<PAGE>
PROSPECTUS
Filed pursuant to Rule 424(B)(4)
SEC File No. 333-48261
5,000,000 Shares
Unigraphics Solutions Inc.
CLASS A COMMON STOCK
---------------
OF THE 5,000,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 3,853,000
SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS AND 1,147,000 SHARES ARE BEING OFFERED INITIALLY
OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS. ALL OF THE SHARES OF CLASS A COMMON STOCK BEING
OFFERED ARE BEING SOLD BY UNIGRAPHICS SOLUTIONS INC., WHICH
IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF ELECTRONIC DATA
SYSTEMS CORPORATION. PRIOR TO THE OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK.
SEE "UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC
OFFERING PRICE.
---------------
HOLDERS OF CLASS A COMMON STOCK GENERALLY HAVE RIGHTS IDENTICAL TO THOSE OF
HOLDERS OF CLASS B COMMON STOCK, EXCEPT THAT HOLDERS OF CLASS A COMMON
STOCK ARE ENTITLED TO ONE VOTE PER SHARE WHILE HOLDERS OF CLASS B
COMMON STOCK ARE ENTITLED TO 10 VOTES PER SHARE ON ALL MATTERS
SUBMITTED TO A VOTE OF STOCKHOLDERS. HOLDERS OF CLASS A COMMON
STOCK ARE GENERALLY ENTITLED TO VOTE WITH THE HOLDERS OF CLASS
B COMMON STOCK AS ONE CLASS ON ALL MATTERS AS TO WHICH THE
HOLDERS OF CLASS B COMMON STOCK ARE ENTITLED TO VOTE. SEE
"DESCRIPTION OF CAPITAL STOCK." UPON COMPLETION OF THE
OFFERING, EDS WILL OWN 100% OF THE OUTSTANDING CLASS
B COMMON STOCK OF THE COMPANY, WHICH WILL REPRESENT
APPROXIMATELY 98.4% OF THE COMBINED VOTING POWER
OF ALL CLASSES OF VOTING STOCK IN THE COMPANY
(APPROXIMATELY 98.2% IF THE U.S.
UNDERWRITERS' OVER-ALLOTMENT OPTION IS
EXERCISED IN FULL). SEE "RELATIONSHIP
WITH EDS AND CERTAIN TRANSACTIONS."
---------------
THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE UNDER THE SYMBOL "UGS," SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
PRICE $14 A SHARE
---------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share............................. $14.00 $.98 $13.02
Total(3).............................. $70,000,000 $4,900,000 $65,100,000
</TABLE>
- -------
(1) The Company and EDS have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
750,000 additional Shares of Class A Common Stock at the price to public
less underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the U.S. Underwriters exercise such option in
full, the total price to public, underwriting discounts and commissions
and proceeds to Company will be $80,500,000, $5,635,000 and $74,865,000,
respectively. See "Underwriters."
---------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about June 23, 1998, at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
---------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST
J.P. MORGAN & CO.
June 17, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK OFFERED HEREBY,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
Until July 12, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Class A Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as Underwriters and with respect to their
unsold allotments or subscriptions.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................... 3
Risk Factors........................................................... 10
Special Note Regarding Forward-Looking Statements...................... 17
Use of Proceeds........................................................ 18
Dividend Policy........................................................ 18
Capitalization......................................................... 19
Dilution............................................................... 20
Pro Forma Financial Information........................................ 21
Selected Financial and Operating Data.................................. 27
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 28
Business............................................................... 40
Management............................................................. 55
Security Ownership of Management and Principal Stockholder............. 65
Relationship with EDS and Certain Transactions......................... 66
Description of Capital Stock........................................... 69
Shares Eligible for Future Sale........................................ 78
Certain Federal Income Tax Consequences for Non-United States Holders.. 80
Underwriters........................................................... 82
Legal Matters.......................................................... 85
Experts................................................................ 85
Additional Information................................................. 86
Index to Financial Statements.......................................... F-1
</TABLE>
----------------
For investors outside the United States: No action has been or will be taken
in any jurisdiction by the Company or any Underwriter that would permit a
public offering of the Class A Common Stock or possession or distribution of
this Prospectus in any jurisdiction where action for that purpose is required,
other than in the United States. Persons into whose possession this Prospectus
comes are required by the Company and the Underwriters to inform themselves
about, and to observe any restrictions as to, the offering of the Class A
Common Stock and the distribution of this Prospectus.
In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the terms "United States" and "U.S." mean the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
----------------
The Company owns or otherwise has rights to trademarks and trade names that
it uses in conjunction with the sale of its products. Unigraphics
Solutions(TM), Unigraphics(R), Solid Edge(R), Parasolid(R) and IMAN(R), among
others, are trademarks that are owned by the Company. This Prospectus also
makes reference to trademarks of companies other than those of the Company.
Where other companies or their trademarks are referenced in this Prospectus,
such companies make no representation or endorsement as to the securities
offered hereby or the information contained herein.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CLASS A
COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH
THE OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF CLASS A COMMON STOCK IN
THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITERS."
2
<PAGE>
Unigraphics Solutions/TM/
[Logo of Parasolid, Solid Edge, Unigraphics and IMAN]
Mid-Range thru High End product Development Solutions
[Graphics of products designed with the Company's software]
Boeing Space Systems
Titleist and Foot-Joy Worldwide
LG Electronics Design Tech, Ltd.
Pratt & Whitney
Mosley Automotive
Detroit Diesel
Sunbeam Product Design Group
Boeing
Abu AB
Gencorp/Aerojet
Aircom Manufacturing Inc.
Seiko Instruments Inc.
Jura EA AG
APPH Ltd.
SOCOMEC S.A.
Ericsson Inc.
Electrodrives Ltd.
Decathlon
Univ. of Bohemia
Classic Design
Creaholic S.A.
Howald AG
Ryobi Motor Products
Dalian Locomotive & Rolling Stock
Lucent Technologies
European Gas Turbines
Origin Medsystems Inc.
Dresser-Rand
Sundstrand Aerospace
STN Atlas Elektronik GmbH
General Motors Do Brazil
IAI ELTA
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and related notes appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information contained in this
Prospectus assumes that the U.S. Underwriters' over-allotment option is not
exercised. As used herein, references to the "Company" include the historical
operating results and activities of, and assets and liabilities assigned to,
the business and operations which comprise the Company as of the date hereof.
The following terms used in this Prospectus have the respective meanings
assigned to them: (i) CAD--computer-aided design; (ii) CAM--computer-aided
manufacturing; (iii) CAE--computer-aided engineering; (iv) MCAD--the mechanical
CAD/CAM/CAE business; (v) PDM--product data management; and (vi) seat--a
configuration of the Company's software products that can be operated by a
single user.
THE COMPANY
The Company is a leading global provider of scalable, integrated, enterprise-
level MCAD solutions that are used for virtual product development principally
in the automotive and transportation, aerospace, consumer products, equipment
and machinery and electronics industries. The Company's MCAD solutions consist
of both software products and consulting services. The Company's software
products allow customers to reduce design, engineering and manufacturing costs
and minimize the time between a product's inception and its introduction to the
market while simultaneously improving product quality. Through MCAD, product
design is accomplished digitally, eliminating the need for paper drawings or
physical prototypes. With digital assemblies, fit, tolerances and moving
mechanisms, as well as design alternatives, can be tested before a physical
product has been made. For example, automobile designers can virtually "open"
the door or trunk and can "walk around" a digital three-dimensional ("3-D")
model of a car to assess its design. MCAD systems produce large volumes of data
which can be managed by the Company's product data management ("PDM") software.
The Company's PDM software makes the most current product data readily
accessible to all appropriate users throughout a manufacturing enterprise. Some
of the Company's significant customers, located worldwide, include General
Motors Corporation ("GM"), The Boeing Company ("Boeing"), Ericsson Telecom AB
("Ericsson") and General Electric Company ("GE").
The Company offers a full line of design, analysis and manufacturing software
products that meets the diverse needs of its customer base, which includes a
spectrum of companies from multinational corporations to small machine shops.
The Company addresses all aspects of digital product development, including (i)
product modeling, (ii) product information management, (iii) data transfer and
(iv) process re-engineering. The Company's integrated, scalable software
solutions range from Unigraphics, its high-end MCAD software product suite for
complex design, manufacture and assembly projects, to Solid Edge, its Windows-
based, easy-to-use design and drafting product. Both Unigraphics and the latest
version of Solid Edge, Version 5.0 (which was released in May 1998), are based
on the Company's core solid modeling kernel, Parasolid. As a result, the
Company can differentiate itself from its competitors by enabling Unigraphics
and Solid Edge to seamlessly share geometric data without the need for
translation. The Company's PDM software, IMAN, works in conjunction with both
the Company's and third parties' MCAD software to organize and manage the large
volume of data and numerous versions associated with the typical digital
product model. A key element of the Company's product development strategy is
the management, visualization and simulation of product data across the World
Wide Web ("Web") so that model data may be shared among all users of the
Company's MCAD and PDM products and companion applications. In addition, the
Company offers a full range of customization, implementation and integration
consulting services that enables customers to re-engineer their methods of
virtual product development by optimizing the use of the Company's software.
Through its Unigraphics, Solid Edge, Parasolid and IMAN products, the Company
served more than 4,000 customers worldwide at December 31, 1997, comprising an
aggregate of over 93,000 seats. Of these seats, there were over 49,000
Unigraphics seats, over 9,000 Solid Edge seats, over 72,000 Parasolid seats
(including over
3
<PAGE>
49,000 seats embedded in Unigraphics) and over 12,000 IMAN seats. With its
suite of core products, its large worldwide installed seat base and the
continuing evolution of Parasolid as a solid modeling standard for MCAD
software, the Company believes that it is well positioned to take advantage of
the MCAD market's varying demands for software functionality, virtual product
development and product data management.
BUSINESS STRATEGY
Demand in MCAD and PDM markets is dictated by the needs of users throughout
companies of all sizes and across extended enterprises to collaborate on
virtual product development. These users often require different levels of
software functionality. The Company's strategy is to offer a variable,
customizable combination of software products and implementation and
integration services to address the product and process complexities associated
with design and assembly projects. The key elements of the Company's strategy
include:
PROVIDING A FULL RANGE OF INTEGRATED SCALABLE ENTERPRISE SOLUTIONS. The
Company provides a full range of MCAD software products to meet the needs of
its customers, from its high-end Unigraphics product suite to its mid-range
offering, Solid Edge. Both Solid Edge 5.0 and Unigraphics are integrated
through the use of the Company's core solid modeler, Parasolid, thereby
allowing Unigraphics and Solid Edge to seamlessly share geometric data without
the need for translation. Unigraphics is scalable with the ability to add
modules or features to fit the needs of the Company's customers, thereby
reducing hardware system requirements. Solid Edge's Windows capabilities
improve design engineering productivity, shorten learning curves and reduce
training costs. The Company believes that it is well positioned because each of
its customers can buy the precise software product or products that meet that
customer's particular needs and allow its users to share data within a single
organization or throughout several organizations.
ESTABLISHING PARASOLID AS A SOLID MODELING STANDARD. The Company believes
that Parasolid has emerged as the mid-range MCAD solid modeling standard while
being fully capable of addressing the demanding requirements of high-end MCAD
software. Unigraphics, the Company's high-end MCAD offering, is based on
Parasolid. The Company licenses Parasolid for incorporation into mid-range MCAD
software products such as Dassault Systemes S.A.'s ("Dassault") Solid Works and
Parametric Technology Corporation's ("Parametric") DesignWave. In addition,
Bentley Systems, Inc. ("Bentley") has recently incorporated Parasolid in its
mid-range product, MicroStation Modeler, to Parasolid. The Company also
licenses Parasolid to various third-party niche software application
developers, who create Parasolid-compatible specialized applications that
enhance the functionality of Unigraphics and Solid Edge. Accordingly, the
Company expects that the growing prevalence of Parasolid-based applications
will make Parasolid part of the buying criteria for MCAD software, thereby
giving Unigraphics, the only high-end MCAD product to use Parasolid, an
advantage over competing high-end products.
OFFERING FULL FUNCTION PRODUCT DATA MANAGEMENT. The Company believes that
IMAN is one of the industry's most functional product data management tools for
engineering applications. IMAN captures, manages and provides enterprise-wide
access to the large volume of data generated throughout the virtual product
development cycle. IMAN's technology is scalable for use within a wide range of
customer implementations, extending from small Unigraphics-centric design teams
to globally distributed enterprises with thousands of concurrent users across
many functional areas, such as engineering, manufacturing, marketing and
procurement. The Company believes that IMAN's strengths lie in (i) its tight
integration with Unigraphics, which enables IMAN to manage the complex
interrelationships among Unigraphics files, (ii) its variant configuration
modeling, which facilitates the definition of the modularized, rules-based
views of the bill of materials that are required for efficient manufacturing of
customized products and (iii) its object-oriented architecture, which enables
designers to share data across an enterprise. A key element of the Company's
PDM strategy is utilizing Web-based technologies to provide a common framework
for the visualization, simulation and management of product data. The Company's
Web technologies provide enterprise-wide access to the virtual product model
and associated specification data, enabling organizations outside of the
traditional users of the Company's MCAD products to utilize the data. For
example, marketing departments can view virtual products and provide immediate
feedback during the product development process.
4
<PAGE>
MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company is focused on continually
developing and acquiring the most technologically advanced MCAD products.
Unigraphics' breadth of modeling functionality combines complex surface design
capabilities with advanced feature and solid modeling while providing some of
the most advanced CAM technology on the market today. Solid Edge, which has
pioneered advances in ease of use, was developed with native Windows
functionality, including familiar "drag and drop" features, menu driven
options, dialog boxes and on-line help, and was the first mechanical CAD
product to be certified as Microsoft Office compatible. In order to maintain
its technological leadership, the Company releases major enhancements
containing significant improvements to each of its four core products
approximately twice per year. In addition, the Company has developed UG/WAVE, a
next generation parametric approach to top-down product design that allows
"what-if" evaluations of engineering alternatives. For example, UG/WAVE allows
engineers to more efficiently evaluate at the system level the impact of
changes in wing design on the aerodynamic performance of an airplane.
LEVERAGING AND EXPANDING ITS CUSTOMER BASE. The Company intends to expand its
user base by increasing sales to existing customers and to new customers by
expanding its sales force and by utilizing Web-based distribution. The Company
intends to increase the licensing of its MCAD software to its existing customer
base by offering an affordable integrated scalable product line. The Company is
targeting existing users of two-dimensional ("2-D") software by marketing the
latest version of Solid Edge as an affordable, easy-to-use 3-D product. The
Company intends to increase the size of its customer base by marketing to the
suppliers of its aerospace and automotive original equipment manufacturers
("OEMs"). The Company believes that both of its MCAD software offerings are
attractive to suppliers who seek to meet OEM requirements because (i)
Unigraphics is available in discrete modules to allow users to purchase only
the Unigraphics capabilities their businesses require and (ii) Solid Edge is an
affordable easy-to-use MCAD software package that will have the ability to
seamlessly transfer geometric data to high-end Unigraphics users. As part of
the Solid Edge Acquisition (as hereinafter defined), the Company acquired
Engineering Modeling Systems Software ("EMS"), a high-end MCAD product, which
had over 6,000 seats at December 31, 1997. The Company will seek to convert EMS
customers to Unigraphics or Solid Edge.
RECENT DEVELOPMENTS
SOLID EDGE ACQUISITION. On March 2, 1998, the Company completed the
acquisition (the "Solid Edge Acquisition") of the MCAD business of Intergraph
Corporation ("Intergraph") consisting of the Solid Edge and EMS product lines
(the "Solid Edge/EMS Business") for a purchase price of $105 million (excluding
approximately $2 million of acquisition costs). The Solid Edge Acquisition
involved the direct transfer to the Company of the intellectual property rights
(through the ownership of some intellectual property and a perpetual, royalty-
free license for the remaining intellectual property) needed to modify and
improve all acquired or licensed intellectual property and to own any
modifications or improvements that it makes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Solid Edge
Acquisition."
Generally, Intergraph's customer contracts for Solid Edge and EMS also
covered other products and services of Intergraph. Therefore, such contracts
were not assigned to the Company. However, the Company will provide products
and services under such contracts as they relate to the Solid Edge/EMS
Business, and will receive the related economic benefits, until such time as
the Company and those Solid Edge and EMS customers enter into new agreements.
RELATIONSHIP WITH EDS. The Company is a newly-formed Delaware corporation
and, prior to the Offering (as hereinafter defined), a direct wholly owned
subsidiary of Electronic Data Systems Corporation ("EDS"). Upon completion of
the Offering, EDS will own 100% of the outstanding Class B Common Stock, par
value $.01 per share (the "Class B Common Stock"), of the Company representing
approximately 98.4% of the combined voting power of all classes of voting stock
of the Company (approximately 98.2% if the U.S. Underwriters' over-allotment
option is exercised in full). As long as EDS beneficially owns a majority of
the
5
<PAGE>
combined voting power, it will have the ability to elect all of the members of
the Board of Directors of the Company (the "Board of Directors") and ultimately
to control the management and affairs of the Company. See "Risk Factors--
Relationship with EDS."
Pursuant to a reorganization consummated effective as of January 1, 1998 (the
"Reorganization"), the Company became the successor to the MCAD businesses of
EDS which were formerly operated within several business units of EDS. In order
to fund the purchase price and expenses in connection with the Solid Edge
Acquisition, the Company borrowed $105 million from EDS pursuant to the
Intercompany Credit Agreement (as hereinafter defined). In addition, effective
March 6, 1998, the Company issued to EDS as a dividend a $73 million note (the
"Intercompany Note"). The net proceeds from the Offering (as hereinafter
defined) will be used to repay indebtedness to EDS outstanding under the
Intercompany Credit Agreement and any remaining proceeds will be applied to
reduce amounts owed to EDS under the Intercompany Note. In connection with the
Reorganization, the Company entered into certain agreements with EDS and its
affiliates, the terms of which were generally effective as of January 1, 1998.
See "Risk Factors--Relationship with EDS," "Relationship with EDS and Certain
Transactions--Contractual Arrangements" and "Pro Forma Financial Information."
----------------
The Company's executive offices are located at 13736 Riverport Drive,
Maryland Heights, Missouri, 63043, and its telephone number is (314) 344-5900.
6
<PAGE>
THE OFFERING
The offering hereby of 3,853,000 shares of Class A Common Stock, par value
$.01 per share (the "Class A Common Stock" and, together with the Class B
Common Stock, the "Common Stock"), of the Company initially being offered in
the United States and Canada (the "U.S. Offering") and the offering of
1,147,000 shares of Class A Common Stock initially being offered outside the
United States and Canada (the "International Offering") are collectively
referred to as the "Offering." The closing of each of the U.S. Offering and the
International Offering is conditioned on the closing of the other.
Class A Common Stock
Offered:
U.S. Offering......... 3,853,000 shares(1)
International
Offering.............. 1,147,000 shares
---------
Total............... 5,000,000 shares(1)
=========
Common Stock to Be
Outstanding After the
Offering:
Class A Common Stock.... 5,000,000 shares(1)(2)
Class B Common Stock.... 31,265,000 shares
----------
Total................. 36,265,000 shares(1)(2)
==========
Use of Proceeds........... The net proceeds to the Company from the Offering
are estimated to be approximately $64.1 million.
Such net proceeds will be used to repay
indebtedness to EDS outstanding under the
Intercompany Credit Agreement and any remaining
proceeds will be applied to reduce amounts owed to
EDS under the Intercompany Note. See "Use of
Proceeds."
Voting Rights............. The holders of Class A Common Stock generally have
rights identical to holders of Class B Common
Stock, except that holders of Class A Common Stock
are entitled to one vote per share and holders of
Class B Common Stock are entitled to 10 votes per
share. The Class A Common Stock and Class B Common
Stock generally will vote together as a single
class on all matters except as otherwise required
by Delaware law. See "Description of Capital
Stock--Common Stock--Voting Rights." Under certain
circumstances, Class B Common Stock will
automatically convert to Class A Common Stock. See
"Description of Capital Stock--Common Stock--
Conversion."
Proposed New York Stock
Exchange Symbol........... UGS
- --------
(1) Assumes the U.S. Underwriters' over-allotment option is not exercised.
(2) Does not include approximately 800,000 shares of Class A Common Stock
subject to issuance pursuant to options to be awarded under the Company's
1998 Incentive Plan. See "Management--1998 Incentive Plan."
RISK FACTORS
See "Risk Factors" immediately following the Prospectus Summary for a
discussion of certain factors that should be considered in evaluating an
investment in the Class A Common Stock.
7
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data of the Company with respect to each of
the years in the three-year period ended December 31, 1997 and the three-month
periods ended March 31, 1997 and 1998 are derived from the financial statements
of the Company prepared in accordance with generally accepted accounting
principles. The summary historical statement of operations and balance sheet
data as of December 31, 1996 and 1997 and each of the years in the three-year
period ended December 31, 1997 are derived from the financial statements of the
Company, which were audited by KPMG Peat Marwick LLP, independent certified
public accountants. The summary historical statement of operations and balance
sheet data presented below as of December 31, 1995 and March 31, 1997 and 1998
and the three-month periods ended March 31, 1997 and 1998 are derived from the
unaudited financial statements of the Company which, in the opinion of
management of the Company, include all adjustments necessary for a fair
presentation of the results of such unaudited periods. The historical financial
information may not be indicative of the Company's future performance and does
not necessarily reflect what the financial position and results of operations
of the Company would have been had the Company operated as a separate, stand-
alone entity during the periods covered. The unaudited pro forma statement of
operations data below assumes the Reorganization, the Solid Edge Acquisition,
the issuance of the Intercompany Note and the Offering and the application of
the estimated net proceeds therefrom occurred on January 1, 1997. The unaudited
pro forma balance sheet data presented below assumes the Offering and the
application of the estimated net proceeds therefrom had occurred on March 31,
1998. The following information should be read in conjunction with, and is
qualified in its entirety by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Pro Forma
Financial Information and the financial statements and related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------ ---------------------------------
PRO FORMA PRO FORMA
1995 1996 1997 1997(1) 1997 1998 1998(1)
-------- -------- -------- --------- --------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Software............... $ 89,103 $209,480 $115,479 $134,463 $ 26,236 $ 31,560 $ 33,807
Services............... 111,575 121,528 137,794 154,028 30,547 37,885 40,417
Hardware............... 66,944 83,201 61,320 61,320 12,344 17,083 17,083
-------- -------- -------- -------- --------- --------- --------
Total revenue........ $267,622 $414,209 $314,593 $349,811 $ 69,127 $ 86,528 $ 91,307
======== ======== ======== ======== ========= ========= ========
Gross profit(2)......... $158,557 $274,389 $185,469 $206,249 $ 40,520 $ 50,023 $ 52,404
Operating income
(loss)................. 29,872 134,779 34,731 20,156 6,641 (33,962) 6,195
Other income, net(3).... 129 106 5,092 (2,311) 11 9,692 8,806
Net income (loss)....... 18,376 83,336 25,013 11,211 4,179 (14,083) 9,601
Basic earnings (loss)
per share(4)........... $ 0.59 $ 2.67 $ 0.80 $ 0.13 $ (0.45)
Weighted average common
shares outstanding..... 31,265 31,265 31,265 31,265 31,265
Pro forma net earnings
(loss) per share(5).... $ 0.69 $ 0.31 $ 0.12 $ (0.39) $ 0.26
Pro forma weighted
average common shares
outstanding............ 36,265 36,265 36,265 36,265 36,265
OTHER DATA:
Non-GM software
revenue................ $ 73,484 $ 89,328 $115,479 $134,463 $ 26,236 $ 31,560 $ 33,807
GM software revenue(6).. 15,619 120,152 -- -- -- -- --
-------- -------- -------- -------- --------- --------- --------
Total software
revenue............. $ 89,103 $209,480 $115,479 $134,463 $ 26,236 $ 31,560 $ 33,807
======== ======== ======== ======== ========= ========= ========
BALANCE SHEET DATA (END
OF PERIOD):
Working capital(7)...... $ 34,091 $ 87,835 $ 52,958 $ 76,559 $ 48,221 $ 48,221
Total assets............ 146,907 231,206 166,790 208,186 254,591 254,591
Long-term debt.......... -- -- -- -- 156,055 91,955
Stockholder's equity/net
investment............. 90,770 132,147 88,350 118,381 6,136 70,236
</TABLE>
(footnotes appear on following page)
8
<PAGE>
- --------
(1) The pro forma information does not include a write-off of acquired in-
process research and development costs of $42.5 million incurred in
connection with the Solid Edge Acquisition. These pro forma results may not
necessarily be indicative of future results of the combined entities.
(2) Gross profit for each of the years in the three-year period ended December
31, 1997 includes $13.4 million of amortization relating to EDS'
acquisition of the Company in 1991. Gross profit for the three months ended
March 31, 1997 and 1998 includes $3.4 million of amortization relating to
EDS' acquisition of the Company in 1991. Gross profit for the three months
ended March 31, 1998 also includes $1.1 million of amortization relating to
the Solid Edge Acquisition.
(3) The increase in other income, net during the year ended December 31, 1997
and three months ended March 31, 1998 is due to gains on the sale of
investment securities.
(4) For purposes of the calculation of basic earnings per share, weighted
average common shares outstanding assumes 31,265,000 shares of Class B
Common Stock are outstanding for each period presented.
(5) Pro forma earnings per share for the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998 have been calculated by dividing
net income by the weighted average shares outstanding as calculated in
accordance with Securities and Exchange Commission rules for initial public
offerings. Such rules require that the weighted average shares calculation
give retroactive effect to the issuance of shares whose proceeds will be
used to pay any dividend declared by the Company prior to the Offering.
Therefore, pro forma weighted average shares of the Company for the year
ended December 31, 1997 and the three months ended March 31, 1997 and 1998
are comprised of 31,265,000 shares of Class B Common Stock described above
and 5,000,000 shares of Class A Common Stock, assuming all such shares are
outstanding as of the beginning of each period. Employee stock options for
approximately 800,000 shares of Class A Common Stock to be issued upon
completion of the Offering at the initial public offering price are assumed
to have no dilutive effect on earnings per share. The Company plans on
accounting for its employee stock options under the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees."
(6) In 1996, the Company's parent, EDS, entered into a corporate software
license agreement with GM which provides for the delivery of up to 10,000
seats of Unigraphics and IMAN as well as the provision of maintenance
services for an initial term of three years. Software license revenue of
$110.3 million relating to this agreement was recognized in 1996. The
Company has agreed to perform EDS' obligations to provide products and
services under such agreement pursuant to the GM Subcontract (as
hereinafter defined) executed in connection with the Reorganization.
(7) Working capital consists of total current assets less total current
liabilities.
SUMMARY SOLID EDGE/EMS FINANCIAL DATA
The following summary financial data of the Solid Edge/EMS Business with
respect to each of the years in the three-year period ended December 31, 1997
are derived from the statements of revenues and direct expenses of the Solid
Edge/EMS Business prepared in accordance with generally accepted accounting
principles. Such statements were audited by Ernst & Young LLP, independent
certified public accountants. The following information should be read in
conjunction with, and is qualified in its entirety by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Solid Edge Acquisition" and the financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF REVENUES AND DIRECT EXPENSES DATA:
Revenues:
Software........................................ $ 14,800 $ 15,419 $ 18,984
Maintenance and services........................ 19,711 16,461 16,234
-------- -------- --------
Total revenues................................. $ 34,511 $ 31,880 $ 35,218
======== ======== ========
Excess of direct expenses over revenues.......... $ (6,327) $(10,122) $ (4,116)
</TABLE>
9
<PAGE>
RISK FACTORS
Prospective purchasers of the Class A Common Stock offered hereby should
consider carefully the following risk factors in addition to the other
information presented in this Prospectus.
RISKS ASSOCIATED WITH ABSENCE OF HISTORY AS A STAND-ALONE COMPANY AND
INTEGRATION OF SOLID EDGE/EMS BUSINESS
The Company, which was formed in October 1997, succeeded to the MCAD
business of EDS in the United States effective as of January 1, 1998 (or later
with respect to certain operations outside the United States). Prior to such
time, the operations of the Company had been operated within several business
units of EDS, and not as a separate legal division or subsidiary. After the
Reorganization, the Company integrated its various operations into a single
operating unit. Although management has extensive experience managing the
Company as a part of EDS, there is no operating history of the Company as a
stand-alone entity for a prospective investor to evaluate. There can be no
assurance that the Company will be able to successfully integrate its
operations into a single entity or that such integration will be achieved in
an efficient and effective manner. After the Offering, the Company will be a
subsidiary of EDS, but will operate as a stand-alone company, and EDS will
have no obligation to provide assistance to the Company or any of its
subsidiaries except for certain financial, tax and other services as described
in "Relationship with EDS and Certain Transactions."
The Company consummated the Solid Edge Acquisition on March 2, 1998. Prior
to the Solid Edge Acquisition, the Solid Edge/EMS Business had not been
operated as a separate subsidiary or division of Intergraph but had been
integrated with Intergraph's other operations. As a result, there is only
limited financial and operating information for an investor to evaluate.
Management and operation of the Solid Edge/EMS Business will initially
require a certain amount of coordination with Intergraph and must be
integrated with the Company's other businesses and there can be no assurance
that any such coordination or integration will be achieved in an efficient and
effective manner. The Company continues to seek additional opportunities to
acquire, or merge with, related businesses and is presently evaluating, as it
does on a regular basis, potential opportunities. The Company is not currently
engaged in negotiations for a material acquisition. There can be no assurance
that the Company will be able to successfully integrate the Solid Edge/EMS
Business or such other businesses into its operations or that the integration
of the Solid Edge/EMS Business or any other acquired businesses will not
materially limit the amount of time that management may devote to running the
Company's day-to-day business or disrupt the Company's ongoing business.
Further growth in the Company's operations from additional businesses may
strain the Company's existing management resources and its financial and
management systems and controls and may require the Company to make additional
expenditures in such areas. See "Prospectus Summary--Recent Developments--
Solid Edge Acquisition" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RELATIONSHIP WITH EDS
EDS currently owns all of the outstanding capital stock of the Company. See
"Relationship with EDS and Certain Transactions." Upon completion of the
Offering, EDS will own 100% of the Company's outstanding Class B Common Stock,
representing approximately 98.4% of the combined voting power of all classes
of voting stock of the Company (approximately 98.2% if the U.S. Underwriters'
over-allotment option is exercised in full). The Class A Common Stock and the
Class B Common Stock will be the only voting stock of the Company outstanding
following the Offering. As long as EDS continues to beneficially own a
majority of the combined voting power of the Common Stock, it will have the
ability to elect all of the members of the Board of Directors and control the
management and affairs of the Company, including any determinations with
respect to mergers or other business combinations involving the Company, the
acquisition or disposition of assets by the Company, the incurrence of
indebtedness by the Company, the issuance of any additional Common Stock or
other equity securities or the declaration and payment of any dividends on the
Common Stock. In addition, EDS will be able
10
<PAGE>
to determine the outcome of any matter submitted to a vote of the Company's
stockholders for approval and to cause or prevent a change in control of the
Company.
The Restated Certificate of Incorporation of the Company (the "Certificate
of Incorporation") provides that any amendment or termination of any agreement
or arrangement, or any new agreement or arrangement, between the Company and
EDS or its affiliates effected with the approval of a majority of the
Company's directors who are not officers of either the Company or EDS or
directors of EDS (the "Disinterested Directors") or consistent with guidelines
or standards approved by the Disinterested Directors, or approved by the
holders of a majority of the Company's outstanding voting stock (not including
shares owned by EDS) shall be deemed fair to the Company and its stockholders.
If such approval is not obtained, however, no presumption shall arise that
such amendment or termination (or new agreement) is not fair to the Company
and its stockholders. The Certificate of Incorporation also contains
provisions allocating corporate opportunities that may be suitable for both
EDS and the Company. See "Description of Capital Stock--Certificate of
Incorporation and Bylaw Provisions."
Certain intercompany agreements and arrangements exist between the Company,
EDS and EDS' other subsidiaries, including a management services agreement and
a subcontract arrangement with respect to the provision of Unigraphics and
related services to GM. There can be no assurance that the services provided
to the Company by EDS under the Affiliate Agreements (as hereinafter defined)
will continue to be provided, and if not, whether or on what terms such
licenses or services could be replicated. In addition, while the parties to
the Affiliate Agreements endeavored to establish terms fair to both EDS and
the Company, as a result of EDS' control of the Company none of such
agreements resulted from "arm's-length" negotiations. There can be no
assurance that the Company would not have received more favorable terms from
an unaffiliated party. For a description of the Affiliate Agreements, see
"Relationship with EDS and Certain Transactions."
Conflicts of interest may arise between the Company and EDS in a number of
areas relating to their past and ongoing relationships, including the nature
and quality of services rendered by EDS and its affiliates to the Company, the
performance by the Company of its obligation under the subcontract arrangement
relating to products and services to be provided to GM, potential competitive
business activities, tax and employee benefit matters, indemnity agreements,
registration rights, sales or distributions by EDS of all or any portion of
its ownership interest in the Company or EDS' ability to control the
management and affairs of the Company. There can be no assurance that EDS and
the Company will be able to resolve any potential conflict or that, if
resolved, the Company would not have received more favorable resolution if it
were dealing with an unaffiliated party. In addition, certain of the Affiliate
Agreements contain specific procedures for resolving disputes between the
Company and EDS with respect to the subject matter of those agreements. There
can be no assurance that more favorable results to the Company would not be
obtained under different procedures.
Beneficial ownership of at least 80% of the total voting power and value of
the outstanding Common Stock is required in order for EDS to continue to
include the Company in its consolidated group for federal income tax purposes,
and beneficial ownership of at least 80% of the total voting power and 80% of
each class of nonvoting capital stock is required in order for EDS to effect a
tax-free spin-off (as defined under "Description of Capital Stock--Common
Stock--Conversion") of the Company or certain other tax-free transactions.
Each member of a consolidated group for federal income tax purposes is jointly
and severally liable for the federal income tax liability of each other member
of the consolidated group. Each member of the EDS controlled group, which
includes EDS, the Company and EDS' other subsidiaries, is also jointly and
severally liable for pension and benefit funding and termination liabilities
of other group members, as well as certain benefit plan taxes. Accordingly,
the Company could be liable under such provisions in the event any such
liability is incurred, and not discharged, by any other member of the EDS
consolidated or controlled group. If the Company were no longer to be included
in EDS' consolidated group for federal tax purposes, there is no assurance
that the Company's tax position would not be less favorable than it is at
present.
In addition, by virtue of its controlling beneficial ownership and the terms
of a Tax Sharing Agreement (as hereinafter defined) between the Company and
EDS, EDS effectively controls all of the Company's tax decisions. Under the
Tax Sharing Agreement, EDS has sole authority to respond to and conduct all
tax
11
<PAGE>
proceedings (including tax audits) relating to the Company's federal and
combined state returns, to file all such returns on behalf of the Company and
to determine the amount of the Company's liability to (or entitlement to
payment from) EDS under the Tax Sharing Agreement. See "Relationship with EDS
and Certain Transactions--Contractual Agreements--Tax Sharing Agreement." This
arrangement may result in conflicts of interests between the Company and EDS.
For example, under the Tax Sharing Agreement, EDS may choose to contest,
compromise or settle any adjustment or deficiency proposed by the relevant
taxing authority in a manner that may be beneficial to EDS and detrimental to
the Company.
DEPENDENCE ON KEY CUSTOMERS/INDUSTRIES
The Company's earnings are highly dependent on its business with GM. In
connection with the split-off of EDS from GM in June 1996, EDS entered into a
Master Services Agreement (the "EDS/GM MSA") and certain related agreements
pursuant to which EDS serves as GM's principal supplier of information
technology on a worldwide basis for an initial term of 10 years. The EDS/GM
MSA serves as the framework for the negotiation and operation of service
agreements between GM and EDS related to certain "in scope" services (as
defined in the EDS/GM MSA). The EDS/GM MSA provides GM with termination rights
under certain circumstances, including upon the occurrence of certain changes
of control of EDS. EDS and GM entered into a Unigraphics Software Corporate
License Agreement, effective as of July 1, 1996 (the "EDS/GM Site License
Agreement"), which provided for the sale to GM of a perpetual license of up to
10,000 seats of Unigraphics, including IMAN, and the provision of three years
of maintenance services for such products. These products and services are "in
scope" services under the EDS/GM MSA. The EDS/GM Site License Agreement
terminates on June 30, 1999. In connection with the Reorganization, EDS and
the Company entered into a Memorandum of Understanding, effective January 1,
1998 (the "GM Subcontract"), pursuant to which the Company receives all
revenues and performs EDS' obligations under the EDS/GM Site License Agreement
and agrees to cooperate with EDS in providing additional products and services
to GM under the EDS/GM MSA. The GM Subcontract further provides that the
Company may provide directly to GM products and services that are outside of
the scope of the EDS/GM MSA. Approximately 34%, or $139.4 million, of the
Company's 1996 revenue was attributable to products and services provided to
GM. Although less than 10% of the Company's 1997 revenue was attributable to
the products and services provided to GM, approximately 48% of the Company's
accounts receivable balance at December 31, 1997 was related to products and
services provided to GM. If the EDS/GM MSA were to be terminated, or if the
Company (as a subcontractor to EDS) and GM do not enter into a successor to
the EDS/GM Site License Agreement upon termination of that agreement in 1999,
the Company's financial condition and results of operations would be
materially adversely affected.
The Company's products are licensed to customers in a variety of industry
sectors, but approximately 40% of the Company's 1997 revenue was derived from
the automotive and transportation and aerospace industries. Both industries
are relatively mature MCAD markets that have been substantially penetrated.
The Company's future success will depend on its ability to maintain and
increase product licensing in the automotive and transportation and aerospace
industries, as well as other industries, and there can be no assurance that
the Company will be able to achieve this objective. Additionally, both the
automotive and transportation and aerospace industries are cyclical, and an
economic downturn in one of these industries would likely have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Customers."
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCTS
The MCAD industry is characterized by rapidly changing technology and
frequent new product introductions and product enhancements. Therefore, the
Company's success is highly dependent upon its ability to enhance its existing
products and to introduce new products in a cost-effective and timely manner
to meet evolving customer requirements. The Company has committed and intends
to continue to commit substantial resources to the development of new
products. Because new product development commitments must be made well in
advance of sales, however, new product decisions must anticipate both future
demand and the technology that will be responsive to such demand. Delays in
developing new products with anticipated technological
12
<PAGE>
advances or in commencing releases of new products may have a material adverse
effect on the Company's financial condition and results of operations, as
might the issuance of releases in which material defects or shortcomings
emerge. There can be no assurance that new products will gain market
acceptance or will not be adversely affected by technological changes or new
product announcements by others. In addition, since many software users rely
on databases of existing parts for new product designs, there can be no
assurance that potential customers will switch to the Company's new products.
