GROWTH RATE
----------------------------------
SIX MONTHS ENDED JUNE 30, 2000 VS.
SIX MONTHS SIX MONTHS ENDED JUNE 30, 1999
ENDED ----------------------------------
JUNE 30, 2000
--------------- IF SOP 98-9 HAD
PERCENTAGE OF BEEN ADOPTED ON
TOTAL REVENUE AS REPORTED OCTOBER 1, 1997
--------------- ----------- ---------------
<S> <C> <C> <C>
The Americas 43% 17% 0%
Europe 29% 17% 8%
Asia-Pacific 28% 73% 65%
Total 100% 29% 15%
</TABLE>
The increase in reported revenues for all regions was due to increases
from core business revenue and from the acquisitions of MARC, UAI and CSAR.
These acquisitions accounted for revenue increases in The Americas of
$1,854,000, or 6%, in Asia-Pacific of $4,718,000, or 35%, and in Europe of
$2,372,000, or 12%.
Revenue growth in 2000 was also impacted from unfavorable foreign
currency translation rates for the German Deutsche Mark and favorable foreign
currency translation rates for the Japanese Yen. Revenue in the current year
would have been approximately $84,423,000 if translated using the prior year's
foreign currency translation rates. MSC's international operations in Europe and
Asia-Pacific are sales organizations with high gross profit margins, which is
due to these operations having minimal software development expenses. As a
result, MSC is exposed to the effects of foreign currency fluctuations of the
United States Dollar versus the Japanese Yen and the
19
<PAGE>
German Deutsche Mark. The following table details the effect of the currency
rate changes on revenue for 2000 and the risk of change in 2000. The trend
exchange rate was determined by prorating the rate change between 1999 and
2000 and is used to illustrate the sensitivity to foreign currency
fluctuations. The trend rate is for illustration purposes only and may or may
not reflect the actual translation rate in future periods.
<TABLE>
<CAPTION>
2000 2000 2000 USING
USING 1999 USING 2000 1999/2000 TREND
EXCHANGE RATES EXCHANGE RATES EXCHANGE RATE
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
The Americas $ 35,755,000 $ 35,755,000 $ 35,755,000
Europe 26,923,000 23,496,000 20,069,000
Asia-Pacific (1) 21,745,000 23,537,000 25,777,000
------------ ------------ ------------
Total Revenue $ 84,423,000 $ 82,788,000 $ 81,601,000
============ ============ ============
Exchange Rates:
$ / DM 0.5618 0.4902 0.4186
Yen / $ 118.57 106.72 94.87
</TABLE>
(1) Includes revenue denominated in United States Dollars of $5,602,000.
COST OF REVENUE
Cost of Revenue - Software Licenses - COR-LIC was $10,729,000, or 22%
of license revenues, for 2000 compared to $9,972,000, or 23% of license
revenues, for the prior year. COR-LIC for 2000 and 1999 included software
amortization of $5,352,000 and $4,229,000, respectively. Cost of revenue for
1999 also included a software impairment charge of $1,500,000. COR-LIC,
excluding amortization of capitalized software costs and the software impairment
charge, was $5,377,000, or 11% of license revenues, for 2000, compared to
$4,243,000, or 10% of license revenues, for the prior year. This percent
increase was due to a $1,107,000 increase in royalty expense, or 1.6% of license
revenues, which was due to MARC royalties, partially offset by a $106,000
decrease in third party commissions, or 0.4% of license revenues, due to a
decreased usage of agent resellers in the Asia-Pacific region.
Cost of Revenue - Maintenance and Services - COR-M&S was $11,063,000,
or 33% of maintenance and services revenues, for 2000 compared to $8,677,000, or
43% of maintenance and services revenues, for the prior year. The increase in
COR-M&S was due to: (1) a $992,000 increase in the cost of technical support
services; (2) a $728,000 increase in consulting costs; (3) a $505,000 increase
for Engineering-e.com; and (4) a $161,000 increase in the use of training
consultants to conduct seminars. These cost increases did not increase
commensurate with the increases in revenue, which caused the decrease in COR-M&S
as a percent of maintenance and services revenue.
GROSS PROFIT - Gross profit, which is total revenue less cost of
revenue, was $60,996,000, or 74% of total revenue, for 2000, an increase of
$15,550,000 as compared to a gross profit of $45,446,000, or 71% of total
revenue, for 1999. This percent increase was due to the percent decreases in
COR-LIC and COR-M&S.
