<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
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 1-14155
-------------
Unigraphics Solutions Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2728894
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13736 Riverport Drive, Maryland Heights, Missouri 63043
- -----------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(314) 344-5900
--------------------------
(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 October 31, 1998, there were outstanding 5,000,000 shares of the
registrant's Class A Common Stock, $.01 par value per share, and 31,265,000
shares of the registrant's Class B Common Stock, $.01 par value per share.
================================================================================
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C>
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Operations............................................ 3
Consolidated Balance Sheets...................................................... 4
Consolidated Statements of Cash Flows............................................ 5
Notes to Consolidated Financial Statements....................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks...................... 14
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K................................................ 15
Signatures.................................................................................. 16
Exhibit 11 Statement Re Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule (for SEC information only)
</TABLE>
2
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and shares amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Software $ 39,154 $ 24,651 $ 109,334 $ 79,667
Services 45,416 33,297 129,680 99,691
Hardware 12,562 18,408 46,548 47,397
----------- ----------- ----------- -----------
Total revenue 97,132 76,356 285,562 226,755
Cost of revenue:
Software
Amortization 6,018 3,672 16,164 11,016
Royalties, distribution and other 4,259 3,064 11,910 9,629
Services 16,376 15,283 50,939 41,852
Hardware 10,700 13,399 38,926 32,478
----------- ----------- ----------- -----------
Total cost of revenue 37,353 35,418 117,939 94,975
----------- ----------- ----------- -----------
Gross profit 59,779 40,938 167,623 131,780
Operating expenses:
Selling, general and administrative 36,564 24,660 98,679 73,992
Research and development 16,747 12,105 46,598 34,555
In-process research and development -- -- 42,468 --
----------- ----------- ----------- -----------
Total operating expenses 53,311 36,765 187,745 108,547
----------- ----------- ----------- -----------
Operating income (loss) 6,468 4,173 (20,122) 23,233
Other income, net 882 3,795 8,582 3,809
----------- ----------- ----------- -----------
Income (loss) before income taxes 7,350 7,968 (11,540) 27,042
Provision for income taxes 2,645 2,964 (5,605) 10,056
----------- ----------- ----------- -----------
Net income (loss) $ 4,705 $ 5,004 $ (5,935) $ 16,986
=========== =========== =========== ===========
Comprehensive income (loss) $ 3,786 $ 5,959 $ (804) $ 16,524
=========== =========== =========== ===========
Earnings (loss) per share:
Basic $ 0.13 $ 0.16 $ (0.18) $ 0.54
=========== =========== =========== ===========
Diluted $ 0.13 $ 0.16 $ (0.18) $ 0.54
=========== =========== =========== ===========
Weighted average number of
Common shares outstanding:
Basic 36,265,000 31,265,000 33,195,147 31,265,000
=========== =========== =========== ===========
Diluted 36,265,000 31,265,000 33,195,147 31,265,000
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and shares amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 26,772 $ 11
Marketable securities 9,686 2,685
Accounts receivable, net 100,436 115,692
Prepaids and other 6,576 3,624
-------- --------
Total current assets 143,470 122,012
-------- --------
Property and equipment, net 22,411 19,821
-------- --------
Operating and other assets
Software, goodwill, and other intangibles, net 73,111 24,957
Deferred income taxes 10,846 --
-------- --------
Total operating and other assets 83,957 24,957
-------- --------
Total assets $249,838 $166,790
======== ========
Liabilities and Stockholders' Equity/Net Investment
Current liabilities
Accounts payable and accrued liabilities $ 56,855 $ 41,759
Deferred revenue 12,077 7,798
Income taxes payable 27,806 --
Deferred income taxes - current portion 7,531 19,497
-------- --------
Total current liabilities 104,269 69,054
-------- --------
Intercompany note 67,925 --
Deferred income taxes -- 9,386
Stockholders' equity/net investment
Preferred stock, $.01 par value; authorized
20,000,000 shares, none issued -- --
Class A common stock, $.01 par value; 168,735,000
shares authorized; 5,000,000 shares issued and 50 --
outstanding at September 30, 1998
Class B common stock, $.01 par value; 31,265,000
shares authorized; 31,265,000 shares issued and
outstanding at September 30, 1998 313 --
Additional paid-in capital 148,676 --
Retained earnings (deficit) (78,936) --
Accumulated other comprehensive income 7,541 2,410
Stockholder's net investment -- 85,940
-------- --------
Total stockholders' equity/net investment 77,644 88,350
-------- --------
Total liabilities and stockholders' equity/net investment 249,838 $166,790
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