The Company has introduced a number of new product innovations in the first
half of 1998. The Company introduced its Parasolid solid modeling kernel in
Solid Edge 5.0 in May 1998, replacing Solid Edge's previous solid modeling
kernel. New versions of Unigraphics contain significant changes in the
software with the introduction of the UG/WAVE technology. There can be no
assurance that future versions of Unigraphics and Solid Edge or any of the
Company's other core products will perform as expected or that they will
achieve market acceptance or contribute significantly to the Company's
revenue. The Company's business strategy includes establishing Parasolid as
the MCAD industry's solid modeling standard. Competitors of the Company could
develop independent solid modeling kernels and license them to third parties.
Although the Company believes that Parasolid is the emerging solid modeling
standard for mid-range MCAD software, there can be no assurance that it will
become the solid modeling standard or that a competitor of the Company will
not develop a solid modeling kernel that will become the standard for the MCAD
industry. If a competitor of the Company were to develop a product that became
the solid modeling standard, it could have a material adverse effect not only
on the future success of Parasolid, but also on the Company's other products
which are based on the Parasolid solid modeling kernel.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company's success is heavily dependent upon its proprietary software
technology. The Company relies on a combination of contracts, copyrights,
trade secret laws and patents to establish and protect its proprietary rights
in its technology. Effective copyright, trade secret and patent protection,
however, may be unavailable or limited in certain countries. Litigation, which
could demand financial and management resources, may be necessary to enforce
its copyrights, patents or other intellectual property rights. There can be no
assurance that the steps taken by the Company will be adequate to deter
misappropriation or independent third party development of its technology.
To date, the Company has not been involved in any litigation regarding
copyrights, trademarks, trade secrets or other intellectual property rights
alleging the possible infringement of such intellectual property rights of
others. Litigation alleging infringement of the intellectual property rights
of others is not uncommon in the MCAD and PDM industry and there can be no
assurance that such litigation will not be commenced in the future against the
Company. If litigation were to be commenced against the Company alleging
infringement of the intellectual property rights of others, the Company could
incur significant costs with respect to the defense thereof, irrespective of
the validity or the successful assertion of such claims, which could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business--Intellectual Property" and "--Litigation."
COMPETITION
Markets for the Company's products are highly competitive and characterized
by rapidly changing technology and evolving standards. The Company's
competitors include (i) generalist MCAD developers that offer broad-range
systems, such as Dassault, Matra Datavision, Parametric and Structural Dynamic
Research Corporation ("SDRC"); (ii) specialist software developers whose
product lines are focused on CAD products, CAM products, CAE products or PDM
products; and (iii) numerous smaller niche software developers.
The Company has experienced and expects to continue to experience strong
competition. The Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products
than the
13
<PAGE>
Company. Current and potential competitors may establish strategic alliances
or undertake acquisitions to increase the ability of their products to address
the needs of the Company's current and prospective customer base. For example,
Dassault markets and distributes its software products through a non-exclusive
marketing agreement with International Business Machines Corporation. See
"Business--Competition."
DECLINING PRICES OF MCAD AND PDM PRODUCTS
As is common in high technology industries, the MCAD industry is
characterized by selling prices which have tended to decline for existing
products over time due to competition, lower marginal costs and rapid
technological change. In particular, increased competition from new sources,
including the introduction of numerous lower priced, higher volume 3-D CAD
products, the emergence of a mid-range market, and the increased penetration
of niche players into the CAM and CAE markets, has led to price pressure on
MCAD software products which is expected to continue. Despite declining unit
prices, the total size of the MCAD global market, as measured by revenue, has
increased over the past several years. See "Business--The MCAD Software
Industry." There can be no assurance, however, the MCAD global market will
continue to grow.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon, among other
factors, the continued service of its key senior executives and research and
development, technical, support and other personnel, and on its ability to
continue to attract, retain and motivate qualified personnel. The competition
for such employees is intense, and the loss of the services of any of these
key personnel without adequate replacement or the inability to attract new
qualified personnel could have a material adverse effect on the Company. The
Company will enter into employment contracts with certain executive officers
prior to the consummation of the Offering. The Company generally does not
maintain insurance with respect to the loss of its key personnel. See
"Management."
RISKS IN INTERNATIONAL OPERATIONS
As a global participant in the MCAD industry, the Company's business is
subject to various risks beyond its control, such as instability of foreign
economies and governments, changes in laws and policies affecting trade and
investment, fluctuations in exchange rates and the slowdown in European
business activity during the summer months. In 1997, approximately 54% of the
Company's revenue was derived from sales outside the United States. There can
be no assurance that the Company will not experience material adverse effects
on its business and results of operations arising from its international
operations and sales. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SIGNIFICANT QUARTERLY FLUCTUATIONS
The Company's quarterly operating results have varied significantly and are
likely to vary significantly in the future, depending on factors such as the
number, timing and significance of product enhancements or new products by the
Company or its competitors, the ability of the Company to develop, introduce
and market new and enhanced versions of its products, customer order deferrals
in anticipation of new or enhanced Company products, foreign currency exchange
rates, general conditions in the MCAD and computer industries and regional
economies and other events or factors. A substantial portion of the Company's
orders and shipments typically occur in the last month of each quarter.
Therefore, the timing of orders and shipments, unexpected delays or actions
taken by competitors in reducing prices or introducing new products could
result in significant quarterly fluctuations in the Company's results of
operations. The Company's software revenue, total revenue, operating income
and net income are generally lower in the first and third quarters of a given
year than in the second and fourth quarters. Additionally, as is typical in
the MCAD software industry, the Company historically has experienced its
highest licensing activity for the year in December. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Quarterly Results of Operations."
14
<PAGE>
YEAR 2000 COMPLIANCE
Currently, there is a significant uncertainty in the software industry and
among software users regarding the impact of the year 2000 on installed
software. For example, many customers historically captured only two digit
entries in the date code field. Software database modifications, and/or
implementation modifications, are required to enable such software to
distinguish between 21st and 20th century dates. Current versions of the
Company's products are designed to be "Year 2000" compliant. The Company is in
the process of determining the extent to which the customized implementations
of, and third-party programs for, its software products are Year 2000
compliant, as well as the impact of any non-compliance on the Company and its
customers. The Company does not currently believe that the effects of any Year
2000 non-compliance in the Company's installed base of software will result in
any material adverse impact on the Company's business or results of
operations. However, there can be no assurance that the Company will not be
exposed to potential claims resulting from system problems associated with the
century change.
In accordance with the Management Services Agreement (as hereinafter
defined), the Company will continue to use centralized internal accounting
systems of EDS in the near term. EDS has completed the assessment and planning
stages and has commenced the renovation process for its internal systems,
including those used by the Company. The Company has been advised that EDS
anticipates that this process and the subsequent testing and implementation of
the modified code will be completed in stages, from mid-1998 through mid-1999.
Costs incurred to make EDS' centralized internal accounting systems Year 2000
compliant will be paid entirely by EDS. The failure to complete the Year 2000
conversion process for EDS' internal systems on a timely basis would have a
material adverse impact on the Company's business or results of operations.
LIMITED RELEVANCE OF HISTORICAL FINANCIAL INFORMATION
The financial information included herein may not necessarily reflect the
results of operations, financial position and cash flows of the Company in the
future or what the results of operations, financial position and cash flows
would have been had the Company been a separate, stand-alone entity during the
periods presented. The financial information included herein does not reflect
many significant changes that will occur in the funding and operations of the
Company as a result of the Reorganization. In addition, the consolidated
financial statements of the Company include certain assets, liabilities,
revenues and expenses which were not historically recorded at the level of,
but are associated with, the business transferred to the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Pro Forma Financial Information."
There are no financial or operating data, other than statements of assets
sold and revenues and direct expenses, for the Solid Edge/EMS Business for
each of the years in the three-year period ended December 31, 1997, as there
is not sufficient data available to permit the preparation of a complete set
of financial statements in accordance with generally accepted accounting
principles. During such periods, the Solid Edge/EMS Business did not comprise
a separate business unit of Intergraph and was not a material part of its
overall business. As a result, there is only limited financial and operating
information available for a potential investor to evaluate trends in gross
profit, expenses or net income. In addition, because the Solid Edge/EMS
Business was operated as part of the software product business of Intergraph
during each of the years in the three-year period ended December 31, 1997,
various costs incurred by Intergraph during such years were allocated to the
Solid Edge/EMS Business based on estimates described in the notes to the
financial statements included elsewhere in this Prospectus. As a result, the
financial and operating data presented for the Solid Edge/EMS Business for
such years may not reflect the costs and expenses that would have resulted if
the Solid Edge/EMS Business had been operated as a separate entity.
POTENTIAL ANTI-TAKEOVER CONSIDERATIONS
Under the Company's Certificate of Incorporation, the Board of Directors has
the authority, without action by the Company's stockholders, to fix certain
terms and issue shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"), and to issue rights to purchase securities or other
property from the Company. Actions
15
<PAGE>
of the Board of Directors pursuant to this authority may have the effect of
delaying, deterring or preventing a change in control of the Company. Other
provisions in the Company's Certificate of Incorporation and in the Restated
Bylaws (the "Bylaws") impose procedural and other requirements, including the
requirement that a vote of more than 80% of the voting stock of the Company is
necessary for stockholders to amend the Bylaws and certain provisions of the
Certificate of Incorporation. These requirements could make it more difficult
to effect certain corporate actions, including replacing incumbent directors.
In addition, the Board of Directors is divided into three classes, each of
which is to serve for a staggered three-year term after the initial
classification and election, and, after EDS ceases to be the beneficial owner
of an aggregate of at least a majority of the voting power of the Company,
incumbent directors may not be removed without cause, all of which may make it
more difficult for a third party to gain control of the Board of Directors.
With certain exceptions, Section 203 of the Delaware General Corporation Law
(the "DGCL") imposes certain restrictions on mergers and other business
combinations between the Company and any holder of 15% or more of the voting
stock of the Company. Section 203 does not apply to EDS' interest in the
Company. See "Description of Capital Stock--Certificate of Incorporation and
Bylaw Provisions."
BENEFITS OF OFFERING TO CURRENT STOCKHOLDER
EDS may realize certain benefits as a result of the Offering, including the
creation of a public market for the Class A Common Stock, which should
increase the liquidity of EDS' investment in Common Stock and potentially
increase the market value of its holding of Common Stock. EDS will also have a
substantial unrealized gain based upon the difference between the pro forma
net tangible book deficit per share of Class A Common Stock immediately before
the Offering and the pro forma net tangible book deficit per share of Common
Stock immediately after completion of the Offering, which would have been
$2.11 per share at March 31, 1998. See "Dilution." In addition, the net
proceeds of the Offering will be used to repay indebtedness to EDS outstanding
under the Intercompany Credit Agreement and any remaining proceeds will be
applied to reduce amounts owed to EDS under the Intercompany Note. See "Use of
Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE
Subject to applicable law, EDS may sell any and all of the shares of Common
Stock it owns after completion of the Offering. EDS and the Company have
agreed, however, subject to certain exceptions, not to sell or otherwise
dispose of any shares of Class A Common Stock (other than the shares offered
hereby or pursuant to employee stock option plans which exist on, or are
described herein to be implemented after, the date of this Prospectus) for a
period of 180 days after the date of this Prospectus without the prior written
consent of Morgan Stanley & Co. Incorporated, on behalf of the Underwriters.
In connection with the Offering, the Company and EDS have entered into an
agreement which provides that EDS will have certain rights to have shares of
Common Stock owned by it after the Offering registered by the Company under
the Securities Act of 1933, as amended (the "Securities Act"), in order to
permit the public sale of such shares. In addition, beginning one year after
EDS acquired its shares of Common Stock, EDS will be permitted to sell in the
public market specified amounts of such Common Stock without registration
pursuant to Rule 144 under the Securities Act ("Rule 144"). No prediction can
be made as to the effect, if any, that future sales of Common Stock by EDS, or
the availability of Common Stock for future sale, will have on the market
price of the Class A Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Class A Common
Stock. See "Shares Eligible for Future Sale."
ABSENCE OF A PRIOR PUBLIC MARKET; VOLATILITY OF PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price of the Class A
Common Stock was determined through negotiation between the Company and the
Underwriters and may not be indicative of the market price for the Class A
Common Stock after the Offering. See "Underwriters."
16
<PAGE>
The market price for the Class A Common Stock may be highly volatile. The
Company believes that factors such as announcements by it, or by its
competitors, of quarterly financial results could cause the market price of
the Class A Common Stock to fluctuate substantially. The stock market has from
time to time experienced extreme price and volume fluctuations which have
particularly affected the market prices for many high technology companies. In
addition, the stock market may experience extreme price and volume
fluctuations which often are unrelated to the operating performance of
specific companies. Market fluctuations or perceptions regarding the Company's
industry, as well as general economic or political conditions, may adversely
affect the market price of the Class A Common Stock.
DILUTION
Purchasers of the Class A Common Stock in the Offering will experience
immediate and substantial dilution in the amount of $14.39 in the pro forma
net tangible book deficit per share of Class A Common Stock from the initial
public offering price. See "Dilution."
NO INTENTION TO PAY DIVIDENDS
The Company intends to retain its earnings to finance future growth and,
therefore, does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," Pro Forma Financial Information, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
including, without limitation, those concerning (i) the estimates, projections
and assumptions used in determining the value assigned to in-process research
and development in connection with the Solid Edge Acquisition, (ii) the
integration of the Solid Edge/EMS Business into the Company's operations,
(iii) the success of establishing Parasolid as a solid modeling standard for
MCAD software, (iv) the schedule for developing and releasing new software,
(v) the capabilities of new software, (vi) the Company's continuing
relationship with EDS, (vii) future sales activities and (viii) Year 2000
compliance contain certain forward-looking statements concerning the Company's
operations, economic performance and financial condition. Because such
statements involve risks and uncertainties, actual results may differ
materially from those expressed or implied by such forward-looking statements.
Factors that could cause such differences include, but are not limited to,
those discussed under "Risk Factors."
17
<PAGE>
USE OF PROCEEDS
The Company will receive approximately $64.1 million from the sale of Class
A Common Stock in the Offering (approximately $73.9 million if the U.S.
Underwriters' over-allotment option is exercised in full) after deducting
underwriting commissions and estimated expenses payable by the Company.
Substantially all of the net proceeds of the Offering will be used to repay
outstanding indebtedness to EDS under the Intercompany Credit Agreement which
was incurred to pay the purchase price and certain expenses in connection with
the Solid Edge Acquisition. Borrowings by the Company under the Intercompany
Credit Agreement bear interest at a rate equal to the one-month London
Interbank Offered Rate ("LIBOR") plus 0.5%. Any remaining net proceeds of the
Offering will be used to repay amounts outstanding under the Intercompany Note
to EDS. The Intercompany Note bears interest, payable semiannually, at a rate
equal to the one-month London Interbank Bid Rate ("LIBID") minus 0.5%. See
"Relationship with EDS and Certain Transactions."
DIVIDEND POLICY
The Company currently intends to retain its earnings to finance future
growth and, therefore, does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Any future determination as to the
payment of dividends will depend upon the future results of operations,
capital requirements and financial condition of the Company and such other
factors as the Board of Directors may consider, including any contractual or
statutory restrictions on the Company's ability to pay dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth information regarding the cash position,
consolidated long-term debt and capitalization of the Company (i) at March 31,
1998 and (ii) as adjusted to reflect the Offering and the application of the
net proceeds therefrom as described in "Use of Proceeds." This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Pro Forma Financial Information and
the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash................................................ $ 14,624 $ 14,624
======== ========
Intercompany Note (1)............................... $ 73,000 $ 73,000
Intercompany Credit Agreement (1)................... 83,055 18,955
Stockholders' equity:
Class A Common Stock: $.01 par value; 168,735,000
shares authorized; 5,000,000 shares issued and
outstanding, as adjusted (2)(3).................. -- 50
Class B Common Stock: $.01 par value; 31,265,000
shares issued and outstanding, as adjusted....... 313 313
Additional paid-in capital.......................... 85,627 149,677
Accumulated deficit................................. (87,083) (87,083)
Accumulated other comprehensive income.............. 7,279 7,279
-------- --------
Total stockholders' equity/net investment........... 6,136 70,236
-------- --------
Total capitalization.......................... $162,191 $162,191
======== ========
</TABLE>
- --------
(1) The actual amounts that will be outstanding under the Intercompany Note
and the Intercompany Credit Agreement subsequent to the Offering will be
directly affected by the cash flows of the Company from April 1, 1998
through the date of the Offering.
(2) Assumes the U.S. Underwriters' over-allotment option is not exercised.
(3) Does not include approximately 800,000 shares of Class A Common Stock
subject to issuance pursuant to options to be awarded under the Company's
1998 Incentive Plan. See "Management--1998 Incentive Plan."
19
<PAGE>
DILUTION
The net tangible book deficit of the Company at March 31, 1998 was
approximately $(78.2) million, or $(2.50) per share of Common Stock. Net
tangible book deficit per share of Common Stock represents the amount of total
tangible assets less total liabilities, divided by the total number of shares
of Common Stock outstanding.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of Class A Common Stock in the Offering and the
pro forma net tangible book deficit per share of Common Stock immediately
after the completion of the Offering. After giving effect to the sale of
approximately 5,000,000 shares of Class A Common Stock at a price of $14.00
per share by the Company in the Offering and the application of the net
proceeds therefrom, the pro forma net tangible book deficit of the Company as
of March 31, 1998 would have been approximately $(14.1) million, or $(0.39)
per share of Common Stock. This represents an immediate dilution in pro forma
net tangible book deficit per share of $14.39 to investors who purchase shares
of Class A Common Stock in the Offering. The following table illustrates the
dilution in pro forma net tangible book value per share to such investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $14.00
Net tangible book deficit per share as of March 31, 1998 ... (2.50)
Decrease in net tangible book deficit per share attributable
to new investors(1)(2)..................................... 2.11
-----
Pro forma net tangible book deficit per share as of March
31, 1998 after giving effect to the Offering(1)............ (0.39)
------
Dilution in net tangible book deficit per share to new
investors(2)............................................... $14.39
======
</TABLE>
- --------
(1) Assumes the U.S. Underwriters' over-allotment option is not exercised.
(2) Does not include approximately 800,000 shares of Class A Common Stock
subject to issuance pursuant to options to be awarded under the Company's
1998 Incentive Plan. See "Management--1998 Incentive Plan."
20
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
consists of an unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1998 and related unaudited Condensed Combined Statements of
Operations for the year ended December 31, 1997 and the three months ended
March 31, 1998 (collectively, the "Pro Forma Statements") and are based upon
the historical financial statements of the Company and the Solid Edge/EMS
Business. The Pro Forma Statements reflect adjustments to the historical
financial statements to give effect for certain transactions which have either
occurred or are probable to occur. The unaudited Pro Forma Condensed Combined
Balance Sheet has been prepared assuming that the Offering and the application
of the estimated proceeds therefrom occurred on March 31, 1998, and the Pro
Forma Condensed Combined Statements of Operations have been prepared assuming
that the Solid Edge Acquisition, the Reorganization, the issuance of the
Intercompany Note and the Offering and the application of the estimated
proceeds therefrom occurred on January 1, 1997.
The Solid Edge Acquisition was accounted for as a purchase. The purchase
price has been allocated in the Pro Forma Statements to the assets acquired
based on estimated fair values at the date of acquisition. The allocation of
the purchase price is subject to change based on the completion of an
independent appraisal. Management does not believe that the final allocation
of the purchase price or the related useful lives assigned to the acquired
assets will be materially different from the preliminary amounts presented in
the Pro Forma Statements.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the transactions had been consummated as presented in
the accompanying Pro Forma Statements, nor is it necessarily indicative of
future results of operations or financial position.
The Pro Forma Statements should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes thereto of the Company and the
Solid Edge/EMS Business included elsewhere herein.
21
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
COMPANY ADJUSTMENTS FOR PRO FORMA
HISTORICAL OFFERING AS ADJUSTED
---------- --------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets.............. $140,621 $64,100 (a) $140,621
(64,100)(b)
Property and equipment,
net........................ 20,718 -- 20,718
Software and other
intangibles, net........... 84,366 -- 84,366
Deferred income taxes....... 8,886 -- 8,886
-------- -------- --------
Total assets.............. $254,591 $ -- $254,591
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities......... $ 92,400 $ -- $ 92,400
Intercompany debt........... 156,055 (64,100)(b) 91,955
Stockholders' equity........ 6,136 64,100 (a) 70,236
-------- -------- --------
Total liabilities and
stockholders' equity..... $254,591 $ -- $254,591
======== ======== ========
</TABLE>
See accompanying notes to Pro Forma Statements.
22
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR
REORGANIZATION,
SOLID EDGE/EMS INTERCOMPANY NOTE PRO FORMA PRO FORMA
COMPANY BUSINESS AND SOLID EDGE PRO FORMA ADJUSTMENTS FOR COMBINED AS
HISTORICAL HISTORICAL ACQUISITION COMBINED OFFERING ADJUSTED
---------- -------------- ----------------- --------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue........... $314,593 $35,218 $ -- $349,811 $ -- $349,811
-------- ------- -------- -------- ------ --------
Cost of revenue......... 129,124 3,979 10,459 (c) 143,562 -- 143,562
Selling, general, and
administrative......... 102,759 25,404 -- 128,163 -- 128,163
Research and
development............ 47,979 9,951 -- 57,930 -- 57,930
-------- ------- -------- -------- ------ --------
Total costs and
expenses............. 279,862 39,334 10,459 329,655 -- 329,655
-------- ------- -------- -------- ------ --------
Operating income
(loss)............... 34,731 (4,116) (10,459) 20,156 -- 20,156
Other income (expense),
net.................... 5,092 -- (11,570)(d) (6,478) 4,167(f) (2,311)
-------- ------- -------- -------- ------ --------
Income (loss) before
income taxes......... 39,823 (4,116) (22,029) 13,678 4,167 17,845
Provision for income
taxes.................. 14,810 -- (9,726)(e) 5,084 1,550(e) 6,634
-------- ------- -------- -------- ------ --------
Net income (loss)..... $ 25,013 $(4,116) $(12,303) $ 8,594 $2,617 $ 11,211
======== ======= ======== ======== ====== ========
Pro forma net earnings
per share(g)........... $ 0.31
========
Weighted average shares
outstanding(g)......... 36,265
========
</TABLE>
See accompanying notes to Pro Forma Statements.
23
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS FOR
REORGANIZATION,
SOLID EDGE/EMS INTERCOMPANY NOTE PRO FORMA PRO FORMA
COMPANY BUSINESS AND SOLID EDGE PRO FORMA ADJUSTMENTS FOR COMBINED AS
HISTORICAL HISTORICAL ACQUISITION COMBINED OFFERING ADJUSTED
---------- -------------- ----------------- --------- --------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total revenue........... $ 86,528 $4,779 $ -- $91,307 $ -- $91,307
-------- ------ ------- ------- ----- -------
Cost of revenue......... 36,505 659 1,739 (c) 38,903 -- 38,903
Selling, general, and
administrative......... 27,229 3,348 -- 30,577 -- 30,577
Research and
development............ 14,288 1,344 -- 15,632 -- 15,632
In process research and
development............ 42,468 -- (42,468)(c) -- -- --
-------- ------ ------- ------- ----- -------
Total costs and
expenses............. 120,490 5,351 (40,729) 85,112 -- 85,112
-------- ------ ------- ------- ----- -------
Operating income
(loss)............... (33,962) (572) 40,729 6,195 -- 6,195
Other income (expense),
net.................... 9,692 -- (1,928)(d) 7,764 1,042 (f) 8,806
-------- ------ ------- ------- ----- -------
Income (loss) before
income taxes......... (24,270) (572) 38,801 13,959 1,042 15,001
Provision for income
taxes.................. (10,187) -- 15,212 (e) 5,025 375 (e) 5,400
-------- ------ ------- ------- ----- -------
Net income (loss)..... $(14,083) $( 572) $23,589 $ 8,934 $ 667 $ 9,601
======== ====== ======= ======= ===== =======
Pro forma net earnings
per share(g)........... $ 0.26
=======
Weighted average shares
outstanding(g)......... 36,265
=======
</TABLE>
See accompanying notes to Pro Forma Statements.
24
<PAGE>
NOTES TO PRO FORMA STATEMENTS
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the transactions had been consummated as presented in
the accompanying Pro Forma Statements, nor is it necessarily indicative of
future results of operations or financial position. The Unaudited Pro Forma
Condensed Combined Statements of Operations are not indicative of the Company
on a going forward basis because they necessarily exclude various operating
expenses relating to the Company and Solid Edge. The historical statements of
Solid Edge/EMS operations include all revenues and expenses directly
attributable to the Solid Edge and EMS product lines for the periods
presented. Direct costs consist principally of cost of sales, product
development expenses, and selling and marketing expenses. Indirect costs
incurred by Intergraph such as corporate, general and administrative and other
costs have not been included in the Unaudited Pro Forma Condensed Combined
Statements of Operations due to the fact that any such incremental costs which
would be incurred by the Company as a result of the Solid Edge Acquisition
would not be material.
The accompanying Unaudited Pro Forma Condensed Combined Balance Sheet as of
March 31, 1998 reflects the following pro forma adjustments for the Offering
and the application of the estimated net proceeds therefrom as if such
transactions had occurred on March 31, 1998.
(a) To record the issuance of 5,000,000 shares of Class A Common Stock of the
Company pursuant to the Offering, resulting in net proceeds of
approximately $64.1 million. Such net proceeds assume that the U.S.
Underwriters' over-allotment option is not exercised.
(b) To record the repayment of a portion of the outstanding borrowings under
the Intercompany Credit Agreement and the Intercompany Note with the net
proceeds from the Offering.
The accompanying Unaudited Pro Forma Condensed Combined Statements of
Operations for the year ended December 31, 1997 and the three months ended
March 31, 1998, reflect the following pro forma adjustments, assuming the
Solid Edge Acquisition, the Reorganization, the issuance of the Intercompany
Note and the Offering and the application of the estimated net proceeds
therefrom had occurred on January 1, 1997.
(c) To reflect additional amortization expense on intangibles acquired in the
Solid Edge Acquisition. The transaction has been accounted for as a
purchase. The purchase price has been allocated to the assets acquired
based on estimated fair values at the date of acquisition. Such values are
as follows (in thousands):
<TABLE>
<S> <C>
Current assets..................................................... $ 220
Property and equipment and other assets............................ 1,147
Intangibles:
Software (two year useful life).................................. 3,377
Goodwill (seven year useful life)................................ 55,758
Workforce (five year useful life)................................ 4,030
In-process research and development costs........................ 42,468
--------
Total purchase price........................................... $107,000
========
</TABLE>
Amounts assigned to in-process research and development costs were expensed
upon acquisition. Pro forma depreciation expense associated with property
and equipment acquired in the Solid Edge Acquisition is assumed to be
consistent with historical depreciation expense. The Pro Forma Condensed
Combined Statement of Operations do not reflect the write-off of in-process
research and development costs of $42.5 million in connection with the
Solid Edge Acquisition.
(d) To record interest expense resulting from borrowings under the
Intercompany Credit Agreement of $105.0 million in connection with the
Solid Edge Acquisition on March 2, 1998 and the $73.0 million Intercompany
Note issued as a dividend to EDS on March 6, 1998. All such indebtedness
is assumed to bear interest at 6.5% for the periods presented. The
interest rates on the Intercompany Credit Agreement and the Intercompany
Note are variable. The effect on income of a 1/8% variance from the
assumed interest rate would be $222,500 and $55,625 for the year ended
December 31, 1997 and the three months ended March 31, 1998, respectively.
25
<PAGE>
(e) To record the estimated tax impact of pre-tax statement of operations
adjustments at the Company's 1997 effective tax rate of 37.2% and
estimated 1998 effective tax rate of 36.0%.
(f) To record the reduction of interest expense (using a 6.5% interest rate)
in connection with the repayment of a portion of the outstanding
borrowings under the Intercompany Credit Agreement and the Intercompany
Note with the net proceeds of the Offering.
(g) The pro forma earnings per common share data is calculated using the total
shares of Common Stock expected to be outstanding after the Offering
(36,265,000 shares). Employee stock options for approximately 800,000
shares of Class A Common Stock to be issued upon completion of the
Offering at the initial public offering price are assumed to have no
dilutive effect on earnings per share. The Company plans on accounting for
its employee stock options under APB Opinion No. 25, "Accounting for Stock
Issued to Employees."
26
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data of the Company with respect to each of
the five years in the five-year period ended December 31, 1997 and the three-
month periods ended March 31, 1997 and 1998 are derived from the financial
statements of the Company prepared in accordance with generally accepted
accounting principles. The selected historical statement of operations and
balance sheet data as of December 31, 1996 and 1997 and for each of the years
in the three-year period ended December 31, 1997 are derived from the
financial statements of the Company, which were audited by KPMG Peat Marwick
LLP, independent certified public accountants. The selected statement of
operations and balance sheet data presented below as of December 31, 1993,
1994 and 1995 and March 31, 1997 and 1998 and for the years ended December 31,
1993 and 1994 and the three-month periods ended March 31, 1997 and 1998 are
derived from the unaudited financial statements of the Company which, in the
opinion of management of the Company, include all adjustments necessary for a
fair presentation of the results of such unaudited periods. The historical
financial information may not be indicative of the Company's future
performance and does not necessarily reflect what the financial position and
results of operations of the Company would have been had the Company operated
as a separate, stand-alone entity during the periods covered. The following
information should be read in conjunction with, and is qualified in its
entirety by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Software............... $ 64,359 $ 63,750 $ 89,103 $ 209,480 $115,479 $ 26,236 $ 31,560
Services............... 79,761 95,888 111,575 121,528 137,794 30,547 37,885
Hardware............... 65,143 71,578 66,944 83,201 61,320 12,344 17,083
-------- -------- -------- --------- -------- -------- --------
Total revenue.......... 209,263 231,216 267,622 414,209 314,593 69,127 86,528
-------- -------- -------- --------- -------- -------- --------
Cost of revenue:
Software:
Amortization........... 13,412 13,412 14,641 14,808 14,754 3,672 4,596
Royalties, distribution
and other............. 9,260 6,427 12,854 23,677 13,199 2,785 3,277
Services............... 30,950 26,115 34,328 41,721 57,059 13,759 14,726
Hardware............... 45,572 48,995 47,242 59,614 44,112 8,391 13,906
-------- -------- -------- --------- -------- -------- --------
Total cost of revenue.. 99,194 94,949 109,065 139,820 129,124 28,607 36,505
-------- -------- -------- --------- -------- -------- --------
Gross profit(1)......... 110,069 136,267 158,557 274,389 185,469 40,520 50,023
Operating expenses:
Selling, general and
administrative........ 81,346 77,229 85,031 92,444 102,759 22,934 27,229
Research and develop-
ment.................. 44,000 42,623 43,654 47,166 47,979 10,945 14,288
In process research and
development........... -- -- -- -- -- -- 42,468
-------- -------- -------- --------- -------- -------- --------
Total operating ex-
penses................ 125,346 119,852 128,685 139,610 150,738 33,879 83,985
-------- -------- -------- --------- -------- -------- --------
Operating income
(loss)................. (15,277) 16,415 29,872 134,779 34,731 6,641 (33,962)
Other income, net(2).... 59 341 129 106 5,092 11 9,692
-------- -------- -------- --------- -------- -------- --------
Income (loss) before in-
come taxes............. (15,218) 16,756 30,001 134,885 39,823 6,652 (24,270)
Provision for income
taxes.................. (4,355) 6,133 11,625 51,549 14,810 2,473 (10,187)
-------- -------- -------- --------- -------- -------- --------
Net income (loss)....... $(10,863) $ 10,623 $ 18,376 $ 83,336 $ 25,013 $ 4,179 $(14,083)
======== ======== ======== ========= ======== ======== ========
Basic earnings (loss)
per share(3)........... $ (0.35) $ 0.34 $ 0.59 $ 2.67 $ 0.80 $ 0.13 $ (0.45)
======== ======== ======== ========= ======== ======== ========
Weighted average common
shares outstanding..... 31,265 31,265 31,265 31,265 31,265 31,265 31,265
======== ======== ======== ========= ======== ======== ========
Pro forma net earnings
(loss) per share(4).... $ 0.69 $ 0.12 $ (0.39)
======== ======== ========
Pro forma weighted
average common shares
outstanding............ 36,265 36,265 36,265
======== ======== ========
OTHER DATA:
Non-GM software reve-
nue.................... $ 56,272 $ 52,121 $ 73,484 $ 89,328 $115,479 $ 26,236 $ 31,560
GM software revenue(5).. 8,087 11,629 15,619 120,152 -- -- --
-------- -------- -------- --------- -------- -------- --------
Total software revenue
...................... $ 64,359 $ 63,750 $ 89,103 $ 209,480 $115,479 $ 26,236 $ 31,560
======== ======== ======== ========= ======== ======== ========
BALANCE SHEET DATA (END
OF PERIOD):
Working capital(6)...... $ 26,635 $ 33,460 $ 34,091 $ 87,835 $ 52,958 $76,559 $ 48,221
Total assets............ 171,363 162,956 146,907 231,206 166,790 208,186 254,591
Long-term debt.......... -- -- -- -- -- -- 156,055
Stockholder's equity/net
investment............. 119,176 107,272 90,770 132,147 88,350 118,381 6,136
</TABLE>
- -------
(1) Gross profit for each of the years in the five-year period ended December
31, 1997 includes $13.4 million of amortization relating to EDS'
acquisition of the Company in 1991. Gross profit for the three months
ended March 31, 1997 and 1998 includes $3.4 million of amortization
relating to EDS' acquisition of the Company in 1991. Gross profit for the
three months ended March 31, 1998 also includes $1.1 million of
amortization relating to the Solid Edge Acquisition.
(2) The increase in other income, net for the year ended December 31, 1997 and
for the three months ended March 31, 1998 is due to gains on the sale of
investment securities.
(3) For purposes of the calculation of basic earnings per share, weighted
average common shares outstanding assumes 31,265,000 shares of Class B
Common Stock are outstanding for each period presented.
(4) Pro forma earnings per share for the year ended December 31,1997 and the
three months ended March 31, 1997 and 1998 have been calculated by
dividing net income by the weighted average shares outstanding as
calculated in accordance with Securities and Exchange Commission rules for
initial public offerings. Such rules require that the weighted average
share calculation give retroactive effect to the issuance of shares whose
proceeds will be used to pay any dividend declared by the Company prior to
the Offering. Therefore, pro forma weighted average shares of the Company
for the year ended December 31, 1997 and the three months ended March 31,
1997 and 1998 are comprised of 31,265,000 shares of Class B Common Stock
described above and 5,000,000 shares of Class A Common Stock, assuming all
such shares are outstanding as of the beginning of each period. Employee
stock options for approximately 800,000 shares of Class A Common Stock to
be issued upon completion of the Offering at the initial public offering
price are assumed to have no dilutive effect on earnings per share. The
Company plans on accounting for its employee stock options under the
provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees."
(5) In 1996, the Company's parent, EDS, entered into a corporate software
license agreement with GM which provides for the delivery of up to 10,000
seats of Unigraphics and IMAN as well as the provision of maintenance
services for an initial term of three years. Software license revenue of
$110.3 million relating to this agreement was recognized in 1996. The
Company has agreed to perform EDS' obligations to provide products and
services under such agreement pursuant to the GM Subcontract executed in
connection with the Reorganization.
(6) Working capital consists of total current assets less total current
liabilities.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of the financial condition and
results of operations of the Company prior to the Solid Edge Acquisition,
unless otherwise specifically stated. For a discussion of the Solid Edge
Acquisition, see "--Solid Edge Acquisition."
OVERVIEW
The Company generates revenue primarily from the licensing of MCAD and PDM
software products, provision of software consulting and support services and
computer equipment sales to users of the Company's products. The Company
operates business units in the United States and more than 20 other countries.
The Company's software products are licensed to customers through the
Company's direct sales force and by specific arrangements with certain
distributors, value-added resellers ("VARs") and other marketing
representatives. The Company also offers a full range of customization,
implementation and integration consulting services.
Effective as of January 1, 1998, the Company succeeded to the MCAD business
of EDS which had previously been 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. See "Risk Factors--Risks Associated with Absence of History as
a Stand-Alone Company and Integration of Solid Edge/EMS Business," "--Limited
Relevance of Historical Financial Information" and "Selected Financial and
Operating Data."
The Company's customers may license only software products or software
products coupled with customization, implementation, consulting and/or
maintenance services. Pricing for software licenses is based on the
configuration of the Company's products selected by the customer on a per seat
basis or pursuant to a site license for multiple seats. The MCAD software
industry is characterized by selling prices which have tended to decline for
existing software products over time due to competition, lower marginal costs
and rapid technological change.
The Company typically licenses software to customers under perpetual or term
license arrangements. Revenue on such perpetual arrangements is recognized
upon delivery of the software or as seats are installed, depending on the
terms of the arrangement and providing all revenue recognition criteria have
been met. Revenue on term license arrangements is recognized ratably over the
license term. Software revenue also includes royalty revenue related to the
licensing of Parasolid to third-party software developers.
Services revenue includes revenue from maintenance and consulting services.
Revenue attributable to maintenance services is recognized ratably over the
maintenance period. Maintenance fees entitle customers to the receipt of
product upgrades as well as customer support. Maintenance fees generate
recurring revenue and thereby provide a degree of stability to the Company's
results of operations. The Company typically provides maintenance services to
its customers on an annual basis with automatic renewals subject to the
Company's or the customer's right to terminate the maintenance upon 60 days
prior notice. The average maintenance renewal rate over the past five years
has been approximately 98%. Consulting and other services consist primarily of
customer training, implementation and integration, engineering and data
exchange services.
Hardware revenue results from the sale of bundled hardware/software products
to certain customers. Hardware consists of computer hard drives, monitors and
related equipment which is typically purchased through EDS and resold to
customers. In late 1996, the Company began deemphasizing hardware sales in
order to focus on higher margin software sales and consulting services.
Therefore, hardware revenue declined in 1997 and is expected to continue to
decline in the future.
In 1996 EDS and GM signed the EDS/GM Site License Agreement for Unigraphics
software. The EDS/GM Site License Agreement is a three-year arrangement that
consists of three elements: (1) a license of the
28
<PAGE>
Unigraphics software for up to 10,000 seats; (2) maintenance for the installed
software; and (3) a specified upgrade to be delivered by a non-Unigraphics
business unit of EDS on a when-and-if available basis. The contract did not
require any significant modification or customization of the software. The
contract price was approximately $178 million, of which approximately $110.3
million was attributed to the software license element, approximately $64.3
million was attributable to maintenance support and approximately $3.7 million
was attributed to the specified upgrade. Revenue related to the specified
upgrade will not be recorded by the Company since such upgrade will be
delivered to the customer by a non-Unigraphics business unit of EDS. The
license fee is payable over three years in monthly installments of
approximately $3.1 million. Maintenance revenue is recognized on a per-seat
basis over the term of the arrangement. Accordingly, the $64.3 million
expected maintenance revenue is an estimate that is dependent on how many
seats are ultimately deployed. The Company has estimated the total revenue to
be derived from maintenance based on the anticipated deployment of seats over
the license period. The Company recognized license revenue of approximately
$110.3 million in 1996 under this arrangement since all conditions for revenue
recognition had been met.