OPERATING EXPENSES - Operating expenses, other than cost of revenue,
were $52,740,000 for 2000 compared to $55,238,000 for the prior year, a decrease
of $2,498,000, or 5%. Operating expenses for 1999 included a write-off of
acquired in-process technology of $4,067,000 and restructuring costs of
$5,497,000. Without these charges, operating expenses would have totaled
$45,674,000 for 1999 compared to $52,740,000 for 2000, an increase of
$7,066,000, or 15%. This increase resulted from additional development and
selling costs from the acquisitions of MARC, UAI and CSAR, the creation of
Engineering-e.com in the second quarter of 1999, and the creation of the
MSC.Linux division in January 2000.
20
<PAGE>
RESEARCH AND DEVELOPMENT - Research and development expense for 2000
was $8,943,000 compared to $9,636,000 for 1999, a decrease of $493,000, or
5%. The decrease was due to a $1,641,000 increase in the total gross
investment in research and development activities, which was partially offset
by an increase of $2,134,000 in the amount of research and development
expenditures capitalized under SFAS No. 86.
The total gross investment in research and development activities for
2000 was $15,010,000, or 18% of total revenue, compared to $13,369,000, or 21%
of total revenue, for the prior year. The increase in research and development
expense resulted from additional development costs from the acquisitions of
MARC, UAI and CSAR and the creation of the MSC.Linux division. This level of
investment was in accordance with management's expectations.
Capitalized software development costs were $6,067,000 for 2000
compared to $3,933,000 for the prior year, an increase of $2,134,000. 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. MSC'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 - Selling, general and
administrative expenses were $38,401,000, or 46% of total revenue, for 2000
compared to $33,873,000, or 53% of total revenue, for 1999, an increase of
$4,528,000, or 13%. This increase resulted from additional selling costs
totaling $3,809,000 from the acquisition of MARC, primarily in the Asia-Pacific
region, the creation of the MSC.Linux division in January 2000, and increased
product marketing costs. The remaining increase of $719,000 in general and
administrative expense was due to: (1) a $359,000 increase from the creation of
Engineering-e.com in the second quarter of 1999; (2) a $191,000 increase in
internally used software licenses; and (3) a $169,000 increase in other general
and administrative expenses.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES - Amortization of
goodwill and other intangibles was $5,396,000 for 2000 compared to $2,365,000
for 1999, an increase of $3,031,000. The increase was due to the acquisitions of
MARC, UAI and CSAR. The amount of amortization of goodwill and other intangibles
in 2000 is expected to continue at the same level as the first two quarters of
2000, excluding the impact of any new acquisitions.
As with revenue, MSC's expenses are impacted by foreign currency
fluctuations. The following table details the effect of the currency rate
changes on total operating expense for 2000 and the risk of change in 2000. The
trend exchange rate was determined by prorating the rate change between 1999 and
2000 and is used to illustrate the sensitivity to foreign currency fluctuations.
The trend rate is for illustration purposes only and may or may not reflect the
actual translation rate in the future period.
<TABLE>
<CAPTION>
2000 2000 2000 USING
USING 1999 USING 2000 1999/2000 TREND
EXCHANGE RATES EXCHANGE RATES EXCHANGE RATE
-------------- -------------- ---------------
<S> <C> <C> <C>
Total Operating Expense:
The Americas $ 51,536,000 $ 51,536,000 $ 51,536,000
Europe 14,947,000 13,044,000 11,141,000
Asia-Pacific 8,782,000 9,952,000 11,482,000
------------ ------------ ------------
Total Operating Expense $ 75,265,000 $ 74,532,000 $ 74,159,000
============= ============= ============
Exchange Rates:
$ / DM 0.5618 0.4902 0.4186
Yen / $ 120.78 106.56 92.34
</TABLE>
21
<PAGE>
OPERATING INCOME (LOSS) - Operating income was $8,256,000 for 2000
compared to an operating loss of ($9,792,000) for 1999, an increase of
$18,048,000. Operating income (loss) for 2000 and 1999 includes the effects of
MSC's adoption of SOP 98-9 in the fourth quarter of 1998, in addition to ongoing
operating costs necessary for the operation of the business. Operating loss for
1999 includes impairment charges, restructuring costs, and the write-off of
acquired in-process technology. Without the effects of the reversal of
restructuring charges, impairment charges and write-off of acquired in-process
technology, operating income would have been $8,256,000 and $1,272,000 for 2000
and 1999, respectively, an increase of $6,984,000.
OTHER EXPENSE (INCOME) - Total other expense was $3,306,000 for 2000
compared to income of ($8,424,000) for 1999, a decrease of $11,730,000. The
decrease was attributable to a $10,773,000 gain from the sale of an equity
investment. Excluding this gain, other expense was $2,349,000 for 1999, which
represents an increase of $957,000 compared to the $3,306,000 of other expense
for 2000. This increase was due to an increase in interest expense and a
decrease in investment income.
