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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 1-14155
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Unigraphics Solutions Inc.
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(Exact name of registrant as specified in its charter)
Delaware 75-2728894
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
13736 Riverport Drive, Maryland Heights, Missouri 63043
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(Address of principal executive offices)
(Zip Code)
(314) 344-5900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
--- ---
As of May 10, 1999, there were outstanding 5,000,000 shares of the
registrant's Class A Common Stock, $.01 par value per share, and 31,265,000
shares of the registrant's Class B Common Stock, $.01 par value per share.
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Part I -- Financial Information (Unaudited)
Item 1. Financial Statements
Consolidated Statements of Operations....................... 3
Consolidated Balance Sheets................................. 4
Consolidated Statements of Cash Flows....................... 5
Notes to Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks. 15
Part II -- Other Information
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signatures............................................................. 17
</TABLE>
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARES AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
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<S> <C> <C>
Revenue:
Software $ 40,588 $ 31,560
Services 52,774 37,885
Hardware 12,444 17,083
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Total revenue 105,806 86,528
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Cost of revenue:
Software:
Amortization 6,140 4,596
Royalties, distribution and other 5,029 3,277
Services 20,592 14,726
Hardware 9,798 13,906
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Total cost of revenue 41,559 36,505
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Gross profit 64,247 50,023
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Operating expenses:
Selling, general and administrative 35,261 27,229
Research and development 16,905 14,288
In-process research and development - 39,440
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Total operating expenses 52,166 80,957
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Operating income (loss) 12,081 (30,934)
Other income, net 2,218 9,692
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Income (loss) before income taxes 14,299 (21,242)
Provision for income taxes 5,147 (9,091)
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Net income (loss) $ 9,152 $ (12,151)
=========== ===========
Earnings (loss) per share:
Basic and diluted $ 0.25 $ (0.39)
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Weighted average number of
common shares outstanding:
Basic 36,265,000 31,265,000
=========== ===========
Diluted 36,340,077 31,265,000
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</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and shares amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31
1999 1998
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<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 28,372 $ 20,740
Marketable securities 5,266 8,092
Accounts receivable, net 105,111 107,379
Prepaids and other 12,275 6,383
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Total current assets 151,024 142,594
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Property and equipment, net 29,549 26,467
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Operating and other assets
Software, goodwill, and other intangibles, net 66,692 72,443
Deferred income taxes 16,282 16,149
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Total operating and other assets 82,974 88,592
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Total assets $ 263,547 $ 257,653
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 65,333 $ 59,452
Deferred revenue 15,052 12,022
Income taxes payable 50,957 39,098
Deferred income taxes - 2,771
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Total current liabilities 131,342 113,343
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Intercompany note 37,178 55,130
Stockholders' equity
Preferred stock, $.01 par value; authorized
20,000,000 shares, none issued - -
Class A common stock, $.01 par value; 168,735,000
shares authorized; 5,000,000 shares issued and 50 50
outstanding at March 31, 1999
Class B common stock, $.01 par value; 31,265,000
shares authorized; 31,265,000 shares issued and
outstanding at March 31, 1999 313 313
Additional paid-in capital 148,676 148,676
Retained earnings (deficit) (57,610) (66,762)
Accumulated other comprehensive income 3,598 6,903
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Total stockholders' equity 95,027 89,180
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Total liabilities and stockholders' equity $ 263,547 $ 257,653
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1999 1998
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 29,459 $ 29,103
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of marketable securities 2,099 10,145
Payments related to Solid Edge acquisition - (104,993)
Payments for purchases of property and equipment (5,065) (1,613)
Payments for purchases of software and other intangibles (867) (840)
Payments for purchases of marketable securities - (51)
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Net cash used in investing activities (3,833) (97,352)
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CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under Intercompany credit agreement 5,536 107,691
Payments on Intercompany credit agreement (23,556) (24,636)