By recognizing Unigraphics as its single MCAD product development system, GM
has expressed its intent to consolidate its usage of MCAD software systems.
Prior to the EDS/GM Site License Agreement, GM received software and
maintenance services on a monthly basis pursuant to a term lease agreement
which was cancelable upon notice. In connection with the Reorganization, EDS
and the Company entered into the GM Subcontract pursuant to which the Company
receives all revenue and performs substantially all of EDS' obligations under
the EDS/GM Site License Agreement. Although less than 10% of the Company's
1997 revenues were attributable to the products and services provided to GM,
receivables of $55.2 million, or approximately 48% of the Company's accounts
receivable balance, at December 31, 1997 were related to products and services
provided to GM. The extended payment terms of this arrangement have not had a
material effect on the Company's liquidity since any costs incurred to support
the arrangement are adequately funded by maintenance support billings and
related revenue. If the EDS/GM MSA were to be terminated, or if the Company
(as a subcontractor to EDS) and GM were not to enter into a successor
agreement to the EDS/GM Site License Agreement upon termination of that
agreement in 1999, the Company's financial condition and results of operations
would be materially adversely affected.
Effective January 1, 1998, the Company and EDS entered into the Management
Services Agreement, pursuant to which EDS performs various management services
for the Company including treasury, risk management and tax, and similar
administrative services. Amounts charged to the Company under this agreement
approximate EDS' cost of providing the services plus a fixed fee equal to 0.5%
of the Company's total revenues. The Management Services Agreement will expire
on December 31, 2002 unless terminated earlier by either party if EDS and the
Company are no longer under common control. Except for certain tax and
treasury management services relating to consolidated operations or corporate
policy of EDS, which the Company is required to purchase during the term of
the Management Services Agreement, the Company or EDS may terminate any
service on or after January 1, 2000 with prior notice of not less than five
months. The Company's historical financial statements include an allocation of
corporate general and administrative costs in the amount of approximately 2.1%
of total revenues per year. Management believes that this percentage, which is
based on an analysis of actual services and estimated costs provided to the
Company by EDS, is reasonable. However, there can be no assurance that such
costs will be indicative of costs to be incurred under the Management Services
Agreement or in transactions with unrelated third parties. The Company expects
to pay EDS approximately $8.5 million for such services in 1998, subject to
adjustment levels and negotiated prices.
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 $105.0 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 as discussed
below. Costs allocated to identifiable intangible assets will be amortized on
a straight-line basis over the remaining estimated useful lives
29
<PAGE>
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. On a preliminary basis, the
Company has allocated the purchase price as follows: $1.3 million to computer
equipment, furniture and other assets; $3.4 million to software; $4.0 million
to acquired workforce; $42.5 million to in-process research and development
costs; and $55.8 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.
In-process research and development relates to the modification of Solid
Edge 4.0 to include the Company's Parasolid solid modeling kernel. This
project commenced in July 1997 and was completed in May 1998. Initial sales of
Solid Edge 5.0 occurred shortly thereafter. The value assigned to in-process
research and development was determined based on management's estimates of the
remaining costs to develop the in-process technology (e.g. Solid Edge 5.0)
into a commercially viable product, resulting net cash flows from Solid Edge
5.0 and the discounting of such cash flows back to their present value. Upon
acquisition, the estimated costs to be incurred to develop the purchased
technology into a commercially viable product totaled $2.0 million.
In projecting net cash flows resulting from Solid Edge 5.0, management
estimated revenues, cost of sales, research and development, selling, general
and administrative and income taxes for such software. These estimates are
based on the following assumptions.
. The estimated revenues for the Solid Edge product project a compound
annual growth rate over five years of approximately 46% with annual
growth rates ranging from 33% to 75%. Virtually all projected revenues of
the Solid Edge product were ascribed to Solid Edge 5.0 due to the fact
that the integration of the Parasolid modeling kernel into Solid Edge 4.0
was the critical enabling factor to allow the Solid Edge product to
provide the geometric modeling capabilities and user interfaces which are
necessary to compete with other products in the product design and
consumer products markets. In addition, management expects sales of Solid
Edge 4.0 to cease subsequent to May 1998. Projections of revenue growth
are based on management's estimates of market size and growth which are
supported by independent market data and the nature and expected timing
of the development of product enhancements and new products by the
Company and its competitors.
. The estimated cost of sales as a percentage of revenue (11-12%) is
expected to be consistent with historical margins realized by the Solid
Edge/EMS Business. Such percentages are also consistent with industry
standards.
. The estimated selling, general and administrative costs are expected to
increase as a percentage of sales from 37% in 1998 to 45% in 2002. The
selling, general and administrative costs in 1998 are lower as a
percentage of sales, than the projected selling, general and
administrative costs in the later years due to the consolidation of sales
forces. In addition, the Company expects to modify the distributor
channels by discontinuing the relationship with the unproductive
distributors and eliminating the associated salespersons. Incremental
sales in the later years are expected to require proportionately greater
selling efforts to meet the Company's revenue growth plans.
. The estimated research and development costs are expected to decrease as
a percentage of sales from 22% in 1998 to 12% in 2002. The research and
development costs in 1998 are higher as a percentage of sales, than the
projected research and development costs in the later years due to the
costs of combining two research and development departments in 1998 and
the continuing research and developments efforts of the two groups.
. Royalty income on the Parasolid kernel is expected to be received by the
Company from outside parties. The royalty income associated with Solid
Edge 5.0 was assumed to be 6% which is the standard royalty rate the
Company is receiving for the Parasolid kernel. Due to the declining value
of Solid Edge 5.0 over the future periods, the royalty income associated
with Solid Edge 5.0, to determine the research and development valuation,
is reduced accordingly from 6.0% in 1998 to 3.7% in 2002.
30
<PAGE>
The projected net cash flows for Solid Edge 5.0 were discounted using a 15%
weighted average cost of capital ("WACC"). The 15% rate was based upon an
analysis of the WACC for publicly traded companies within the same industry.
The WACC calculation produces the average required rate of return of an
investment in an operating enterprise. A WACC of 15% was also used to
determine the value of the return on working capital and the return on the
workforce which was acquired as part of the Company's purchase of Solid Edge.
In determining the appropriate WACC, the Company considered the attribution of
a higher WACC to the in-process technology, due to the risks inherent in the
development process; however, a higher WACC was not used as the Company
believed that these risks had been significantly reduced by the acquisition
date (as evidenced by the completion of the development in early May 1998). In
addition, the impact of the use of a higher WACC (eg. 16-20%) on the amount of
the purchase price allocated to in-process research and development was not
material.
If actual results differ significantly from the above assumptions, the
Company may be adversely affected in future periods. In addition, the value of
other intangible assets acquired may become impaired.
Revenues of the Solid Edge/EMS Business totaled $34.5 million, $31.9 million
and $35.2 million during 1995, 1996 and 1997, respectively. Sales of Solid
Edge commenced in 1996. Revenues attributable to Solid Edge product and
services represented 22% and 46% of total revenues of the Solid Edge/EMS
Business during the years ended December 31, 1996 and 1997, respectively.
Revenues related to EMS declined from $34.5 million in 1995 to $19.0 million
in 1997 primarily due to the introduction of Solid Edge in 1996. Management
expects that revenues attributable to the EMS product will continue to decline
in the future. Research and development costs of $12.1 million, $10.9 million
and $10.0 million in 1995, 1996 and 1997, respectively, primarily related to
the development of the Solid Edge product. The excess of direct expenses over
revenues of the Solid Edge/EMS Business were $6.3 million, $10.1 million and
$4.1 million during 1995, 1996 and 1997, respectively.
RESULTS OF OPERATIONS
The following tables summarizes the Company's revenue for each of the years
ended December 31, 1995, 1996 and 1997 and the three months ended March 31,
1997 and 1998 by revenue type and geographic region.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ---------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenue:
Software.......................... $ 89,103 $209,480 $115,479 $26,236 $31,560
Services.......................... 111,575 121,528 137,794 30,547 37,885
Hardware.......................... 66,944 83,201 61,320 12,344 17,083
-------- -------- -------- ------- -------
Total revenue................... $267,622 $414,209 $314,593 $69,127 $86,528
======== ======== ======== ======= =======
Revenue by Geographic Region (1):
United States..................... $135,555 $249,049 $144,529 $35,114 $44,670
Europe............................ 96,364 117,172 112,785 23,130 29,926
Other (2)......................... 35,703 47,988 57,279 10,883 11,932
-------- -------- -------- ------- -------
Total revenue................... $267,622 $414,209 $314,593 $69,127 $86,528
======== ======== ======== ======= =======
</TABLE>
- --------
(1) The Company classifies its software and hardware revenue by region based
on the geographic region of the Company's business unit in which a
software license or piece of equipment is sold. Services and other revenue
is classified by the location in which the activity is performed.
(2) Revenue in the "Other" category is derived from Asia Pacific and South and
Central America regions as well as Canada.
31
<PAGE>
The following table sets forth, as a percentage of total revenue, statement
of income data of the Company for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1997 and 1998. These operating
results are not necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ -----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Software.................... 33% 51% 37% 38% 36%
Services.................... 42 29 44 44 44
Hardware.................... 25 20 19 18 20
-------- -------- -------- ------- -------
Total revenue............. 100% 100% 100% 100% 100%
======== ======== ======== ======= =======
Costs of revenue:
Software:
Amortization............... 5% 4% 5% 5% 5%
Royalties, distribution and
other..................... 5 6 4 4 4
Services.................... 13 10 18 20 17
Hardware.................... 18 14 14 12 16
-------- -------- -------- ------- -------
Total cost of revenue..... 41 34 41 41 42
-------- -------- -------- ------- -------
Gross profit.................. 59% 66% 59% 59% 58%
======== ======== ======== ======= =======
Operating expenses:
Selling, general and
administrative............. 32% 22% 33% 33% 31%
Research and development.... 16 11 15 16 17
In process research and
development................ -- -- -- -- 49
-------- -------- -------- ------- -------
Total operating expenses.. 48 33 48 49 97
-------- -------- -------- ------- -------
Operating income (loss)... 11 33 11 10 (39)
Other income, net............. -- -- 2 -- 11
-------- -------- -------- ------- -------
Income (loss) before
income taxes............. 11 33 13 10 (28)
Provision for income taxes.... 4 13 5 4 (12)
-------- -------- -------- ------- -------
Net income (loss)......... 7% 20% 8% 6% (16)%
======== ======== ======== ======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue. Revenue of the Company was $86.5 million during the quarter ended
March 31, 1998, an increase of $17.4 million from $69.1 million for the
corresponding quarter in 1997. Software revenue increased $5.4 million, or
21%, to $31.6 million for the quarter ended March 31, 1998 from the $26.2
million for the corresponding quarter in 1997. This increase was primarily due
to increased sales from Europe which had a significant backlog of sales which
were not shipped until the first quarter of 1998.
Services revenue increased $7.4 million, or 24%, to $37.9 million for the
quarter ended March 31, 1998 from $30.5 million for the corresponding quarter
in 1997. This increase was primarily attributed to increased maintenance
revenues related to GM as well as other customers, totaling approximately $4.3
million. In addition, revenues from training and professional services
increased approximately $3.1 million, primarily attributable to increased GM
training and support.
Hardware revenue increased $4.8 million, or 39%, to $17.1 million for the
quarter ended March 31, 1998 from $12.3 million for the corresponding quarter
in 1997. This increase was primarily due to increased revenues from the United
States totaling $3.9 million, attributable to two significant hardware sales
during the quarter. In addition, hardware revenues from Europe increased $1.3
million as a result of backlog from the fourth quarter of 1997.
32
<PAGE>
The Company derived 48% and 49% of its revenue from international operations
for the quarters ended March 31, 1998 and 1997, respectively. Excluding GM
revenue, international revenue accounted for 53% and 53% of total revenue for
the quarters ended March 31, 1998 and 1997, respectively. Revenue from Europe
increased $6.8 million for the quarter ended March 31, 1998 due to sales
backlog from the fourth quarter of 1997 as noted above. Results of operations
of the Company have not been materially affected by the currency volatility in
Asia Pacific markets.
Gross Profit. The Company's gross profit was $50.0 million for the quarter
ended March 31, 1998 as compared to $40.5 million for the corresponding
quarter in 1997, an increase of $9.5 million. Gross profit margin was 58% and
59% for the quarters ended March 31, 1998 and 1997, respectively. Cost of
software revenue was $7.9 million and $6.5 million for the quarters ended
March 31, 1998 and 1997, respectively. Gross profit margin on software
revenues was approximately 75% for the quarters ended March 31, 1998 and 1997.
Cost of software revenue includes amortization of $4.6 million and $3.7
million for the quarters ended March 31, 1998 and 1997, respectively.
Amortization includes amounts relating to EDS' acquisition of Unigraphics in
1991, which amortization is expected to continue through October 1999, and the
Solid Edge Acquisition, which is expected to continue through 2003. Gross
profit on service revenue increased $6.4 million to $23.2 million for the
quarter ended March 31, 1998 from $16.8 million for the corresponding quarter
in 1997. Gross profit margin on service revenue increased to 61% for the
quarter ended March 31, 1998 from 55% for the corresponding quarter in 1997
principally due to the increase in maintenance revenues as a component of
total service revenues. Gross profit on hardware revenue decreased
$0.8 million to $3.2 million for the quarter ended March 31, 1998 from $4.0
million for the corresponding quarter in 1997. Gross profit margin on hardware
revenue decreased to 19% for the quarter ended March 31, 1998 as compared to
32% for the corresponding quarter in 1997, due to reductions in vendor rebates
in the first quarter of 1998 as compared to first quarter of 1997 and
increased price pressure on personal computer sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $27.2 million for the quarter ended March 31,
1998, an increase of $4.3 million from $22.9 million for the corresponding
quarter in 1997. Selling, general and administrative expenses represented 31%
and 33% of total revenues for the quarters ended March 31, 1998 and 1997,
respectively. Selling costs are comprised of salesperson salaries, commissions
and benefits, travel, sales office occupancy and other related costs. The
increase of $4.3 million in selling, general and administrative costs was
principally due to increases in commissions and bonuses as a result of
increased revenues for the quarter, increased staffing requirements to support
higher anticipated revenue growth and additional employee costs associated
with the Solid Edge Acquisition.
Research and Development Costs. Research and development costs were $14.3
million and $10.9 million for the quarters ended March 31, 1998 and 1997,
respectively. Research and development costs as a percentage of total revenue
were 17% and 16% for the quarters ended March 31, 1998 and 1997, respectively.
The increase of $3.4 million in research and development costs was principally
due to the development of Solid Edge 5.0 as well as increased salaries,
contract labor and travel costs.
In-process Research and Development Expense. In-process research and
development includes the write off of in-process research and development
costs of $42.5 million associated with the Solid Edge Acquisition.
Operating Income (Loss). Operating income (loss) was $(34.0) million for the
quarter ended March 31, 1998 as compared to $6.6 million for the corresponding
quarter in 1997.
Other Income, Net. Other income, net was $9.7 million for the quarter ended
March 31, 1998 as compared to $11 thousand for the corresponding quarter in
1997. During the quarter ended March 31, 1998, the Company realized gains upon
the exercise of warrants and subsequent sale of related marketable equity
securities of $10.1 million. The warrants were received in exchange for
reduced royalty fees from a private software company which 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 1998. The amount of such gains will be dependent on existing
market conditions at the date of sale.
33
<PAGE>
Provision for Income Taxes. The provision for income taxes was $(10.2)
million for the quarter ended March 31, 1998 compared to $2.5 million for the
corresponding quarter in 1997. The Company's effective tax rate was 42% and
37.2% for the quarters ended March 31, 1998 and 1997, respectively. The
Company's effective tax rate was higher than normal in the first quarter of
1998 due to the write-off of in-process research and development costs
discussed above. The Company expects that its effective tax rate for the
remaining quarters in 1998 will be 36%.
Net Income (Loss). Net income (loss) was $(14.1) million and $4.2 million
for the quarters ended March 31, 1998 and 1997, respectively.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenue. Revenue of the Company was $314.6 million during the year ended
December 31, 1997, a decrease of $99.6 million from $414.2 million in 1996.
The decrease in total revenue was due to the recognition of software license
revenue in 1996 pursuant to the EDS/GM Site License Agreement, which resulted
in the recognition of license revenue totaling $110.3 million. Revenue related
to GM totaled $18.6 million in 1997 compared to $139.4 million in 1996. Non-GM
revenue totaled $296.0 million, an increase of $21.2 million, or 8%, over 1996
non-GM revenue of $274.8 million. The increase in non-GM revenue in 1997 was
due to additional sales of software seats and increased maintenance revenue,
partially offset by decreases in sales of computer equipment.
Software revenue decreased $94.0 million to $115.5 million in 1997 due to
recognition of GM revenue in 1996 in connection with the signing of the EDS/GM
Site License Agreement. Non-GM software revenue increased $26.2 million, or
29%, in 1997 primarily due to the licensing of the Unigraphics product suite
to a number of new aerospace customers as a result of increased functionality
available in Versions 12.0 and 13.0 of Unigraphics released in 1997.
Services revenue increased $16.3 million, or 13%, to $137.8 million in 1997
from $121.5 million in 1996. This increase was primarily attributed to
increased maintenance revenue due to continued growth in the Company's
installed customer base and increased training, implementation and integration
consulting services provided to licensees of the Company's software.
Hardware revenue decreased $21.9 million, or 26%, to $61.3 million in 1997
from $83.2 million in 1996. In late 1996, the Company began deemphasizing
hardware sales in order to focus on higher margin software sales and
consulting services. Therefore, hardware revenue declined in 1997 and is
expected to continue to decline in the future.
The Company derived 54% and 40% of its revenue from international operations
during 1997 and 1996, respectively. Excluding GM revenue, international
revenue accounted for 58% and 60% of total revenue in 1997 and 1996,
respectively. Revenue from Asia Pacific increased $7.1 million in 1997 due to
increased software revenue in Japan, China and Korea. These increases were
partially offset by a decline in revenue in Europe of $4.4 million, primarily
resulting from reduced hardware revenue in Eastern Europe and Germany. Results
of operations of the Company have not been materially affected by the currency
volatility in Asia Pacific markets in late 1997.
Gross Profit. The Company's gross profit was $185.5 million in 1997 as
compared to $274.4 million in 1996, a decrease of $88.9 million. Gross profit
margin was 59% and 66% in 1997 and 1996, respectively. The decrease in gross
profit margin in 1997 is due to the exceptionally high proportion of software
revenue to total revenue in 1996 as a result of revenue attributable to the
EDS/GM Site License as well as a slight decline in the gross profit margin for
services. Cost of software revenue was $28.0 million and $38.5 million in 1997
and 1996, respectively. Gross profit on service revenue increased $0.9 million
to $80.7 million in 1997 from $79.8 million in 1996. Gross profit margin on
service revenue declined to 59% in 1997 from 66% in 1996 principally due to a
higher proportion of consulting and other revenue to total service revenue as
well as increased staffing in the
34
<PAGE>
U.S. and Asia Pacific regions. Gross profit on hardware revenue decreased $6.4
million to $17.2 million in 1997 from $23.6 million in 1996. Gross profit
margin on hardware revenue was 28% in 1997 and 1996. Cost of software revenue
includes amortization of $13.4 million per year relating to EDS' acquisition
of Unigraphics in 1991, which amortization is expected to continue through
October 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $102.8 million in 1997, an increase of $10.4
million from $92.4 million in 1996. Selling, general and administrative
expenses represented 33% and 22% of total revenues in 1997 and 1996,
respectively. Exclusive of GM revenues, selling, general and administrative
costs represented 35% and 34% of 1997 and 1996 revenues, respectively. Selling
costs are comprised of salesperson salaries, commissions and benefits, travel,
sales office occupancy and other related costs. The increase of $10.4 million
in selling, general and administrative costs was principally due to increased
selling costs due to increases in non-GM sales and expansion of the Company's
U.S. and Asia Pacific sales operations. Such increase was partially offset by
lower allocations of corporate general and administrative expenses from EDS
due to lower total revenue.
Research and Development Costs. Research and development costs were $48.0
million and $47.2 million in 1997 and 1996, respectively. Research and
development costs as a percentage of total revenue were 15% and 11% in 1997
and 1996, respectively. Research and development costs as a percentage of
total revenue in 1996 were lower than in 1997 due primarily to increased
revenue associated with the EDS/GM Site License Agreement in 1996.
Operating Income. Operating income was $34.7 million in 1997 as compared to
$134.8 million in 1996.
Other Income, Net. Other income, net was $5.1 million in 1997 as compared to
$0.1 million in 1996. During 1997, the Company realized gains upon the
exercise of warrants and subsequent sale of related marketable equity
securities of $5.1 million. The warrants were received in exchange for reduced
royalty fees from a private software company which was acquired by a public
company in 1997. The Company anticipates that significant gains on similar
transactions will also be reflected in its results of operations in 1998. The
amount of such gains will be dependent on the timing of the Company's vesting
in related warrants and existing market conditions at the date of sale.
Provision for Income Taxes. The provision for income taxes was $14.8 million
in 1997 compared to $51.5 million in 1996. The Company's effective tax rate
was 37.2% and 38.2% in 1997 and 1996, respectively. The difference between the
Company's effective tax rate and the statutory federal income tax rate
primarily resulted from state and foreign taxes, partially offset by research
and experimentation credits.
Net Income. Net income was $25.0 million and $83.3 million in 1997 and 1996,
respectively.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Revenue. Revenue of the Company was $414.2 million during the year ended
December 31, 1996, an increase of $146.6 million from $267.6 million in 1995.
The increase in total revenue was principally due to the recognition of
software license revenue upon the signing of the EDS/GM Site License Agreement
in 1996. Revenue related to GM totaled $139.4 million in 1996 compared to
$36.6 million in 1995. Non-GM revenue totaled $274.8 million, an increase of
$43.8 million, or 19%, over 1995 non-GM revenue of $231.0 million.
Software revenue increased $120.4 million to $209.5 million in 1996
primarily due to the signing of the EDS/GM Site License Agreement. Non-GM
software revenue increased $15.8 million, or 22%, in 1996. The increase in
non-GM revenue was due to the introduction of Version 11.0 of Unigraphics
which was the Company's first MCAD product capable of handling large, complex
design assemblies with hundreds of components, making it especially well
suited for automotive and aerospace manufacturers. In addition, certain
modules associated with Unigraphics 11.0 were specifically designed for the
commercial automotive market which the Company believes enabled EDS to obtain
the EDS/GM Site License Agreement. Furthermore, licenses
35
<PAGE>
of software to suppliers of GM increased as a result of GM's decision to
standardize its operations using a single MCAD product.
Services revenue increased $9.9 million, or 9%, to $121.5 million in 1996
from $111.6 million in 1995. This increase is primarily attributed to
increased maintenance revenue due to growth in the Company's installed
customer base and increased training, implementation and integration
consulting services provided to licensees.
Hardware revenue increased $16.3 million, or 24%, to $83.2 million in 1996
from $66.9 million in 1995. Hardware revenue increased primarily due to
increased sales in Europe which typically consisted of bundled hardware and
software products.
The Company derived 40% and 49% of its revenue from international operations
during 1996 and 1995, respectively. International revenue accounted for 60%
and 57% of total revenue, exclusive of GM revenue, in 1996 and 1995,
respectively. Revenue from Europe increased $20.8 million in 1996, primarily
due to increased software and hardware revenue in most European countries.
Revenue from Asia Pacific increased $7.1 million in 1996, principally due to
increased software revenue in China, Singapore and Australia.
Gross Profit. The Company's gross profit was $274.4 million in 1996 as
compared to $158.6 million in 1995, an increase of $115.8 million. Gross
profit margin was 66% and 59% in 1996 and 1995, respectively. The increase in
gross profit margin in 1996 was due to the exceptionally high proportion of
software revenue to total revenue in 1996 as a result of revenue attributable
to the EDS/GM Site License Agreement. Cost of software sales was $38.5 million
and $27.5 million in 1996 and 1995, respectively. Gross profit on services
revenue increased $2.6 million to $79.8 million in 1996 from $77.2 million in
1995. Gross profit margin on services revenue declined to 66% in 1996 from 69%
in 1995 principally due to a higher proportion of consulting and other service
revenue to total service revenue. Gross profit on hardware revenue increased
$3.9 million to $23.6 million in 1996 from $19.7 million in 1995. Gross profit
margin on hardware revenue was 28% and 29% in 1996 and 1995, respectively.
Cost of software revenue includes amortization of $13.4 million per year
relating to EDS' acquisition of Unigraphics in 1991, which amortization is
expected to continue through October 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses totaled $92.4 million in 1996, an increase of $7.4
million from $85.0 million in 1995, of which $3.1 million was attributable to
the increased allocation for general and administrative expense from EDS due
to higher revenue and the remainder was due to increased selling costs
resulting from higher sales as well as expansion of foreign operations.
Selling, general and administrative expenses represented 22% and 32% of total
revenue in 1996 and 1995, respectively. Exclusive of GM revenue, selling,
general and administrative costs represented 34% and 37% of 1996 and 1995
revenue, respectively.
Research and Development Costs. Research and development costs were $47.2
million and $43.7 million in 1996 and 1995, respectively. Research and
development costs as a percentage of total revenue were 11% and 16% in 1996
and 1995, respectively.
Operating Income. Operating income was $134.8 million in 1996 as compared to
$29.9 million in 1995.
Provision for Income Taxes. The provision for income taxes was $51.5 million
in 1996 compared to $11.6 million in 1995. The Company's effective tax rate
was 38.2% and 38.7% in 1996 and 1995, respectively. The difference between the
Company's effective tax rate and the statutory federal income tax rate
primarily results from state and foreign income taxes.
Net Income. Net income was $83.3 million and $18.4 million in 1996 and 1995,
respectively.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain quarterly information for the Company
for the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1998. Such information is derived from the
36
<PAGE>
Company's unaudited financial statements, prepared on a basis consistent with
the Company's audited financial statements. In the opinion of management, the
unaudited quarterly information includes all necessary adjustments, which are
normal and recurring, required for a fair presentation of the information.
Operating results for any given quarter are not necessarily indicative of
results for any future period and should not be relied upon as an indicator of
future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software............... $22,081 $27,282 $30,149 $129,968 $26,236 $28,780 $24,651 $35,812 $31,560
Services............... 28,108 30,305 28,643 34,472 30,547 35,847 33,297 38,103 37,885
Hardware............... 18,337 23,748 16,228 24,888 12,344 16,645 18,408 13,923 17,083
------- ------- ------- -------- ------- ------- ------- ------- --------
Total revenue.......... 68,526 81,335 75,020 189,328 69,127 81,272 76,356 87,838 86,528
------- ------- ------- -------- ------- ------- ------- ------- --------
Cost of revenue:
Software............... 6,829 9,635 6,524 15,497 6,457 7,452 6,736 7,308 7,873
Services............... 9,402 11,537 9,804 10,978 13,759 12,810 15,283 15,207 14,726
Hardware............... 13,118 17,275 11,405 17,816 8,391 10,688 13,399 11,634 13,906
------- ------- ------- -------- ------- ------- ------- ------- --------
Total cost of revenue.. 29,349 38,447 27,733 44,291 28,607 30,950 35,418 34,149 36,505
------- ------- ------- -------- ------- ------- ------- ------- --------
Gross profit............ 39,177 42,888 47,287 145,037 40,520 50,322 40,938 53,689 50,023
Selling, general and
administrative......... 21,381 22,578 22,430 26,055 22,934 26,398 24,660 28,767 27,229
Research and
development............ 11,989 10,912 11,809 12,456 10,945 11,505 12,105 13,424 14,288
In-process research and
development............ -- -- -- -- -- -- -- -- 42,468
------- ------- ------- -------- ------- ------- ------- ------- --------
Operating income
(loss)................. 5,807 9,398 13,048 106,526 6,641 12,419 4,173 11,498 (33,962)
Other income (expense),
net.................... (11) (104) (11) 232 11 3 3,795 1,283 9,692
------- ------- ------- -------- ------- ------- ------- ------- --------
Income (loss) before
income taxes........... 5,796 9,294 13,037 106,758 6,652 12,422 7,968 12,781 (24,270)
Provision for income
taxes.................. 2,214 3,551 4,982 40,802 2,473 4,619 2,964 4,754 (10,187)
------- ------- ------- -------- ------- ------- ------- ------- --------
Net income (loss)....... $ 3,582 $ 5,743 $ 8,055 $ 65,956 $ 4,179 $ 7,803 $ 5,004 $ 8,027 $(14,083)
======= ======= ======= ======== ======= ======= ======= ======= ========
</TABLE>
The Company's total revenue for the first, second, third and fourth quarters
of 1997 represented 22%, 26%, 24% and 28%, respectively, of total revenue for
1997. In 1996, the first, second, third and fourth quarters represented 17%,
20%, 18% and 45%, of total revenue for the year. The Company's quarterly
operating results have varied significantly and are likely to vary
significantly in the future, depending on factors such as number, timing and
significance of product enhancements or new products by the Company or its
competitors, the ability of the Company to develop, introduce and market new
and enhanced versions of its products, general conditions in the MCAD and
computer industries and regional economies and other events and factors.
The Company's first quarter software revenue, total revenue, operating
income and net income have generally been the lowest of any quarter during the
year. Additionally, as is typical in the MCAD software industry, the Company
historically has experienced its highest licensing activity each year in the
fourth quarter.
Revenue and cost of revenue relating to software increased in the fourth
quarter of 1996 primarily due to the signing of the EDS/GM Site License
Agreement resulting in the recognition of software revenue totaling $101.1
million in that quarter. Total software revenue recognized by the Company
under the EDS/GM Site License Agreement in 1996 was $110.3 million. See "--
Results of Operations" for further discussion of the impact of the EDS/GM Site
License Agreement.
The Company's net income for the first quarter of 1998 was significantly
less than in prior years as a result of the Solid Edge Acquisition. The
Company allocated approximately $42.5 million of the purchase price of the
Solid Edge/EMS Business to in-process research and development which the
Company expensed in the first quarter of 1998. The Company's results of
operations for the first quarter of 1998 also reflect amortization of acquired
software and other intangibles of approximately $1.1 million associated with
the Solid Edge Acquisition. Such amortization was recorded as cost of software
revenue. See "--Solid Edge Acquisition" for a
37
<PAGE>
discussion of the impact of the Solid Edge Acquisition on the financial
statements and results of operations of the Company, including with respect to
the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has utilized the central cash management function
of EDS to finance its operations. Cash requirements were satisfied either by
intercompany transactions between EDS and the Company or by cash from
operations. Intercompany transactions between EDS and the Company did not bear
interest. In connection with the Reorganization, EDS and the Company entered
into the Intercompany Credit Agreement which provides the Company with funding
to meet its daily cash requirements. Under the Intercompany Credit Agreement,
the interest rate to be charged to the the Company is the sum of the one-month
LIBOR plus 0.5%. In addition, the Company is required, with minor exceptions,
to lend any excess cash it has available to EDS, with such loans to bear
interest at a rate equal to the one-month LIBID minus 0.5%. Subsequent to the
Offering, 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) will be $70.0 million. 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. See
"Relationship with EDS and Certain Transactions--Contractual Arrangements--
Intercompany Credit Agreement."
In connection with the Solid Edge Acquisition, the Company borrowed $105.0
million under the Intercompany Credit Agreement on March 2, 1998. In addition,
effective March 6, 1998, the Company issued to EDS as a dividend the
Intercompany Note in the principal amount of $73.0 million. The Intercompany
Note is payable on March 6, 2001 and bears interest, payable semiannually, at
a rate equal to the one-month LIBID minus 0.5%. The net proceeds from the
Offering will be used to repay indebtedness under the Intercompany Credit
Agreement.
The Company generated net cash from operating activities of $43.3 million,
$53.8 million and $74.3 million in 1995, 1996 and 1997, respectively. Net cash
used in investing activities was $7.4 million, $12.4 million and $4.1 million
in 1995, 1996 and 1997, respectively. Included in investing activities for
these years were capital expenditures of $6.6 million, $12.3 million and $9.1
million, respectively. The Company generated net cash from operating
activities of $29.1 million and $18.0 million for the quarters ended March 31,
1998 and 1997, respectively. Net cash used in investing activities was $97.4
million and $1.7 million for the quarters ended March 31, 1998 and 1997,
respectively. Investing activities for the quarter ended March 31, 1998,
include $105.0 million relating to the Solid Edge Acquisition. Included in
investing activities for these periods were capital expenditures of $1.6
million and $1.6 million, respectively. At March 31, 1998, the Company had an
unbilled receivable from GM of $46.0 million relating to the software revenue
recognized in 1996 under the EDS/GM Site License Agreement. Such receivable is
scheduled to be paid in 1998 and the first half of 1999. 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 12 months.
YEAR 2000 ISSUE
Current versions of the Company's products are designed to be Year 2000
compliant. The Company is in the process of determining the extent to which
the customized implementations of its software products are Year 2000
compliant, as well as the impact of any non-compliance on the Company and its
customers. While there can be no assurance that the Company will not be
exposed to potential claims resulting from system problems associated with the
Year 2000 issue, the Company does not currently believe that the effects of
any Year 2000 non-compliance in the Company's installed base of software will
result in any material adverse impact on the Company's business or results of
operations.
38
<PAGE>
In accordance with the Management Services Agreement with EDS, the Company
will continue to use centralized internal accounting systems of EDS in the
near term. EDS has completed the assessment and planning stages and has
commenced the renovation process for its internal systems, including those
used by the Company. The Company has been advised that EDS anticipates that
this process and the subsequent testing and implementation of the modified
code will be completed in stages, from mid-1998 through mid-1999. Costs
incurred to make EDS' centralized internal accounting systems Year 2000
compliant will be paid entirely by EDS. The failure to complete the Year 2000
conversion process for EDS' internal systems on a timely basis would have a
material adverse impact on the Company's business or results of operations.
IMPACT OF CHANGES IN EXCHANGE RATES
The Company's results of operations can be affected by changes in exchange
rates. Revenue received and expenses paid in currencies other than the U.S.
dollar are translated into U.S. dollars for financial reporting purposes based
on the average exchange rate for the period. During the year ended December
31, 1997, international revenue and operating income represented 54% and 56%,
respectively, of total revenue and operating income of the Company. The
Company's most significant international operations are located in Germany and
the United Kingdom, which comprised 20% and 16%, respectively, of total
international revenue in 1997. Foreign revenue and costs are generally
received and paid in the local currency. Historically, foreign currency
transaction gains (losses) have not had a material effect on the Company's
operations.
INFLATION
Historically, inflation has not had a material effect on the Company's
results of operations.
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.
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
is not expected to have a material adverse impact on the Company's financial
statements.
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. Initial application of SOP 98-1 is not expected to
have a material impact on the Company's financial statements. The Company has
not determined if it will adopt the provisions of this SOP prior to its
effective date.
39
<PAGE>
BUSINESS
The Company is a leading global provider of scalable, integrated,
enterprise-level MCAD solutions that are used for virtual product development
principally in the automotive and transportation, aerospace, consumer
products, equipment and machinery and electronics industries. The Company's
MCAD solutions consist of both software products and consulting services. The
Company's software products allow customers to reduce design, engineering and
manufacturing costs and minimize the time between a product's inception and
its introduction to the market while simultaneously improving product quality.
Through MCAD, product design is accomplished digitally, eliminating the need
for paper drawings or physical prototypes. With digital assemblies, fit,
tolerances and moving mechanisms, as well as design alternatives, can be
tested before a physical product has been made. For example, automobile
designers can virtually "open" the door or trunk and can "walk around" a
digital 3-D model of a car to assess its design. MCAD systems produce large
volumes of data which can be managed by the Company's PDM software. The
Company's PDM software makes the most current product data readily accessible
to all appropriate users throughout a manufacturing enterprise. Some of the
Company's significant customers, located worldwide, include GM, Boeing,
Ericsson and GE.
The Company offers a full line of design, analysis and manufacturing
software products that meets the diverse needs of its customer base, which
includes a spectrum of companies from multinational corporations to small
machine shops. The Company addresses all aspects of digital product
development, including (i) product modeling, (ii) product information
management, (iii) data transfer and (iv) process re-engineering. The Company's
integrated, scalable software solutions range from Unigraphics, its high-end
MCAD software product suite for complex design, manufacture and assembly
projects, to Solid Edge, its Windows-based, easy-to-use design and drafting
product. Both Unigraphics and Solid Edge 5.0 are based on the Company's core
solid modeling kernel, Parasolid. As a result, the Company can differentiate
itself from its competitors by enabling Unigraphics and Solid Edge to
seamlessly share geometric data without the need for translation. The
Company's PDM software, IMAN, works in conjunction with both the Company's and
third parties' MCAD software to organize and manage the large volume of data
and numerous versions associated with the typical digital product model. A key
element of the Company's product development strategy is the management,
visualization and simulation of product data across the Web so that model data
may be shared among all users of the Company's MCAD and PDM products and
companion applications. In addition, the Company offers a full range of
customization, implementation and integration consulting services that enables
customers to re-engineer their methods of virtual product development by
optimizing the use of the Company's software.
Through its Unigraphics, Solid Edge, Parasolid and IMAN products, the
Company served more than 4,000 customers worldwide at December 31, 1997,
comprising an aggregate of over 93,000 seats. Of these seats, there were over
49,000 Unigraphics seats, over 9,000 Solid Edge seats, over 72,000 Parasolid
seats (including over 49,000 seats embedded in Unigraphics) and over 12,000
IMAN seats. With its suite of core products, its large worldwide installed
seat base and the continuing evolution of Parasolid as a solid modeling
standard for MCAD software, the Company believes that it is well positioned to
take advantage of the MCAD market's varying demands for software
functionality, virtual product development and product data management.
THE MCAD SOFTWARE INDUSTRY
Product development has traditionally been an iterative process of detailed
product definition, conceptual design, layout, drafting, physical prototyping,
testing, design refinement, manufacturing and assembly. Prior to the
development of computer-driven design tools, the product development cycle
demanded a long lead time since modifications to a product's design required
time intensive manual redesign at each step. CAD and CAM first became
available in the early 1970s and allowed engineers to create drawings using
computers much more quickly and accurately than by hand.
The product development market is in transition. As is common in many high
technology sectors, the MCAD industry is characterized by selling prices which
have tended to decline for existing products over time
40
<PAGE>
due to competition, lower marginal costs and rapid technological change. In
particular, increased competition from new sources, including the introduction
of numerous lower priced, higher volume 3-D CAD products, the emergence of a
mid-range market, and the increased penetration of niche players into the CAM
and CAE markets, has increased price pressure on MCAD software products.
Despite declining unit prices, the total size of the MCAD global market, as
measured by revenue, has increased over the past several years.
Once focused on the individual engineer's demand for MCAD functionality, the
market is now driven by the needs of the expanded enterprise of OEMs,
suppliers, partners and customers to collaborate, share data and integrate the
multiple sub-assemblies in the creation of a complex master digital model.