--------- --------
<S> <C> <C>
Net cash provided by operating activities $ 68,214 $ 62,122
--------- --------
Cash Flows from Investing Activities
Proceeds from sale of marketable securities 12,272 3,812
Payments related to Solid Edge acquisition (104,993) --
Payments for purchases of property and equipment (8,413) (5,391)
Payments for purchases of software and other intangibles (834) (116)
Payments for purchases of marketable securities (51) (14)
--------- --------
Net cash used in investing activities (102,019) (1,709)
--------- --------
Cash Flows from Financing Activities
Borrowings under Intercompany Credit Agreement 113,687 --
Payments on Intercompany Credit Agreement (118,163) --
Proceeds from sale of stock 65,100 --
Net advances to affiliates -- (60,413)
--------- --------
Net cash provided by (used in) financing activities 60,624 (60,413)
--------- --------
Effect of exchange rate changes on cash and cash equivalents (58) --
--------- --------
Net increase in cash and cash equivalents 26,761 --
Cash and cash equivalents at beginning of period 11 1
--------- --------
Cash and cash equivalents at end of period $ 26,772 $ 1
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Unigraphics
Solutions Inc. ("Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information. In the opinion
of management, all adjustments (consisting of only normal recurring items) which
are necessary for a fair presentation have been included. The results of interim
periods are not necessarily indicative of results which may be expected for any
other interim period or for the full year.
Note 2. Earnings Per Share
Basic earnings per share of common stock is computed by dividing net income
by the weighted-average number of common shares outstanding during the period.
Diluted earnings per share is calculated in the same manner as basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding, assuming the exercise
of all employee stock options and the vesting of restricted stock units that
would have had a dilutive effect on earnings per share. There were no employee
stock options or vesting of restricted stock units that would have had a
dilutive effect as of September 30, 1998.
Note 3. Solid Edge Acquisition
On March 2, 1998, the Company acquired the mechanical computer-aided design
("CAD"), computer-aided engineering ("CAE"), and computer-aided manufacturing
("CAM") business of Intergraph Corporation consisting of the Solid Edge and EMS
product lines (the "Solid Edge Acquisition") for a purchase price of $105
million (excluding approximately $2 million of acquisition costs). The Company
borrowed $105 million from EDS (hereinafter defined) pursuant to the
Intercompany Credit Agreement (hereinafter defined). The cost of the Solid Edge
Acquisition was allocated to identifiable assets based on estimated fair values.
Costs allocated to identifiable intangible assets will be amortized on a
straight-line basis over the remaining estimated useful lives of the assets.
Costs allocated to in-process research and development in the amount of $42.5
million were expensed in the three month period ended March 31, 1998. The excess
of purchase price over fair value of identifiable assets acquired was recorded
as goodwill and will be amortized on a straight-line basis over its useful life
of seven years. The Company has allocated the purchase price as follows: $3.4
million to software; $4.0 million to acquired workforce; $42.5 million to in-
process research and development costs; and $57.1 million to goodwill. As a
result of the write-off of in-process research and development costs and
additional amortization expense resulting from the Solid Edge Acquisition, the
Company expects that net income in 1998 will be significantly less than in prior
years.
6
<PAGE>
The following summary presents selected unaudited pro forma consolidated
information for the Company assuming the Solid Edge Acquisition and related
financing under the Intercompany Credit Agreement had occurred on January 1,
1997 (in thousands, except for earnings per share):
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------------------------------
<S> <C> <C>
Revenues $290,340 $251,086
======== ========
Net Income $ 17,587 $ 5,125
======== ========
Earnings per share $ 0.53 $ 0.16
======== ========
</TABLE>
The pro forma information does not include the write-off of $42.5 million of in-
process research and development costs acquired in connection with the Solid
Edge Acquisition.
Note 4. Public Offering of Common Stock and Issuance of Options
On June 23, 1998, the Company completed an initial public offering of
5,000,000 shares of Class A Common Stock, $.01 par value per share, of the
Company. The net proceeds of the offering were used to repay $65.1 million of
indebtedness outstanding under the Intercompany Credit Agreement between the
Company and Electronic Data Systems Corporation ("EDS"). Currently there are a
total of 36,265,000 outstanding shares of Company Common Stock, including
5,000,000 shares of Class A Common Stock and 31,265,000 shares of Class B Common
Stock. EDS currently owns 100% of the Class B Common Stock. EDS' holdings
represent 86.2% of the outstanding shares of all classes of Common Stock and
98.4% of the combined voting power of all classes of voting stock of the
Company.