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Net cash provided by (used in) financing activities (18,020) 83,055
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Effect of exchange rate changes on cash and cash equivalents 27 (193)
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Net increase in cash and cash equivalents 7,633 14,613
Cash and cash equivalents at beginning of period 20,740 11
-------- ---------
Cash and cash equivalents at end of period $ 28,373 $ 14,624
======== =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Unigraphics Solutions Inc. ("Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information. In
the opinion of management, all adjustments (consisting of only normal recurring
items) which are necessary for a fair presentation have been included. The
results of interim periods are not necessarily indicative of results which may
be expected for any other interim period or for the full year. For further
information, refer to the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
Note 2. Earnings Per Share
The Company presents both basic and diluted earnings per share. Basic
earnings per share of common stock is computed by dividing net income by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is calculated in the same manner as basic earnings per share
except that the denominator is increased to include the number of additional
common shares that would have been outstanding, assuming the exercise of all
employee stock options that would have had a dilutive effect on earnings per
share. Following is the calculation for both basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1999 1998
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(in thousands, except per share data)
<S> <C> <C>
Net income (loss) $ 9,152 $ (12,151)
Weighted-average shares outstanding 36,265 31,265
Diluted effect of employee and
director stock options 75 -
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Diluted shares outstanding 36,340 31,265
======== =========
Basic and Diluted earnings (loss)
per share $ 0.25 (0.39)
</TABLE>
Note 3. Comprehensive Income/(Loss)
Comprehensive income/(loss) for the three months ended March 31, 1999
and 1998 was $5.8 million and $(7.3) million, respectively. The difference
between comprehensive income and net income for the three months ended March 31,
1999 related to foreign currency translation adjustments and unrealized holding
gains on certain of the Company's investments. The difference between
comprehensive loss and net loss for the three months ended March 31, 1998 was
related to unrealized holding gains on certain of the Company's investment in
marketable securities.
Note 4. Segment Information
6
<PAGE>
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, engineering analysis, testing and manufacturing of
mechanical products.
Geographic Segments
The Company aggregates its operations by geographic location for management
reporting purposes. Reportable segments consist of the Americas, Europe, and
Asia Pacific. The Company uses operating income, exclusive of software
amortization costs and in-process research and development costs, to measure
segment profit or loss. The following is a summary of certain financial
information by reportable geographic segment for the three months ended March
31, 1999 and 1998 (in thousands):
Three Months Ended March 31, Three Months Ended December 31,
March 31, 1999 1999 March 31, 1999 1998
------------------- --------- ------------------ ------------
Operating Total Operating Total
Revenues Income Assets Revenues Income Assets
-------- -------- ------- -------- --------- -------
Americas 55,864 14,438 172,210 47,529 9,342 162,647
Europe 39,790 4,910 70,574 29,926 2,673 74,449
Asia Pacific 10,152 (1,127) 20,763 9,073 1,087 20,557
-------- -------- ------- -------- -------- -------
Total 105,806 18,221 263,547 86,528 13,102 257,653
-------- -------- ------- -------- -------- -------
Reconciliation of operating income/(loss) for the three months ended March
31, 1999 and 1998 follows (in thousands):
1999 1998
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Total operating income for reportable segments 18,221 13,102
Unallocated software amortization costs (6,140) (4,596)
Unallocated in-process R&D costs - (39,440)
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Operating income/(loss) 12,081 (30,934)
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There are no intercompany sales between geographic areas. All sales are from
external customers.
Note 5. Depreciation and Amortization
Property and equipment is stated net of accumulated depreciation of $30.7
million and $33.0 at March 31, 1999 and December 31, 1998, respectively.
Additionally, software, goodwill and other intangibles are stated net of
accumulated amortization of $133.9 million and $127.8 million at March 31, 1999
and December 31, 1998, respectively. Depreciation and amortization expense for
the three months ended March 31, 1999 and 1998 was $8.2 million and $6.4
million, respectively.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides scalable, integrated, enterprise-level mechanical
computer-aided design solutions that are used for virtual product development
principally in the automotive and transportation, aerospace, consumer products,
equipment and machinery, and electronics industries. For further information,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
The Company generates revenue primarily from the licensing of mechanical
CAD/CAM/CAE and product data management (collectively "MCAD") software products,
and the provision of software consulting, support services and computer
equipment to users of the Company's products. The Company operates business
units in the United States and in 29 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 and
other marketing representatives.