These needs have raised MCAD and PDM decision making to executive management
levels. However, the requirement for an enterprise level solution has not
lessened the need to provide superior functionality and engineering
capabilities to the individual user.
Customer requirements for enterprise wide product development solutions are
driving a demand for scalability and redefining the historically fragmented
MCAD marketplace. Scalability is provided through a graduated series of MCAD
and PDM products that has been optimized for each level of user throughout the
customer's organization, enabling the customer to buy or lease only those
products it needs, at the most affordable prices, and to upgrade functionality
as necessary. The Company believes that this need for scalability is
contributing to the consolidation in the MCAD software industry as companies
attempt to address both the high-end and mid-range markets.
The Company believes the factors dictating customer demand in this new
consolidating market are: (i) enterprise level product design and development,
(ii) affordable solid modeling, (iii) Windows orientation, (iv) software
interoperability and (v) product data management.
Enterprise Level Product Design and Development. Product development
involves more than desktop product modeling. The development of a particular
product involves multiple organizations, within and outside a given
enterprise, designing a complex digital master product model, testing this
model, and then revising it or advancing the original design. While this
completely digital "master-model" approach had always been an objective,
current technological innovation and process understanding have finally
converged so that an enterprise level framework for product development can be
established with MCAD and PDM software.
Affordable Solid Modeling. Solid modeling enables the user to generate more
accurate and complete product descriptions for use throughout the entire
design, manufacturing and engineering process. The availability of such solid
modeling software reinforced the distinction between high-end software, like
Unigraphics, and low-end 2-D drafting MCAD software. The Company believes its
decision to license its Parasolid solid modeling kernel contributed to the
growth of a mid-range market in which advanced solid modeling functionality is
now available at affordable prices with significantly more functionality than
is available in low-end systems. Due to the affordability of mid-range MCAD
software, the Company believes the mid-range 3-D market will grow
substantially over the next several years by drawing a small percentage of
MCAD users from the high-end sector and a large percentage of users from the
low-end 2-D sector and by creating new users out of traditional "blueprint"
designers who design manually.
Windows Orientation. In addition to price considerations, mid-range MCAD
products attract customers by incorporating the user-friendly Windows
interface, thereby allowing users to work without extensive or specialized
training. Not only is the Windows interface familiar, but it allows a user to
easily move from other Microsoft applications to a product modeling
application on the same operating platform and computer hardware. Today, most
mid-range MCAD offerings combine solid modeling capabilities with the Windows
user interface for both the Windows 95 and Windows NT operating systems.
Interoperability. In order to design products efficiently, an enterprise's
various design teams must be able to collaborate through the exchange of
digital design data. The fact that most geometry engines are embedded within
the source code of their corresponding MCAD products has prohibited the
development of high-end and
41
<PAGE>
mid-range products that share the same solid modeler. Consequently, MCAD
systems produce data files that cannot be read or used by other systems.
Product designers must therefore rely on translators to exchange data. This
data translation process is time-consuming and often results in inaccuracies
that require correction. Industry-wide efforts to solve this problem, such as
STEP (Standard for the Exchange of Product Model Data), have so far been
inadequate.
Product Data Management. PDM software captures and manages all information
generated during the product development cycle, making data readily accessible
to appropriate users throughout an organization. This data capture and
management enables organizations to share information earlier in the product
development cycle, encourages data reuse and reduces engineering changes. PDM
software is beginning to extend beyond traditional database management.
Working together with MCAD software, PDM systems are enabling enterprise-wide
visualization and simulation of the virtual product. PDM systems are provided
not only by MCAD software suppliers, but also by independent PDM vendors.
BUSINESS STRATEGY
Demand in MCAD and PDM markets is dictated by the needs of users throughout
companies of all sizes and across extended enterprises to collaborate on
virtual product development. These users often require different levels of
software functionality. The Company's strategy is to offer a variable,
customizable combination of software products and implementation and
integration services to address the product and process complexities
associated with design and assembly projects. The key elements of the
Company's strategy include:
PROVIDING A FULL RANGE OF INTEGRATED SCALABLE ENTERPRISE SOLUTIONS. The
Company provides a full range of MCAD software products to meet the needs of
its customers from its high-end Unigraphics product suite to its mid-range
offering, Solid Edge. Both Solid Edge 5.0 and Unigraphics are integrated
through the use of the Company's core solid modeler, Parasolid, thereby
allowing Unigraphics and Solid Edge to seamlessly share geometric data without
the need for translation. Unigraphics is scalable with the ability to add
modules or features to fit the needs of the Company's customers, thereby
reducing hardware system requirements. Solid Edge's Windows capabilities
improve design engineering productivity, shorten learning curves and reduce
training costs. The Company believes that it is well positioned because each
of its customers can buy the precise software product or products that meet
that customer's particular needs and allow its users to share data within a
single organization or throughout several organizations.
ESTABLISHING PARASOLID AS A SOLID MODELING STANDARD. The Company believes
that Parasolid has emerged as the mid-range MCAD solid modeling standard while
being fully capable of addressing the demanding requirements of high-end MCAD
software. Unigraphics, the Company's high-end MCAD offering, is based on
Parasolid. The Company licenses Parasolid for incorporation into mid-range
MCAD software products such as Dassault's Solid Works and Parametric's
DesignWave. In addition, Bentley has recently incorporated Parasolid in its
mid-range product, MicroStation Modeler, to Parasolid. The Company also
licenses Parasolid to various third-party niche software application
developers, who create Parasolid-compatible specialized applications that
enhance the functionality of Unigraphics and Solid Edge. Accordingly, the
Company expects that the growing prevalence of Parasolid-based applications
will make Parasolid part of the buying criteria for MCAD software, thereby
giving Unigraphics, the only high-end MCAD product to use Parasolid, an
advantage over competing high-end products.
OFFERING FULL FUNCTION PRODUCT DATA MANAGEMENT. The Company believes that
IMAN is one of the industry's most functional product data management tools
for engineering applications. IMAN captures, manages and provides enterprise-
wide access to the large volume of data generated throughout the virtual
product development cycle. IMAN's technology is scalable for use within a wide
range of customer implementations, extending from small Unigraphics-centric
design teams to globally distributed enterprises with thousands of concurrent
users across many functional areas, such as engineering, manufacturing,
marketing and procurement. The Company believes that IMAN's strengths lie in
(i) its tight integration with Unigraphics, which enables IMAN to manage the
complex interrelationships among Unigraphics files, (ii) its variant
configuration modeling,
42
<PAGE>
which facilitates the definition of the modularized, rules-based views of the
bill of materials that are required for efficient manufacturing of customized
products and (iii) its object-oriented architecture, which enables designers
to share data across an enterprise. A key element of the Company's PDM
strategy is utilizing Web-based technologies to provide a common framework for
the visualization, simulation and management of product data. The Company's
Web technologies provide enterprise-wide access to the virtual product model
and associated specification data, enabling organizations outside of the
traditional users of the Company's MCAD products to utilize the data. For
example, marketing departments can view virtual products and provide immediate
feedback during the product development process.
MAINTAINING TECHNOLOGICAL LEADERSHIP. The Company is focused on continually
developing and acquiring the most technologically advanced MCAD products.
Unigraphics' breadth of modeling functionality combines complex surface design
capabilities with advanced feature and solid modeling while providing some of
the most advanced CAM technology on the market today. Solid Edge, which has
pioneered advances in ease of use, was developed with native Windows
functionality, including familiar "drag and drop" features, menu driven
options, dialog boxes and on-line help, and was the first mechanical CAD
product to be certified as Microsoft Office compatible. In order to maintain
its technological leadership, the Company releases major enhancements
containing significant improvements to each of its four core products
approximately twice per year. In addition, the Company has developed UG/WAVE,
a next generation parametric approach to top-down product design that allows
"what-if" evaluations of engineering alternatives. For example, UG/WAVE allows
engineers to more efficiently evaluate at the system level the impact of
changes in wing design on the aerodynamic performance of an airplane.
LEVERAGING AND EXPANDING ITS CUSTOMER BASE. The Company intends to expand
its user base by increasing sales to existing customers and to new customers
by expanding its sales force and by utilizing Web-based distribution. The
Company intends to increase the licensing of its MCAD software to its existing
customer base by offering an affordable integrated scalable product line. The
Company is targeting existing users of 2-D software by marketing the latest
version of Solid Edge as an affordable, easy-to-use 3-D product. The Company
intends to increase the size of its customer base by marketing to the
suppliers of its aerospace and automotive OEMs. The Company believes that both
of its MCAD software offerings are attractive to suppliers who seek to meet
OEM requirements because (i) Unigraphics is available in discrete modules to
allow users to purchase only the Unigraphics capabilities their businesses
require and (ii) Solid Edge is an affordable easy-to-use MCAD software package
that will have the ability to seamlessly transfer geometric data to high-end
Unigraphics users. As part of the Solid Edge Acquisition, the Company acquired
EMS, a high-end MCAD product, which had over 6,000 seats at December 31, 1997.
The Company will seek to convert EMS customers to Unigraphics or Solid Edge.
PRODUCTS AND SERVICES
PRODUCTS
The Company provides a full range of integrated, scalable software
applications, based on four core product lines: (i) Unigraphics, a suite of
high-end MCAD software for large scale Unix/Windows NT-based design,
manufacture and assembly projects, (ii) Solid Edge, a mid-range, easy-to-use
Windows MCAD modeling system for mechanical part and assembly design, (iii)
Parasolid, a solid modeling kernel, featuring an exact boundary representation
geometric modeler for high-end and mid-range MCAD, as well as commercial,
internal and data exchange applications and (iv) IMAN, a product data
management software application which organizes and manages the volumes of
data and numerous versions associated with the typical digital product model.
Unigraphics. The Company believes that Unigraphics is one of the most
functional and technologically advanced MCAD systems available. Unigraphics is
used for complex design-through-manufacturing applications in the aerospace,
automotive and transportation, heavy machinery and equipment, electronics and
consumer products industries. The Unigraphics system allows a product
manufacturer to manage and coordinate the overall
43
<PAGE>
process used to design the product, reduce the time and cost of the product
development cycle and organize and share product development data within a
manufacturer's organization and between a manufacturer and its OEMs and
suppliers. Its focus on mechanical engineering, including the ability to
design the entire product and its component parts, precision, high
visualization and integration with manufacturing, make it appropriate for
large and complex product development applications which require "master-
model" driven data sharing. However, it can also be scaled down, through the
use of a more streamlined software bundle, to meet the criteria of smaller,
less demanding projects.
Unigraphics consists of a suite of four scalable pre-configured bundles, all
of which can be individually tailored to meet customers' feature, function and
price requirements. To further enhance scalability and customization, each
bundle is comprised of various software component modules or "building
blocks." All four bundles share and are progressively built upon certain core
modules, such as UG/Gateway, UG/Modeling (solid, feature, free-form and/or
assembly) and UG/Drafting. In addition, the Company has created over 200
specialized modules to provide specific features, which may be an included
function of a particular bundle or which may be added to a bundle as a custom
feature. All four of the bundles incorporate the same user interface and are
based upon the same Parasolid geometry engine and master-model concept, which
allows all of the bundles to interoperate and share data. These four bundles,
ranging from least to most expensive and advanced, are UG/Creator,
UG/Designer, UG/Advanced Designer and UG/Advanced Manufacturing. The Company's
scalable approach to the MCAD market allows the base purchase price of a
particular bundle to be applied to the "upgrade" of a customer's system to the
next bundle level.
UG/Creator. UG/Creator is specifically designed as a mid-range companion
product for users who work within or for an existing Unigraphics-based
organization. Aimed at users, such as parts suppliers, who need powerful
design functionality but do not require all of the advanced features of
Unigraphics, UG/Creator includes a flexible solid, feature and free-form
modeler, a sketcher and assembly modeling capability. Data created by
UG/Creator can be moved "upstream" to any of the more advanced
Unigraphics bundles. The other three Unigraphics bundles described below
can fully and seamlessly share data bi-directionally "upstream" to more
complex Unigraphics bundles and "downstream" to less complex bundles.
UG/Designer. The next step in the Company's Unigraphics scale,
UG/Designer, is a full-featured Unigraphics bundle which meets the needs
of component modeling and drafting while also delivering complete
interoperability with advanced Unigraphics applications. UG/Designer
provides for curve, surface and solid geometry modeling, fully
associative drafting and industry standard data translation
capabilities. Because UG/Designer is fully and bi-directionally
associative with all Unigraphics bundles, it is particularly appropriate
for Unigraphics-based suppliers who need the ability to access and
modify standard product designs of a particular manufacturer generated
in Unigraphics, rather than merely access and read product data.
UG/Advanced Designer. The third UG bundle, UG/Advanced Designer, is the
Company's most advanced product modeling (versus manufacturing) tool
set. In addition to the functions provided with UG/Designer, UG/Advanced
Designer is equipped with freeform modeling and assembly modeling
capabilities, user-defined features and a rapid prototyping interface.
This bundle extends high-performance geometry creation using both
parametric and non-parametric modeling techniques to design products
either from the top-down or bottom-up. Where UG/Designer is ideal for
designing component parts of products, such as the power train (the
engine and transmission) of an automobile, UG/Advanced Designer is
suitable for designing the entire product, such as the automobile.
UG/Advanced Manufacturing. The Company's most functional and full-
featured bundle is UG/Advanced Manufacturing, which is suitable for
product design and large scale assembly and manufacturing. U/G Advanced
Manufacturing includes all of the design functions of UG/Advanced
Designer, as well as manufacturing-specific features, which allow the
programming of multi-axis machine tools and simulation capabilities to
actually manufacture the products designed with UG/Advanced Designer.
Extensive editing and customization routines give each user the
flexibility to meet his or her particular design and manufacturing
needs.
44
<PAGE>
The Company has specifically designed Unigraphics with an open, object-
oriented software architecture. Users and third party developers can access
this open architecture through the UG/Open module, which provides a
programming framework for integrating other applications with Unigraphics. The
UG/Open framework includes an extensive set of programming tools that enable
third parties to create highly automated and sophisticated applications that
are well integrated with Unigraphics. Many of such third parties participate
in the Company's Alliance Program (as defined herein) as either "Toolkit VARs"
or business partners. See "--Sales and Marketing--Business Partnerships--
Alliance Program."
The open Unigraphics architecture enables customers to achieve significant
productivity improvements by designing and integrating their own proprietary
software applications with Unigraphics. For example, Denso Co., Ltd.
("Denso"), the largest supplier of automobile parts in Japan, is using UG/Open
in an object oriented programming environment to build a set of streamlined
engineering applications that extend the built-in capabilities of Unigraphics.
These applications capture Denso's proprietary engineering expertise,
providing a high degree of automation for designing such things as instrument
panel components, fuel systems, and HVAC. By incorporating specialized
applications into Unigraphics, Denso is able to improve its engineering
efficiency.
In Version 14.0 of Unigraphics, which was released in April 1998, the
Company expanded one of its newest modules, UG/WAVE, within the three high-end
UG bundles. UG/WAVE, a next generation parametric approach to top-down product
design, allows "what-if" evaluations of engineering alternatives. For example,
UG/WAVE allows engineers to more efficiently evaluate at the system level the
impact of design changes on such factors as the aerodynamic performance of an
airplane through changes in wing structure. By identifying and specifying the
most important variables that drive a product's design, high level
specifications can be passed down and imposed on lower-level subassemblies,
thereby automatically updating the product model. The WAVE methodology is
based on the premise that there exist not only relationships of a "global"
nature that may affect several subsystems in a product's design, but also
relationships of a more "local" nature that only need to be dealt within a
limited context of one or a few subassemblies. UG/WAVE has the ability to
segregate global relationships into an associative "control structure," with
more local relationships isolated in the components of the assembly.
In addition to incorporating software developed by the Company based on its
own core competencies, in certain cases, the Company also integrates
specialized third party components and applications into the Unigraphics
product suite. For example, Lightworks Ltd.'s software is used as the
visualization engine within Unigraphics for photo realistic rendering.
Solid Edge. Solid Edge is a solid modeling system for mechanical part and
assembly design that incorporates high-performance CAD functions into an
affordable, easy-to-use software package. Solid Edge is a mid-range product
targeted towards the machinery, consumer products and consumer electronics
markets and the many users of 2-D CAD or traditional "blueprint" paper design
methods. Solid Edge supports a wide range of mechanical design applications,
including assembly design, part modeling, detailing and drafting. Solid Edge's
automatic interference detection and reporting quickly identifies assembly
problems and its concurrent assembly access allows several designers to work
on separate parts or subassemblies within the same assembly model--all with
immediate access to up-to-the-moment work of other design team members. The
Solid Edge user interface is fully Windows-compliant and task-oriented,
leading the user through a series of directed steps to accomplish the desired
task.
Solid Edge was developed specifically as a native Windows application, is
available on Windows 95 or Windows NT and is well integrated into the overall
Windows environment with the standard Windows interface, including "drag and
drop" features, menu driven options, dialog boxes and on-line help. Solid Edge
is certified as "Designed for Microsoft Windows NT and Windows 95" and was the
first MCAD product to be certified as Microsoft Office compatible. The Company
believes Solid Edge's Windows capabilities improve design engineering
productivity, shorten learning curves, reduce training costs and lower system
administration overhead. The Solid Edge CAD system works well with familiar
Windows word processing, spreadsheet,
45
<PAGE>
database, presentation graphics and electronic mail packages and its native
Windows orientation allows a user to bi-directionally "cut and paste" Solid
Edge data into and from these other Windows applications.
Parasolid. Parasolid is an exact boundary representation geometric modeler,
supporting complex blending, freeform surfaces and feature-based solids to
serve MCAD applications. Parasolid's extensive functionality is based on a
library of routines with an object-oriented programming interface. Parasolid
provides robust solid modeling and integrated surface/sheet modeling
capabilities, including the ability to create non-manifold and cellular
bodies. It is designed for easy integration and is the only commercially
available solid modeling toolkit used in a high-end MCAD system. Parasolid is
used in Unigraphics for free-form surface construction and feature modeling as
well as all applications, including drafting, visualization, machining and
mesh generation. Parasolid is also used as the geometric modeling kernel in
Solid Edge 5.0.
The Parasolid solid modeling kernel provides the geometric engine for a
variety of MCAD applications. Its functionality includes the ability to handle
the complex blending of edges and faces and the hollowing, shelling and
creating of offset surfaces, which is important in the creation of plastic
parts. In addition, Parasolid enables a user to taper and draft angles to
calculate mold parting lines and drafts, a key aspect of die and mold design.
Finally, one of Parasolid's most unique aspects is its tolerant modeling
function which allows different tolerances to be applied to individual edges
and faces, thereby enabling the importation of less-than-perfect geometry from
other systems.
The Company released Version 9.1 of Parasolid in February 1998, which
extended Parasolid's penetration in the modeling kernel market by adding
enhancements such as blending of complex vertices and extensions to hollowing
operations. These improvements are especially important for automotive and
aerospace modeling applications. The next Parasolid release, Version 10, is
scheduled for shipment in August 1998.
The Company licenses Parasolid for use in such mid-range MCAD software
products as Dassault's Solid Works, Bentley's MicroStation Modeler and
Parametric's DesignWave. Parasolid is also used by many specialized software
developers to create Parasolid-compatible programs. Consequently, any MCAD
software and specialized applications that use the Parasolid engine will
become part of the "Parasolid Pipeline" and will be able to share geometric
data with other applications in the "pipeline." This seamless geometric data
sharing does not require translation of data from one program to another. The
Company has also published Parasolid's XT file format. All of these products
will be geometrically compatible with the Company's Unigraphics and Solid Edge
products, which, in turn, will be integrated with each other.
IMAN. IMAN is a full-function product data management system that organizes,
manages, customizes and distributes the volumes of data and numerous versions
associated with the typical digital product model, addressing all information
in the product development environment. IMAN makes the most current product
data readily accessible to all appropriate users throughout the manufacturing
enterprise, including the engineering, purchasing and manufacturing
departments, thereby eliminating time-consuming searches and the need to re-
create data. Design, manufacturing, engineering, planning, scheduling and
other organizations can easily access and manage applicable data such as MCAD
files, bills of material, process plans, analysis models and results, audio
and video annotations, prototypes, cost structures, material specifications
and purchase orders. The Company believes that when IMAN is used in
conjunction with Unigraphics, the combination is the most tightly integrated
PDM/MCAD product on the market today. This integration supports the bi-
directional updating of a product model's structure and attributes, whether a
change to the model occurs in IMAN or Unigraphics. For example, the product
model's structure can be modified within IMAN to meet a specific customer
configuration. The updated product model can then be retrieved and validated
within Unigraphics prior to sending the customized bill of material to
manufacturing.
IMAN provides configuration management, version control and other data
management capabilities through PC- and Web-based client-server architectures
communicating with remote servers. IMAN data are stored in a commercial data
base management system ("DBMS"), such as Oracle, but most of IMAN is
independent of the underlying DBMS because it creates a proprietary object-
oriented abstraction of how the data are physically
46
<PAGE>
stored in the DBMS. The Unigraphics user has the option of storing files
directly in the native file system (such as UNIX or Windows) or in the IMAN
data repository.
The Company is actively engaged in creating a new user interface to IMAN's
PDM engine. This new visual/virtual interface will be built upon Web-based
tools, including HTML and Java applets. It is being tailored for different
types of customers, such as "data consumers" who are mainly interested in
viewing the data, "reviewers" who need to comment on and/or approve data as
well as view it and "data authors" who generate new or substantially edit
existing data. IMAN's use of Web technology provides global access to the data
from virtually any computing platform located anywhere in the world. In turn,
IMAN's distributed object architecture provides for on-demand access to the
geographically dispersed data. This architecture provides optimal performance
while conserving global data storage requirements.
The IMAN product suite consists of a set of scalable modules that can be
combined with Unigraphics modules to meet the varying needs of the Company's
customers. IMAN Base, the foundation IMAN module, maintains and secures
product data integrity by coordinating multiple concurrent user access and
preventing unauthorized data changes. All data--specifications, standard,
engineering, production and technical publications--associated with a product
and its life cycle are managed through IMAN Base. A basic IMAN license also
includes IMAN Workspace, which is an easy-to-use, graphical interface to IMAN,
and IMAN SA (System Administration), which is a utility for defining users'
roles and responsibilities and the customer's workflow procedures. Additional
IMAN modules include: (i) IMAN PSM (Product Structure Management) for managing
product configurations, (ii) IMAN Workflow for modeling business processes to
promote collaborative engineering, (iii) ITK (Integration Toolkit), an
application programming interface for integrating other applications with
IMAN, and (iv) IMAN Image Services for managing scanned images and documents
as well as multi-media data. IMAN Image Services will be a part of Version 5.0
of IMAN, which is expected to be released in June 1998.
EMS. EMS is a high-end MCAD software that was acquired as part of the Solid
Edge Acquisition. The Company will continue to maintain and support the EMS
product; however, it will seek to convert EMS customers to Unigraphics or
Solid Edge. There can be no assurance that such customers will switch to
Unigraphics or Solid Edge or that EMS customers will continue their current
software maintenance contracts.
CONSULTING AND SUPPORT SERVICES
The Company offers a full range of customization, implementation and
integration consulting services and support services to its customers. The
Company provides complete multi-platform consulting services for deployment
and support of its MCAD and PDM technologies and for their integration into a
customer's product development environment. Such services enable customers to
re-engineer their methods of virtual product development by optimizing the use
of the Company's software. The Company charges for its consulting and support
services in three different ways. Support service costs for the first 90 days
are generally included in the cost of an initial product license. Standard
ongoing support services, such as a 24-hour technical troubleshooting
telephone hotline, are included in the cost of an annual maintenance license.
Specialized consulting services or support, such as instructor-led training
courses, are charged by the man-hour or on a project basis.
Customization, Implementation and Integration Consulting. The Company's
customization, implementation and integration consulting helps customers (i)
identify, acquire, customize and install hardware, software and communications
components and (ii) build and modify interfaces to allow different application
components to function together effectively. For example, Motor Coach
Industries ("Motor Coach") of Winnipeg, Manitoba, Canada launched its new
Renaissance bus using Unigraphics and IMAN software in conjunction with the
Company's consulting and implementation services. In particular, the Company's
consultants provided technical guidance and implementation and integration
expertise regarding the product information management of this large scale
project.
47
<PAGE>
Technical Support. The Company provides comprehensive technical support
services to its customers, including 24-hour a day support for certain users,
operating system support, Web tools and services and an electronic bulletin
board system, which provides electronic conferencing, electronic mail, file
transfer, call logging, and a symptom/solution database. The cost of most of
the services are built into product maintenance fees.
Training. Training is designed to dramatically extend users' MCAD and PDM
skills and knowledge. The Company's training services include instructor-led
courses, computer assisted self teaching modules, on-line library, custom
course development and education, instructor placement, training assessments
and a Master Certificate Program providing a series of classes that ensure
users master the skills needed to use specific software.
Data Exchange. One of the biggest obstacles companies face in realizing an
enterprise-wide product development environment is the exchange of data from
one MCAD system to another or from one media type (tapes) to another
(diskettes). To optimize data exchange, the Company offers platform transfers,
standards and premium-based translator services, media transfers, and rapid
prototyping translations.
Engineering. The Company provides engineering services both on-site or at
remote locations for increased affordability. Engineering services include
modeling and drafting, analysis, data conversion and translation, numerical
control programming, and customized programming.
HARDWARE
The Company sells hardware to customers on an as-needed basis. The Company
purchases its hardware through EDS pursuant to purchase agreements that EDS
has with various hardware vendors. As long as EDS owns a majority interest in
the Company, the Company will be able to purchase hardware pursuant to these
purchase agreements. The Company has relationships with certain hardware
vendors to ensure that the Company's software and the vendors' hardware are
compatible and mutually supportable. These relationships generally provide for
joint marketing and sales efforts, including joint advertising, reselling
discounts and finders fees. The Company's hardware partners include Compaq
Computer Corporation, Dell Computer Corporation, Digital Equipment Corp.,
Hewlett-Packard Company, International Business Machines Corporation,
Intergraph Computer Systems, NeTpower Inc., Silicon Graphics Inc. and Sun
Microsystems Corporation. In late 1996, the Company began deemphasizing
hardware sales in order to focus on higher margin software sales and
consulting services.
LICENSE AGREEMENTS
The Company typically charges a fixed license fee per seat for Unigraphics,
Solid Edge and IMAN based upon the number of modules and features within each
such seat. Typically, the customer receives a perpetual license for each of
these products. This license fee generally includes some short-term
maintenance and integration services as well as training services. The Company
typically provides maintenance services to its customers on an annual basis
with automatic renewals subject to the Company's or the customer's right to
terminate the maintenance upon 60 days prior notice. The Company typically
charges a maintenance fee equal to a percentage of the initial license fee,
which entitles the customer to regular product updates and enhancements and
general telephone support. The average maintenance renewal rate over the past
two years has been approximately 98%.
The Company typically licenses Parasolid directly to VARs or distributors
who embed Parasolid in their own proprietary software products. These
customers typically pay an initial development license fee for the use of
Parasolid and royalty payments related to sales of their own proprietary
software products. A small number of customers license Parasolid solely for
use in their own internal operations.
48
<PAGE>
CUSTOMERS
The Company's customers come from a wide range of industries, including the
six key industries that are the focus of the Company's business strategy--
automotive and transportation, aerospace, consumer products, equipment and
machinery, electronics and universities. In 1997, no single customer of the
Company accounted for more than 10% of total revenues. The following table
sets forth, by strategic industry sector, certain of the Company's largest and
most significant customers:
<TABLE>
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
Automotive &
Transportation ..... Arctic Cat, Inc. Dura Mechanical Components, Inc. New Flyer Industries
AVTOVAZ (Lada) Excel Industries, Inc. New Venture Gear
Benetton Formula One Ltd. FMC Corporation Norton TRW
Byron Jackson Pump General Motors Corporation Robert Bosch GmbH
Cosworth Engineering Grumman Data Systems Corporation Tower Automotive
Division of Vickers Plc
DAF Trucks NV Motorcoach Industries United Technologies Corporation
Denso Co. Ltd. Navistar International VME Americas Inc.
--------------------------------------------------------------------------------------------------------
Aerospace ........... The Boeing Company General Electric Company Martin-Baker Aircraft Ltd
Dynamic Engineering, Inc. Israel Aircraft Industries Ltd Pilatus Aircraft Limited
European Gas Turbines Ltd Kaman Corporation United Technologies Corporation
FiatAvio SpA Learjet Corporation
Gencorp Aerojet Lucas Aerospace Inc.
--------------------------------------------------------------------------------------------------------
Consumer Products.... Calsonic Corporation Morioka Seiko Kogyo Ryobi Motor Products
Continental AG Moulinex SA Stanley Works
Dresser-Rand Company NASA Lewis Research Center The Gillette Company
Komet of America Incorporated Pentax (Asahi Kougaku) Titleist and Foot-Joy Worldwide
Minolta Rossignol SA
--------------------------------------------------------------------------------------------------------
Equipment and
Machinery .......... Cascade Corporation Heidelberg Web Press Inc. Makino Milling
Donaldson Company, Inc. Hitachi Kouki Co. Ltd. MTD Products Inc.
Fanuc Ltd. Husky Injection Molding Systems Ltd. Takara Seisakusho
FMC Corporation Kennametal, Inc. Valenite Inc.
--------------------------------------------------------------------------------------------------------
Electronics ......... Digital Equipment Corporation Siemens AG Yazaki Electronic Components Ltd.
Electromechanical Components
Philips Electronics NV Telefonaktlebolaget LM
Ericsson Telecom AB
--------------------------------------------------------------------------------------------------------
University .......... ETH Zurich Pennsylvania State University The University of Dayton
Cranfield Institute of Technology Polytechnic University The University of Illinois
GMI Engineering & Management Prairie View A&M University University of Hartford
Illinois State University Rochester Institute of Technology University of Washington
Iowa State University Stevens Institute of Technology University of Wisconsin-Madison
Kochi Polytechnic College Silver Creek Central School
Mississippi State University Technical University of Eindhoven
--------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
AUTOMOTIVE AND TRANSPORTATION
Automotive and transportation customers that use Unigraphics in their
manufacturing processes include GM, Tower Automotive and Motor Coach
Industries. In addition, many suppliers of the Company's automotive and
transportation customers use Unigraphics or Solid Edge to design parts for
these customers. Motor Coach Industries used Unigraphics in 1996 and 1997 to
virtually design the entire prototype of its Renaissance motor coach. This
virtual design process helped reduce the number of parts required by
approximately 60% and decreased the time from inception to market by 21
months, from 60 months to 39 months. In 1995, Robert Bosch GmbH migrated
25,000 of its motor model designs from a competing MCAD product to the
Company's Unigraphics product. These motors are often incorporated into
vehicles manufactured by GM, which is also a Unigraphics customer.
In 1996, GM entered into the EDS/GM Site License Agreement in which GM
selected Unigraphics as GM's only vehicle development software platform. By
recognizing Unigraphics as its single MCAD product development system, GM has
expressed its intent to consolidate its usage of MCAD software systems. This
consolidation will support tight integration of all phases of the GM vehicle
development processes with common data and integrated applications.
AEROSPACE
Unigraphics has been used by many aerospace manufacturers, including Boeing,
Israel Aircraft Industries Ltd ("Israel Aircraft"), Learjet Corporation and
Martin-Baker Aircraft Ltd, to design and manufacture various aircraft and
aircraft parts. Unigraphics was the CAD/CAM system used for the design of the
F-18 E/F fighter aircraft. The use of Unigraphics, high speed machining and a
design for manufacturing and assembly approach resulted in a 75% reduction in
the number of engineering changes and a 42% reduction in the number of parts
compared to the design of the F-18 C/D unit. In 1996 and 1997, Israel Aircraft
employed Unigraphics to manufacture the wing of its Galaxy aircraft directly
from an electronic mockup of the model, without the need for any physical
mockups.
CONSUMER PRODUCTS
Unigraphics' breadth of functionality supports the design and manufacturing
of highly styled and complex consumer products. For this market, the
development process includes the definition of aesthetic surfaces incorporated
with the functional elements of the product. Unigraphics has proved especially
adept at integrating the aesthetic design elements with the practical and
engineering elements of products such as those from Moulinex SA. Integrated
digital mockup, photo-realistic rendering and feature-based solid modeling
have allowed enterprises to reduce their product development cycles.
Solid Edge is also well suited to many design tasks within the consumer
products marketplace. Feature-based solids modeling, sheet metal, assemblies
and comprehensive drafting are employed on tasks that were once time consuming
manual design processes.
EQUIPMENT AND MACHINERY
Unigraphics is widely used for the manufacturing of large, complex equipment
and machinery. Its high functionality is particularly valuable to vertically
integrated equipment and machinery manufacturers seeking to satisfy all of
their MCAD needs with a single system.
The Company believes that Solid Edge is well suited for many smaller product
design tasks within the equipment and machinery industry. Manufacturers that
have typically performed their design functions in two dimensions can migrate
to Solid Edge and incorporate the design benefits of 3-D solid modeling
applications such as mass properties analysis, interference detection, 3-D
visualization and assembly mock-ups. By performing more design steps with a 3-
D MCAD system, issues of form, fit and function can be addressed digitally,
rather than with physical prototypes, thereby reducing product development
cycle times and costs.
50
<PAGE>
ELECTRONICS
Due to the short shelf life of consumer electronics products, the
electronics industry must be able to create a product, from inception to
manufacture, in a very short period of time. The Company's products allow the
mechanical design and packaging aspects of electronics products to be
considered in tandem with the actual electronics development being performed
by a different MCAD system. For example, a user of Unigraphics can design the
plastic keys of a computer keyboard at the same time the actual keyboard
electronics are being developed by another engineer on a different design
system.
UNIVERSITY
Through a number of programs, the Company provides its products to the
engineering departments of several universities and other educational
institutions. These programs not only provide educational opportunities for
the university students but also familiarize them with the Company's MCAD and
PDM products. The Company believes that this familiarity will encourage
engineering students to select the Company's products for their engineering
projects and further cause them to purchase or support the purchase of the
Company's products after graduation.
SALES AND MARKETING
GENERAL
The Company has a worldwide direct sales force and distributor network. The
Company's sales organization, which is divided by geographic zone, comprises
approximately 1,100 employees in 78 offices worldwide, with approximately 445
employees in the Americas, approximately 430 employees in Europe and
approximately 225 employees in the Asia/Pacific region. Each regional office
operates autonomously, but industry groups, which focus on the automotive and
transportation and aerospace industries, have been organized from a cross-
section of sales, marketing and technical personnel in each region. The
Company also has approximately 57 Unigraphics distribution partners or VARs in
21 countries covering several regions, including Eastern Europe, the Middle
East, Japan and Korea.
Unigraphics and IMAN are primarily marketed and sold by the Company's direct
sales force. The high-end Unigraphics/IMAN sales cycle typically lasts from
six to eighteen months as prospective customers generally consider and test
MCAD and PDM systems from several competing vendors. The Company's sales force
is focused on increasing sales penetration at existing customers through the
sale of additional Unigraphics seats, modules and services to such customers.
Emphasis during the sales cycle is not only on product functionality, but also
on the integration of MCAD and PDM software with networking and computing
capabilities. A typical sale will include customization, implementation and
integration consulting services.
While the mid-range Solid Edge sales process is generally shorter than the
Unigraphics/IMAN sales cycles, it usually involves the testing and
benchmarking of competing products. The Company intends to market and sell
Solid Edge primarily through its VARs, with support from Company-generated
marketing materials as well as shared support of industry trade shows and
seminars, advertising within trade publications and journals and direct mail
and telemarketing solicitation programs. The Company intends to strengthen its
VAR distribution network by having members of such network report directly to
senior level sales management personnel.
BUSINESS PARTNERSHIPS
The Company has established two business partnership programs to develop
relationships with various software developers to ensure that the Company's
software products are fully integrated with other software products in the
MCAD and PDM market.
Alliance Program. The Alliance Program is an extensive and growing group of
niche software suppliers which provide specialized software applications to be
used in conjunction with Unigraphics and IMAN. The
51
<PAGE>
Company typically enters into joint marketing agreements with software
suppliers whereby the Company and the software suppliers undertake joint
marketing and promotional efforts. The Company provides its customers with
both print and online catalogs listing the names of the Alliance Program
members and the software that each member provides. The Company believes that
the Alliance Program allows the Company's customers to capitalize on the use
of Unigraphics and IMAN. For example, Variation Systems Analysis provides a
tolerance checking ability software to be used in conjunction with Unigraphics
and Composite Design Technologies provides software that provides composite
design and manufacturing capability not available in Unigraphics.
Voyager Program. The Voyager Program is a worldwide consortium of leading
software vendors offering products that complement Solid Edge's mechanical
design and drafting capabilities. It was initiated by Intergraph before the
Solid Edge Acquisition and the Company is in the process of re-signing members
to new contracts with the Company. The typical Voyager Program agreement
provides for joint marketing and promotional activities. An example of a
Voyager Program member is Structural Research and Analysis Corporation, the
developer of COSMOS/Edge, an application used to perform stress analysis
calculations in conjunction with Solid Edge.
RESEARCH AND DEVELOPMENT
The Company's research and development staff comprises approximately 430
employees located at several offices worldwide. Members of the Company's
research and development organization are primarily located in: Cypress,
California; Huntsville, Alabama; St. Louis, Missouri; Cambridge, England; and
Cologne, Germany. The Company's current research and development staff is
composed of people with diverse backgrounds and strong industry and technical
expertise, including many senior technical and managerial people who have been
employed in the Company's development organization for fifteen years or more.
During 1997, the Company spent approximately $48.0 million on software
research, development and engineering, constituting approximately 42% of its
total software revenue. The Company's software practices, architecture and
computing environment support development of software products in multiple
locations, allowing project teams to collaborate on software development
without requiring team members to be located at the same site.
The Company uses a functional development process to create technologically
advanced products. This well-defined process emphasizes requirements
definition, up-front design and early detection of defects. In addition to
focusing on functionality, the Company ensures that its products are adapted
to the most popular and productive computing environments, which currently
include UNIX and Windows NT workstations employing a modern graphical user
interface based on Motif, Microsoft Windows, Web and 3-D graphics technology.
The Company's software products are designed and built using object-oriented
programming techniques.
Major enhancement releases of each of the Company's four core products are
distributed approximately twice each year. The Company generally believes that
new releases contain significant improvements to the functionality of each
product as well as updates and performance improvements. Product updates are
released periodically between enhancement releases if problems are discovered
in production software. Each product enhancement release must be upwardly
compatible with the previous enhancement release and maintenance releases must
be upwardly and downwardly compatible relative to the previous enhancement
release.
Reliability of the Company's products is assessed using manual testing and
the Company's suite of automated tests. Automated performance tests are also
executed for every new software build to ensure that there are no performance
or memory utilization regressions. Solid Edge's development, marketing and
support operations have been ISO 9001 certified and the Company is currently
seeking such certification for its other operations.