Employee stock options for the purchase of approximately 700,000 shares of
Class A Common Stock were issued upon completion of the offering at the initial
public offering price of $14.00 per share.
Note 5. Early Adoption of Statement of Position (SOP) 98-1
In March 1998, Statement of Position (SOP) 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use, was issued. This
SOP requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The provisions of SOP 98-1 are effective for financial
statements issued for fiscal years beginning after December 15, 1998, although
early adoption is allowed. During the third quarter, the Company adopted the
provisions of this SOP effective January 1, 1998. Net income (loss) excluding
application of SOP 98-1 would have been $4.1 million and $(6.4) million for the
three months and nine months ended September 30, 1998, respectively. Basic and
diluted earnings (loss) per share of common stock excluding application of SOP
98-1 would have been $0.11 and $(0.19) for the three months and nine months
ended September 30, 1998, respectively. The impact of SOP 98-1 was not material
to the prior quarters' results.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company provides scalable, integrated, enterprise-level mechanical
computer-aided design solutions that are used for virtual product development
principally in the automotive and transportation, aerospace, consumer products,
equipment and machinery, and electronics industries. For further information,
refer to the Company's Registration Statement on Form S-1 (File No. 333-48261).
Pursuant to a reorganization consummated as of January 1, 1998 (the
"Reorganization"), the Company became the successor to the mechanical
CAD/CAM/CAE ("MCAD") business of Electronic Data Systems Corporation, a Delaware
corporation ("EDS"), which business was formerly operated within several
business units of EDS. The Company's historical financial statements reflect the
results of operations, financial condition and cash flows of the Company as a
component of EDS prior to the Reorganization and may not be indicative of actual
results of operations and financial position of the Company subsequent to the
Reorganization.
In connection with the Reorganization, effective as of January 1, 1998, the
Company entered into a Management Services Agreement with EDS pursuant to which
EDS performs various management services for the Company, including treasury,
risk management, tax and similar administrative services. The agreement provides
for the payment of fees to EDS for such services, either on a fixed price or
usage basis, which fees are generally designed to approximate EDS' cost of
providing the services, as well as a fixed fee equal to .5% of the Company's
total revenues. In addition, pursuant to the Intercompany Credit Agreement dated
January 1, 1998 between the Company and EDS entered into in connection with the
Reorganization (the "Intercompany Credit Agreement"), the Company is required to
borrow from EDS, and EDS is required to lend to the Company, amounts required by
the Company to fund its daily cash requirements. Since the closing of the
initial public offering of the Company's Class A Common Stock referred to below,
the maximum amount available to the Company under this facility is $70 million.
Effective as of March 6, 1998, the Company issued to EDS as a dividend an
Intercompany Note in the principal amount of $73 million (the "Intercompany
Note"). See "Liquidity and Capital Resources" for further discussion.
On June 23, 1998, the Company completed the initial public offering of
5,000,000 shares of Class A Common Stock, $.01 par value per share, of the
Company. The net proceeds of the offering were used to repay $65.1 million of
indebtedness outstanding under the Intercompany Credit Agreement.
Solid Edge Acquisition
On March 2, 1998, the Company completed the Solid Edge Acquisition for a
purchase price of $105 million (excluding approximately $2 million of
acquisition costs). The Company borrowed $105 million from EDS pursuant to the
Intercompany Credit Agreement. The cost of the Solid Edge Acquisition was
allocated to identifiable assets based on estimated fair values. Costs allocated
to identifiable intangible assets will be amortized on a straight-line basis
over the remaining estimated useful lives of the assets. Costs allocated to in-
process research and development in the amount of $42.5 million were expensed in
the three month period ended March 31, 1998. The excess of purchase price over
fair value of identifiable assets acquired was recorded as goodwill and will be
amortized on a straight-line basis over its useful life of seven years. The
Company has allocated the purchase price as follows: $3.4 million to software;
$4.0 million to acquired workforce; $42.5 million to in-process research and
development costs; and $57.1 million to goodwill. As a result of the write-off
of in-process research and development costs and additional amortization expense
resulting from the Solid Edge Acquisition, the Company expects that net income
in 1998 will be significantly less than in prior years.
Financial performance for the Solid Edge product since the acquisition has
been consistent with the projections utilized in the allocation of the purchase
price for the Solid Edge Acquisition.