Pursuant to a reorganization consummated as of January 1, 1998 (the
"Reorganization"), the Company became the successor to the MCAD business of
Electronic Data Systems Corporation, a Delaware corporation ("EDS"), which
business was formerly operated within several business units of EDS. The
Company's historical financial statements reflect the results of operations,
financial condition and cash flows of the Company as a component of EDS prior to
the Reorganization and may not be indicative of actual results of operations and
financial position of the Company subsequent to the Reorganization.
In 1996 EDS and GM signed the Unigraphics Software Corporate License
Agreement (the "EDS/GM Site License" or "Site License") for Unigraphics software
and related services. The Site License is a three-year arrangement that consists
of three elements: (1) a perpetual license of the 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 was not recorded by the Company since
such upgrade was 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 over the term of
the agreement based generally on the deployment schedule. The Company recognized
Site License software license revenue of approximately $110.3 million in 1996.
Prior to the Site License, 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 the revenue and
performs substantially all of EDS' obligations under the Site License subsequent
to the Reorganization. Although less than 10% of the Company's 1998 revenues
were attributable to the products and services provided to GM under the Site
License and other agreements, receivables of $11.3 million, or approximately 11%
of the Company's accounts receivable balance at March 31, 1999 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 Master Service Agreement
were to be terminated, or if the Company (as a subcontractor to EDS or
otherwise) and GM do not to enter into a successor agreement to the Site License
upon expiration of that agreement in June 1999, the Company's financial
condition and results of operations would be materially adversely affected.
8
<PAGE>
In connection with the Reorganization, effective as of January 1,
1998, the Company entered into a Management Services Agreement with EDS pursuant
to which EDS performs various management services for the Company, including
treasury, risk management, tax and similar administrative services. The
agreement provides for the payment of fees to EDS for such services, either on a
fixed price or usage basis, which fees are generally designed to approximate
EDS' cost of providing the services, as well as a fixed fee equal to .5% of the
Company's total revenues. 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, or earlier if
the parties mutually agree. 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 the services and
estimated costs of such services 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 paid EDS $6.4 million for such services in
1998; and currently is negotiating with EDS relative to the 1999 services and
charges. There can be no assurances that the charges the Company negotiates
will, in the aggregate, be lower than the aggregate of charges the Company might
be able to negotiate with third party suppliers of such services.
Pursuant to the Intercompany Credit Agreement dated January 1, 1998
between the Company and EDS entered into in connection with the Reorganization
(the "Intercompany Credit Agreement"), the Company is required to borrow from
EDS, and EDS is required to lend to the Company, amounts required by the Company
to fund its daily cash requirements. Since the closing of the initial public
offering of the Company's Class A Common Stock referred to below, the maximum
amount available to the Company under this facility is $70 million. Effective as
of March 6, 1998, the Company issued to EDS as a dividend an Intercompany Note
in the principal amount of $73 million (the "Intercompany Note"). As of March
31, 1999 approximately $37.2 million remains payable under the Intercompany
Note. See "Liquidity and Capital Resources" for further discussion.
On June 23, 1998, the Company completed the initial public offering of
5,000,000 shares of Class A Common Stock, $.01 par value per share, of the
Company. The net proceeds of the offering were used to repay $65.1 million of
indebtedness outstanding under the Intercompany Credit Agreement.
Solid Edge Acquisition
On March 2, 1998, the Company completed the Solid Edge Acquisition for a
purchase price of $105 million (excluding approximately $2 million of
acquisition costs). The Company borrowed $105 million from EDS pursuant to the
Intercompany Credit Agreement. The cost of the Solid Edge Acquisition was
allocated to identifiable assets based on estimated fair values. Costs allocated
to identifiable intangible assets will be amortized on a straight-line basis
over the remaining estimated useful lives of the assets. Costs allocated to in-
process research and development in the amount of $39.4 million were expensed in
the three month period ended March 31, 1998. The excess of purchase price over
fair value of identifiable assets acquired was recorded as goodwill and will be
amortized on a straight-line basis over its useful life of seven years. The
Company has allocated the purchase price as follows: $3.4 million to software;
$4.0 million to acquired workforce; $39.4 million to in-process research and
development costs; and $60.2 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, net income in 1998 was significantly
less than in prior years.