INTELLECTUAL PROPERTY
The Company relies on a combination of contracts, trade secret laws and
patents to establish and protect the proprietary rights to its technology. The
Company distributes its products under software licenses which grant
52
<PAGE>
customers licenses to, rather than ownership of, the Company's products and
which contain various provisions protecting the Company's ownership and
confidentiality of the licensed technology. The source code for Unigraphics,
IMAN and Parasolid is protected as a trade secret and as an unpublished
copyright work and in certain instances with a patent. However, no assurance
can be made that others will not copy or otherwise obtain and use the
Company's products or technology without authorization. In addition, effective
copyright, trade secret and patent protection or enforcement may be
unavailable or limited in certain countries. The Company believes that, due to
the rapid technological advances within the industry, factors such as the
technological and creative skills of its personnel are more important to
establishing and maintaining a technology leadership position within the
industry than are the various legal protections of the technology.
The Solid Edge Acquisition involved (i) the direct transfer to the Company
of the intellectual property rights unique to the Solid Edge and EMS products
and (ii) a perpetual, royalty-free license to the Company for certain patents,
patent applications and other intellectual property for the Solid Edge and EMS
products which is also used across other Intergraph business lines and in
other Intergraph products. The Company has the right to modify and improve all
acquired or licensed intellectual property and to own any modifications or
improvements that it makes.
Unigraphics Solutions, Unigraphics, Solid Edge, Parasolid and IMAN, among
others, are trademarks that are owned by the Company.
COMPETITION
Markets for the Company's products are highly competitive and characterized
by rapidly changing technology and evolving standards. The Company's
competitors include (i) generalist MCAD developers that offer broad-range
systems, such as Dassault, Matra Datavision, Parametric and SDRC; (ii)
specialist software developers whose product lines are focused on CAD
products, CAM products, CAE products or PDM products; and (iii) numerous
smaller niche software developers.
The Company's products compete on the basis of functionality, technical
performance, price, operating system compatibility, integration, customization
capability, marketing and technical support and training. The ability of the
Company to compete successfully depends on factors both within and outside the
Company's control, including, among others, the successful and timely
development of new products, versions and features, product performance and
quality, pricing, customer service and support and both MCAD and PDM industry
and general economic trends.
The Company has experienced and expects to continue to experience strong
competition. The Company's competitors may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products
than the Company. Current and potential competitors may establish strategic
alliances or undertake acquisitions to increase the ability of their products
to address the needs of the Company's current and prospective customer base.
PROPERTIES
In connection with the Reorganization, the Company entered into sublease
agreements with EDS covering substantially all of the real property occupied
by the Company at the time of the Reorganization. The terms of such sublease
agreements incorporate the financial and other material terms of EDS' lease
agreements for the subject property (other than the sublease for the Company's
St. Louis headquarters for which the rental rate charged to the Company is
based on an estimate of current market rates). The Company will pay to EDS
annual aggregate rental payments of approximately $11.9 million in 1998 in
respect of all real property leased or subleased from EDS.
The Company's corporate headquarters is located in St. Louis, Missouri,
where it subleases from EDS approximately 86,000 square feet of office space
for corporate general and administrative, marketing, research
53
<PAGE>
and development and consulting services activities. That sublease will expire
in September 2001 and provides for an annual aggregate rental payment
(including operating expenses) to EDS in 1998 of approximately $1.8 million.
The Company subleases approximately 127,000 square feet of office space in
Cypress, California from EDS, until the expiration of EDS' lease in June 2002.
The annual aggregate rental payment to EDS under such sublease is
approximately $1.8 million (excluding utilities). The Cypress facility is the
Company's principal technical development and support center, where the
principal activities and functions include research and development, a global
technical access center, consulting services, product manufacturing and
distribution, marketing, demonstration and training and general
administration. The Company's European headquarters are located in Fleet,
Hants, United Kingdom. This facility is being sublet from EDS until expiration
of EDS' master lease facility in 2001 at an annual aggregate rental payment of
approximately $360,000 (including operating expenses). Activities at the
United Kingdom office include oversight of European operations, marketing and
finance. The Company's Asia Pacific headquarters is located in Hong Kong,
where the Company subleases approximately 4,300 square feet from EDS for a
term expiring in November 1998. The headquarters for Germany and Eastern
Europe is in Cologne, Germany, where the Company subleases 19,700 square feet
of office space from EDS until the expiration of EDS' master lease facility in
2001. The annual aggregate rental payment to EDS under such sublease is
approximately $1 million (excluding operating expenses.) Activities at the
Cologne office include research and development, customer training and general
administration. The headquarters for Solid Edge operations is in Huntsville,
Alabama. The Company leases approximately 37,600 square feet from Intergraph,
which lease will expire in December 1998.
EMPLOYEES
At March 2, 1998, the Company employed over 2,000 persons who conduct
business in more than 60 offices worldwide. The Company's future success will
depend, in part, on its ability to attract, retain and motivate highly
qualified technical, engineering, marketing and management personnel. None of
the Company's U.S. employees are represented by a labor union. The Company has
never experienced a work stoppage and believes that its employee relations are
good.
LEGAL PROCEEDINGS
The Company is from time to time involved in routine litigation incidental
to its operations. None of the litigation in which the Company is currently
involved, individually or in the aggregate, is material to the financial
condition or results of operations.
To date, the Company has not experienced any litigation regarding
copyrights, trademarks, trade secrets or other intellectual property rights
alleging the infringement of such intellectual property rights of others.
Litigation alleging infringement of the intellectual property rights of others
is not uncommon in the MCAD industry and there can be no assurance that such
litigation will not be commenced in the future against the Company. If such
litigation were to be commenced against the Company, the Company could incur
significant costs with respect to the defense thereof, irrespective of the
validity or the successful assertion of such claims, which could have a
material adverse effect on the Company's results of operations or financial
condition. See "Risk Factors--Dependence on Proprietary Technology."
54
<PAGE>
MANAGEMENT
The directors and executive officers of the Company, their present positions
and their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John J. Mazzola....... 54 President and Chief Executive Officer
Anthony J. Affuso..... 52 Vice President--Product Marketing and Development
Douglas E. Barnett.... 38 Vice President and Chief Financial Officer
Donald E. Davidson.... 57 Vice President--Asia Pacific
James Duncan.......... 61 Vice President--Europe
Dennis P. Kruse....... 49 Vice President--Americas
Robert F. Loss, III... 58 Vice President--Operations
Gary J. Fernandes..... 54 Chairman of the Board of Directors
Gary B. Moore......... 48 Vice Chairman of the Board of Directors
</TABLE>
The following biographies describe the business experience of the directors
and executive officers of the Company.
John J. Mazzola was appointed President and Chief Executive Officer of the
Company on January 1, 1998. From 1992 to December 1997, Mr. Mazzola served as
the President of the Unigraphics division of EDS. Prior to 1992, Mr. Mazzola
served as President of McDonnell Douglas Systems Integration ("MDSI"), the
predecessor to the Unigraphics division of EDS. Prior to 1992, Mr. Mazzola
held numerous positions within MDSI, including Vice President of Manufacturing
and Engineering, Director of Marketing, Vice President of Check Card Systems
and Vice President of Research and Development.
Anthony J. Affuso was appointed Vice President--Product Marketing and
Development of the Company on January 1, 1998. From March 1992 to December
1997, Mr. Affuso served as the Vice President of Software Development and
Marketing of the Unigraphics division of EDS, with responsibility for research
and development for the Company's core products. From September 1989 to March
1992, Mr. Affuso was in charge of the business unit of EDS which automated
GM's world-wide engineering, computing, communications and information
management infrastructure.
Douglas E. Barnett was appointed Vice President and Chief Financial Officer
of the Company on March 2, 1998. From January 1996 to March 1998, Mr. Barnett
served as Vice President and Corporate Controller of Giddings & Lewis, Inc.
("Giddings & Lewis"), a publicly traded company and the largest supplier of
industrial automation products in North America. From 1991 to 1996, Mr.
Barnett served as Treasurer of Giddings & Lewis.
Donald E. Davidson was appointed Vice President--Asia Pacific of the Company
on January 1, 1998. Mr. Davidson served as Managing Director of the Asia
Pacific Region for the Unigraphics division of EDS from November 1991 to
December 1997 with responsibility for all direct and indirect sales and
support activities covering Japan, Korea, Greater China, South East Asia and
Australasia.
James Duncan was appointed Vice President--Europe of the Company on January
1, 1998. Mr. Duncan oversees operations in 32 countries located throughout
Europe, India, the Middle East and Africa. Mr. Duncan served as Managing
Director of the European operations for the Unigraphics division of EDS from
November 1991 to December 1997.
Dennis P. Kruse was appointed Vice President--Americas of the Company on
January 1, 1998. Mr. Kruse served as Vice President--Sales, Americas for the
Unigraphics division of EDS from April 1994 to December 1997 with
responsibility for sales profit and loss, pre- and post-sales support,
training and technical sales support. From 1987 to 1994, Mr. Kruse served as
Director of the Western Region for the Unigraphics division of EDS and, prior
to 1991, MDSI.
55
<PAGE>
Robert F. Loss, III was appointed Vice President--Operations of the Company
on January 1, 1998. From March 1992 to December 1997, Mr. Loss served as the
Vice President of Operations of the Unigraphics division of EDS with
responsibility for software documentation and media manufacturing, product
delivery, customer services, product support, educational services and
internal management of information systems. Prior to 1992, Mr. Loss held
numerous positions within MDSI, including Vice President of Development and
Operations, Director of Product Management and Director of Business Management
and Marketing.
Gary J. Fernandes has been Vice Chairman of EDS since June 1996, a director
of EDS since 1981 and is a member of EDS' Office of the Chairman. Mr.
Fernandes was a Senior Vice President of EDS from October 1984 until June
1996. He has oversight responsibility for EDS' worldwide business development
and corporate development (including marketing and strategic planning) and is
Chairman of its A.T. Kearney management consulting services subsidiary and of
EDS Australia. Mr. Fernandes joined EDS in 1969 and has served in numerous
management capacities in the United States, Europe and Japan. He is a director
of The Southland Corporation and John Wiley & Sons, Inc. Mr. Fernandes became
Chairman of the Board of Directors of the Company at its inception in October
1997. Mr. Fernandes will continue to serve on the board of directors of EDS
after the Offering.
Gary B. Moore has been a Senior Vice President of EDS since June 1996 and
prior to that time had been a Vice President of EDS since 1992. Since June
1996, Mr. Moore has held responsibility for EDS' business units serving
customers in the manufacturing, retail and distribution industries. He served
as Chairman of EDS Japan from January 1993 to June 1996. Mr. Moore became Vice
Chairman of the Board of Directors of the Company at its inception in October
1997.
Until completion of the Offering, the Company will have a Board of Directors
consisting of Messrs. Fernandes and Moore. After completion of the Offering,
the Company anticipates that the size and composition of the Board of
Directors will be changed to seven members and will include Messrs. Fernandes,
Moore and Mazzola, two directors who are current or former officers or
employees of EDS and two directors who will be persons who are neither
employees or officers of the Company or EDS nor directors of EDS (a "Non-
employee Director").
INFORMATION REGARDING THE BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors will be divided into three classes of directors, with
each class elected to a three-year term every third year and holding office
until their successors are elected and qualified. The class whose term of
office will expire at the Company's 1999 Annual Meeting of Stockholders will
consist of Mr. Mazzola and one other employee of EDS; the class whose term of
office will expire at the Company's 2000 Annual Meeting of Stockholders will
consist of Mr. Moore, one Non-employee Director and one other employee of EDS;
and the class whose term of office will expire at the Company's 2001 Annual
Meeting of Stockholders will consist of Mr. Fernandes and one Non-employee
Director.
The Bylaws authorize the Board of Directors to designate three committees,
an Executive Committee, an Audit Committee and a Compensation Committee. The
Board of Directors will, upon consummation of the Offering, designate an
Executive Committee, an Audit Committee and a Compensation Committee. In
addition, the Board of Directors may, from time to time, designate one or more
additional committees, which shall have such duties and may exercise such
powers as are granted to it by the Board of Directors.
The Executive Committee will consist of three or more members, including the
Chairman of the Board of Directors, the Vice Chairman of the Board of
Directors and the Chief Executive Officer. The Executive Committee has and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Company, with the exception of
such powers and authority as may be specifically reserved to the Board by law
or by resolution adopted by the Board of Directors.
The Audit Committee, which will be composed entirely of directors who are
not employees or officers of the Company or EDS or directors of EDS, will
review and recommend the selection of independent auditors, the
56
<PAGE>
fees to be paid to such auditors, the adequacy of the audit and accounting
procedures of the Company and such other matters as may be specifically
delegated to the Audit Committee by the Board of Directors. In this
connection, the Audit Committee shall, at its request, meet with
representatives of the independent auditors and with the financial officers of
the Company separately or jointly.
The Compensation Committee, which will be composed entirely of Non-employee
Directors, will administer management incentive compensation plans, including
the 1998 Incentive Plan (as hereinafter defined), and will review and make
recommendations with respect to the management remuneration policies of the
Company, including salary rates and fringe benefits of elected officers, other
remuneration plans such as incentive compensation, deferred compensation and
stock option plans, directors' compensation and benefits and such other
matters as may be specifically delegated to the Compensation Committee by the
Board of Directors.
COMPENSATION OF DIRECTORS
Non-employee Directors will receive an annual retainer of $20,000 for Board
of Directors and committee service, a fee of $3,500 for serving as a committee
chairman, a fee of $1,000 for attending each meeting of the Board of Directors
or any committee thereof and reimbursement for reasonable out-of-pocket
expenses incurred in connection with attendance at such meeting of the Board
of Directors or any committee thereof.
In addition, each Non-employee Director will receive, on an annual basis
pursuant to the 1998 Incentive Plan, options to purchase 3,000 shares of Class
A Common Stock at an exercise price equal to the fair market value of such
shares at the date of grant. A Non-employee Director may make an annual
election to receive, in lieu of all or any portion of the cash portion of
director's fees he or she would otherwise receive in the next year, non-
qualified stock options to purchase Common Stock in accordance with the terms
of the 1998 Incentive Plan.
EXECUTIVE COMPENSATION
Prior to the Reorganization, all employees of the Company, including the
executive officers, were compensated by EDS. Since the Reorganization, the
executive officers and all other employees of the Company have been
compensated solely by the Company. Following the Offering, the executive
officers of the Company will continue to participate in most EDS compensation
plans other than the EDS 1996 Incentive Plan, which, with respect to future
grants to employees of the Company, will be replaced by the Company's 1998
Incentive Plan. The Company will conduct a comprehensive review of all benefit
plans during 1998 with the goal of adopting its own benefit plans over time
following the Offering.
The Company's executive officers will receive annual cash compensation in
the form of a base salary and will participate in a formula-based incentive
compensation plan that is tied to the Company's financial performance. In
addition, the Company's executive officers and other key employees will be
eligible to participate in the 1998 Incentive Plan.
THE 1998 INCENTIVE PLAN
The Board of Directors has adopted, and EDS, as the Company's sole
stockholder prior to the consummation of the Offering has approved, effective
upon the consummation of the Offering, the Unigraphics Solutions Inc. 1998
Incentive Plan (the "1998 Incentive Plan"). The description set forth below
represents a summary of the principal terms and conditions of the 1998
Incentive Plan in the form so approved and does not purport to be complete.
Such description is qualified in its entirety by reference to the 1998
Incentive Plan, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
Any outstanding awards under the EDS 1996 Incentive Plan (or its predecessor
plan) held by executives or other employees of the Company will remain
outstanding following the closing of the Offering. However, no new awards are
expected to be granted to employees or directors of the Company under the EDS
1996 Incentive Plan. The value of outstanding awards under the EDS 1996
Incentive Plan may be taken into consideration by the Compensation Committee
in determining any awards to be granted under the Company's 1998 Incentive
Plan.
57
<PAGE>
GENERAL
Key employees eligible for awards ("Awards") under the 1998 Incentive Plan
(the "Employees") are those that hold positions of responsibility and whose
performance can have a significant effect on the success of the Company and
its subsidiaries. The only directors eligible for automatic or elective Awards
under the 1998 Incentive Plan are Non-employee Directors.
Awards to Employees under the 1998 Incentive Plan ("Employee Awards") may be
made in the form of grants of stock options ("Options"), stock appreciation
rights ("SARs"), restricted or non-restricted stock or units denominated in
stock ("Stock Awards"), cash awards ("Cash Awards"), performance awards
("Performance Awards") or any combination of the foregoing. Awards to Non-
employee Directors under the 1998 Incentive Plan ("Director Awards") will be
in the form of grants of Options.
The 1998 Incentive Plan provides for Awards to be made in respect of a
maximum of 1,300,000 shares of Class A Common Stock, of which 100,000 shares
will be available for Director Awards and the remainder will be available for
Employee Awards. No participant under the 1998 Incentive Plan may be granted
in any 12 month period Options for more than 200,000 shares of Class A Common
Stock, Stock Awards for more than 100,000 shares of Class A Common Stock or
Cash Awards in excess of $2.0 million. Shares of Class A Common Stock which
are the subject of Awards that are forfeited or terminated, expire
unexercised, are settled in cash in lieu of Class A Common Stock or in a
manner such that all or some of the shares covered thereby are not issued or
are exchanged for Awards that do not involve Class A Common Stock will again
immediately become available for Awards under the 1998 Incentive Plan.
The 1998 Incentive Plan, as it applies to Employee Awards, but not with
respect to Non-employee Directors, will be administered by the Compensation
Committee. To the extent required pursuant to Rule 16b-3 under the Exchange
Act in order for the grant of Employee Awards to be exempt under Section 16,
the Compensation Committee will at all times consist of at least two members
of the Board of Directors who meet the requirements of the definition of "Non-
Employee Director" set forth in Rule 16b-3(b)(3)(i).
Insofar as the 1998 Incentive Plan relates to Employee Awards, the
Compensation Committee will have the exclusive authority to administer the
1998 Incentive Plan and to take all actions which are specifically
contemplated thereby or are necessary or appropriate in connection with the
administration thereof. The Compensation Committee may, in its discretion,
provide for the extension of the exercisability of an Employee Award,
accelerate the vesting or exercisability of an Employee Award, eliminate or
make less restrictive any restrictions contained in an Employee Award, waive
any restriction or other provision of the 1998 Incentive Plan or in any
Employee Award or otherwise amend or modify an Employee Award in any manner
that is either (i) not adverse to the Employee holding the Employee Award or
(ii) consented to by such Employee.
EMPLOYEE AWARDS
The Compensation Committee will administer the 1998 Incentive Plan,
determine the type or types of Employee Awards made under the 1998 Incentive
Plan and will designate the Employees who are to be recipients of such Awards.
Each Employee Award may be embodied in an agreement, which will contain such
terms, conditions and limitations as are determined by the Compensation
Committee. Employee Awards may be granted singly, in combination or in tandem.
Employee Awards may also be made in combination or in tandem with, in
replacement of, or as alternatives to, grants or rights under the 1998
Incentive Plan or any other employee plan of the Company or any of its
subsidiaries, including any acquired entity; provided, however, that no Option
may be issued in exchange for the cancellation of an Option with a lower
exercise price. All or part of an Employee Award may be subject to conditions
established by the Compensation Committee, which may include continuous
service with the Company and its subsidiaries, achievement of specific
business objectives, increases in specified indices, attainment of specified
growth rates and other comparable measurements of performance.
58
<PAGE>
The types of Employee Awards that may be made under the 1998 Incentive Plan
are as follows:
Options. Options are rights to purchase a specified number of shares of
Class A Common Stock at a specified price. An option granted pursuant to the
1998 Incentive Plan may consist of either an incentive stock option ("ISO")
that complies with the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), or a non-qualified stock option
("NQSO") that does not comply with such requirements. ISOs must have an
exercise price per share that is not less than the fair market value of the
Class A Common Stock on the date of grant. To the extent that the aggregate
fair market value of ISOs exercised by an Employee in any one calendar year
exceeds $100,000, such options shall be treated as NQSOs and not as ISOs.
NQSOs must have an exercise price per share that is not less than, but may
exceed, the fair market value of the Class A Common Stock on the date of
grant. In either case, the exercise price must be paid in full at the time an
Option is exercised in cash or, if the Employee so elects, by means of
tendering Class A Common Stock or surrendering another Award.
SARs. SARs are rights to receive a payment, in cash or Class A Common Stock,
equal to the excess of the fair market value or other specified valuation of a
specified number of shares of Class A Common Stock on the date the rights are
exercised over a specified strike price. An SAR may be granted under the 1998
Incentive Plan to the holder of an Option with respect to all or a portion of
the shares of Class A Common Stock subject to such Option or may be granted
separately. The terms, conditions and limitations applicable to any SARs,
including the term of any SARs and the date or dates upon which they become
exercisable, will be determined by the Compensation Committee.
Stock Awards. Stock Awards consist of restricted and non-restricted grants
of Class A Common Stock or units denominated in Class A Common Stock. The
terms, conditions and limitations applicable to any Stock Awards will be
determined by the Compensation Committee. The Compensation Committee may
remove any restrictions on Stock Awards, at its discretion. Without limiting
the foregoing, rights to dividends or dividend equivalents may be extended to
and made part of any Stock Award in the discretion of the Compensation
Committee.
Cash Awards. Cash Awards consist of grants denominated in cash. The terms,
conditions and limitations applicable to any Cash Awards will be determined by
the Compensation Committee.
Performance Awards. Performance Awards consist of grants made to an Employee
subject to the attainment of one or more performance goals. A Performance
Award will be paid, vested or otherwise deliverable solely upon the attainment
of one or more pre-established, objective performance goals established by the
Compensation Committee prior to the earlier of (i) 90 days after the
commencement of the period of service to which the performance goals relate
and (ii) the elapse of 25% of the period of service, and in any event while
the outcome is substantially uncertain. A performance goal may be based upon
one or more business criteria that apply to the Employee, one or more business
units of the Company or the Company as a whole, and may include any of the
following: revenues, net income, stock price, market share, earnings per
share, return on equity, return on assets or decrease in costs. Subject to the
foregoing, the terms, conditions and limitations applicable to any Performance
Awards will be determined by the Compensation Committee.
DIRECTOR AWARDS
Under the 1998 Incentive Plan, each Non-employee Director will receive the
Awards described below, which will be granted either automatically or at the
option of the Non-employee Director in lieu of director's fees.
Non-employee Director Options. On the date of his or her initial election to
the Board of Directors, each Non-employee Director will automatically receive
a grant of NQSOs that provide for the purchase of 3,000
59
<PAGE>
shares of Class A Common Stock. In addition, on the first business day of the
month following the date on which each annual meeting of the stockholders of
the Company is held (each, an "Annual Director Award Date"), each Non-employee
Director will automatically receive a grant of NQSOs that provide for the
purchase of 3,000 shares of Class A Common Stock. A Non-employee Director who
is elected otherwise than by election at an annual meeting of stockholders of
the Company, and other than those elected immediately following the Offering,
will automatically receive, on the date of his or her election, a grant of
NQSOs that provides for the purchase of a number of shares of Class A Common
Stock equal to the product of (i) 3,000 and (ii) a fraction the numerator of
which is the number of days between the election of such Non-employee Director
and the next scheduled Annual Director Award Date and the denominator of which
is 365. The term of the NQSOs granted to Non-employee Directors will be for a
period of ten years from the date of grant. The exercise price of such NQSOs
will be equal to the fair market value of the Class A Common Stock on the date
of grant. Such exercise price must be paid in full in cash at the time an NQSO
is exercised. All NQSOs granted to Non-employee Directors under the 1998
Incentive Plan will become exercisable in increments of one-third of the total
number of shares of Class A Common Stock that are subject thereto on the
first, second and third anniversaries of the date of grant. All unvested NQSOs
granted to a Non-employee Director will be forfeited if the Non-employee
Director resigns from the Board of Directors without the consent of a majority
of the other directors.
In addition a Non-employee Director may make an annual election to receive,
in lieu of all or any portion of the director's fees he or she would otherwise
receive in the next year (including both annual retainer and meeting fees), a
number of NQSOs equal to the product of (x) three times (y) a fraction the
numerator of which is equal to the dollar amount of fees the Non-employee
Director elects to forego in the next year in exchange for NQSOs and the
denominator of which is equal to the fair market value of Class A Common Stock
on the date of the election. The terms of the NQSOs received by a Non-employee
Director pursuant to such election will be the same as those of the NQSOs
automatically granted as described above.
OTHER PROVISIONS
The Board of Directors may amend, modify, suspend or terminate the 1998
Incentive Plan for the purpose of addressing any changes in legal requirements
or for any other purpose permitted by law, except that (i) no amendment that
would impair the rights of any Employee or Non-employee Director with respect
to any Award may be made without the consent of such Employee or Non-employee
Director and (ii) no amendment requiring stockholder approval in accordance
with Rule 16b-3 under the Exchange Act will be effective until such approval
has been obtained.
In the event of any subdivision or consolidation of outstanding shares of
Class A Common Stock, declaration of a stock dividend payable in shares of
Class A Common Stock or other stock split, the 1998 Incentive Plan provides
for the Compensation Committee to make appropriate adjustments to (i) the
number of shares of Class A Common Stock reserved under the 1998 Incentive
Plan, (ii) the number of shares of Class A Common Stock covered by outstanding
Awards in the form of Class A Common Stock or units denominated in Class A
Common Stock, (iii) the exercise or other price in respect of such Awards,
(iv) the appropriate fair market value and other price determinations for
Awards in order to reflect such transactions, (v) the number of shares of
Class A Common Stock covered by Options automatically granted to Non-employee
Directors, (vi) the number of shares covered by restricted Stock Awards
automatically granted to Non-employee Directors and (vii) the limitations set
forth in the 1998 Incentive Plan regarding the number of Awards which may be
made to any Employee in a given year. Furthermore, in the event of any other
recapitalization or capital reorganization of the Company, any consolidation
or merger of the Company with another corporation or entity, the adoption by
the Company of any plan of exchange affecting the Class A Common Stock or any
distribution to holders of Class A Common Stock of securities or property
(other than normal cash dividends or stock dividends), the Board of Directors
will make appropriate adjustments to the amounts or other items referred to in
clauses (ii), (iii), (iv), (v), (vi) and (vii) above to give effect to such
transactions, but only to the extent necessary to maintain the proportionate
interest of the holders of the Awards and to preserve, without exceeding, the
value thereof.
60
<PAGE>
ANTICIPATED OPTION AND SAR GRANTS TO THE EXECUTIVE OFFICERS FOR 1998
On the date of the consummation of the Offering, the Company will make
grants of an aggregate of approximately 800,000 NQSOs to certain key personnel
in connection with the Offering including the following grants to the named
executive officers:
STOCK OPTIONS TO BE GRANTED TO EXECUTIVE OFFICERS UNDER THE 1998 INCENTIVE
PLAN
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK
NAME UNDERLYING OPTIONS GRANTED EXERCISE OR BASE PRICE EXPIRATION DATE
---- -------------------------- ---------------------- ---------------
<S> <C> <C> <C>
John J. Mazzola............. 100,000 (a) March 1, 2008
Anthony J. Affuso........... 75,000 (a) March 1, 2008
Douglas E. Barnett.......... 45,000 (a) March 2, 2008
Donald E. Davidson.......... 35,000 (a) March 1, 2008
James Duncan................ 40,000 (a) March 1, 2008
Dennis P. Kruse............. 40,000 (a) March 1, 2008
</TABLE>
(a) The exercise price is equal to the initial price to public set forth on
the cover page of this Prospectus.
THE EDS RETIREMENT PLAN
Following the closing of the Offering, the Company intends to fully review
its employee benefit packages to seek to better align its benefit packages
with those of its competitors. Prior to the completion of such review, the
Company's employees will continue to participate in substantially all EDS
benefit plans to the extent permitted by law, including the Electronic Data
Systems Corporation Retirement Plan (the "EDS Retirement Plan"). All of the
Company's employees who have at least one year of Service and are at least 18
years of age are eligible to participate in the EDS Retirement Plan.
The following table indicates the estimated annual benefits payable upon
retirement to Messrs. Mazzola, Affuso, Loss, Duncan and Kruse, for the
specified compensation and years of service classifications, under the EDS
Retirement Plan.
PROJECTED TOTAL ANNUAL RETIREMENT BENEFITS UNDER THE EDS RETIREMENT PLAN
<TABLE>
<CAPTION>
YEARS OF SERVICE
INAL AVERAGEF -------------------------------------------------
EARNINGS 5 10 15 20 25 30
- ------------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000.......................... .. $ 3,011 $ 6,023 $ 9,034 $12,045 $ 15,057 $ 18,068
100,000.......................... .. 7,186 14,373 21,559 28,745 35,932 43,118
150,000.......................... .. 11,361 22,723 34,084 45,445 56,807 68,168
200,000.......................... .. 15,536 31,073 46,609 62,145 77,682 93,218
250,000.......................... .. 19,711 39,423 59,134 78,845 98,557 118,268
300,000.......................... .. 23,886 47,773 71,659 95,545 119,432 143,318
</TABLE>
As of December 31, 1997, the final average earnings for the highest five
consecutive years over the last 10-year period and the eligible years of
credited service for each of the named executive officers was as follows: Mr.
Mazzola, $249,972--6 years; Mr. Affuso, $176,445--13 years; Mr. Kruse,
$178,382--6 years; Mr. Davidson, $183,580--6 years; Mr. Duncan, $121,506--6
years. The annual base salary for the most recent year considered in the
calculation of such average annual base salary is set forth in the Summary
Compensation Table set forth below under the column labeled "Salary."
"Earnings" under the EDS Retirement Plan generally refer to total annual
cash compensation (up to $160,000 for 1997 as limited by the Code) for
services rendered to the Company and its participating subsidiaries, together
with any salary reduction contributions to the EDS Deferred Compensation Plan,
and shall exclude extraordinary compensation (such as overseas living
allowances, relocation allowances and benefits under any employee benefit
plan, such as the 1998 Incentive Plan). Benefits under the EDS Retirement
61
<PAGE>
Plan generally equal (i) 55% of the participant's final average earnings
(based on the highest five consecutive years of includible earnings within the
last ten years of employment), less the maximum offset allowance that can be
deducted from final average earnings as determined under the Code, multiplied
by (ii) the participant's years of credited benefit service (not to exceed
30), divided by 30. Benefits are payable in the form of a single or joint
survivor life annuity, unless otherwise elected.
EDS STOCK PURCHASE PLAN
Under the terms of the Management Services Agreement entered into between
the Company and EDS, all employees of the Company will be permitted to
continue participation in the Electronic Data Systems Corporation Stock
Purchase Plan (the "EDS Stock Purchase Plan") to the extent they are currently
permitted by law to participate. The Company will reimburse EDS for the
difference between the price paid for a share of common stock, par value $.01
per share ("EDS Common Stock"), of EDS pursuant to the EDS Stock Purchase Plan
and the fair market value of such share of EDS Common Stock. In connection
with its overall review of the Company's benefit packages to occur following
the closing of the Offering, EDS or the Company may determine to discontinue
the Company's participation in such plan.
The EDS Stock Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. All full-time employees of EDS
and certain subsidiaries are eligible to participate in the EDS Stock Purchase
Plan.
All eligible employees who enroll in an offering receive options to purchase
shares of EDS Common Stock at a price that is not less than the lesser of (i)
85% of the fair market value of the stock on the offering date or (ii) an
amount which under the terms of the offering is not less than 85% of such fair
market value at the time the right to purchase is exercised. Shares of EDS
Common Stock purchased under the EDS Stock Purchase Plan may not be sold or
transferred within two years of the date of purchase unless they are first
offered to EDS at the lesser of (i) the price originally paid for the shares
or (ii) the fair market value per share of EDS Common Stock on the date the
shares are offered to EDS.
EMPLOYMENT AGREEMENTS
In May 1998, the Company entered into employment agreements ("Employment
Agreements") with Messrs. Mazzola, Affuso, Barnett, Davidson, Duncan and Kruse
(each an "Executive") which provide for a term of two years, subject to
automatic, annual renewals, unless such Executive or the Company provides
written notice of termination at least 60 days prior to the expiration or
renewal date, as applicable, of the agreement. Under the terms of the
Employment Agreements, the Executives will receive minimum annual base
salaries as follows: Mr. Mazzola, $210,000; Mr. Affuso, $200,000; Mr. Barnett,
$180,000; Mr. Davidson, $140,000; Mr. Duncan, $160,000; and Mr. Kruse,
$160,000. The Executives are also eligible to receive a bonus to be paid on or
before the first anniversary of the Employment Agreements based upon the
actual performance of the Company in relation to its projected business plan
as follows: Mr. Mazzola, $175,000; Mr. Affuso, $100,000; Mr. Davidson,
$80,000; Mr. Duncan, $90,000; and Mr. Kruse, $90,000. Mr. Barnett will receive
an unconditional and irrevocable bonus of $90,000 to be paid on or before the
first anniversary of his Employment Agreement. In addition, the Executives are
eligible to participate in the Company's 1998 Incentive Plan for the first
calendar year following the effective date of the Employment Agreements. Upon
consummation of the Offering, each Executive will receive a stock option grant
to purchase the following number of shares of Class A Common Stock: Mr.
Mazzola, 100,000 shares; Mr. Affuso, 75,000 shares; Mr. Barnett, 45,000
shares; Mr. Davidson, 35,000 shares; Mr. Duncan, 40,000 shares; and Mr. Kruse,
40,000 shares. The options vest in equal thirds over a three year period, are
exercisable at the initial price to public set forth on the front cover of
this Prospectus and expire on the tenth anniversary of the Employment
Agreements. Messrs. Mazzola, Affuso, Davidson, Duncan and Kruse continue to
vest in any awards made under the EDS 1996 Incentive Plan as long as such
individuals are employees of the Company; however, such individuals are not
eligible for any new awards under the EDS 1996 Incentive Plan. In the event
any Executive terminates his employment with the Company for "Cause" (as
defined in the Employment Agreements) or the Company terminates any Executive
without Cause, then such
62
<PAGE>
Executive will be entitled to receive the equivalent of one year of his then
annual salary and bonus and all unvested stock options will vest. The
Employment Agreements provide that the Executives will not compete with the
Company, become employed by a customer of the Company or solicit employees of
the Company for a period of twelve months after termination of such
Executive's employment with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation information with respect to the named executives for 1997
reflects compensation earned prior to the effectiveness of the Reorganization
while the business of the Company was operated within several business units
of EDS. Accordingly, the Company did not have a compensation committee during
1997.
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements (the
"Indemnification Agreements") with certain of its directors and executive
officers (the "Indemnitees"), a form of which is filed with the Commission as
an exhibit to the Registration Statement of which this Prospectus is a part.
Under the terms of the Indemnification Agreements, the Company has generally
agreed to indemnify, and advance expenses to, each Indemnitee to the fullest
extent permitted by applicable law on the date of such agreements and to such
greater extent as applicable law may thereafter permit. In addition, the
Indemnification Agreements contain specific provisions pursuant to which the
Company has agreed to indemnify each Indemnitee (i) if such person is, by
reason of his or her status as a director, nominee for director, officer,
agent or fiduciary of the Company or of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise with which
such person was serving at the request of the Company (any such status being
hereinafter referred to as a "Corporate Status"), made or threatened to be
made a party to any threatened, pending or completed action, suit,
arbitration, alternative dispute resolution mechanism, investigation or other
proceeding (each, a "Proceeding"), other than a Proceeding by or in the right
of the Company, (ii) if such person is, by reason of his or her Corporate
Status, made or threatened to be made a party to any Proceeding brought by or
in the right of the Company to procure a judgment in its favor, except that no
indemnification shall be made in respect of any claim, issue or matter in such
Proceeding as to which such Indemnitee shall have been adjudged to be liable
to the Company if applicable law prohibits such indemnification (unless and
only to the extent that a court shall otherwise determine), (iii) against
expenses actually and reasonably incurred by such person or on his or her
behalf in connection with any Proceeding to which such Indemnitee was or is a
party by reason of his or her Corporate Status and in which such Indemnitee is
successful, on the merits or otherwise, (iv) against expenses actually and
reasonably incurred by such person or on his or her behalf in connection with
a Proceeding to the extent that such Indemnitee is, by reason of his or her
Corporate Status, a witness or otherwise participates in any Proceeding at a
time when such person is not a party in the Proceeding, and (v) against
expenses actually and reasonably incurred by such person in any judicial
adjudication of or any award in arbitration to enforce his or her rights under
the Indemnification Agreements.
Furthermore, under the terms of the Indemnification Agreements, the Company
has agreed to pay all reasonable expenses incurred by or on behalf of an
Indemnitee in connection with any Proceeding, whether brought by or in the
right of the Company or otherwise, in advance of any determination with
respect to entitlement to indemnification and within 15 days after the receipt
by the Company of a written request from such Indemnitee for such payment. In
the Indemnification Agreements, each Indemnitee has agreed that he or she will
reimburse and repay the Company for any expenses so advanced to the extent
that it shall ultimately be determined that he or she is not entitled to be
indemnified by the Company against such expenses.
The Indemnification Agreements also include provisions that specify the
procedures and presumptions which are to be employed to determine whether an
Indemnitee is entitled to indemnification thereunder. In some cases, the
nature of the procedures specified in the Indemnification Agreements varies
depending on whether there has occurred a "Change in Control" (as defined in
the Indemnification Agreements) of the Company.
63
<PAGE>
COMPENSATION OF THE NAMED EXECUTIVE OFFICERS IN 1997
The following Summary Compensation Table sets forth certain compensation
information for the chief executive officer and the four other executive
officers of the Company as of December 31, 1997 who, based on employment with
EDS and its subsidiaries, were the five most highly compensated officers of
the Company. All of the information set forth in this table reflects
compensation earned by such individuals for services with EDS and its
subsidiaries.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- -----------------------------
AWARDS PAYOUTS
OTHER --------------------- -------
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING LTIP COMPEN-
NAME SALARY BONUS(A) SATION(B) AWARDS(C) OPTIONS PAYOUTS SATION(D)
---- --------- ------------------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
John J. Mazzola......... $ 170,000 $ 60,000 $ 204 $ 516,750 -- -- $424
Anthony J. Affuso....... 152,500 35,000 295 215,313 -- -- 295
Donald E. Davidson...... 112,425 88,827 53,268 107,656 -- -- --
James Duncan............ 122,320 128,722 -- 107,656 -- -- --
Dennis P. Kruse......... 118,220 128,696 -- 107,656 -- -- --
</TABLE>
- --------
(a) Represents bonuses earned by the named executives with respect to the year
ended December 31, 1997. Amounts for Messrs. Davidson, Duncan and Kruse
include commissions or new business bonuses of $84,677, $59,812 and
$106,198, respectively.
(b) For Messrs. Mazzola and Affuso, amounts represent payments in respect of
taxes due on imputed interest for non-interest bearing loans. For Mr.
Davidson, amount represents cost of living adjustments for foreign
service.