8
<PAGE>
Forward-looking Statements
All statements other than historical statements contained in this Report on
Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Without limitation, these
forward-looking statements include statements regarding expected future declines
in hardware revenues, future income gains to be realized from the exercise of
warrants and subsequent sale of related marketable securities, the Company's
effective tax rate for the remainder of calendar year 1998, the Company's Year
2000 exposure, the Company's exposure resulting from the introduction in 1999 of
a new currency (the "euro") in certain European countries, and the sufficiency
of liquidity and capital resources over the next twelve months. Any Form 10-K,
Annual Report to Shareholders, Form 10-Q or Form 8-K of the Company may include
these and other forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements have been made or may in
the future be made by the Company, including statements regarding future
operating performance, short- and long-term revenue and earnings growth, the
value of new contract signings, and MCAD industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: competition in the MCAD
industry and the impact of such competition on pricing, revenues and margins;
market acceptance of new Company product or service offerings and costs
associated with the development and marketing of such offerings; the financial
performance of current and future customer contracts; the cost of attracting and
retaining highly skilled personnel; the ability of the Company to successfully
integrate its operations into a single, effective and efficient entity; and the
significant quarterly fluctuations in the Company's operating results caused by,
among other factors, the timing of orders and shipments. Such factors are
described in more detail in the Company's most recent Registration Statement
(File No. 333-48261) under "Risk Factors" beginning on page 10.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
Results of Operations
Revenues. Revenues were $97.1 million during the three months ended
September 30, 1998, an increase of $20.7 million from $76.4 million for the
corresponding period in 1997. Revenues were $285.6 million during the nine
months ended September 30, 1998, an increase of $58.8 million from $226.8
million for the corresponding period in 1997.
Software revenues increased $14.5 million, or 59%, to $39.2 million for the
three month period ended September 30, 1998, from $24.7 million for the
corresponding period in 1997. Software revenues increased $29.6 million, or 37%,
to $109.3 million for the nine month period ended September 30, 1998, from $79.7
million for the corresponding period in 1997. The increase for the three month
period resulted from strong sales performance in all geographic areas and the
addition of the Solid Edge/EMS product line. The increase for the nine month
period resulted from strong sales performance, particularly in Europe and Asia
Pacific, and the addition of the Solid Edge/EMS product line.
Services revenues increased $12.1 million, or 36%, to $45.4 million for the
three month period ended September 30, 1998, from $33.3 million for the
corresponding period in 1997. Services revenues increased $30.0 million, or 30%,
to $129.7 million for the nine month period ended September 30, 1998, from $99.7
million for the corresponding period in 1997. The increases resulted from
software maintenance growth in all geographic areas, particularly Europe and
Asia Pacific, corresponding with the higher software sales activity.
As anticipated, hardware revenues decreased $5.8 million, or 32%, to $12.6
million for the three month period ended September 30, 1998, from $18.4 million
for the corresponding period in 1997. Hardware revenues decreased $0.9 million,
or 2%, to $46.5 million for the nine month period ended September 30, 1998, from
$47.4 million for the corresponding period in 1997. All geographic areas
experienced decreases for the three month
9
<PAGE>
period. Only the Americas showed an increase for the nine month period. Over
time, the Company expects hardware revenues to decline and to become a smaller
portion of its business.
Revenues from international operations represented 53% of total revenues
for the three months ended September 30, 1998 and 1997. Revenues from
international operations represented 52% of total revenues for the nine months
ended September 30, 1998 and 1997.
Gross Profit. Gross profit was $59.8 million during the three months ended
September 30, 1998, an increase of $18.9 million from $40.9 million for the
corresponding period in 1997. Gross profit was $167.6 million during the nine
months ended September 30, 1998, an increase of $35.8 million from $131.8
million for the corresponding period in 1997. Gross profit margin was 62% and
54% for the three months ended September 30, 1998 and 1997, respectively, and
59% and 58% for the nine months ended September 30, 1998 and 1997, respectively.
Gross profit on software revenues increased $11.0 million, or 61%, to $28.9
million for the three month period ended September 30, 1998, from $17.9 million
for the corresponding period in 1997. Gross profit on software revenues
increased $22.3 million, or 38%, to $81.3 million for the nine month period
ended September 30, 1998, from $59.0 million for the corresponding period in
1997. The increases resulted primarily from strong revenue growth that more than
offset the amortization of goodwill and software intangibles arising from the
Solid Edge Acquisition.
Gross profit on services revenues increased $11.0 million, or 61%, to $29.0
million for the three month period ended September 30, 1998, from $18.0 million
for the corresponding period in 1997. Gross profit on services revenues
increased $20.9 million, or 36%, to $78.7 million for the nine month period
ended September 30, 1998, from $57.8 million for the corresponding period in
1997. The increases resulted primarily from improved margins on professional
services.