Interest expense was $3,371,000 for 2000 compared to $2,602,000 for the
prior year, an increase of $769,000, or 30%. The increase in interest expense
was attributable to increased debt levels as a result of acquisitions. Interest
expense reflects the interest on the convertible subordinated debentures issued
as part of the acquisitions of PDA Engineering in 1994 and MARC in June 1999, as
well as interest on the subordinated notes payable issued as part of the
acquisition of MARC and interest on the note payable taken out as part of the
CSAR acquisition in November 1999. For financial statement purposes, the
convertible subordinated debentures and subordinated notes payable were issued
with a discount. Such discount is amortized over the terms of the convertible
subordinated debentures and subordinated notes payable and treated as additional
interest expense. As a result, reported interest will be higher than the cash
amount of interest that will actually be paid to the holders of the convertible
subordinated debentures and subordinated notes payable.
Other expense (income) was income of ($65,000) for 2000 compared to
income of ($253,000) for 1999, a decrease of $188,000. The decrease is
attributable to a decrease in interest and investment income. The foreign
currency exchange loss was $386,000 and $299,000 for the six months ended June
30, 2000 and 1999, respectively. Other expense (income) also includes gains and
losses on property and equipment and other non-operating income or expense.
PROVISION FOR INCOME TAXES - The estimated effective tax rate is 39%
for 2000 and was 44% in 1999. The difference between the Company's effective
rate and the 34.0% statutory federal rate resulted from state income taxes
and non-deductible goodwill charges from MSC's acquisitions during 1999, as
well as tax benefits gained from the Company's foreign sales corporation. The
difference between the effective tax rate for 2000 and 1999 is due to the
write-off of acquired in-process technology in 1999.
22
<PAGE>
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 MSC. The month of January has historically been the largest revenue
month of the year with the highest volume of renewals.
Under SOP 98-9, MSC 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 MSC's interim accounting periods. 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.
LIQUIDITY AND CAPITAL RESOURCES
In the past, working capital needed to finance MSC's operations 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. MSC may
engage in additional financing methods that it believes are advantageous,
particularly to finance acquisitions. Net cash provided by operating activities
was $20,542,000 and $23,756,000 for the six months ended June 30, 2000 and 1999,
respectively. MSC's working capital (current assets minus current liabilities)
at June 30, 2000 was $16,060,000 compared to $11,656,000 at December 31, 1999,
an increase of $4,404,000.
During 2000, cash outlays related to the restructuring liability were
$1,002,000. The remaining outlays are anticipated to be paid by the end of 2000,
excluding certain lease commitments that may continue into 2001.
In August 1999, MSC entered into a Loan and Security Agreement ("Loan
Agreement") with a bank (the "Bank"). This credit facility includes a
$12,000,000 revolving line of credit and an $8,000,000 term loan. The amount of
the line of credit available in excess of $5,000,000 is subject to a defined
borrowing base of outstanding trade receivables. As of June 30, 2000, the amount
available under the line of credit, based on the defined borrowing base, was
approximately $9,246,000. The term of the revolving portion of the Loan
Agreement expires May 31, 2001. As of June 30, 2000, there was no balance
outstanding on the line of credit and there were no borrowings from the line of
credit during 1999 or 2000. On November 4, 1999, MSC borrowed $8,000,000 in
connection with the acquisition of CSAR. The term of the loan is two years and
requires monthly principal payments of $267,000. As of June 30, 2000, the
balance on the loan was $6,133,000. All borrowings under the Loan Agreement
carry an interest rate equal to the Bank's prime lending rate or LIBOR plus 200
basis points. Borrowings under the Loan Agreement are secured by nearly all of
Company's goods and equipment, inventory, contract rights, and intellectual
property rights. Borrowings also involve certain restrictive covenants,
including restrictions on dividends and investments. As of June 30, 2000, MSC is
in compliance with all covenants.
MSC issued $56,608,000 of convertible subordinated debentures in
connection with the acquisition of PDA Engineering in 1994. An additional
$2,000,000 principal amount of convertible subordinated debentures was issued,
at a discount, in June 1999 in connection with the MARC acquisition. The
debentures bear interest at 7-7/8% with interest payments due semi-annually on
March 15 and September 15. The conversion feature permits the holder to convert
the debentures into shares of MSC's common stock at a conversion price of $15.15
per share. The debentures mature August 18, 2004, but are redeemable at MSC's
option at any time after August 18, 1997 upon payment of a premium. A debenture
interest payment was made in March 2000 for $2,305,000. The estimated interest
payment to be paid in September 2000 is $2,305,000. The amount of interest
expense will decrease if the debentures are converted into common stock. At June
30, 2000, the balance of the convertible subordinated debentures, excluding
unamortized discount of $240,000, was $58,556,000.