(c) Represents awards of the following number of shares of restricted EDS
Common Stock granted pursuant to the EDS 1996 Incentive Plan to the named
executive officers on January 3, 1997: Mr. Mazzola, 12,000 shares; Mr.
Affuso, 5,000 shares; Mr. Davidson, 2,500 shares; Mr. Duncan, 2,500
shares; and Mr. Kruse, 2,500 shares. Such shares will vest ratably over
each of the following 10 years subject to the achievement by EDS of
performance goals. Shares which do not vest in any year due to failure to
achieve such goals will vest in 2007.
(d) Represents the imputed value of outstanding non-interest bearing loans for
the payment of withholding taxes required as a result of the vesting of
restricted stock under the EDS 1996 Incentive Plan.
64
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDER
As of the date of this Prospectus, no shares of Class A Common Stock are
outstanding. Immediately after completion of the Offering, the only shares of
Class A Common Stock that will be outstanding are those that will be issued in
the Offering (including any shares issued if the U.S. Underwriters' over-
allotment option is exercised). See "Management--1998 Incentive Plan." The
table below sets forth certain information with respect to the expected
beneficial ownership of Common Stock of the Company before and after
completion of the Offering by each beneficial owner of more than 5% of the
outstanding shares of Common Stock and by the Company's directors and
executive officers.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BEFORE OFFERING BENEFICIAL OWNERSHIP AFTER OFFERING
------------------------------------------ -------------------------------------------
PERCENT PERCENT PERCENT
PERCENT OF OF OF OF
NUMBER OF COMMON VOTING NUMBER OF COMMON VOTING
NAME OF BENEFICIAL OWNER SHARES STOCK POWER SHARES STOCK POWER
- ------------------------ ---------------- ------------- ---------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Electronic Data Systems 31,265,000 100% 100% 31,265,000 86.2%(2) 98.4%(2)
Corporation(1).........
5400 Legacy Drive
Plano, Texas 75024
All directors and
executive officers as a
group (9 persons)...... -- -- -- -- -- (3) -- (3)
</TABLE>
- --------
(1) EDS exercises sole voting and dispositive power over the shares of Class
B Common Stock held of record by EDS.
(2) If the U.S. Underwriters' over-allotment option is exercised in full, EDS
would beneficially own 84.5% of the Common Stock and 98.2% of the voting
power after the Offering.
(3) Non-employee Directors and executive officers will receive options to
purchase shares of Class A Common Stock pursuant to the 1998 Incentive
Plan. For information on the grants to be made, see "Management."
The following table sets forth certain information as of March 12, 1998
regarding the beneficial ownership of EDS Common Stock by (i) each director of
the Company, (ii) each executive officer named in the Summary Compensation
Table and (iii) all executive officers and directors of the Company as a
group. Unless otherwise noted, the persons named below have sole voting and
investment power with respect to the shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
EDS COMMON STOCK
NAME BENEFICIALLY OWNED PERCENT OF CLASS
---- ------------------- ----------------
<S> <C> <C>
John J. Mazzola.......................... 12,080 *
Anthony J. Affuso........................ 9,707 *
James Duncan............................. 1,250 *
Dennis P. Kruse.......................... 625 *
Donald E. Davidson....................... 4,384 *
Gary J. Fernandes........................ 12,000 *
Gary B. Moore............................ 45,561 *
All directors and executive officers as a
group (9 persons)....................... 89,454 *
</TABLE>
- --------
* Less than one percent (1%).
65
<PAGE>
RELATIONSHIP WITH EDS AND CERTAIN TRANSACTIONS
FORMATION OF THE COMPANY; INDEBTEDNESS TO EDS
The Company was formed on October 2, 1997 and, pursuant to the
Reorganization, became the successor to the Unigraphics MCAD business of EDS
effective as of January 1, 1998.
In connection with the Solid Edge Acquisition, on March 2, 1998 the Company
borrowed $105 million from EDS pursuant to the Intercompany Credit Agreement.
See "--Contractual Arrangements--Intercompany Credit Agreement." In addition,
effective March 6, 1998 the Company issued to EDS as a dividend the
Intercompany Note in the principal amount of $73 million. The Intercompany
Note bears interest, payable semiannually, at the one-month LIBID minus 0.5%,
and matures on March 6, 2001. The net proceeds of the Offering will be used to
repay indebtedness to EDS outstanding under the Intercompany Credit Agreement
and any remaining proceeds will be applied to reduce amounts owed to EDS under
the Intercompany Note. See "Use of Proceeds."
Also in connection with the Reorganization, the Company and EDS entered into
an Intercompany Agreement (the "Intercompany Agreement") pursuant to which
each party indemnified the other for certain obligations relating to the
Reorganization. Pursuant to the Intercompany Agreement, the Company
indemnified EDS for liabilities assumed in the Reorganization and against
third party claims asserted against EDS as a result of EDS' prior ownership of
assets or operation of businesses contributed to the Company and for losses
arising from or in connection with the Company's lease of property from EDS.
In exchange, EDS indemnified the Company for specified liabilities retained by
it in the Reorganization, against third party claims against the Company
relating to EDS' businesses and asserted against the Company as a result of
the ownership or possession by EDS prior to the Reorganization of any asset
contributed to the Company in the Reorganization.
COMMON STOCK OWNERSHIP
EDS currently owns all of the outstanding capital stock of the Company. Upon
completion of the Offering, EDS will own 100% of the Company's outstanding
Class B Common Stock, which will represent approximately 98.4% of the combined
voting power of the Company's outstanding Common Stock (approximately 98.2% if
the U.S. Underwriters' over-allotment option is exercised in full). The Class
A Common Stock and Class B Common Stock will be the only voting stock of the
Company following the Offering. As long as EDS continues to beneficially own a
majority of the combined voting power of the Common Stock, it will have the
ability to elect all of the members of the Board of Directors and control the
management and affairs of the Company, including any determinations with
respect to mergers or other business combinations involving the Company, the
acquisition or disposition of assets by the Company, the incurrence of
indebtedness by the Company, the issuance of any additional Common Stock or
other equity securities or the declaration and payment of any dividends on the
Common Stock. In addition, EDS will be able to determine the outcome of any
matter submitted to a vote of the Company's stockholders for approval and to
cause or prevent a change in control.
Conflicts of interest may arise between the Company and EDS in a number of
areas relating to their past and ongoing relationships, including the nature
and quality of services rendered by EDS and its affiliates to the Company, the
performance by the Company and EDS of their obligations under the GM
Subcontract, potential competitive business activities, tax and employee
benefit matters, indemnity agreements, registration rights, sales or
distributions by EDS of all or any portion of its ownership interest in the
Company or EDS' ability to control the management and affairs of the Company.
There can be no assurance that EDS and the Company will be able to resolve any
potential conflict or that, if resolved, the Company would not have received a
more favorable resolution if it were dealing with an unaffiliated party. In
addition, certain of the Affiliate Agreements contain specific procedures for
resolving disputes between the Company and EDS with respect to the subject
matter of those agreements. There can be no assurance that more favorable
results to the Company would not be obtained under different procedures.
66
<PAGE>
CHARTER PROVISIONS
The Certificate of Incorporation of the Company provides that any amendment
or termination of any agreement or arrangement, or any new agreement or
arrangement, between the Company and EDS or its affiliates effected with the
approval of a majority of the Company's directors who are Disinterested
Directors or consistent with guidelines or standards approved by the
Disinterested Directors, or approved by the holders of a majority of the
Company's outstanding voting stock (not including that owned by EDS) shall be
deemed fair to the Company and its stockholders. If such approval is not
obtained, however, no presumption shall arise that such amendment or
termination (or new agreement) is not fair to the Company and its
stockholders. The Certificate of Incorporation also contains provisions
allocating corporate opportunities that may be suitable for both EDS and the
Company. See "Description of Capital Stock--Certificate of Incorporation and
Bylaw Provisions."
CONTRACTUAL ARRANGEMENTS
In addition to the Intercompany Agreement, the Company entered into the
following agreements with EDS or affiliates of EDS (together with the
Intercompany Agreement, the "Affiliate Agreements").
MANAGEMENT SERVICES AGREEMENT
The Company and EDS are parties to the Management Services Agreement, dated
effective as of January 1, 1998 (the "Management Services Agreement"),
pursuant to which EDS performs various management services for the Company,
including treasury, risk management, tax and similar administrative services.
The Company expects to pay EDS approximately $8.5 million for such services in
1998, subject to adjustment based on service levels and negotiated prices.
This agreement provides for the payments 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 0.5% of the Company's total revenues. The Management Services Agreement
will expire on December 31, 2002 unless terminated earlier by either party if
EDS and the Company are no longer under common control. Except for certain tax
and treasury management services relating to consolidated operations or
corporate policy of EDS, which the Company is required to purchase during the
term of the Management Services Agreement, the Company or EDS may terminate
any service on or after January 1, 2000 with prior notice of not less than
five months. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
TAX SHARING AGREEMENT
The Company and EDS have entered into the Tax Sharing Agreement, dated
effective as of January 1, 1998 (the "Tax Sharing Agreement"), which provides
for the allocation of tax liabilities during the tax periods the Company is
part of consolidated federal, state and local income tax returns filed by EDS.
In addition, the Tax Sharing Agreement sets out certain benefits and
obligations of the Company and EDS for tax matters relating to periods before
the Reorganization and for certain benefits and obligations that would affect
the Company or EDS in the future if the Company ceased to be a member of EDS'
consolidated group for federal income tax purposes. The Tax Sharing Agreement
generally requires the Company to pay to EDS the amount of federal, state and
local income taxes that the Company would have been required to pay had the
Company and its subsidiaries filed their own tax return or returns and not
been included in the EDS consolidated group. The Company is jointly and
severally liable for the federal income tax of EDS and the other companies
included in the consolidated return for all periods in which the Company is
included in the EDS consolidated group. EDS has agreed, however, to indemnify
the Company for any liability for taxes reported or required to be reported on
a consolidated return.
Except for certain items specified in the Tax Sharing Agreement, EDS
generally retains any potential tax benefit carryforwards, and remains
obligated to pay all taxes, attributable to periods before the Reorganization.
67
<PAGE>
INTERCOMPANY CREDIT AGREEMENT
In order to allow EDS to manage efficiently the cash and cash needs of its
subsidiaries, the Company and EDS are parties to the Intercompany Credit
Agreement, effective as of January 1, 1998 (the "Intercompany Credit
Agreement"), pursuant to which 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. In addition, EDS has made an advance to the
Company under the Intercompany Credit Agreement in the amount of $107 million
in connection with the Solid Edge Acquisition, which advance will be repaid
upon consummation of the Offering. The maximum amount that the Company may
borrow at any time from EDS under the Intercompany Credit Agreement (together
with the other non-U.S. credit agreements referred to below) is $177 million
at any time prior to the consummation of the Offering or $70 million at any
time thereafter. Also, under the Intercompany Credit Agreement, the Company is
required to lend to EDS all excess cash of the Company. The interest rate to
be charged to the Company is the sum of the one-month LIBOR plus 0.5%. The
interest rate to be charged to EDS is the one-month LIBID minus 0.5%. On any
business day that the Company has excess cash available, it must use that cash
to repay any outstanding loans it has under the Intercompany Credit Agreement
or make an advance to EDS if no loans are outstanding. The Intercompany Credit
Agreement will terminate on December 31, 2002, unless earlier terminated at
the election of one of the parties upon the occurrence of certain events,
including the termination of the Management Services Agreement or the
cessation of EDS' beneficial ownership of 50% or more of the capital stock of
the Company. In addition to the Intercompany Credit Agreement between the
Company and EDS, EDS Finance plc, a wholly-owned subsidiary of EDS, has
entered into or will enter into credit agreements with substantially all non-
U.S. subsidiaries of the Company, which credit agreements will have terms
similar to the Intercompany Credit Agreement.
GM SUBCONTRACT
The Company and EDS have entered into the GM Subcontract dated effective
January 1, 1998 which sets forth the framework for the provisions of the
Company's products and services to GM. The GM Subcontract provides that all
products and services of the Company which are "in-scope" for purposes of the
EDS/GM MSA will continue to be provided directly by EDS to GM, with the
Company providing such products and services as a subcontractor to EDS and
receiving the revenues attributable to such products and services. "In-scope"
services include the EDS/GM Site License Agreement and any successor
agreement. The GM Subcontract further provides that products and services
which are not "in-scope" under the EDS/GM MSA may be provided directly to GM
by the Company. The GM Subcontract sets forth a framework for cooperation
between EDS and the Company in connection with providing services to GM and
provides for the operation and the representation of EDS and Company with the
goal of furthering both EDS' and the Company's relationships with GM in a
coordinated manner.
OTHER AGREEMENTS
In addition to the agreements set forth above, the Company and EDS are
parties to a Registration Rights Agreement described under "Shares Eligible
for Future Sale," and Sublease Agreements with respect to substantially all of
the real property occupied by the Company described under "Business--
Properties." The Company also has, or expects to enter into, other agreements
with EDS or other EDS affiliates, pursuant to which the Company does not
expect to receive or pay material amounts.
68
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 168,735,000 shares
of Class A Common Stock, 31,265,000 shares of Class B Common Stock and
20,000,000 shares of Preferred Stock. None of the Class A Common Stock or
Preferred Stock is outstanding as of the date hereof. Of the 168,735,000
shares of Class A Common Stock authorized, 5,000,000 shares are being offered
in the Offering (5,750,000 shares if the U.S. Underwriters' over-allotment
option is exercised in full), 31,265,000 shares will be reserved for issuance
upon conversion of Class B Common Stock into Class A Common Stock and
1,300,000 shares have been reserved for issuance pursuant to the 1998
Incentive Plan. See "Management--Compensation of Directors" and "Management--
1998 Incentive Plan." Of the 31,265,000 shares of Class B Common Stock
authorized, 31,265,000 will be outstanding and held by EDS upon consummation
of the Offering. The following summary description of the capital stock of the
Company is qualified by reference to the Certificate of Incorporation and
Bylaws of the Company, copies of which are filed as exhibits to the
Registration Statement.
COMMON STOCK
VOTING RIGHTS
The holders of Class A Common Stock and Class B Common Stock generally have
identical rights except that holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to 10
votes per share on all matters to be voted on by stockholders. Holders of
shares of Class A Common Stock and Class B Common Stock are not entitled to
cumulate their votes in the election of directors. Generally, all matters to
be voted on by stockholders must be approved by a majority (or, in the case of
election of directors, by a plurality) of the votes entitled to be cast by all
shares of Class A Common Stock and Class B Common Stock present in person or
represented by proxy, voting together as a single class, subject to any voting
rights granted to holders of any Preferred Stock. Except as otherwise provided
by law, and subject to any voting rights granted to holders of any outstanding
Preferred Stock, amendments to the Company's Certificate of Incorporation
generally must be approved by a majority of the combined voting power of all
Class A Common Stock and Class B Common Stock voting together as a single
class. However, amendments to the Company's Certificate of Incorporation that
would alter or change the powers, preferences or special rights of the Class A
Common Stock or the Class B Common Stock so as to affect them adversely also
must be approved by a majority of the votes entitled to be cast by the holders
of the shares affected by the amendment, voting as a separate class.
Notwithstanding the foregoing, any amendment to the Company's Certificate of
Incorporation to increase the authorized shares of any class or authorize the
creation, authorization or issuance of any securities convertible into, or
warrants or options to acquire, shares of any such class or classes of stock
shall be approved by the affirmative vote of the holders of a majority of the
Common Stock, voting together as a single class.
Effective as of the first time at which EDS shall cease to be the beneficial
owner of an aggregate of at least a majority of the voting power of the Voting
Stock (as defined herein) of the Company then outstanding (the "Trigger
Date"), amendments to certain provisions of the Certificate of Incorporation
will require the approval of 80% of the combined voting power of all Class A
Common Stock and Class B Common Stock, voting together as a single class.
DIVIDENDS
Holders of Class A Common Stock and Class B Common Stock will share in an
equal amount per share in any dividend declared by the Board of Directors,
subject to any preferential rights of any outstanding Preferred Stock.
Dividends consisting of shares of Class A Common Stock and Class B Common
Stock may be paid only as follows: (i) shares of Class A Common Stock may be
paid only to holders of Class A Common Stock and shares of Class B Common
Stock may be paid only to holders of Class B Common Stock and (ii) shares
shall be paid proportionally with respect to each outstanding share of Class A
Common Stock and Class B Common Stock.
69
<PAGE>
CONVERSION
Each share of Class B Common Stock is convertible while held by EDS or any
of its subsidiaries at such holder's option into one share of Class A Common
Stock. Following the occurrence of a Tax-Free Spin-Off (as hereinafter
defined), if any, shares of Class B Common Stock shall not be convertible into
shares of Class A Common Stock at the option of the holder thereof.
Except as provided below, prior to any Tax-Free Spin-Off, any shares of
Class B Common Stock transferred to a person other than EDS or any of its
subsidiaries or the Class B Transferee (as defined below) shall automatically
convert to shares of Class A Common Stock upon such disposition. Shares of
Class B Common Stock representing more than a 50% economic interest in the
Company transferred by EDS or any of its subsidiaries in a single transaction
to one unrelated person (the "Class B Transferee") or any subsidiary of the
Class B Transferee shall not automatically convert to shares of Class A Common
Stock upon such disposition. Any shares of Class B Common Stock retained by
EDS or its subsidiaries following any such transfer of shares of Class B
Common Stock to the Class B Transferee shall automatically convert into shares
of Class A Common Stock upon such transfer. Shares of Class B Common Stock
transferred to stockholders of EDS or stockholders of the Class B Transferee
in a transaction intended to be on a tax-free basis (a "Tax-Free Spin-Off")
under the Code shall not convert to shares of Class A Common Stock upon the
occurrence of such Tax-Free Spin-Off.
Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be
transferred as Class B Common Stock, subject to applicable laws; provided,
however, that shares of Class B Common Stock shall automatically convert into
shares of Class A Common Stock on the fifth anniversary of the Tax-Free Spin-
Off, unless prior to such Tax-Free Spin-Off, EDS, or the Class B Transferee,
as the case may be, delivers to the Company an opinion of counsel reasonably
satisfactory to the Company to the effect that such conversion could adversely
affect the ability of EDS, or the Class B Transferee, as the case may be, to
obtain a favorable ruling from the Internal Revenue Service that the transfer
would be a Tax-Free Spin-Off. If such an opinion is received, approval of such
conversion shall be submitted to a vote of the holders of the Common Stock as
soon as practicable after the fifth anniversary of the Tax-Free Spin-Off,
unless EDS or the Class B Transferee, as the case may be, delivers to the
Company an opinion of counsel reasonably satisfactory to the Company prior to
such anniversary that such vote could adversely affect the status of the Tax-
Free Spin-Off, including the ability to obtain a favorable ruling from the
Internal Revenue Service; if such opinion is so delivered, such vote shall not
be held. Approval of such conversion will require the affirmative vote of the
holders of a majority of the shares of both Class A Common Stock and Class B
Common Stock present and voting, voting together as a single class, with each
share entitled to one vote for such purpose. No assurance can be given that
such conversion would be consummated. The requirement to submit such
conversion to a vote of the holders of the Common Stock is intended to ensure
that tax-free treatment of the Tax-Free Spin-Off is preserved should the
Internal Revenue Service challenge such automatic conversion as violating the
80% vote requirement currently required by the Code for a tax-free spin-off.
OTHER RIGHTS
On liquidation, dissolution or winding up of the Company, after payment in
full of the amounts required to be paid to holders of Preferred Stock, if any,
all holders of Common Stock, regardless of class, are entitled to share
ratably in any assets available for distribution to holders of shares of
Common Stock.
No shares of either class of Common Stock are subject to redemption or have
preemptive rights to purchase additional shares of Common Stock.
Upon consummation of the Offering, all the outstanding shares of Class A
Common Stock and Class B Common Stock will be legally issued, fully paid and
nonassessable.
70
<PAGE>
PREFERRED STOCK
As of the date of this Prospectus, no shares of Preferred Stock are
outstanding. The Board of Directors may authorize the issuance of Preferred
Stock in one or more series and may determine, with respect to any such
series, the designations, powers, preferences and rights of such series, and
the qualifications, limitations and restrictions thereof, including (i) the
designation of the series; (ii) the number of shares of the series, which
number the Board of Directors may thereafter (except where otherwise provided
in the designations for such series) increase or decrease (but not below the
number of shares of such series then outstanding); (iii) whether dividends, if
any, will be cumulative or noncumulative and the dividend rate of the series;
(iv) the conditions upon which and the dates at which dividends, if any, will
be payable, and the relation which such dividends, if any, shall bear to the
dividends payable on any other class or classes of stock; (v) the redemption
rights and price or prices, if any, for shares of the series; (vi) the terms
and amounts of any sinking fund provided for the purchase or redemption of
shares of the series; (vii) the amounts payable on and the preferences, if
any, of shares of the series, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company; (viii)
whether the shares of the series will be convertible into shares of any other
class or series, or any other security, of the Company or any other
corporation, and, if so, the specification of such other class or series or
such other security, the conversion price or prices or rate or rates, any
adjustments thereof, the date or dates as of which such shares shall be
convertible and all other terms and conditions upon which such conversion may
be made; (ix) restrictions on the issuance of shares of the same series or of
any other class or series; and (x) the voting rights, if any, of the holders
of shares of such series.
The Company believes that the ability of the Board of Directors to issue one
or more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock
will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded.
Although the Board of Directors has no intention at the present time of
doing so, it could issue a series of Preferred Stock that could, depending on
the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of the
Company and its stockholders. The Board of Directors, in so acting, could
issue Preferred Stock having terms that could discourage a potential acquiror
from making, without first negotiating with the Board of Directors, an
acquisition attempt through which such acquiror may be able to change the
composition of the Board of Directors, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock.
BUSINESS COMBINATION STATUTE
As a corporation organized under the laws of the State of Delaware, the
Company will be subject to Section 203 of the DGCL, which restricts certain
business combinations between the Company and an "interested stockholder" (in
general, a stockholder owning 15% or more of the Company's outstanding voting
stock) or its affiliates or associates for a period of three years following
the time that the stockholder becomes an "interested stockholder." The
restrictions do not apply if (i) prior to an interested stockholder becoming
such, the Board of Directors approved either the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction which resulted in any
person becoming an interested stockholder, such interested stockholder owns at
least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding shares owned by certain employee stock
ownership plans and persons who are both directors and officers of the
Company) or (iii) at or subsequent to the time an interested stockholder
becomes such, the business combination is both approved by the Board of
Directors and authorized at an annual or special meeting of the Company's
stockholders, not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock not owned by the interested stockholder.
71
<PAGE>
Because EDS became an interested stockholder at a time when the restrictions
did not apply, the restrictions will not apply to any business combination
with EDS.
Under certain circumstances, Section 203 of the DGCL makes it more difficult
for a person who would be an "interested stockholder" to effect various
business combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate of Incorporation of the Company does not exclude
the Company from the restrictions imposed under Section 203 of the DGCL. It is
anticipated that the provisions of Section 203 of the DGCL may encourage
companies interested in acquiring the Company to negotiate in advance with the
Board of Directors, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves, prior to the
date on which a stockholder becomes an interested stockholder, either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The summary set forth below describes certain provisions of the Certificate
of Incorporation and Bylaws. The summary is qualified in its entirety by
reference to the provisions of the Certificate of Incorporation and Bylaws,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
Certain of the provisions of the Certificate of Incorporation and Bylaws
discussed below may have the effect, either alone or in combination with the
provisions of Section 203 discussed above, of making more difficult or
discouraging a tender offer, proxy contest or other takeover attempt that is
opposed by the Board of Directors but that a stockholder might consider to be
in such stockholder's best interest. Those provisions include (i) restrictions
on the rights of stockholders to remove directors, (ii) prohibitions against
stockholders calling a special meeting of stockholders or acting by unanimous
written consent in lieu of a meeting and (iii) requirements for advance notice
of actions proposed by stockholders for consideration at meetings of the
stockholders. In addition, the Certificate of Incorporation contains
provisions relating to the allocation of certain corporate opportunities and
resolution of certain potential conflicts of interest. See "--Corporate
Opportunity and Conflict of Interest Policies."
CLASSIFIED BOARD OF DIRECTORS; REMOVAL; NUMBER OF DIRECTORS; FILLING
VACANCIES
The Certificate of Incorporation and Bylaws of the Company provide that the
Board of Directors--except for directors who may be elected by the holders of
Preferred Stock or any other series or class of stock--will be divided into
three classes of directors, with the classes to be as nearly equal in number
as possible. One class is to be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1999, another class is to be
originally elected for a term expiring at the annual meeting of stockholders
to be held in 2000 and another class is to be originally elected for a term
expiring at the annual meeting of stockholders to be held in 2001. Each
director is to hold office until his or her successor is duly elected and
qualified. Commencing with the 1999 annual meeting of stockholders, directors
elected to succeed directors whose terms then expire will be elected for a
term of office to expire at the third succeeding annual meeting of
stockholders after their election, with each director to hold office until
such person's successor is duly elected and qualified.
The Bylaws provide that, subject to any rights of holders of Preferred Stock
or any other series or class of stock to elect directors under specified
circumstances, the number of directors will be fixed from time to time
exclusively pursuant to a resolution adopted by directors constituting a
majority of the total number of directors that the Company would have if there
were no vacancies on the Board of Directors (the "Whole Board"), with the
Whole Board consisting of not more than twelve nor less than three directors.
The Bylaws also provide that, subject to any rights of holders of Preferred
Stock or any other series or class of stock, and unless the Board of Directors
otherwise determines, any vacancies will be filled only by the affirmative
vote of a majority of the remaining directors, even if less than a quorum.
Accordingly, absent an amendment to the Bylaws, the Board of Directors could
prevent any stockholder from enlarging the Board of Directors and filling the
new directorships with such stockholder's own nominees.
72
<PAGE>
The Certificate of Incorporation and Bylaws of the Company provide that,
subject to the rights of holders of Preferred Stock or any other series or
class of stock to elect directors under specified circumstances, effective as
of the Trigger Date, directors may be removed only for cause and only upon the
affirmative vote of holders of at least 80% of the voting power of all the
then outstanding shares of stock entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class; provided
however, that prior to the Trigger Date, directors may be removed, without
cause, with the affirmative vote of the holders of at least a majority of the
voting power of the then outstanding Voting Stock, voting together as a class.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Board of
Directors. At least two annual meetings of stockholders, instead of one, will
generally be required to effect a change in a majority of the Board of
Directors. Such a delay may help ensure that the Company's directors, if
confronted by a holder attempting to force a proxy contest, a tender or
exchange offer, or an extraordinary corporate transaction, would have
sufficient time to review the proposal as well as any available alternatives
to the proposal and to act in what they believe to be the best interest of the
stockholders. The classification provisions will apply to every election of
directors, however, regardless of whether a change in the composition of the
Board of Directors would be beneficial to the Company and its stockholders and
whether or not a majority of the Company's stockholders believe that such a
change would be desirable.
The classification provisions could also have the effect of discouraging a
third party from initiating a proxy contest, making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its stockholders. The
classification of the Board of Directors could thus increase the likelihood
that incumbent directors will retain their positions. In addition, because the
classification provisions may discourage accumulations of large blocks of the
Company's stock by purchasers whose objective is to take control of the
Company and remove a majority of the Board of Directors, the classification of
the Board of Directors could tend to reduce the likelihood of fluctuations in
the market price of the Common Stock that might result from accumulations of
large blocks. Accordingly, stockholders could be deprived of certain
opportunities to sell their shares of Common Stock at a higher market price
than might otherwise be the case.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation and Bylaws of the Company provide that,
effective as of the Trigger Date, and subject to the rights of any holders of
Preferred Stock or any other series or class of stock to elect additional
directors under specified circumstances, stockholder action can be taken only
at an annual or special meeting of stockholders and stockholder action may not
be taken by written consent in lieu of a meeting. The Bylaws provide that,
subject to the rights of holders of any series of Preferred Stock to elect
additional directors under specified circumstances, special meetings of
stockholders can be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the Whole Board or the Chairman of the
Board; provided that, prior to the Trigger Date, special meetings can also be
called at the request of the holders of a majority of the voting power of the
then outstanding Voting Stock. Effective as of the Trigger Date, stockholders
are not permitted to call a special meeting or to require that the Board of
Directors call a special meeting of stockholders. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited to
the business brought before the meeting pursuant to the notice of meeting
given by the Company.
The provisions of the Certificate of Incorporation and Bylaws of the Company
prohibiting stockholder action by written consent and permitting special
meetings to be called only by the Chairman or at the request of a majority of
the Whole Board may have the effect, as of the Trigger Date, of delaying
consideration of a stockholder proposal until the next annual meeting. The
provisions would also prevent the holders of a majority of the voting power of
the Voting Stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the Chairman or a majority
of the Whole Board by calling a special meeting of stockholders prior to the
time such parties believe such consideration to be appropriate.
73
<PAGE>
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER
PROPOSALS
The Company's Bylaws establish an advance notice procedure for stockholders
to make nominations of candidates for election as directors or bring other
business before an annual meeting of stockholders of the Company (the
"Stockholder Notice Procedure").
The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified
information to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. The Stockholder Notice Procedure also provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Chairman or the Board of Directors or
by a stockholder who has given timely written notice containing specified
information to the Secretary of the Company of such stockholder's intention to
bring such business before such meeting. Under the Stockholder Notice
Procedure, for notice of stockholder nominations or proposals to be made at an
annual meeting to be timely, such notice must be received by the Company not
less than 90 days nor more than 120 days prior to the first anniversary of the
previous year's annual meeting (or, in the event that the date of the annual
meeting is advanced by more than 20 days or delayed by more than 70 days from
such anniversary date, not earlier than the 120th day prior to such meeting
and not later than the later of (x) the 90th day prior to such meeting and (y)
the 10th day after public announcement of the date of such meeting is first
made). Notwithstanding the foregoing, in the event that the number of
directors to be elected is increased and there is no public announcement
naming all of the nominees for director or specifying the size of the
increased Board of Directors made by the Company at least 100 days prior to
the first anniversary of the preceding year's annual meeting, a stockholder's
notice will be timely, but only with respect to nominees for any new positions
created by such increase, if it is received by the Company not later than the
10th day after such public announcement is first made by the Company. Under
the Stockholder Notice Procedure, for notice of a stockholder nomination to be
made at a special meeting at which directors are to be elected to be timely,
such notice must be received by the Company not earlier than the 120th day
before such meeting and not later than the later of (x) the 90th day prior to
such meeting and (y) the 10th day after public announcement of the date of
such meeting is first made. If the Chairman of the Board or other officer
presiding at a meeting determines at or prior to the meeting that a person was
not nominated or other business was not brought before the meeting in
accordance with the Stockholder Notice Procedure, such person will not be
eligible for election as a director, or such business will not be conducted at
such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure will afford the Board of Directors an opportunity to consider
the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders about
such qualifications. By requiring advance notice of other proposed business,
the Stockholder Notice Procedure will also provide a more orderly procedure
for conducting annual meetings of stockholders and, to the extent deemed
necessary or desirable by the Board of Directors, will provide the Board of
Directors with an opportunity to inform stockholders, prior to such meetings,
of any business proposed to be conducted at such meetings, together with any
recommendations as to the Board of Directors' position regarding action to be
taken with respect to such business, so that stockholders can better decide
whether to attend such a meeting or to grant a proxy regarding the disposition
of any such business.
Although the Bylaws do not give the Board of Directors any power to approve
or disapprove stockholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
the Company and its stockholders.
The Stockholder Notice Procedure does not apply to EDS and its affiliates
prior to the Trigger Date.
74
<PAGE>
AMENDMENTS
The Certificate of Incorporation and Bylaws require that, effective as of
the Trigger Date, any amendment to the provisions of the Bylaws or to certain
provisions of the Certificate of Incorporation, including those provisions
discussed above, must be approved by the holders of at least 80% of the Voting
Stock. This requirement, as of the Trigger Date, will prevent a stockholder
with only a majority of the Common Stock from avoiding the requirements of the
provisions discussed above by amending or repealing such provisions. The
Certificate of Incorporation further provides that the Bylaws may be amended
by the Company's Board of Directors.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate of Incorporation provides that a director will not be
personally liable for monetary damages to the Company or its stockholders for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for paying a dividend or
approving a stock repurchase in violation of Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit. Any amendment or repeal of such provision shall not adversely affect
any right or protection of a director existing under such provision for any
act or omission occurring prior to such amendment or repeal.
The Bylaws provide that the Company will indemnify any person who was or is
a party to any threatened, pending or completed action, suit or proceeding
because he or she is or was a director or officer of the Company, or is or was
serving at the request of the Company as a director or officer of another
corporation, partnership or other enterprise. The Bylaws provide that this
indemnification will be from and against expenses, judgments, fines and
amounts paid in settlement by the indemnitee. However, this indemnification
will only be provided if the indemnitee acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the Company.
CORPORATE OPPORTUNITY AND CONFLICT OF INTEREST POLICIES
In order to address certain potential conflicts of interest between the
Company and EDS, the Certificate of Incorporation contains provisions
concerning the conduct of certain affairs of the Company as they may involve
EDS and its subsidiaries (other than the Company and its subsidiaries) and
their respective officers and directors, and the powers, rights, duties and
liabilities of the Company and its subsidiaries and their respective officers,
directors and stockholders in connection therewith. In general, these
provisions recognize that the Company and EDS and their respective
subsidiaries may engage in the same or similar business activities and lines
of business and have an interest in the same areas of corporate opportunities
and that the Company and EDS and their subsidiaries will continue to have
contractual and business relations with each other (including service of
officers and directors of EDS as directors of the Company). See "Management--
Directors and Executive Officers."
For purposes of these provisions, the terms "Company" and "EDS" include
their subsidiaries and other entities in which they respectively beneficially
own, directly or indirectly, 50 percent or more of the outstanding voting
securities or interests (except that "EDS" does not include the Company and
its subsidiaries and such other entities), and, in the case of EDS, all
successors to EDS by way of merger, consolidation or sale of all or
substantially all its assets.
The Certificate of Incorporation provides that any person purchasing or
otherwise acquiring any interest in any shares of capital stock of the Company
shall be deemed to have notice of and to have consented to these provisions.
Corporate Opportunity Policy. The Certificate of Incorporation provides
that, except as EDS may otherwise agree in writing, EDS will have the right
(i) to engage in the same or similar business activities or lines of business
as the Company, (ii) to do business with any potential or actual client,
customer or supplier of
75
<PAGE>
the Company and (iii) to employ or engage any officer or employee of the
Company. Neither EDS nor any officer or director thereof will be liable to the
Company or its stockholders for breach of any fiduciary duty by reason of
these activities.
If EDS acquires knowledge of a potential transaction or matter that may be a
corporate opportunity for both EDS and the Company, EDS will have no duty to
communicate that opportunity to the Company. Furthermore, EDS will not be
liable to the Company or its stockholders because EDS pursues or acquires that
corporate opportunity for itself, directs that corporate opportunity to
another person or entity or does not present that corporate opportunity to the
Company.
If a director or officer of the Company who is also a director or officer of
EDS acquires knowledge of a potential transaction or matter that may be a
corporate opportunity for both the Company and EDS, the Certificate of
Incorporation requires that the director or officer of the Company act in good
faith in accordance with the following three-part policy, and a director or
officer so acting is deemed to have acted reasonably and in good faith and
fully to have satisfied his or her duties of loyalty and fiduciary duties to
the Company and its stockholders with respect to such opportunity.
First, a corporate opportunity offered to any person who is a director but
not an officer of the Company and who is also an officer (whether or not a
director) of EDS will belong to EDS, unless the opportunity is expressly
offered to that person primarily in his or her capacity as a director of the
Company, in which case the opportunity will belong to the Company.
Second, a corporate opportunity offered to any person who is an officer
(whether or not a director) of the Company and who is also a director but not
an officer of EDS will belong to the Company, unless the opportunity is
expressly offered to that person primarily in his or her capacity as a
director of EDS, in which case the opportunity will belong to EDS.
Third, a corporate opportunity offered to any other person who is either an
officer of both the Company and EDS or a director of both the Company and EDS
will belong to EDS or to the Company, as the case may be, if the opportunity
is expressly offered to the person primarily in his or her capacity as an
officer or director of EDS or of the Company, respectively. Otherwise, the
opportunity will belong to EDS.
Under the Certificate of Incorporation, any corporate opportunity that
belongs to EDS or to the Company pursuant to the foregoing policy will not be
pursued by the other (or directed by the other to another person or entity)
unless and until EDS or the Company, as the case may be, determines not to
pursue the opportunity. If the party to whom the corporate opportunity belongs
does not, however, within a reasonable period of time, begin to pursue, or
thereafter continue to pursue, such opportunity diligently and in good faith,
the other party may pursue such opportunity (or direct it to another person or
entity).
A director or officer of the Company who acts in accordance with the
foregoing three-part policy: (i) will be deemed fully to have satisfied his or
her fiduciary duties to the Company and its stockholders with respect to such
corporate opportunity; (ii) will not be liable to the Company or its
stockholders for any breach of fiduciary duty by reason of the fact that EDS
pursues or acquires such opportunity for itself or directs such corporate
opportunity to another person or does not communicate information regarding
such opportunity to the Company; (iii) will be deemed to have acted in good
faith and in a manner he or she reasonably believes to be in the best
interests of the Company; and (iv) will be deemed not to have breached his or
her duty of loyalty to the Company or its stockholders and not to have derived
an improper benefit therefrom.
Under the Certificate of Incorporation, "corporate opportunities"
potentially allocable to the Company consist of business opportunities which
(i) the Company is financially able to undertake; (ii) are, from their nature,
in the Company's line or lines of business and are of practical advantage to
the Company; and (iii) are ones in which the Company has an interest or
reasonable expectancy.
76
<PAGE>
In addition, "corporate opportunities" do not include transactions in which
the Company or EDS is permitted to participate pursuant to any agreement
between the Corporation and EDS that is in effect as of the time any equity
security of the Company is held of record by any person other than EDS or
subsequently entered into with the approval of the Disinterested Directors.
For purposes of these corporate opportunity provisions, a director of the
Company who is chairman of the Board of Directors (or a committee thereof) or
chief executive officer will not be deemed to be an officer of the Company by
reason of holding such position, unless such person is a full-time employee of
the Company.