Gross profit on hardware revenues decreased $3.1 million, or 62%, to $1.9
million for the three month period ended September 30, 1998, from $5.0 million
for the corresponding period in 1997. Gross profit on hardware revenues
decreased $7.3 million, or 49%, to $7.6 million for the nine month period ended
September 30, 1998, from $14.9 million for the corresponding period in 1997. The
decreases resulted from reductions in finders fees paid to the Company by
hardware vendors and a change in the mix of hardware sales to lower margin
computers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $36.6 million during the three months ended
September 30, 1998, an increase of $11.9 million from $24.7 million for the
corresponding period in 1997. Selling, general and administrative expenses were
$98.7 million during the nine months ended September 30, 1998, an increase of
$24.7 million from $74.0 million for the corresponding period in 1997. Selling,
general and administrative expenses represented 38% and 32% of total revenues
for the three months ended September 30, 1998 and 1997, respectively, and 35%
and 33% of total revenues for the nine months ended September 30, 1998 and 1997.
Selling costs comprise salesperson salaries, commissions and benefits, travel,
sales office occupancy and other related costs. The higher selling, general and
administrative expenses resulted from increases in commissions and bonuses
because of continued strong sales growth over 1997, increased staffing to
support higher revenue growth and additional employee costs associated with the
Solid Edge Acquisition.
Research and Development Costs. Research and development costs were $16.7
million and $12.1 million for the three months ended September 30, 1998 and
1997, respectively. Research and development costs were $46.6 million and $34.6
million for the nine months ended September 30, 1998 and 1997, respectively.
Research and development costs as a percentage of total revenues were 17% and
16% for the three months ended September 30, 1998 and 1997, respectively, and
16% and 15% for the nine months ended September 30, 1998 and 1997, respectively.
The increase in research and development costs resulted principally from the
Solid Edge Acquisition and support of initiatives related to the Company's IMAN
and ProductVision software products.
10
<PAGE>
In-Process Research and Development Costs. In-process research and
development for the nine months ended September 30, 1998 includes the write off
of in-process research and development costs of $42.5 million associated with
the Solid Edge Acquisition in the first quarter of 1998.
Operating Income (Loss). Operating income was $6.5 million and $4.2
million for the three months ended September 30, 1998 and 1997, respectively.
Operating income (loss) was $(20.1) million and $23.2 million for the nine
months ended September 30, 1998 and 1997, respectively.
Other Income, Net. Other income, net was $0.9 million and $3.8 million for
the three months ended September 30, 1998 and 1997, respectively. Other income,
net was $8.6 million and $3.8 million for the nine months ended September 30,
1998 and 1997, respectively. The decrease for the three months ended September
30, 1998 and the increase for the nine months ended September 30, 1998 in other
income, net resulted from differences in the amounts of gain realized from the
sale of marketable equity securities. These securities were obtained through the
exercise of warrants in the quarter ended March 31, 1998. The warrants were
received in exchange for reduced royalty fees from a private software company
that was acquired by a public company in 1997. The Company anticipates that
significant gains on similar transactions will continue to be reflected in its
results of operations in fourth quarter 1998. The amount of such gains will be
dependent on existing market conditions at the time of sale. Interest expense
associated with the Intercompany Credit Agreement and Intercompany Note was $0.6
million and $3.2 million for the three months and nine months ended September
30, 1998, respectively.
Provision for Income Taxes. The provision for income taxes was $2.6
million and $3.0 million for the three months ended September 30, 1998 and 1997,
respectively. The provision for income taxes was $(5.6) million and $10.1
million for the nine months ended September 30, 1998 and 1997, respectively. The
Company's effective tax rate was 36.0% and 37.2% for the three months ended
September 30, 1998 and 1997, respectively, and 48.6% and 37.2% for the nine
months ended September 30, 1998 and 1997, respectively. The Company's effective
tax rate was higher than normal in the first quarter of 1998 as a result of the
write-off of in-process research and development costs discussed above. The
Company expects that its effective tax rate for the remainder of 1998 will be
approximately 36%.
Net Income (Loss). Net income for the three months ended September 30,
1998, was $4.7 million compared to $5.0 million for the corresponding quarter in
1997. Net income (loss) for the nine months ended September 30, 1998, was
$(5.9) million and $17.0 million for the corresponding period in 1997. Basic
and diluted earnings per share of common stock was $0.13 and $0.16 for the three
months ended September 30, 1998 and 1997, respectively. Basic and diluted
earnings (loss) per share of common stock was $(0.18) and $0.54 for the nine
months ended September 30, 1998 and 1997, respectively.
