MSC.Software Corp. may want to white-out the past two years from its history books.
The Santa Ana-based company has changed its chief executive, lost its listing on the New York Stock Exchange, switched its accounting firm, fended off a takeover attempt, failed to keep up with growth in the software market and neglected to file financial reports on time.
The good news for the maker of industrial software: Most of its problems have been dealt with.
MSC, which ranks as one of Orange County’s largest software companies, recently filed restated financial statements for 2002 and most of 2003. It also finally issued income statements for all of 2003 and 2004.
In the next few weeks, MSC aims to file its 2005 quarterly reports.
The company is looking to get its stock listing off the Pink Sheets and onto Nasdaq. MSC executives want to focus more on the company itself by shedding underperforming businesses and tweaking its products from software tools to ones that can be used across an entire company.
“Closing this chapter … has been a Herculean effort and a light drain of market focus,” said Bill Weyand, who took over as chairman and chief executive of MSC last year. “There’s an entirely new management team that’s been driving the company to new and improved financial performance as well as business execution.”
Weyand is the former chairman and chief executive of industrial design software maker Structural Dynamics Research Corp., which was sold to Electronic Data Systems Corp. for about $1 billion in 2001.
MSC still has ways to go. It needs to build sales momentum and get all of its filings up to date in order to get the Nasdaq listing.
Still, investors are getting behind MSC.
MSC shares have doubled to about $20 during the past year. That’s near its record high of $23. Since its lows in the summer of 2004, MSC’s stock has more than tripled.
The company has a market value of about $625 million. A big shareholder is Michael Dell.
“Apart from completing the time-consuming and expensive restatement process, management has otherwise been focused, correctly, on improving the margin structure and consolidating the product portfolio to a more manageable and productive mix,” wrote Jay Vleeschhouwer, an analyst with Merrill Lynch & Co. in New York, in a research note.
This challenging chapter for MSC began in March 2004 with the delay of its 2003 annual report filing with the Securities and Exchange Commission. MSC said it planned to restate 2001 and 2002 results.
The issue seemed innocuous at first. There were allegations that information was withheld from MSC’s independent auditors relating to the stock option accounting for a former employee of an Asian unit.
MSC’s audit committee stepped in to review the issue.
In August 2004, the review was expanded to look at whether information related to revenue accounting in the company’s Asia Pacific region was withheld.
Louis Greco resigned as chief financial officer a few months later. John Laskey, a former finance chief with Irvine’s Quest Software Inc., was hired to replace Greco.
At the same time, San Francisco hedge fund ValueAct Partners LP offered $275 million to take the company private. ValueAct made its offer after buying about 10% of MSC’s shares.
MSC rejected the ValueAct offer. It agreed to add new directors to the board, including Weyand. ValueAct said it would back off its buyout bid until MSC got its financial statements in order.
Then more bad news in March 2005 when the New York Stock Exchange dropped MSC’s listing because it didn’t file its annual report for 2003.
MSC’s investigation of its accounting procedures turned up some problems.
The company found it had internal control weaknesses, including poor oversight, ambiguous and inconsistent internal accounting policies and a lack of information to back up its historical accounting.
MSC dismissed its accounting firm, KPMG International LLP, and hired Deloitte & Touche LLP last spring.
SEC Subpoena
Then came more trouble: The SEC subpoenaed “certain documents” related to the company’s internal investigation of its past financial results. The matter hasn’t been resolved, the company said.
The bottom line of its 2002 and 2003 restatements: a previously reported 2002 net loss of $51.3 million increased by nearly 50% while its net loss of $26.6 million for the first nine months of 2003 decreased by 12%.
2002 revenue was reduced by 6% to $233 million, with sales in the first nine months of 2003 falling by less than 1% to $184 million.
The revisions came after the company made its accounting policies more in-line with its software peers. The issues included the timing of revenue recognition and consulting fees, and the capitalizing software development costs.
MSC’s 2004 sales were up 10% to $227 million, versus a year earlier. Merrill analyst Vleeschhouwer said a big slice of the rise came from currency gains.
The good news: Income was $10.9 million, compared to a loss of $30 million in 2003.
Shedding Units
In the past year, the company has been looking to improve its operations to boost profits. Selling old businesses is part of the effort.
“There had been, quite simply, far too many products accumulated over the years that were uneconomical in terms of sales and support,” Vleeschhouwer said.
MSC sold a product lifecycle management unit to Wooster, Ohio-based TechniGraphics Inc. earlier this year.
The sale is expected to free MSC to focus on the higher-end, physics-based simulation market, Vleeschhouwer said.
MSC also recently sold its Japanese service unit to Information Services International-Dentsu Ltd. of Japan.
“The sale of both businesses has the effect of shrinking the revenue (and cost) base, but we would expect that it would result in a better focus on its core simulation business and greater profitability,” Vleeschhouwer said.