Conflict of Interests Policy. The Certificate of Incorporation provides that
no contract, agreement, arrangement or transaction between the Company and EDS
or any customer or supplier or any entity in which a director of the Company
has a financial interest (a "Related Entity"), or between the Company and one
or more of the directors or officers of the Company, EDS or any Related
Entity, or any amendment, modification or termination thereof, will be
voidable solely because EDS or such customer or supplier, any Related Entity,
or any one or more of the officers or directors of the Company, EDS or any
Related Entity are parties thereto, or solely because any such directors or
officers are present at or participate in the meeting of the Board of
Directors or committee thereof which authorizes the contract, agreement,
arrangement, transaction, amendment, modification or termination (each, a
"Transaction") or solely because their votes are counted for such purpose, if
a specified standard is satisfied. That standard will be satisfied, and EDS,
the Related Entity and the directors and officers of the Company, EDS or the
Related Entity (as applicable) will be deemed to have acted reasonably and in
good faith (to the extent such standard is applicable to such person's
conduct) and fully to have satisfied any duties of loyalty and fiduciary
duties they may have to the Company and its stockholders with respect to such
transaction if any of the following four requirements are met:
(i) the material facts as to the Transaction are disclosed or known to
the Board of Directors or the committee thereof that authorizes the
Transaction, and the Board of Directors or such committee in good faith
approves the Transaction by a majority of the Disinterested Directors on
the Board of Directors or such committee, even if the Disinterested
Directors are less than a quorum;
(ii) the material facts as to the Transaction are disclosed or known to
the holders of Voting Stock entitled to vote thereon, and the Transaction
is specifically approved by vote of the holders of a majority of the then
outstanding Voting Stock not owned by EDS or such Related Entity, voting
together as a single class;
(iii) the Transaction is effected pursuant to guidelines which are in
good faith approved by a majority of the Disinterested Directors on the
Board of Directors or the applicable committee thereof or by vote of the
holders of a majority of the then outstanding Voting Stock not owned by EDS
or such Related Entity, voting together as a single class; or
(iv) the Transaction is fair to the Company as of the time it is approved
by the Board of Directors, a committee thereof or the stockholders of the
Company.
The Certificate of Incorporation also provides that any such Transaction
authorized, approved or effected, and each of such guidelines so authorized or
approved, as described in (i), (ii) or (iii) above, shall be deemed to be
entirely fair to the Company and its stockholders; provided that, if such
authorization or approval is not obtained, or such Transaction is not so
effected, no presumption shall arise that such Transaction or guideline is not
fair to the Company and its stockholders. In addition, the Certificate of
Incorporation provides that EDS shall not be liable to the Company or its
stockholders for breach of any fiduciary duty that EDS may have by reason of
the fact that EDS takes any action in connection with any transaction between
EDS and the Company.
Effective as of the Trigger Date, the affirmative vote of the holders of
more than 80 percent of the outstanding Voting Stock, voting together as a
single class, will be required to alter, amend or repeal any of these conflict
of interest or corporate opportunity provisions in a manner adverse to the
interests of EDS.
77
<PAGE>
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Certificate of Incorporation authorizes the Board of Directors to create
and issue rights entitling the holders thereof to purchase from the Company
shares of capital stock or other securities or property. The times at which
and terms upon which such rights are to be issued would be determined by the
Board of Directors and set forth in the contracts or instruments that evidence
such rights. The authority of the Board of Directors with respect to such
rights includes, but is not limited to, determination of (i) the purchase
price of the capital stock to be purchased upon exercise of such rights; (ii)
provisions relating to the times at which and the circumstances under which
such rights may be exercised or sold or otherwise transferred, either together
with or separately from, any other stock or other securities of the Company;
(iii) provisions which adjust the number or exercise price of such rights or
amount or nature of the stock receivable upon exercise of such rights in the
event of a combination, split or recapitalization of any stock of the Company,
a change in ownership of the Company's stock or other securities or a
reorganization, merger, consolidation, sale of assets or other occurrence
relating to the Company or any stock of the Company, and provisions
restricting the ability of the Company to enter into any such transaction
absent an assumption by the other party or parties thereto of the obligations
of the Company under such rights; (iv) provisions which deny the holder of a
specified percentage of the outstanding securities of the Company the right to
exercise such rights and cause such rights held by such holder to become void;
(v) provisions which permit the Company to redeem or exchange such rights; and
(vi) the appointment of the rights agent with respect to such rights. This
provision is intended to confirm the authority of the Board of Directors to
issue such share purchase rights or other rights to purchase stock or
securities of the Company or any other corporation.
LISTING
The Class A Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "UGS," subject to official notice of issuance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is The Bank of New
York.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices.
Upon completion of the Offering, the Company will have 5,000,000 shares of
Class A Common Stock issued and outstanding (5,750,000 if the U.S.
Underwriters' over-allotment option is exercised in full) and 31,265,000
shares of Class B Common Stock issued and outstanding. All of the shares of
Class A Common Stock to be sold in the Offering will be freely tradable
without restrictions or further registration under the Securities Act, except
that shares purchased by an "affiliate" of the Company (as that term is
defined in Rule 144) will be subject to the resale limitations of Rule 144.
All of the outstanding shares of Class B Common Stock are owned by EDS and
have not been registered under the Securities Act and may not be sold in the
absence of an effective registration statement under the Securities Act other
than in accordance with Rule 144 or another exemption from registration
("Restricted Shares"). Restricted Shares will become eligible for resale in
the public market at various dates in the future.
The Restricted Shares will constitute "restricted securities" within the
meaning of Rule 144 promulgated under the Securities Act and will be eligible
for sale in the open market after the Offering subject to the contractual
lockup provisions and applicable requirements of Rule 144 described below. In
addition, for as long as EDS is able to cause a majority of the Company's
Board of Directors to be elected, it will be able to cause the Company at any
time to register under the Securities Act all or a portion of the Common Stock
owned by it, in which event such shares could be sold publicly upon the
effectiveness of any such registration without
78
<PAGE>
restriction. EDS may also, at any time following the contractual lockup
provisions described below, sell any or all of the Class B Common Stock in a
private placement without regard to the Rule 144 restrictions described below.
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed between the later of the date on which "restricted
shares" (as that phrase is defined in Rule 144) were acquired from the Company
and the date on which they were acquired from an "affiliate" of the Company
(an "Affiliate," as that term is defined in Rule 144), then the holder of such
restricted shares (including an Affiliate) is entitled to sell a number of
shares within any three-month period that does not exceed the greater of (i)
one percent of the then outstanding shares of the Common Stock or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales and the availability of current public information concerning the
Company. Affiliates may sell shares not constituting restricted shares in
accordance with the foregoing volume limitations and other requirements but
without regard to the one-year period. Under Rule 144(k), if a period of at
least two years has elapsed between the later of the date on which restricted
shares were acquired from the Company and the date on which they were acquired
from an Affiliate, a holder of such restricted shares who is not an Affiliate
at the time of the sale and has not been an Affiliate for at least three
months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
The foregoing description of Rule 144 is not intended to be a complete
description thereof.
Sales of significant amounts of the Class A Common Stock, or the perception
that such sales could occur, could have an adverse impact on the market price
of the Class A Common Stock. Each of the Company and its directors, executive
officers and EDS has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 180 days after the date of this Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly,
any shares of Class A Common Stock or any securities convertible into or
exercisable or exchangeable for Class A Common Stock or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any
of the economic consequences of ownership of the Class A Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Class A Common Stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not apply to (w)
the sale of Shares to the Underwriters, (x) the issuance of options, SARs or
shares of Class A Common Stock granted pursuant to the 1998 Incentive Plan,
(y) the issuance by the Company of shares of Class A Common Stock upon the
exercise of an option or a warrant or the conversion of a security outstanding
on the date of this Prospectus of which the Underwriters have been advised in
writing or (z) transactions by any person other than the Company relating to
shares of Class A Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares. See
"Underwriters."
The Company and EDS are also parties to the Registration Rights Agreement
pursuant to which EDS may demand registration under the Securities Act of
shares of the Company's capital stock held by it at any time subject to its
agreement not to sell any shares prior to the expiration of 180 days from the
date of this Prospectus. So long as EDS owns capital stock of the Company
representing more than 20% of the total voting power of all classes of stock
of the Company outstanding, EDS may exercise this "demand registration" at any
time and on an unlimited number of occasions. Transferees of EDS (and EDS upon
a reduction in its ownership to less than 20% of the voting power) may only
exercise this demand registration right three times. If EDS owns less than 50%
of the total voting power of all classes of stock of the Company outstanding,
the Company may postpone a demand registration under certain customary
circumstances. In addition, at any time prior to the tenth anniversary of the
date of the Registration Rights Agreement, EDS may request the Company to
include shares of the Company's capital stock held by it in any registration
proposed by the Company of such capital stock under the Securities Act. The
Registration Rights Agreement contains provisions regarding the pro rata
payment of expenses by the Company and EDS and regarding mutual
indemnification agreements between the Company and EDS for certain securities
laws violations.
79
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES FOR NON-UNITED STATES HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership and taxable disposition of Class A Common Stock by a
person or entity other than (i) a citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any state thereof, (iii) an estate,
the income of which is subject to United States federal income taxation
regardless of its source or (iv) a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust (a "Non-U.S. Holder"). This summary does not address
all of the United States federal income and estate tax considerations that may
be relevant to a Non-U.S. Holder in light of its particular circumstances or
to Non-U.S. Holders that may be subject to special treatment under United
States federal income tax laws (such as insurance companies, tax-exempt
organizations, financial institutions, brokers, and dealers in securities).
Furthermore, this summary does not discuss any aspects of state, local or
foreign taxation. This summary is based on current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury regulations, judicial
opinions, published positions of the United States Internal Revenue Service
(the "IRS") and other applicable authorities, all of which are subject to
change, possibly with retroactive effect. Each prospective purchaser of Class
A Common Stock is advised to consult its tax advisor with respect to the tax
consequences of acquiring, holding and disposing of Class A Common Stock.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Class A Common Stock generally will
be subject to withholding of United States federal income tax at a 30 percent
rate (or such lower rate as may be specified by an applicable income tax
treaty) unless the dividends are effectively connected with the conduct of a
trade or business of the Non-U.S. Holder within the United States (and, if an
income tax treaty applies, is applicable to a United States permanent
establishment of the Non-United States Holder) and the Non-United States
Holder provides the payor with proper documentation (generally I.R.S. Form
4224 or any successor form), in which case the dividends will be taxed at
ordinary United States federal income tax rates and will not be subject to the
withholding tax described above. If the Non-U.S. Holder is a corporation, such
effectively connected income may also be subject to an additional "branch
profits tax" which is imposed, under certain circumstances, at a rate of 30%
(or such lower rate as may be specified by an applicable treaty) of the Non-
United States corporation's "effectively connected earnings and profits,"
subject to certain adjustments.
SALE OR DISPOSITION OF CLASS A COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other disposition
of Class A Common Stock unless (i) the gain is effectively connected with a
trade or business of the Non-U.S. Holder in the United States; (ii) in the
case of a Non-U.S. Holder who is an individual and holds the Class A Common
Stock as a capital asset, (a) such holder is present in the United States for
183 or more days in the taxable year of the disposition and (b) such holder
has a "tax home" in the United States for United States federal income tax
purposes or maintains an office or other fixed place of business in the United
States to which such gain is attributable; (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of United States federal income tax
law applicable to certain United States expatriates whose loss of U.S.
citizenship has as one of its principal purposes the avoidance of U.S. taxes;
or (iv) the Company becomes a U.S. real property holding corporation and
either (a) the Class A Common Stock ceases to be "regularly traded on an
established securities market" for United States federal income tax purposes
or (b) the Non-U.S. Holder has held, directly or indirectly, at any time
during the five-year period ending on the date of disposition (or, if shorter,
the Non-U.S. Holder's holding period), more than 5 percent of all of the
Company's outstanding Common Stock. The Company is not, and does not
anticipate becoming, a U.S. real property holding company.
80
<PAGE>
BACKUP WITHHOLDING AND INFORMATION REPORTING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the amount, if any, of tax
withheld with respect to such dividends. This information may also be made
available to the tax authorities in the Non-U.S. Holder's country of
residence.
United States backup withholding (which generally is a withholding tax
imposed at the rate of 31% on certain payments to persons that fail to furnish
certain information under the United States information reporting
requirements) generally will not apply to dividends paid to Non-United States
Holders if such dividends are subject to the 30% withholding discussed above
(or that are not so subject because a tax treaty applies that reduces or
eliminates such 30% withholding). In the case of dividends which are not
described in the preceding sentence, backup withholding would still not apply
(i) under current law, if such dividends are paid before January 1, 2000 to a
Non-United States Holder at an address outside of the United States or (ii)
under recently promulgated final United States Treasury regulations which are
to become effective as of January 1, 2000, if certain certification procedures
(or, in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are satisfied.
Upon the sale or other taxable disposition of Class A Common Stock by a Non-
U.S. Holder to or through a United States office of a broker, the broker must
backup withhold at a rate of 31 percent and report the sale to the IRS, unless
the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes exemption. Upon the sale or other taxable disposition of
Class A Common Stock by a Non-U.S. Holder to or through the foreign office of
a United States broker, or a foreign broker with certain types of
relationships to the United States, the broker must report the sale to the IRS
(but, prior to January 1, 2000, is probably not required to backup withhold)
unless the broker has documentary evidence in its files that the seller is a
Non-U.S. Holder and certain other conditions are met, or the holder otherwise
establishes an exemption. A sale or other taxable disposition of Class A
Common Stock by a Non-U.S. Holder to or through the foreign office of a
foreign broker that does not have certain types of relationships to the United
States is generally not subject to either information reporting or backup
withholding.
Backup withholding is not an additional U.S. federal income tax. Amounts
withheld under the backup withholding rules are generally allowable as a
refund or credit against such Non-U.S. Holder's United States federal income
tax liability, if any, provided that the required information is furnished to
the IRS.
FEDERAL ESTATE TAXES
Class A Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for United States federal estate tax
purposes) of the United States at the time of death will be included in such
individual's gross estate for United States federal estate tax purposes,
unless an applicable estate tax treaty provides otherwise.
81
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the U.S.
Underwriters named below for whom Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC and
J.P. Morgan Securities Inc. are acting as U.S. Representatives, and the
International Underwriters named below for whom Morgan Stanley & Co.
International Limited, Donaldson, Lufkin & Jenrette International, Hambrecht &
Quist LLC and J.P. Morgan Securities Ltd. are acting as International
Representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of shares of Class A Common
Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................ 1,261,500
Donaldson, Lufkin & Jenrette Securities Corporation.............. 315,375
Hambrecht & Quist LLC............................................ 630,750
J.P. Morgan Securities Inc....................................... 315,375
Adams, Harkness & Hill, Inc. .................................... 70,000
BancAmerica Robertson Stephens................................... 140,000
Cowen & Company.................................................. 70,000
Dain Rauscher Wessels............................................ 70,000
A Division of Dain Rauscher
Fifth Third/The Ohio Company..................................... 70,000
Goldman, Sachs & Co. ............................................ 140,000
Edward D. Jones & Co., L.P. ..................................... 70,000
Kirkpatrick, Pettis, Smith, Polian Inc. ......................... 70,000
Lehman Brothers Inc. ............................................ 140,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated............... 140,000
Parker/Hunter Incorporated....................................... 70,000
Piper Jaffray Inc. .............................................. 70,000
Raymond James & Associates, Inc. ................................ 70,000
Soundview Financial Group, Inc. ................................. 70,000
Stephens Inc. ................................................... 70,000
---------
Subtotal....................................................... 3,853,000
---------
International Underwriters:
Morgan Stanley & Co. International Limited....................... 573,500
Donaldson, Lufkin & Jenrette International....................... 143,375
Hambrecht & Quist LLC............................................ 286,750
J.P. Morgan Securities Ltd. ..................................... 143,375
---------
Subtotal....................................................... 1,147,000
---------
Total........................................................ 5,000,000
=========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives, are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain
82
<PAGE>
legal matters by their counsel and to certain other conditions. The
Underwriters are obligated to take and pay for all of the shares of Class A
Common Stock offered hereby (other than those covered by the U.S.
Underwriters' over-allotment option described below) if any such shares are
taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions: (i)
it is not purchasing any Shares (as hereinafter defined) for the account of
anyone other than a United States or Canadian Person (as hereinafter defined)
and (ii) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Shares or distribute any prospectus relating to the Shares
outside the United States or Canada or to anyone other than a United States or
Canadian Person. Pursuant to the Agreement between U.S. and International
Underwriters, each International Underwriter has represented and agreed that,
with certain exceptions: (i) it is not purchasing any Shares for the account
of any United States or Canadian Person and (ii) it has not offered or sold,
and will not offer or sell, directly or indirectly, any Shares or distribute
any prospectus relating to the Shares in the United States or Canada or to any
United States or Canadian Person. With respect to any Underwriter that is a
U.S. Underwriter and an International Underwriter, the foregoing
representations and agreements (i) made by it in its capacity as a U.S.
Underwriter apply only to it in its capacity as a U.S. Underwriter and (ii)
made by it in its capacity as an International Underwriter apply only to it in
its capacity as an International Underwriter. The foregoing limitations do not
apply to stabilization transactions or to certain other transactions specified
in the Agreement between U.S. and International Underwriters. As used herein,
"United States or Canadian Person" means any national or resident of the
United States or Canada, or any corporation, pension, profit-sharing or other
trust or other entity organized under the laws of the United States or Canada
or of any political subdivision thereof (other than a branch located outside
the United States and Canada of any United States or Canadian Person), and
includes any United States or Canadian branch of a person who is otherwise not
a United States or Canadian Person. All shares of Class A Common Stock to be
purchased by the Underwriters under the Underwriting Agreement are referred to
herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares so sold shall be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning
83
<PAGE>
of the Public Offers of Securities Regulations 1995; (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
with respect to anything done by it in relation to the Shares in, from or
otherwise involving the United Kingdom; and (iii) it has only issued or passed
on and will only issue or pass on in the United Kingdom any document received
by it in connection with the offering of the Shares to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document
may otherwise lawfully be issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the shares of Class A
Common Stock directly to the public at the public offering price set forth on
the cover page hereof and part to certain dealers at a price that represents a
concession not in excess of $0.58 a share under the public offering price. Any
Underwriter may allow, and such dealers may reallow, a concession not in
excess of $0.10 a share to other Underwriters or to certain dealers. After the
initial offering of the shares of Class A Common Stock, the offering price and
other selling terms may from time to time be varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
750,000 additional shares of Class A Common Stock at the public offering price
set forth on the cover page hereof, less underwriting discounts and
commissions. The U.S. Underwriters may exercise such option solely for the
purpose of covering over-allotments, if any, made in connection with the
offering of the shares of Class A Common Stock offered hereby. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares of Class A Common Stock as the number set forth next to such
U.S. Underwriter's name in the preceding table bears to the total number of
shares of Class A Common Stock set forth next to the names of all U.S.
Underwriters in the preceding table.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 475,000 shares offered hereby for
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Class A Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A Common Stock offered by them.
The Class A Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "UGS," subject to official notice of issuance.
Each of the Company and its directors and executive officers and EDS has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of this Prospectus, (i) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend
84
<PAGE>
or otherwise transfer or dispose of, directly or indirectly, any shares of
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock or (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Class A Common Stock, whether any
such transaction described in clause (i) or (ii) above is to be settled by
delivery of Class A Common Stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not apply to (w)
the sale of Shares to the Underwriters, (x) the issuance of options, SARs or
shares of Class A Common Stock granted pursuant to the 1998 Incentive Plan,
(y) the issuance by the Company of shares of Class A Common Stock upon the
exercise of an option or a warrant or the conversion of a security outstanding
on the date of this Prospectus of which the Underwriters have been advised in
writing or (z) transactions by any person other than the Company relating to
shares of Class A Common Stock or other securities acquired in open market
transactions after the completion of the offering of the Shares.
In order to facilitate the offering of the Class A Common Stock, the
Underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A Common Stock. Specifically, the Underwriters
may over-allot in connection with the offering, creating a short position in
the Class A Common Stock for their own account. In addition, to cover over-
allotments or to stabilize the price of the Class A Common Stock, the
Underwriters may bid for, and purchase, shares of Class A Common Stock in the
open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an Underwriter or a dealer for distributing the Class A
Common Stock in the offering, if the syndicate repurchases previously
distributed Class A Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Class A Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company and EDS and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the Class A
Common Stock. The initial public offering price was determined by negotiations
between the Company and the U.S. Representatives. Among the factors considered
in determining the initial public offering price were the future prospects of
the Company and its industry in general, sales, earnings and certain other
financial operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company.
LEGAL MATTERS
The validity of the issuance of the shares of Class A Common Stock offered
by this Prospectus will be passed upon for the Company by Baker & Botts,
L.L.P., Dallas, Texas. Certain legal matters in connection with the sale of
the Class A Common Stock offered hereby will be passed upon for the
Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The financial statements and schedule of the Company as of December 31, 1996
and 1997 and for each of the years in the three-year period ended December 31,
1997 have been included in this Prospectus in reliance upon the reports of
KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of that firm as experts in auditing
and accounting.
85
<PAGE>
The statements of assets sold and statements of revenues and direct expenses
of the Solid Edge/EMS Business as of December 31, 1996 and 1997 and for the
fiscal years ended December 31, 1995, 1996 and 1997 included in this
Prospectus have been audited by Ernst & Young LLP, independent auditors, as
stated in their report thereon appearing elsewhere herein, and are so included
in reliance on such report given upon the authority of that firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of Class A Common Stock offered by this Prospectus. This Prospectus
constitutes a part of the Registration Statement and does not contain all of
the information set forth in the Registration Statement, certain parts of
which are omitted from this Prospectus as permitted by the rules and
regulations of the Commission. Statements made in this Prospectus regarding
the contents of any contract, agreement or other document are not necessarily
complete. With respect to each contract, agreement or other document filed
with the Commission as an exhibit to the Registration Statement, reference is
made to the exhibit for further information regarding the contents thereof,
and each such statement is qualified in its entirety by such reference. For
further information regarding the Company and the shares of Class A Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules thereto.
The Registration Statement, including the exhibits and schedules thereto,
are available for inspection at, and copies of such materials may be obtained
at prescribed rates from, the public reference facilities maintained by the
Commission at its principal offices located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its regional offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60601 and 7 World Trade Center, New York, New York 10048. The
Commission also makes electronic filings publicly available on the Internet at
http://www.sec.gov and the Registration Statement, including the exhibits and
schedules thereto, may be inspected at such site.
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports and other information with the Commission. In addition, the Company
intends to furnish to its stockholders annual reports containing consolidated
financial statements examined by an independent public accounting firm.
86
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS OF UNIGRAPHICS SOLUTIONS INC.
Report of Independent Auditors.......................................... F-2
Statements of Operations for the Years Ended December 31, 1995, 1996 and
1997 and Three Months Ended March 31, 1997 and 1998 (Unaudited)........ F-3
Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998
(Unaudited)............................................................ F-4
Statements of Stockholder's Equity/Net Investment for the Years Ended
December 31, 1995, 1996 and 1997 and the Three Months Ended March 31,
1998 (unaudited)....................................................... F-5
Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and
1997 and the Three Months Ended March 31, 1997 and 1998 (Unaudited).... F-6
Notes to Financial Statements........................................... F-7
FINANCIAL STATEMENTS OF THE SOLID EDGE AND ENGINEERING MODELING SYSTEMS
SOFTWARE PRODUCT LINES OF INTERGRAPH CORPORATION
Report of Independent Auditors.......................................... F-21
Statements of Assets Sold as of December 31, 1996 and 1997.............. F-22
Statements of Revenues and Direct Expenses for the Years Ended December
31, 1995, 1996 and 1997................................................ F-23
Notes to Statements of Assets Sold and Statements of Revenues and Direct
Expenses............................................................... F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Electronic Data Systems Corporation:
We have audited the accompanying balance sheets of Unigraphics Solutions
Inc., a subsidiary of Electronic Data Systems Corporation, as of December 31,
1996 and 1997, and the related statements of operations and stockholder's
equity/net investment, and cash flows for each of the years in the three-year
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Unigraphics Solutions Inc.
as of December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
March 6, 1998
F-2
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software....................... $ 89,103 $209,480 $115,479 $26,236 $ 31,560
Services....................... 111,575 121,528 137,794 30,547 37,885
Hardware....................... 66,944 83,201 61,320 12,344 17,083
-------- -------- -------- ------- --------
Total revenue................ 267,622 414,209 314,593 69,127 86,528
-------- -------- -------- ------- --------
Cost of revenue:
Software:
Amortization.................. 14,641 14,808 14,754 3,672 4,596
Royalties, distribution and
other........................ 12,854 23,677 13,199 2,785 3,277
Services....................... 34,328 41,721 57,059 13,759 14,726
Hardware....................... 47,242 59,614 44,112 8,391 13,906
-------- -------- -------- ------- --------
Total cost of revenue........ 109,065 139,820 129,124 28,607 36,505
-------- -------- -------- ------- --------
Gross profit..................... 158,557 274,389 185,469 40,520 50,023
-------- -------- -------- ------- --------
Operating expenses:
Selling, general and
administrative................ 85,031 92,444 102,759 22,934 27,229
Research and development....... 43,654 47,166 47,979 10,945 14,288
In-process research and
development................... -- -- -- -- 42,468
-------- -------- -------- ------- --------
Total operating expenses..... 128,685 139,610 150,738 33,879 83,985
-------- -------- -------- ------- --------
Operating income (loss)...... 29,872 134,779 34,731 6,641 (33,962)
Other income, net................ 129 106 5,092 11 9,692
-------- -------- -------- ------- --------
Income (loss) before income
taxes....................... 30,001 134,885 39,823 6,652 (24,270)
Provision for income taxes....... 11,625 51,549 14,810 2,473 (10,187)
-------- -------- -------- ------- --------
Net income (loss)............ $ 18,376 $ 83,336 $ 25,013 $ 4,179 $(14,083)
======== ======== ======== ======= ========
Basic earnings (loss) per share.. $ 0.59 $ 2.67 $ 0.80 $ 0.13 $ (0.45)
======== ======== ======== ======= ========
Pro forma net earnings (loss) per
share........................... $ 0.69 $ 0.12 $ (0.39)
======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents...................... $ 1 $ 11 $ 14,624
Marketable securities.......................... -- 2,685 10,311
Accounts receivable, net....................... 171,427 115,692 110,236
Prepaids and other............................. 1,809 3,624 5,450
-------- -------- --------
Total current assets......................... 173,237 122,012 140,621
Property and equipment, net...................... 18,380 19,821 20,718
Software, and other intangibles, net............. 39,589 24,957 84,366
Deferred tax asset............................... -- -- 8,886
-------- -------- --------
Total assets................................. $231,206 $166,790 $254,591
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY/NET
INVESTMENT
Current liabilities
Accounts payable and accrued liabilities....... $ 45,203 $ 41,759 $ 51,864
Deferred revenue............................... 7,740 7,798 10,295
Income taxes payable........................... -- -- 9,477
Deferred income taxes--current................. 32,459 19,497 20,764
-------- -------- --------
Total current liabilities.................... 85,402 69,054 92,400
Intercompany credit agreement (Note 10).......... -- -- 83,055
Intercompany note (Note 10)...................... -- -- 73,000
Deferred income taxes............................ 13,657 9,386 --
Commitments and contingent liabilities
Stockholder's equity/net investment:
Preferred stock, $.01 par value, 20,000,000
shares authorized, none issued................ -- -- --
Class A common stock, $.01 par value,
168,735,000 shares authorized, none issued.... -- -- --
Class B common stock, $.01 par value,
31,265,000 shares authorized, issued and
outstanding at March 31, 1998--(Note 10)...... -- -- 313
Additional paid-in-capital (Note 10)........... -- -- 85,627
Retained earnings (deficit).................... -- -- (87,083)
Accumulated other comprehensive income......... 1,060 2,410 7,279
Stockholder's net investment................... 131,087 85,940 --
-------- -------- --------
Total stockholder's equity/net investment.... 132,147 88,350 6,136
-------- -------- --------
Total liabilities and stockholder's
equity/net investment....................... $231,206 $166,790 $254,591
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
STATEMENTS OF STOCKHOLDER'S EQUITY/NET INVESTMENT
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS
ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED STOCKHOLDER'S
COMPREHENSIVE CLASS B PAID-IN- COMPREHENSIVE EARNINGS NET
INCOME (LOSS) COMMON STOCK CAPITAL INCOME (DEFICIT) INVESTMENT
------------- ------------ ---------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... $ -- $ -- $ 526 $ -- $106,746
Net advances to
affiliates............. -- -- -- -- (35,882)
Foreign currency
translation............ $ 1,004 -- -- 1,004 -- --
Net income.............. 18,376 -- -- -- -- 18,376
-------- ----- ------- ------ -------- --------
Comprehensive income.... $ 19,380
========
Balance at December 31,
1995................... -- -- 1,530 -- 89,240
Net advances to
affiliates............. -- -- -- -- (41,489)
Foreign currency
translation............ $ (470) -- -- (470) -- --
Net income.............. 83,336 -- -- -- -- 83,336
-------- ----- ------- ------ -------- --------
Comprehensive income.... $ 82,866
========
Balance at December 31,
1996 -- -- 1,060 -- 131,087
Net advance to
affiliates............. -- -- -- -- (70,160)
Foreign currency
translation............ $ (395) -- -- -- -- --
Unrealized gain on
marketable security(net
of tax expense of $940
thousand).............. 1,745 -- -- -- -- --
--------
Other comprehensive
income................. 1,350 -- -- 1,350 -- --
Net income.............. 25,013 -- -- -- -- 25,013
-------- ----- ------- ------ -------- --------
Comprehensive income.... $ 26,363
========
Balance at December 31,
1997................... -- -- 2,410 -- 85,940
Reorganization and
recapitalization....... 313 85,627 -- -- (85,940)
Dividend to parent...... -- -- -- (73,000) --
Foreign currency
translation............ $ (70) -- -- -- -- --
Unrealized gain on
marketable security
(net of tax expense of
$2,660 thousand) ...... 4,939 -- -- -- -- --
--------
Other comprehensive
income................. 4,869 -- -- 4,869 -- --
Net loss................ (14,083) -- -- -- (14,083) --
-------- ----- ------- ------ -------- --------
Comprehensive loss...... $ (9,214)
========
Balance at March 31,
1998 (unaudited)....... $ 313 $85,627 $7,279 $(87,083) $ --
===== ======= ====== ======== ========
Disclosure of
reclassification
amount:
Unrealized holding
gains arising during
the quarter ended
March 31, 1998 (net of
tax expense of $3,600
thousand)............. $ 6,684
Less: reclassification
adjustment for gains
included in net income
(net of tax benefit of
$940 thousand) ....... (1,745)
--------
Net unrealized gains on
securities............ $ 4,939
========
</TABLE>
F-5
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities
Net income (loss)........ $ 18,376 $ 83,336 $ 25,013 $ 4,179 $ (14,083)
-------- -------- -------- --------- ---------
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Deferred income taxes.. 1,647 30,653 (18,174) (4,545) (19,664)
Depreciation and
amortization.......... 21,266 22,923 22,134 5,188 6,373
Allowance for bad
debts................. 2,994 1,251 2,425 337 181
Gain on sale of
marketable equity
securities............ -- -- (5,097) -- (10,124)
In process research and
development........... -- -- -- -- 42,468
Changes in operating
assets and
liabilities, net of
affect of acquired
company:
Accounts receivable.. 3,150 (98,952) 51,126 20,201 5,247
Prepaids and other... (1,523) 2,464 (1,783) (3,066) (1,463)
Accounts payable and
accrued
liabilities......... (3,190) 11,344 (1,630) (4,173) 8,149
Income taxes
payable............. -- -- -- -- 9,477
Deferred revenue..... 542 829 254 (155) 2,542
-------- -------- -------- --------- ---------
Total adjustments.. 24,886 (29,488) 49,255 13,787 43,186
-------- -------- -------- --------- ---------
Net cash provided by
operating activities.... 43,262 53,848 74,268 17,966 29,103
-------- -------- -------- --------- ---------
Cash Flows from Investing
Activities
Proceeds from sales of
marketable securities... -- -- 5,126 -- 10,145
Payments related to Solid
Edge acquisition........ -- -- -- -- (104,993)
Payments for purchases of
property and equipment.. (6,559) (12,319) (9,073) (1,558) (1,613)
Payments for purchases of
software and other
intangibles............. (821) (40) (122) (114) (840)
Payments for purchases of
marketable securities... -- -- (29) -- (51)
-------- -------- -------- --------- ---------
Net cash used in
investing activities.... (7,380) (12,359) (4,098) (1,672) (97,352)
-------- -------- -------- --------- ---------
Cash Flows from Financing
Activities--
Borrowings under
Intercompany Credit
Agreement............... -- -- -- -- 107,691
Payments on Intercompany
Credit Agreement........ -- -- -- -- (24,636)
Net advances to
affiliates.............. (35,882) (41,489) (70,160) (16,294) --
-------- -------- -------- --------- ---------
Net cash provided by
(used in) financing
activities.............. (35,882) (41,489) (70,160) (16,294) 83,055
-------- -------- -------- --------- ---------
Effect of exchange rates on
cash and cash
equivalents............... -- -- -- -- (193)
Net Increase in Cash and
Cash Equivalents.......... -- -- 10 -- 14,613
Cash and Cash Equivalents
at Beginning of Year...... 1 1 1 1 11
-------- -------- -------- --------- ---------
Cash and Cash Equivalents
at End of Year............ $ 1 $ 1 $ 11 $ 1 $ 14,624
======== ======== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Unigraphics Solutions Inc., a wholly owned subsidiary of Electronic Data
Systems Corporation ("EDS"), was incorporated under the laws of the state of
Delaware on October 2, 1997. Unigraphics Solutions Inc. is the successor to
the Unigraphics business of EDS (the "Division") which operated within several
business units of EDS through December 31, 1997. Unigraphics Solutions Inc.
develops, markets and supports mechanical computer-aided design ("CAD"),
computer-aided manufacturing ("CAM") and computer-aided engineering ("CAE")
software to customers in more than 20 countries. All references to the
"Company" in the notes to the financial statements refer to Unigraphics
Solutions Inc. and its predecessor businesses and divisions.
On January 1, 1998, EDS reorganized the business of the Division (the
"Reorganization"). As part of the Reorganization, the businesses of the
Division were combined under the Company. See Note 10 regarding transactions
related to the implementation of the Reorganization.
Basis of presentation
The accompanying financial statements have been prepared using EDS'
historical basis in the assets and liabilities of the Company. The 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 the actual results of operations and financial position
of the Company subsequent to the Reorganization. Management believes the
statements of operations include a reasonable allocation of administrative
costs, which are described in Note 2, incurred by EDS on behalf of the
Company.
All significant accounts and transactions among the Company's businesses
have been eliminated. For financial reporting purposes, the equity accounts of
the Company have been accumulated into a single disclosure caption entitled
Stockholder's Net Investment.
Earnings per Share
In February 1997, Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share, was issued which requires the presentation of basic
and diluted earnings per share for each period presented in the Company's
financial statements. SFAS No. 128 also requires presentation of earnings per
share by a Company that has made a filing or is in the process of filing with
a regulatory agency in preparation for sale of securities in a public market.
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.
For purposes of the calculation of basic earnings per share, weighted average
common shares outstanding assumes 31,265,000 shares of Class B Common Stock
are outstanding for each period presented (see Note 10). 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 restricted stock units that would have had a dilutive effect on
earnings per share. Employee stock options for approximately 800,000 shares of
Class A Common Stock to be issued upon completion of the Offering at the
initial public offering price are assumed to have no dilutive effect.
Pro forma earnings per share for the year ended December 31, 1997 and the
three months ended March 31, 1997 and 1998 have been calculated by dividing
net income by the weighted average shares outstanding as calculated in
accordance with Securities and Exchange Commission rules for initial public
offerings. Such rules require that the weighted average share calculation give
retroactive effect to the issuance of shares whose
F-7
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
proceeds will be used to pay any dividend declared by the Company prior to the
Offering. Therefore, pro forma weighted average shares of the Company for the
year ended December 31, 1997 and the three months ended March 31, 1997 and
1998 are comprised of 31,265,000 shares of Class B Common Stock described
above and 5,000,000 shares of Class A Common Stock described in Note 11,
assuming all such shares are outstanding as of the beginning of each period.
Marketable Securities
Marketable securities at December 31, 1997 consist of corporate equity
securities which are classified as available-for-sale. Management determines
the appropriate classification of all securities at the time of purchase and
reevaluates such designation as of each balance sheet date. The Company's
available-for-sale securities are recorded at fair value. Unrealized holding
gains, net of the related tax effect, of $1.7 million are excluded from net
income and included in Stockholder's Net Investment. A decline in the fair
value of any available-for-sale security below cost that is deemed other than
temporary is charged to earnings, resulting in the establishment of a new cost
basis for the security. Proceeds and realized gains from sales of marketable
securities totaled $5.1 million during the year ended December 31, 1997.
Specific identification is used to determine cost in computing gain or loss.
Inventory Valuation
Inventories, primarily consisting of computer equipment, are stated
principally at the lower of cost or market using the average cost method and
are included in prepaids and other current assets in the accompanying balance
sheet. The Company uses EDS' centralized inventory purchase system whereby
computer equipment is shipped directly from EDS or the vendor to the customer
and charged to the Company through an intercompany transaction. Included in
inventory are amounts for computer equipment which has been shipped to
customers and charged to the Company but not yet billed to customers.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation of property and equipment is calculated using the straight-line
method over the estimated useful lives of the assets. Depreciation expense
totaled $6.7 million, $8.1 million and $7.3 million during the years ended
December 31, 1995, 1996 and 1997, respectively. The ranges of estimated useful
lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Facilities............................................................. 5-7
Computer equipment..................................................... 5
Other equipment and furniture.......................................... 5-7
</TABLE>
Software, and Other Intangibles
The Company capitalizes software development costs in compliance with
Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Capitalization of software development costs begins upon the establishment of
technological feasibility of the product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to certain external
forces including, but not limited to, anticipated future gross product
revenue, estimated economic life and changes in software and hardware
technology. Amortization of capitalized software development costs
F-8
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
begins when the products are available for release to customers and is
generally computed on a straight-line basis over 3 years or, if less, the
remaining estimated economic life of the product. Software purchased by the
Company, including amounts allocated to software when the Company was acquired
by EDS, and utilized in designing software and operations is capitalized and
amortized on a straight-line basis over a five- to eight-year period.
In the accompanying statements of operations, amortization is included in
cost of software for capitalized software development costs and software
acquired in business combinations. Software purchased for internal use is
amortized to cost of software or selling, general and administrative expenses,
as determined by the nature of its use. Amortization of capitalized and
purchased software totaled $14.6 million, $14.8 million and $14.8 million
during the years ended December 31, 1995, 1996 and 1997, respectively.
Revenue Recognition
The Company's software products are licensed to customers through the
Company's direct sales force and by specific arrangements with certain
distributors, value-added resellers and other marketing representatives.
Revenue generated from licenses is recognized when the following criteria have
been met: (a) a written contract for the license of software has been
executed, (b) the Company or its representative has shipped the products and
fulfilled its contractual obligations to the customer, (c) the fee is fixed or
determinable, and (d) collectibility is probable. Revenues recognized but not
yet billed to customers total $103.1 million and $56.2 million, at December
31, 1996 and 1997, respectively. Unbilled revenue amounts recorded at December
31, 1997 and expected to be collected subsequent to 1998 total $18.9 million.
Revenue from maintenance contracts is recognized ratably over the term of
the agreement and is generally billed on a monthly basis. Deferred revenue is
recorded when upfront payments are received for annual maintenance
arrangements. Revenue from consulting, customer training and other services is
recognized as the service is performed.