Inflation. The Company believes that inflation generally had little effect
on its results of operations for the periods presented.
Recent Accounting Pronouncements. In June 1997, SFAS No. 130, Reporting
Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, were issued. SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. Reclassification of financial statements for earlier
periods, provided for comparative purposes, is required. The statement also
requires the accumulated balance of other comprehensive income to be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the statement of financial position. SFAS No. 131 establishes
standards for reporting information about operating segments in annual and
interim financial statements. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Categories required to be
reported as well as reconciled to the financial statements are segment profit or
loss, certain specific revenue and expense items, and segment assets. SFAS No.
130 and No. 131 are effective for fiscal years beginning after December 15,
1997.
11
<PAGE>
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2, Software Revenue Recognition, to
supersede SOP 91-1, the previously released SOP on this topic. SOP 97-2 provides
additional guidance on when revenue should be recognized, and in what amounts,
for licensing, selling, leasing, or otherwise marketing computer software. The
provisions of SOP 97-2 are effective for transactions entered into in fiscal
years beginning after December 15, 1997. Adoption of SOP 97-2 did not have a
material adverse impact on the Company's financial statements.
Liquidity and Capital Resources
The Company's central cash management function is performed by EDS. The
Company has an Intercompany Credit Agreement with EDS under which there was no
amount outstanding at September 30, 1998. The maximum amount that the Company
may borrow at any time from EDS under the Intercompany Credit Agreement (and
certain other credit agreements between EDS Finance PLC, a wholly-owned
subsidiary of EDS, and certain non-U.S. subsidiaries of the Company) is $70
million. Amounts outstanding under the Intercompany Credit Agreement bear
interest, payable quarterly at a rate equal to one-month LIBOR plus 0.5%. The
Intercompany Credit Agreement restricts the Company from obtaining financing
from any party other than EDS without written consent from EDS, unless EDS fails
to provide funding available to the Company under the Intercompany Credit
Agreement. The Intercompany Credit Agreement terminates on December 31, 2002,
unless terminated earlier at the election of one of the parties upon occurrence
of certain events, and requires that the Company lend to EDS all excess cash of
the Company at a rate of one-month LIBID minus 0.5%.
The Company also has outstanding an Intercompany Note in the principal
amount of $67.9 million payable to EDS on March 6, 2001. The Intercompany Note
bears interest, payable semiannually, at a rate equal to one-month LIBID minus
0.5%.
The Company's net cash provided by operations for the nine months ended
September 30, 1998 increased $6.4 million to $68.5 million from $62.1 million in
the comparable period in the prior year. The Company's net cash used in
investing activities for the nine months ended September 30, 1998 increased
$100.6 million to $102.3 million from $1.7 million in the same prior year
period. The increase resulted primarily from cash payments made in connection
with the Solid Edge Acquisition and a higher level of purchases of property and
equipment and software, partially offset by proceeds received from the sale of
marketable securities. Cash flows provided by financing activities increased
$121.0 million to $60.6 million for the nine months ended September 30, 1998,
primarily because of $65.1 million of proceeds received from the Company's
initial public offering of Class A Common Stock as well as decreases in cash
payments on intercompany balances with EDS. The Company believes currently
available sources of liquidity, including the Intercompany Credit Agreement and
cash generated from operations, will be sufficient for its operations for at
least the next twelve months.
Impact of Year 2000
The Year 2000 ("Y2K") problem refers to concerns that many existing
computer programs may fail to accurately process date information beyond the
year 1999 because such programs do not properly recognize and/or process years
that begin with "20" instead of the familiar "19."
With respect to the Company's current software product offerings, the
Company believes that its product offerings are "Year 2000 compliant." The
Company has conducted Y2K compliance reviews of Company-developed code for the
current versions of Unigraphics, IMAN, Parasolid, Solid Edge and EMS software
and believes this software to be compliant. Additionally, regarding third-party-
supplied software contained within, or offered in conjunction with, Company-
developed software, the Company has either tested such code for Y2K compliance
or has received assurances from third party suppliers that such code will be
compliant by the end of calendar year 1998.
Regarding the installed base of Company-supported software products,
customers using older software product versions which are found to be non-
compliant, in most cases, can purchase upgrades that are Year 2000
12
<PAGE>
compliant. However, customers who have written their own programs that
manipulate, calculate, store or display dates represented as two digits may need
to modify such internal programs to avoid Year 2000 problems.