23
<PAGE>
MSC also issued subordinated notes payable in June 1999, in connection
with the MARC acquisition, in the aggregate principal amount of $14,236,000. The
subordinated notes payable bear interest at 8% with interest payments due
semi-annually in January and July. The estimated interest payment to be paid in
January 2001 is $577,000. $3,236,000 of the notes payable are due in June 2001
and the remaining $11,000,000 are due by June 2009.
Management expects to continue to invest a substantial portion of MSC's
revenues in the development of new computer software technologies and products
and the enhancement of certain existing products. During 2000 and 1999, MSC
expended a total of $15,010,000 and $13,369,000, respectively, on development
efforts, of which $6,067,000 and $3,933,000, 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 2000 and 1999, MSC acquired $4,182,000 and $1,010,000,
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. MSC's capital expenditures vary
from year to year, as required by business needs. MSC 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 2000 and 2001 to be higher than 1999 due to
additional expenditures in the Engineering-e.com and MSC.Linux divisions.
MSC does not plan to pay dividends in the foreseeable future. In
addition, MSC's Loan Agreement with its principal bank contains restrictions on
the payment of dividends.
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 MSC 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, it 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 MSC's labor cost.
MSC 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 MSC'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 MSC's
business.
24
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The forward-looking statements in this report, including statements
concerning projections of MSC'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 MSC's software products;
- MSC's dependence on certain industries;
- The impact of the Internet on MSC's business;
- 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;
- MSC's ability to reduce costs without adversely impacting
revenues;
- Successful involvement of international and domestic business
partners in creating mechanical engineering solutions;
- MSC's ability to attract, motivate and retain salespeople,
programmers and other key personnel;
- The adoption by MSC of certain anti-takeover provisions; and
- Continued demand for its products, including MSC.Nastran,
MSC.Patran, MSC.Marc, MSC.Dytran, MSC.MVision, MSC.Nastran for
Windows, and MSC.Working Model 4D.
Subsequent written and oral forward-looking statements attributable to
MSC or persons acting on its behalf are hereby expressly qualified in their
entirety by the cautionary statements in this section of this report and by the
discussion of "Risk Factors" in MSC's Annual Report on Form 10-K for the year
ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MSC is exposed to the impact of foreign currency fluctuations and
interest rate changes. MSC has not experienced a material change in these market
risk areas from the end of the preceding fiscal year.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 10, 2000, the Annual Meeting of Stockholders of the Company
was held for the purpose of voting on:
(i) The election of two Directors (Class III) to the
Board of Directors;
(ii) The Company's 2000 Executive Cash or Stock Bonus Plan;
(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 1,000,000 shares and increases the number of options that can
be granted to any individual during any calendar year from 200,000 to
500,000; and
(iv) Ratification of the appointment of Ernst & Young LLP
as independent auditors for 2000.
(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 III) to the Board of
Directors:
SHARES SHARES
DIRECTOR VOTED FOR WITHHELD
-------- --------- --------
George N. Riordan 12,852,482 53,068
William F. Grun 12,862,611 42,939
The other directors whose terms continued after the
Annual Meeting are Donald Glickman, Larry S. Barels and Frank Perna,
Jr.
(ii) Approval of the Company's 2000 Executive Cash or
Stock Bonus Plan:
<TABLE>
<CAPTION>
VOTES CAST
----------------------------------------------------------------------------------------
For Against Abstain Broker Non-Votes
------------ ------------------ -------------- -------------------
<S> <C> <C> <C>
8,227,821 1,641,033 38,554 2,998,142
</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 1,000,000 shares and increases the number of options
that can be granted to any individual during any calendar year from
200,000 to 500,000:
<TABLE>
<CAPTION>
VOTES CAST
----------------------------------------------------------------------------------------
For Against Abstain Broker Non-Votes
------------ ------------------ -------------- -------------------
<S> <C> <C> <C>
6,340,239 3,524,429 42,740 2,998,142
</TABLE>
26
<PAGE>
(iv) Ratification of Ernst & Young LLP as Independent Auditors
for 2000:
VOTES CAST
-----------------------------------------------------------
For Against Abstain
---------- ------- -------
12,880,696 11,195 13,659
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 27.1 Financial Data Schedule for the Six Months Ended June 30, 2000
27
<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 14, 2000 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)
28