Cost of Revenue
The cost of software licenses primarily consists of the cost of distributing
the software products and an allocation of the amortization of capitalized
software development costs and royalty fees paid to third parties under
licensing agreements. Costs of maintenance and services primarily consist of
staff and related costs associated with the generation and support of software
service revenue and an allocation of the amortization of capitalized software
development costs and royalty fees paid to third parties under licensing
agreements. Management believes that the methodology for allocating the costs
is reasonable.
Currency Translation
Assets and liabilities of non-U.S. subsidiaries or divisions whose
functional currency is not the U.S. dollar are translated at current exchange
rates. Revenue and expense accounts are translated using an average rate for
the period. Translation gains (losses) are not included in determining net
income but are reflected as a component of Stockholder's Net Investment.
Cumulative currency translation adjustments included in Stockholder's Net
Investment were $1.1 million and $0.7 million at December 31, 1996 and 1997,
respectively. Foreign currency transaction gains (losses) were not material.
Income Taxes
The operations of the Company are included in EDS' consolidated income tax
returns. Current and deferred taxes have been allocated to the Company as if
taxes were computed on a stand-alone basis.
F-9
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Tax benefits of operating losses and tax
credit carryforwards generated by the Company in foreign jurisdictions and
utilized by EDS to offset non-Company taxable income in such jurisdictions are
recognized by the Company as a reduction in Stockholder's Net Investment. See
Note 10 regarding the tax sharing agreement between the Company and EDS
effective January 1, 1998.
Statements of Cash Flows
The Company uses the indirect method to present cash flows from operating
activities and considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Financial Instruments
The carrying amounts of the Company's other financial instruments, including
cash and cash equivalents, trade accounts receivable, other current assets,
trade accounts payable, and accrued expenses approximate fair value because of
the short maturity of these instruments.
The carrying amount and fair value of the Company's available-for-sale
marketable securities was $2.7 million at December 31, 1997. The estimated
fair value of the securities is based upon quoted market prices.
At December 31, 1997, the Company also owned unvested warrants to purchase
447,091 shares of a public company for $0.11 per share. The warrants were
acquired in exchange for reduced royalty fees from a private software company
which was acquired by the public company in 1997. The warrants have a nominal
carrying value and vest over 8 years, or earlier if the acquired company's
revenues exceed predetermined amounts. The fair value of the underlying shares
to which these unvested warrants relate was $13.8 million at December 31,
1997.
Significant Customers
Effective July 1, 1996, the Company's parent, EDS, entered into a corporate
software license agreement with General Motors Corporation ("GM") which
provided for the delivery of various software products as well as the
provision of maintenance services for an initial term of three years. The
Company has agreed to perform EDS' obligation to provide products and services
under such agreement pursuant to a Memorandum of Understanding executed in
connection with the Reorganization.
During the years ended December 31, 1995, 1996 and 1997, the portion of
Company revenues attributable to GM was 14%, 34%, and 6%, respectively. Other
than GM, no single customer accounted for more than 10% of the Company's
revenues in 1995, 1996 or 1997. Accounts receivable, including amounts
unbilled, from GM accounted for 54% and 48% of total accounts receivable in
1996 and 1997, respectively.
Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of customers constituting the Company's
customer base and their dispersion across different industry and geographic
areas. Accounts receivable are shown net of allowances of $4.9 million and
$5.4 million as of December 31, 1996 and 1997, respectively.
F-10
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those estimates.
During 1995 and the period from January 1, 1996 through June 30, 1996,
Company billings to GM were included in the billings of EDS under a master
agreement that, prior to EDS' split-off from GM, served as a framework for
individual services agreements between GM and EDS. Management has estimated
that the Company's portion of GM revenues for 1995 and 1996 under EDS' master
service agreement with GM were $36.6 million and $21.4 million, respectively,
based on the number of workstations installed with Unigraphics software during
the year and average price per installed seat. Management believes that this
estimate is reasonable.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less cost to sell.
Interim Financial Information
The accompanying unaudited consolidated financial statements as of March 31,
1998 and for the three months ended March 31, 1997 and 1998 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 for interim periods are not
necessarily indicative of results which may be expected for any other interim
period or for the full year.
NOTE 2: RELATED PARTY TRANSACTIONS
The Company utilized central cash management systems of EDS to finance its
operations. Cash requirements were satisfied either by intercompany
transactions between EDS and the Company or by cash from operations. Such
intercompany transactions are included in the Stockholder's Net Investment
account in the balance sheets and as net cash advances to affiliates in the
statements of cash flows. Intercompany transactions between EDS and the
Company do not bear interest and therefore, no interest charge is reflected in
the accompanying statements of income. An analysis of the intercompany
activity included in the Stockholder's Net Investment account follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- --------- ---------
<S> <C> <C> <C>
Purchases of inventory from EDS............ $ 47,242 $ 59,614 $ 44,112
Allocation of corporate services and em-
ployee benefits........................... 7,272 10,945 9,298
Other net payments/transfers to EDS
relating to normal cash management
activity.................................. (90,396) (112,048) (123,570)
-------- --------- ---------
Net advances to affiliates............... $(35,882) $ (41,489) $ (70,160)
======== ========= =========
</TABLE>
F-11
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
EDS provides services for the Company for management, accounting, human
resources, information systems, legal, taxes and other corporate activities.
Such corporate expenses amounting to $5.5 million, $8.6 million and $6.6
million have been allocated to the Company during the years ended December 31,
1995, 1996 and 1997, respectively, and are reflected in the accompanying
consolidated statements of operations as selling, general and administrative
expenses. These costs were allocated to the Company by multiplying Company
revenues by a standard overhead rate for each period presented. The standard
overhead rate was developed through analysis of actual services and related
estimated costs provided to the Company on a historical basis. However, the
costs of these transactions may differ from those that would result from
transactions with unrelated parties.
EDS has noncontributory defined benefit pension plans covering substantially
all of its employees, including employees of the Company. In general,
employees become fully vested upon attaining five years of service, and
benefits are based on years of service and earnings. The actuarial cost method
currently used is the projected unit credit cost method. EDS' U.S. funding
policy is to contribute amounts that fall within the range of deductible
contributions for federal income tax purposes.
The weighted-average assumptions used for the EDS defined benefit pension
plans using a measurement date of October 1 are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1995 1996 1997
------------------------
<S> <C> <C> <C>
Discount rate....................................... 8.0% 8.0% 7.3%
Rate of increase in compensation levels............. 5.4% 5.4% 5.5%
Long-term rate of return on assets.................. 9.9% 9.7% 10.1%
</TABLE>
Net pension cost consisted of the following components (in millions):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost for the period.................. $ 87.6 $ 119.8 $ 135.8
Interest cost on projected benefit obliga-
tion........................................ 97.5 121.8 159.8
Actual return on assets...................... (158.6) (195.5) (458.0)
Net amortization and deferral................ 59.9 78.3 286.4
-------- -------- --------
Net pension cost............................. $ 86.4 $ 124.4 $ 124.0
======== ======== ========
</TABLE>
F-12
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1997, the assets of these plans consisted primarily
of equity and fixed income securities and U.S. government obligations. The
following is a reconciliation of the funded status of the EDS defined benefit
plans (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997
------------------ -----------------
ASSETS ACCUM. ASSETS ACCUM.
EXCEED BENEFITS EXCEED BENEFITS
ACCUM. EXCEED ACCUM. EXCEED
BENEFITS ASSETS BENEFITS ASSETS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Plans' assets at fair value.......... $1,772.2 $ 8.0 $2,368.6 $ 8.3
Actuarial present value of benefit
obligation
Vested benefits.................... 1,178.5 86.6 1,570.7 91.0
Nonvested benefits................. 89.8 14.2 113.1 14.8
-------- ------- -------- -------
Accumulated benefit obligation....... 1,268.3 100.8 1,683.8 105.8
Effect of projected future salary
increases........................... 513.8 57.0 671.3 50.4
-------- ------- -------- -------
Projected benefit obligation......... 1,782.1 157.8 2,355.1 156.2
Excess (deficiency) of Plans' assets
over projected benefit obligation... (9.9) (149.8) 13.5 (147.9)
Unrecognized net (gain) loss......... 68.4 (15.3) 106.0 (7.8)
Unrecognized net (asset) obligation
at date of adoption................. (2.5) 22.2 0.4 17.2
Unrecognized prior service cost...... 10.5 (0.8) 9.2 (0.4)
-------- ------- -------- -------
Net prepaid (accrued) pension cost... $ 66.5 $(143.7) $ 129.1 $(138.9)
======== ======= ======== =======
</TABLE>
Costs related to these plans are allocated to the Company through an
intercompany transaction based on the ratio of total payroll dollars of the
Company to total payroll dollars of EDS for the employee groups of the
respective plans and are included in selling, general and administrative
expenses. During the years ended December 31, 1995, 1996 and 1997, the Company
recognized expense of $1.8 million, $2.4 million and $2.7 million,
respectively, for such pension coverage.
EDS has a deferred compensation plan which provides a long-term savings
program for U.S. employees, including employees of the Company. This plan
allows eligible employees to contribute a percentage of their compensation to
a savings program and to defer income taxes until the time of distribution.
EDS also offers a stock purchase plan which enables EDS employees to purchase
shares of EDS common stock at 85% of the quoted market price through payroll
deductions of up to 10% of their compensation.
Eligible employees of the Company participate in EDS' PerformanceShare Plan
which permits the granting of stock-based awards in the form of stock options
for up to 20.0 million shares of EDS common stock. In 1997, EDS granted to
employees options to acquire 14.1 million shares of EDS common stock, of which
0.2 million were issued to Company employees. The options vest after 10 years
of service, subject to accelerated vesting based on the appreciation in quoted
market price of the Company common stock. The exercise price of $37.375
equaled the quoted market price of EDS stock on the date of grant. EDS applies
the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, in accounting for its plans. Therefore, no compensation costs
related to this grant are reflected in the historical financial statements of
the Company. If compensation cost for the PerformanceShare Plan had been
determined in accordance with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's pro forma net income for the year
ended December 31, 1997 would not have been materially different from
historical amounts.
F-13
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
ACCUMULATED
COST DEPRECIATION NET
------- ------------ -------
<S> <C> <C> <C>
Buildings and facilities....................... $ 4,036 $ 3,181 $ 855
Computer equipment............................. 45,106 29,279 15,827
Other equipment and furniture.................. 4,831 3,133 1,698
------- ------- -------
Total........................................ $53,973 $35,593 $18,380
======= ======= =======
<CAPTION>
DECEMBER 31, 1997
----------------------------
ACCUMULATED
COST DEPRECIATION NET
------- ------------ -------
<S> <C> <C> <C>
Buildings and facilities....................... $ 3,562 $ 3,070 $ 492
Computer equipment............................. 46,499 29,468 17,031
Other equipment and furniture.................. 5,048 2,750 2,298
------- ------- -------
Total........................................ $55,109 $35,288 $19,821
======= ======= =======
</TABLE>
NOTE 4: SOFTWARE AND OTHER INTANGIBLES
Software and other intangibles at December 31, 1996 and 1997 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ -------
<S> <C> <C> <C>
Software.......................................... $133,711 $ 94,329 $39,382
Other intangibles................................. 483 276 207
-------- -------- -------
Total........................................... $134,194 $ 94,605 $39,589
======== ======== =======
<CAPTION>
DECEMBER 31, 1997
-----------------------------
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ -------
<S> <C> <C> <C>
Software.......................................... $133,711 $109,016 $24,695
Other intangibles................................. 605 343 262
-------- -------- -------
Total........................................... $134,316 $109,359 $24,957
======== ======== =======
</TABLE>
NOTE 5: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 1996 and 1997 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Accounts payable............................................... $ 4,624 $ 6,805
Accrued foreign value added tax................................ 5,253 5,453
Accrued compensation........................................... 6,717 6,132
Accrued expenses............................................... 28,609 23,369
------- -------
Total........................................................ $45,203 $41,759
======= =======
</TABLE>
F-14
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6: INCOME TAXES
Income taxes related to the Company were allocated as if they were calculated
on a separate return basis. The provision for income tax expense is summarized
as follows (in thousands):
<TABLE>
<CAPTION>
U.S. NON-
YEAR ENDED DECEMBER 31, 1995 FEDERAL U.S. STATE TOTAL
- ---------------------------- ------- ------ ------ -------
<S> <C> <C> <C> <C>
Current.......................................... $ 9,226 $2,186 $1,101 $12,513
Deferred......................................... 1,416 (2,534) 230 (888)
------- ------ ------ -------
Total.......................................... $10,642 $ (348) $1,331 $11,625
======= ====== ====== =======
<CAPTION>
U.S. NON-
YEAR ENDED DECEMBER 31, 1996 FEDERAL U.S. STATE TOTAL
- ---------------------------- ------- ------ ------ -------
<S> <C> <C> <C> <C>
Current.......................................... $18,124 $2,769 $2,450 $23,343
Deferred......................................... 26,355 (2,447) 4,298 28,206
------- ------ ------ -------
Total.......................................... $44,479 $ 322 $6,748 $51,549
======= ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
U.S. NON-
YEAR ENDED DECEMBER 31, 1997 FEDERAL U.S. STATE TOTAL
- ---------------------------- ------- ------ ------ -------
<S> <C> <C> <C> <C>
Current........................................ $27,692 $3,317 $3,894 $34,903
Deferred....................................... (15,625) (1,920) (2,548) (20,093)
------- ------ ------ -------
Total........................................ $12,067 $1,397 $1,346 $14,810
======= ====== ====== =======
</TABLE>
Income before income taxes included the following components (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
U.S. income........................................ $33,046 $135,115 $38,297
Non-U.S. income (loss)............................. (3,045) (230) 1,526
------- -------- -------
Total............................................ $30,001 $134,885 $39,823
======= ======== =======
</TABLE>
A reconciliation of income tax expense using the statutory federal income tax
rate of 35.0 percent to the actual income tax expense follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Income before income taxes.......................... $30,001 $134,885 $39,823
Statutory federal income tax........................ 10,500 47,210 13,938
State income tax, net of federal tax benefit........ 866 4,386 875
Non-US taxes, net of credit......................... 717 403 863
Research and experimentation credits................ (530) (549) (1,001)
Other............................................... 72 99 135
------- -------- -------
Total............................................. $11,625 $ 51,549 $14,810
======= ======== =======
Effective income tax rate........................... 38.7% 38.2% 37.2%
======= ======== =======
</TABLE>
F-15
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences and carryforwards, which result in
a significant portion of the deferred tax assets and liabilities, are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1997
------------------ ------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Adjustments necessary to convert accrued
amounts to a tax basis..................... $4,383 $33,134 $3,120 $19,468
Accumulated depreciation/amortization....... -- 13,657 -- 9,386
Allowance for doubtful accounts............. 496 -- 338 --
Other....................................... -- 4,204 -- 3,487
------ ------- ------ -------
Subtotal.................................. 4,879 50,995 3,458 32,341
Less valuation allowance.................. -- -- -- --
------ ------- ------ -------
Total................................... $4,879 $50,995 $3,458 $32,341
====== ======= ====== =======
</TABLE>
Tax benefits of operating losses and tax credit carryforwards totaling $2.5
million, $2.4 million and $1.9 million for the years ended December 31, 1995,
1996 and 1997 generated by the Company in foreign jurisdictions and utilized
by EDS to offset non-Company taxable income in such jurisdictions are
recognized by the Company as a reduction in Stockholder's Net Investment.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the period in
which those temporary differences become deductible. Management believes it is
more likely than not that the Company will realize the benefits of these
deductible differences.
NOTE 7: SEGMENT INFORMATION
Industry Segments
The Company's business involves operations in principally one industry
segment: providing mechanical design automation software and related services
to manufacturers for the design, analysis, testing and manufacturing of
mechanical products.
Geographic Segments
The following presents information about the Company's operations in
different geographic areas (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
---------------------------------
U.S. EUROPE OTHER TOTAL
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Revenues................................... $135,555 $96,364 $35,703 $267,622
======== ======= ======= ========
Operating income........................... $ 24,801 $ 643 $ 4,428 $ 29,872
======== ======= ======= ========
Identifiable assets........................ $ 85,805 $40,185 $20,917 $146,907
======== ======= ======= ========
</TABLE>
F-16
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1996
----------------------------------
U.S. EUROPE OTHER TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues.................................. $249,049 $117,172 $47,988 $414,209
======== ======== ======= ========
Operating income.......................... $114,046 $ 11,440 $ 9,293 $134,779
======== ======== ======= ========
Identifiable assets....................... $162,373 $ 40,149 $28,684 $231,206
======== ======== ======= ========
<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997
----------------------------------
U.S. EUROPE OTHER TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues.................................. $144,529 $112,785 $57,279 $314,593
======== ======== ======= ========
Operating income.......................... $ 15,314 $ 13,577 $ 5,840 $ 34,731
======== ======== ======= ========
Identifiable assets....................... $112,892 $ 34,258 $19,640 $166,790
======== ======== ======= ========
</TABLE>
NOTE 8: COMMITMENTS AND CONTINGENT LIABILITIES
The Company is not a party to any litigation other than ordinary, routine
litigation incidental to its business. In the opinion of management, the
ultimate liability, if any, resulting from the aforementioned contingencies
will not have a material adverse effect on the Company's consolidated results
of operations or financial position.
The Company licenses software used to develop components of certain software
products. Royalties are payable to developers of the software at various rates
and amounts generally based on unit sales or revenues. Royalty expense was
$3.4 million, $8.0 million, and $5.7 million for the years ended December 31,
1995, 1996 and 1997, respectively. Such costs are included in cost of
revenues-software.
NOTE 9: SOLID EDGE ACQUISITION
On March 2, 1998, the Company acquired the Solid Edge/EMS mechanical CAD/CAM
business of Intergraph Corporation (the "Solid Edge Acquisition") for $105.0
million (excluding approximately $2 million of acquisition costs). The Company
borrowed $105.0 million from EDS pursuant to a credit agreement established in
connection with the Reorganization (the "Intercompany Credit Agreement"). The
cost of acquired companies is allocated first to identifiable assets based on
estimated fair values. Costs allocated to identifiable intangible assets are
amortized on a straight-line basis over the remaining estimated useful lives
of the assets as determined by underlying contract terms or independent
appraisals. Amounts allocated to in-process research and development costs are
expensed in the period of acquisition. The excess of purchase price over the
fair value of identifiable assets acquired, net of liabilities assumed, is
recorded as goodwill and amortized on a straight-line basis over the useful
life of seven years. In connection with the acquisition, the Company incurred
a charge of $42.5 million relating to the write off of acquired in-process
research and development costs.
F-17
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ---------------
1997 1997 1998
------------ ------- -------
<S> <C> <C> <C>
Revenues....................................... $349,811 $77,227 $91,307
======== ======= =======
Net income..................................... $ 11,570 $ 375 $ 9,440
======== ======= =======
Net earnings per share......................... $ 0.37 $ 0.01 $ 0.30
======== ======= =======
</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 10: REORGANIZATION AND AFFILIATE AGREEMENTS (UNAUDITED)
The following transactions were consummated in connection with the
Reorganization:
INTERCOMPANY INDEBTEDNESS--In addition to the $105.0 million borrowed under
the Intercompany Credit Agreement in connection with the Solid Edge
Acquisition, effective March 6, 1998, the Company issued to EDS as a dividend
an Intercompany Note in the principal amount of $73.0 million. The
Intercompany Note is payable on March 6, 2001 and bears interest, payable
semiannually, at a rate equal to the London Interbank Bid Rate ("LIBID") minus
0.5%. A portion of the amounts advanced to the Company under the Intercompany
Credit Agreement in respect of the Solid Edge Acquisition is expected to be
repaid to EDS with the net proceeds of the initial public offering discussed
under Note 11 (the "Offering"). 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.
CAPITAL STOCK--At March 31, 1998, the Company had authorized 1,000 shares of
common stock, all of which were issued and outstanding. On May 21, 1998, the
Company filed a restated articles of incorporation with the state of Delaware
which authorized the issuance of 168,735,000 shares of Class A common stock,
31,265,000 shares of Class B common stock and 20,000,000 shares of preferred
stock. As a result, 1,000 shares of common stock, representing all outstanding
shares of common stock of the Company, were converted into 31,265,000 shares
of Class B common stock on May 21, 1998. The holders of Class A common stock
and Class B common stock of the Company will have identical voting rights
except that holders of Class A common stock will be entitled to one vote per
share while holders of Class B common stock are entitled to ten votes per
share on all matters to be voted on by stockholders. Holders of Class A common
stock and Class B common stock will share in an equal amount per share in any
dividend declared by the Board of Directors, subject to any preferential
rights of any outstanding preferred stock of the Company. Neither class of
common stock are subject to redemption or have preemptive rights to purchase
additional shares of common stock. Preferred stock of the Company can be
issued in series with varying preferences and conversion features as
determined by the Board of Directors.
CASH AND CASH EQUIVALENTS--Effective with the Reorganization, the Company
began maintaining separate cash and investment accounts from EDS. Transactions
with EDS no longer result in immediate charges and credits to the Company's
cash equivalents, but are settled through intercompany billings. EDS manages
the Company's cash management system under the Management Services Agreement
discussed below.
F-18
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MANAGEMENT SERVICES AGREEMENT--The Company and EDS are parties to the
Management Services Agreement, effective as of January 1, 1998 (the
"Management Services Agreement") pursuant to which EDS performs various
management services for the Company including treasury, risk management and
tax, and similar administrative services, that EDS has historically provided
to the Company. Amounts charged to the Company under this agreement
approximate EDS' cost of providing the services plus a fixed fee equal to 0.5%
of the Company's total revenues. The Management Services Agreement will expire
on December 31, 2002 unless terminated earlier by either party if EDS and the
Company are no longer under common control. Except for certain tax and
treasury management services relating to consolidated operations or corporate
policy of EDS, which the Company is required to purchase during the term of
the Management Services Agreement, the Company or EDS may terminate any
service on or after January 1, 2000 with prior notice of not less than five
months.
TAX SHARING AGREEMENT--The Company and EDS have entered into a tax sharing
agreement (the "Tax Sharing Agreement") which provides for the allocation of
tax liabilities during the tax periods the Company is part of consolidated
federal, state and local income tax returns filed by EDS. In addition, the Tax
Sharing Agreement sets out certain benefits and obligations of the Company and
EDS for tax matters relating to periods before the Reorganization and for
certain benefits and obligations that would affect the Company or EDS in the
future if the Company ceased to be a member of EDS's consolidated group for
federal income tax purposes. The Tax Sharing Agreement generally requires the
Company to pay EDS the amount of federal, state and local income taxes that
the Company would have been required to pay had the Company and its
subsidiaries filed their own tax return or returns and not been included in
the EDS consolidated group. The Company is jointly and severally liable for
the federal income tax of EDS and the other companies included in the
consolidated return for all periods in which the Company is included in the
EDS consolidated group. EDS has agreed, however, to indemnify the Company for
any liability for taxes reported or required to be reported on a consolidated
return.
Except for certain items specified in the Tax Sharing Agreement, EDS
generally retains any potential tax benefit carryforwards, and remains
obligated to pay all taxes, attributable to periods before the Reorganization.
CREDIT AGREEMENT--In order to allow EDS to manage efficiently the cash and
cash needs of its subsidiaries, the Company and EDS (or EDS Subsidiary, EDS
Finance plc, as the case may be) are parties to the Intercompany Credit
Agreement, pursuant to which the Company is required to borrow from EDS, and
EDS is required to lend to the Company, any amount required by the Company to
fund its daily cash requirements. In addition, EDS has made an advance to the
Company under the Intercompany Credit Agreement in the amount of $105.0
million in connection with the Solid Edge Acquisition, which advance will be
repaid upon consummation of the Offering. The maximum amount that the Company
may borrow at any time from EDS under the Intercompany Credit Agreement
(together with the other non-U.S. credit agreements referred to below) is
$177.0 million at any time prior to the closing of the Offering, or $70.0
million at any time thereafter. Also, under the Intercompany Credit Agreement,
the Company is required to lend to EDS all excess cash of the Company. The
interest rate to be charged to the Company is the sum of the one-month London
Interbank Offered Rate plus 0.5%. The interest rate to be charged to EDS is
the one-month LIBID minus 0.5%. On any business day that the Company has
excess cash available, it must use that cash to repay any outstanding loans it
has under the Intercompany Credit Agreement or make an advance to EDS if no
loans are outstanding. The Intercompany Credit Agreement will terminate on
December 31, 2002, unless earlier terminated at the election of one of the
parties upon the occurrence of certain events, including the termination of
the Management Services Agreement or the cessation of EDS' beneficial
ownership of 50% or more of the capital stock of the Company. In addition to
the Intercompany Credit Agreement between the Company and EDS, EDS Finance
plc, a wholly-owned
F-19
<PAGE>
UNIGRAPHICS SOLUTIONS INC.
(A SUBSIDIARY OF ELECTRONIC DATA SYSTEMS CORPORATION)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
subsidiary of EDS, has entered into or will enter into credit agreements with
substantially all non-U.S. subsidiaries of the Company having terms similar to
the Intercompany Credit Agreement.
GM SUBCONTRACT--In connection with the Reorganization, EDS and the Company
entered into a Memorandum of Understanding, effective January 1, 1998 (the "GM
Subcontract"), pursuant to which the Company receives all revenues and
performs EDS' obligations under the EDS/GM Site License Agreement and agrees
to cooperate with EDS in providing additional products and services to GM
under the EDS/GM MSA. The GM Subcontract further provides that the Company may
provide directly to GM products and services that are outside of the scope of
the EDS/GM MSA.
OTHER AGREEMENTS--In addition to the agreements set forth above, the Company
and EDS are parties to a Registration Rights Agreement described under "Shares
Eligible for Future Sale." The Company and EDS are also parties to various
subleases pursuant to which the Company subleases from EDS the real property
occupied by the Company prior to the Reorganization. The terms of these
sublease agreements incorporate the financial and other material terms of EDS'
lease agreements for the subject properties.. The Company also has, or expects
to enter into, other agreements with EDS or other EDS affiliates, pursuant to
which the Company does not expect to receive or pay material amounts.
PENSION BENEFITS--The Company and EDS have entered into an agreement which
permits the employees of the Company to continue to participate in the benefit
plans and programs sponsored by EDS until the Company establishes separate
plans and programs for employees.
1998 INCENTIVE PLAN--The Board of Directors has adopted, and EDS, as the
Company's sole stockholder, prior to the consummation of the Offering, has
approved, effective with the consummation of the Offering, the Unigraphics
Solutions Inc. 1998 Incentive Plan (the "1998 Incentive Plan"). Employees
eligible for awards under the 1998 Incentive Plan are those that hold
positions of responsibility and whose performance can have a significant
effect on the success of the Company and its subsidiaries. The only directors
eligible for automatic or elective awards under the 1998 Incentive Plan are
Non-employee Directors. The 1998 Incentive Plan covers up to 1,300,000 shares
of Class A Common Stock, of which 100,000 shares will be available for
Director Awards and the remainder will be available for Employee awards. The
1998 Incentive Plan permits the granting of stock-based awards in the form of
restricted shares, stock options, stock appreciation rights or cash awards.
NOTE 11: PROPOSED PUBLIC OFFERING OF COMMON STOCK (UNAUDITED)
On March 17, 1998, the Company's Board of Directors authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission for an initial public offering of the Company's Class A Common
Stock. The Company contemplates using the proceeds from such offering to repay
indebtedness incurred in connection with the Solid Edge Acquisition. Upon
completion of the offering of the 5,000,000 shares of Class A Common Stock,
EDS will own 86.2% of the outstanding common shares of the Company, exclusive
of any shares which could be issued pursuant to the underwriters' over-
allotment option or upon exercise of stock options granted in the Company's
1998 Incentive Plan.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Intergraph Corporation
We have audited the accompanying statements of assets sold of the Solid Edge
and Engineering Modeling Systems Software Product Lines of Intergraph
Corporation (the Product Lines) as of December 31, 1996 and 1997 and the
related statements of revenues and direct expenses for each of the years in
the three-year period ended December 31, 1997. These statements are the
responsibility of the Product Lines' management. Our responsibility is to
express an opinion on the statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the basis of accounting used and significant estimates made
by management, as well as evaluating the overall presentation of the
statements. We believe that our audits provide a reasonable basis for our
opinion.
The Product Lines consist of products and services offered by various
subsidiaries and divisions of Intergraph Corporation and as such do not
constitute a separate legal entity. Accordingly, the statements of assets sold
and revenues and direct expenses of the Product Lines have been carved out
from the consolidated balance sheets and statements of operations of
Intergraph Corporation. Management believes the assumptions underlying the
statements of assets sold and revenues and direct expenses of the Product
Lines to be reasonable.
As described in Note 1, the accompanying financial statements were prepared
for the purpose of complying with Rule 3-05 of Regulation S-X of the
Securities and Exchange Commission and are not intended to be a complete
presentation of assets and results of operations on a stand-alone basis of the
Product Lines.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets sold described in Note 2 of the Solid Edge and
Engineering Modeling Systems Software Product Lines of Intergraph Corporation
as of December 31, 1996 and 1997, and the revenues and direct expenses for
each of the years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Birmingham, Alabama
February 28, 1998,
except for Note 2, as to which the date is
March 2, 1998
F-21
<PAGE>
THE SOLID EDGE AND ENGINEERING MODELING SYSTEMS
SOFTWARE PRODUCT LINES
OF INTERGRAPH CORPORATION
STATEMENTS OF ASSETS SOLD
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventories and supplies........................................ $ 36 $ 6
Prepaid expenses................................................ 334 214
Computer hardware, office equipment, and furniture.............. 6,112 6,012
Less--accumulated depreciation................................ 3,865 4,946
------- -------
Net computer hardware, office equipment, and furniture........ 2,247 1,066
------- -------
Other assets.................................................... 86 81
------- -------
Total Assets Sold............................................... $ 2,703 $ 1,367
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
THE SOLID EDGE AND ENGINEERING MODELING SYSTEMS
SOFTWARE PRODUCT LINES
OF INTERGRAPH CORPORATION
STATEMENTS OF REVENUES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Software......................................... $14,800 $ 15,419 $18,984
Maintenance and services......................... 19,711 16,461 16,234
------- -------- -------
Total revenues................................. 34,511 31,880 35,218
------- -------- -------
Direct expenses
Cost of sales.................................... 5,976 4,436 3,979
Product development.............................. 12,119 10,936 9,951
Sales and marketing.............................. 22,743 26,630 25,404
------- -------- -------
Total direct expenses.......................... 40,838 42,002 39,334
------- -------- -------
Excess of direct expenses over revenues............ $(6,327) $(10,122) $(4,116)
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
THE SOLID EDGE AND ENGINEERING MODELING SYSTEMS SOFTWARE PRODUCT LINES OF
INTERGRAPH CORPORATION
NOTES TO STATEMENTS OF ASSETS SOLD AND STATEMENTS OF REVENUES AND DIRECT
EXPENSES
NOTE 1: ORGANIZATION, OPERATIONS, AND BASIS OF PRESENTATION
"Solid Edge" and "Engineering Modeling Systems" ("EMS") software are
application specific software products developed, marketed, and sold by
Intergraph Corporation ("Intergraph") to end user customers for use in
automation of the design of mechanical parts and assemblies. The products are
sold by Intergraph through its direct sales force, its international
subsidiary companies, and through indirect channels including distributors,
business partners, and resellers.
All significant intercompany accounts and transactions have been eliminated
in combination of the accompanying statements.
Historically, financial statements have not been prepared for the Solid Edge
and EMS product lines as they do not represent a separate Intergraph legal
entity or line of business. The accompanying statements are derived from the
historical accounting records of Intergraph and its subsidiary companies, and
present assets sold relative to these product lines as of December 31, 1996
and 1997, and revenues and direct expenses of the product lines for the three
years in the period ended December 31, 1997. The Statements of Revenues and
Direct Expenses includes all revenues and expenses directly attributable to
the Solid Edge and EMS product lines for the periods presented. Direct
expenses consist principally of cost of sales, product development expenses,
and selling and marketing expenses. The Statements do not include general and
administrative expenses, general corporate overhead, interest expense, or
income taxes. These Statements are not intended to be a complete presentation
of Solid Edge and EMS financial position and results of operations had these
product lines operated as a stand alone entity, but were prepared for the
purpose of complying with Rule 3-05 of Regulation S-X of the Securities and
Exchange Commission. Historical operating results may not be indicative of
results after acquisition of these product lines by the buyer.
NOTE 2: ASSET PURCHASE AGREEMENT
The accompanying statements have been prepared for the purpose of presenting
the assets sold pursuant to the Asset Purchase Agreement (the "Agreement")
between Intergraph Corporation and Unigraphics Solutions Inc. ("USI"), a
direct wholly owned subsidiary of Electronic Data Systems Corporation. Under
the Agreement, which was consummated March 2, 1998, USI purchased from
Intergraph for $105 million in cash certain of the assets of the Solid Edge
and EMS product lines, including:
1) Intellectual property interests, including the outright purchase of
the Solid Edge and EMS source code, trademarks, and copyrights unique to
those products, and license agreements with Intergraph for source code,
patents and patent applications, and software development tools common to
the acquired products and other products not sold to USI.
2) Contract rights (except for certain contract rights between Intergraph
and the United States government and contract rights for the sale and
maintenance of software used in the design and manufacturing of structural
support systems for ships and other marine vessels), distributor, business
partner, and reseller contracts, and unfulfilled bids and sales orders with
customers.
3) Inventories and supplies.
4) Computer hardware, office equipment, and furniture.
5) Prepaid expenses and other assets.
In addition, USI extended offers of employment to Intergraph employees
directly associated with the Solid Edge and EMS product lines.
F-24
<PAGE>
THE SOLID EDGE AND ENGINEERING MODELING SYSTEMS
SOFTWARE PRODUCT LINES OF INTERGRAPH CORPORATION
NOTES TO STATEMENTS OF ASSETS SOLD AND
STATEMENTS OF REVENUES AND DIRECT EXPENSES--(CONTINUED)
Assets specifically retained by Intergraph and thus not included in the
accompanying statements include, in addition to those described in 1) and 2)
above, accounts receivable attributable to sales of the product lines up to
the March 2, 1998 closing date, contracts related to real property associated
with the product lines, and certain contracts for third party software
utilized in the product lines.
Liabilities of the product lines assumed by USI are limited to those arising
subsequent to the date of closing under the assumed contracts described above.
All liabilities arising from the operations of the product lines prior to the
closing date, or relating to any of the assets retained, were retained by
Intergraph.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition: Revenues from software sales with no significant post-
shipment obligations are recognized as software is shipped and collectibility
is probable, with any post-shipment costs accrued at that time.
Maintenance and services revenues are recognized ratably over the lives of
the maintenance contracts or as services are performed.
Billings may not coincide with the recognition of revenue. Unbilled accounts
receivable occur when revenue recognition precedes billing to the customer,
and arise primarily from sales with predetermined billing schedules. Billings
in excess of sales occur when billing to the customer precedes revenue
recognition, and arise primarily from maintenance revenue billed in advance of
performance of the maintenance activity.
Inventories: Inventories are stated at the lower of average cost or market.
Computer Hardware, Office Equipment, and Furniture: Computer hardware,
office equipment, and furniture is stated at cost. Depreciation is provided
using the straight line method over estimated useful lives ranging from three
years for computer hardware and office equipment to eight years for certain
items of furniture.
F-25
<PAGE>
UNIGRAPHICS
SOLUTIONS(TM)
<PAGE>
[Alternate Page for International Prospectus]
PROSPECTUS
5,000,000 Shares
Unigraphics Solutions Inc.
CLASS A COMMON STOCK
---------------
OF THE 5,000,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 1,147,000
SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA
BY THE INTERNATIONAL UNDERWRITERS AND 3,853,000 SHARES ARE BEING
OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S.
UNDERWRITERS. ALL OF THE SHARES OF CLASS A COMMON STOCK BEING
OFFERED ARE BEING SOLD BY UNIGRAPHICS SOLUTIONS INC., WHICH
IS CURRENTLY A WHOLLY OWNED SUBSIDIARY OF ELECTRONIC DATA
SYSTEMS CORPORATION. PRIOR TO THE OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE CLASS A COMMON STOCK.
SEE "UNDERWRITERS" FOR A DISCUSSION OF THE
FACTORS CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE.
---------------
HOLDERS OF CLASS A COMMON STOCK GENERALLY HAVE RIGHTS IDENTICAL TO THOSE OF
HOLDERS OF CLASS B COMMON STOCK, EXCEPT THAT HOLDERS OF CLASS A COMMON
STOCK ARE ENTITLED TO ONE VOTE PER SHARE WHILE HOLDERS OF CLASS B COMMON
STOCK ARE ENTITLED TO 10 VOTES PER SHARE ON ALL MATTERS SUBMITTED TO A
VOTE OF STOCKHOLDERS. HOLDERS OF CLASS A COMMON STOCK ARE GENERALLY
ENTITLED TO VOTE WITH THE HOLDERS OF CLASS B COMMON STOCK AS ONE
CLASS ON ALL MATTERS AS TO WHICH THE HOLDERS OF CLASS B COMMON
STOCK ARE ENTITLED TO VOTE. SEE "DESCRIPTION OF CAPITAL
STOCK." UPON COMPLETION OF THE OFFERING, EDS WILL OWN 100%
OF THE OUTSTANDING CLASS B COMMON STOCK OF THE COMPANY,
WHICH WILL REPRESENT APPROXIMATELY 98.4% OF THE COMBINED
VOTING POWER OF ALL CLASSES OF VOTING STOCK IN THE
COMPANY (APPROXIMATELY 98.2% IF THE U.S.
UNDERWRITERS' OVER-ALLOTMENT OPTION IS EXERCISED
IN FULL). SEE "RELATIONSHIP WITH EDS AND
CERTAIN TRANSACTIONS."
---------------
THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE NEW YORK STOCK
EXCHANGE
UNDER THE SYMBOL "UGS," SUBJECT TO OFFICIAL NOTICE OF ISSUANCE.
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
PRICE $14 A SHARE
---------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- -----------
<S> <C> <C> <C>
Per Share............................. $14.00 $.98 $13.02
Total(3).............................. $70,000,000 $4,900,000 $65,100,000
</TABLE>
- -------
(1) The Company and EDS have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company estimated at $1,000,000.
(3) The Company has granted the U.S. Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to an aggregate of 750,000
additional Shares of Class A Common Stock at the price to public less
underwriting discounts and commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in full,
the total price to public, underwriting discounts and commissions and
proceeds to Company will be $80,500,000, $5,635,000 and $74,865,000,
respectively. See "Underwriters."
---------------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Shearman & Sterling, counsel for the Underwriters. It is expected that
delivery of the Shares will be made on or about June 23, 1998, at the office
of Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor
in immediately available funds.
---------------
MORGAN STANLEY DEAN WITTER
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
HAMBRECHT & QUIST
J.P. MORGAN & CO.
June 17, 1998