While there can be no assurances that the Company will not be exposed to
potential claims resulting from software product problems associated with the
Year 2000 problem, the Company does not currently believe that the effects of
any Year 2000 non-compliance in the Company's current software products or in
the Company's installed base of software will result in any material adverse
impact on the Company's business or results of operations.
The Company, in conjunction with its parent EDS and separately, is in the
process of reviewing, remediating, upgrading, and/or acquiring new internal
business systems and services, including the implementation of the SAP
enterprise resource planning software system. In accordance with the Management
Services Agreement between the Company and EDS, the Company will continue using
certain business systems of EDS in the near term. The business systems of EDS
utilized by the Company principally include those that EDS has identified as
"mission critical" systems, such as payroll, accounts receivable, accounts
payable, tax administration and corporate administration. The Company has been
advised by EDS that through September 30, 1998, EDS had completed assessment of
approximately 89% of its mission critical projects, renovation of approximately
57% of such projects, testing of approximately 11% of such projects and
implementation of approximately 11% of such projects. EDS has advised the
Company that it expects to complete the Y2K remediation of its mission critical
projects by the end of the second quarter of 1999 and substantially all of its
non-mission critical projects by the end of the third quarter of 1999. Non-
mission critical systems include non-IT systems such as elevator operations,
HVAC, and security systems. The failure by EDS to timely complete the Y2K
remediation process for those EDS mission-critical systems which the Company
plans to continue using may have a material adverse impact on the Company's
business or results of operation.
Concurrently with EDS' remediation of mission-critical and other systems
used by the Company, the Company is planning to implement enterprise application
software that will replace many EDS mission critical systems. Such Y2K compliant
enterprise application software packages, including general ledger, accounting,
accounts payable and receivable, payroll, and others, are planned for
installation during calendar year 1999 in the United States. Certain new
financial systems also will be installed in Canada, Germany and the United
Kingdom during 1999. The Company plans to phase in new enterprise systems in its
other non U.S. operations during and after 1999. If implementation of any such
new internal system were delayed, the Company would rely on remediated EDS
systems until such time as the new system can be installed. The Company had
planned to install such new enterprise systems regardless of the Year 2000
problem; therefore, costs associated with these new systems have not been
reflected in the costs associated with addressing the Company's Year 2000
issues.
The Company also is in the process of reviewing for Y2K compliance other
unique, internal business systems not included in the EDS systems or the new
enterprise systems mentioned above. Systems being reviewed include certain end
user hardware, operating systems and applications, server hardware and software,
telecommunications hardware, software and services, and other Company
applications. Year 2000 reviews of most of these systems and services used in
the United States have been completed. Year 2000 reviews of such systems and
services used at international locations are in progress. All reviews are
scheduled to be completed by the end of the first quarter of 1999. In many cases
compliance will be achieved by installing upgrades or revisions provided by
third parties in accordance with existing agreements. In other cases, compliance
will be achieved through Company remediation efforts or planned technology
refresh purchases.
Finally, with respect to suppliers and vendors of key products and
services, in many cases the Company acquires such products and services using
existing EDS purchase arrangements. The Company understands that EDS has queried
its vendors regarding Year 2000 compliance. Using the results of its contacts
with suppliers, EDS has compiled a database listing thousands of products and
services and indicating which items are compliant. The Company has relied on
this information in an attempt to ensure that certain items acquired from third
party suppliers pursuant to EDS purchase agreements are Y2K ready. Although the
Company cannot be certain that all mission critical and non- mission critical
supplier products and services are Y2K ready, the Company will continue to study
and evaluate the Y2K compliance of key vendors.
13
<PAGE>
The costs incurred by the Company to achieve Year 2000 compliance will be
expensed as incurred. Costs incurred to make EDS' systems Year 2000 compliant
will be paid by EDS, however such costs may be reflected in charges EDS bills to
internal users such as the Company. The Company is still analyzing the
additional costs to make its internal hardware and software systems Y2K ready.
At this time, the Company does not believe that costs of remediation or
unplanned technology upgrades or replacements will exceed $500,000.
Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to adopt the "euro" as their common legal currency and to
establish fixed conversion rates between their existing sovereign currencies and
the euro. The euro will then trade on currency exchanges and be available for
non-cash transactions. The existing sovereign currencies will remain legal
tender in the participating countries during the transition period ending on
January 1, 2002. Beginning on that date, the participating countries will issue
new euro-denominated currency for use in cash transactions and the existing
sovereign currencies will no longer be legal tender. The Company operates in the
countries which are scheduled to adopt the euro ("Eurozone") and in most of the
other countries of the European Union that initially are not participating in
the euro conversion.
In the near term, EDS will continue to provide many internal systems
services to the Company (including purchasing, accounting, and billing system
services) throughout Europe under the Master Services Agreement between EDS and
the Company. The Company has been informed by EDS that EDS' European systems
will provide the capability to trade with customers and suppliers in the euro
currency by January 1, 1999 and that, by the fourth quarter of 1999, EDS'
European systems will be updated to provide for dual reporting in euro currency
and to allow migration from the existing currencies to the euro over the
following two-year period. Concurrently, the Company is in the process of
replacing and upgrading many of the internal systems currently provided by EDS.
The new systems are planned to be operational throughout Europe on or before
January 1, 2002, the end of the euro transition period, and will accommodate
business in euros. Assuming timely upgrade of current systems and implementation
of relevant replacement systems, the Company does not expect to incur any
material incremental costs to update current systems or to install new systems
having euro-related functionality. Although the Company currently has no reason
to believe that relevant system improvements will be not be timely implemented,
a failure to timely install internal systems to handle business in euros could
have a material impact on the Company's financial condition or results of
operation.
Within the Eurozone, the Company prices its products on an individual
country basis. Effective January 1, 1999 and periodically thereafter during the
transition period, the Company will establish product prices and quote such
prices in both local currencies and the euro. The pricing in euros for similar
products and services is not expected to be identical in the different
countries; however the price differentials are not expected to be significant,
thereby minimizing any negative competitive impact as a result of pricing
transparency. At this time, the Company does not believe the conversion will
have a material adverse impact on its competitiveness in Europe. However, the
Company will continue to analyze euro-related developments; and there can be no
assurance that the euro-conversion program will not have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
14
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
----------------------------------------------------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
None.
15
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
SIGNATURES
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 hereunto duly authorized.
UNIGRAPHICS SOLUTIONS INC.
-----------------------------------
(Registrant)
By /S/ Douglas E. Barnett
-----------------------------------
(Douglas E. Barnett, Vice President
and Chief Financial Officer)
Date: November 13, 1998
16
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
1998 1997 1998 1997
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic Earnings (Loss) Per Share:
Actual shares outstanding - beginning of period 36,265,000 31,265,000 31,265,000 31,265,000
Weighted average number of common shares issued -- -- 1,930,147 --
Weighted average number of common shares
outstanding - end of period 36,265,000 31,265,000 33,195,147 31,265,000
Net income (loss) (in thousands) $ 4,705 $ 5,004 $ (5,935) $ 16,986
Basic earnings (loss) per common share $ 0.13 $ 0.16 $ (0.18) $ 0.54
Diluted Earnings (Loss) Per Share:
Actual shares outstanding - beginning of period 36,265,000 31,265,000 31,265,000 31,265,000
Weighted average number of common shares issued -- -- 1,930,147 --
Weighted average number of common shares
outstanding - end of period 36,265,000 31,265,000 33,195,147 31,265,000
Net income (loss) (in thousands) $ 4,705 $ 5,004 $ (5,935) $ 16,986
Diluted earnings (loss) per common share: $ 0.13 $ 0.16 $ (0.18) $ 0.54
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JUL-01-1998 JUL-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 26,772 1
<SECURITIES> 9,686 1,301
<RECEIVABLES> 105,755 128,151
<ALLOWANCES> 5,319 5,135
<INVENTORY> 0 0
<CURRENT-ASSETS> 143,470 131,786
<PP&E> 54,031 54,615
<DEPRECIATION> 31,621 35,879
<TOTAL-ASSETS> 249,838 179,210
<CURRENT-LIABILITIES> 104,269 80,498
<BONDS> 67,925 0
0 0
0 0
<COMMON> 363 0
<OTHER-SE> 77,281 88,258
<TOTAL-LIABILITY-AND-EQUITY> 249,838 179,210
<SALES> 51,716 43,059
<TOTAL-REVENUES> 97,132 76,356
<CGS> 20,977 20,135
<TOTAL-COSTS> 37,353 35,418
<OTHER-EXPENSES> 53,311 36,765
<LOSS-PROVISION> 51 800
<INTEREST-EXPENSE> 609 0
<INCOME-PRETAX> 7,350 7,968
<INCOME-TAX> 2,645 2,964
<INCOME-CONTINUING> 4,705 5,004
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,705 5,004
<EPS-PRIMARY> 0.13 0.16
<EPS-DILUTED> 0.13 0.16
</TABLE>