Financial performance for the Solid Edge product since the acquisition
has been consistent with the projections utilized in the allocation of the
purchase price for the Solid Edge Acquisition.
Forward-looking Statements
9
<PAGE>
All statements other than historical statements contained in this Report
on Form 10-Q constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Without limitation, these
forward-looking statements include statements regarding expected future declines
in hardware revenues, future income gains to be realized from the exercise of
warrants and subsequent sale of related marketable securities, the Company's
effective tax rate for the remainder of calendar year 1999, the Company's Year
2000 exposure, the Company's exposure resulting from the introduction in 1999 of
a new currency (the "euro") in certain European countries, and the sufficiency
of liquidity and capital resources over the next twelve months. Any Form 10-K,
Annual Report to Shareholders, Form 10-Q or Form 8-K of the Company may include
these and other forward-looking statements. In addition, other written or oral
statements which constitute forward-looking statements have been made or may in
the future be made by the Company, including statements regarding future
operating performance, short- and long-term revenue and earnings growth, the
value of new contract signings, and MCAD industry growth rates and the Company's
performance relative thereto. These forward-looking statements rely on a number
of assumptions concerning future events, and are subject to a number of
uncertainties and other factors, many of which are outside the Company's
control, that could cause actual results to differ materially from such
statements. These include, but are not limited to: competition in the MCAD
industry and the impact of such competition on pricing, revenues and margins;
market acceptance of new Company product or service offerings and costs
associated with the development and marketing of such offerings; the financial
performance of current and future customer contracts; the cost of attracting and
retaining highly skilled personnel; the ability of the Company to successfully
integrate its operations into a single, effective and efficient entity; and the
significant quarterly fluctuations in the Company's operating results caused by,
among other factors, the timing of orders and shipments. Such factors are
described in more detail in the Company's most recent Annual Report on Form 10-K
beginning on page 21.
The Company disclaims any intention or obligation to update or revise any
forward-looking statements whether as a result of new information, future events
or otherwise.
RESULTS OF OPERATIONS
Revenues. Revenues were $105.8 million during the three months ended
March 31, 1999, an increase of $19.3 million from $86.5 million for the
corresponding period in 1998.
Software revenues increased $9.0 million, or 29%, to $40.6 million for
the three month period ended March 31, 1999, from $31.6 million for the
corresponding period in 1998. The increase resulted from strong sales
performance in Europe and the Americas and the addition of the Solid Edge/EMS
product line.
Services revenues increased $14.9 million, or 39%, to $52.8 million for
the three month period ended March 31, 1999, from $37.9 million for the
corresponding period in 1998. The increase resulted from software maintenance
growth in all geographic areas, particularly Europe and Asia Pacific, and
professional services growth in the Americas and Europe.
As anticipated, hardware revenues decreased $4.6 million, or 27%, to
$12.4 million for the three month period ended March 31, 1999, from $17.0
million for the corresponding period in 1998. The Americas and Europe
experienced decreases while Asia Pacific was flat. The Company expects hardware
revenues to continue to decline and to become a smaller portion of its business.
Revenues from international operations represented 51% and 48% of total
revenues for the three months ended March 31, 1999 and 1998, respectively.
Strong Europe growth resulted in the increase in the international percentage.
Gross Profit. Gross profit was $64.2 million during the three months
ended March 31, 1999, an increase of $14.2 million from $50.0 million for the
corresponding period in 1998. Gross profit margin was 61% and 58% for the three
months ended March 31, 1999 and 1998, respectively.
10
<PAGE>
Gross profit on software revenues increased $5.7 million, or 24%, to
$29.4 million for the three month period ended March 31, 1999, from $23.7
million for the corresponding period in 1998. The increases resulted primarily
from strong revenue growth that more than offset the additional amortization of
goodwill and software intangibles arising from the acquisition of the Solid Edge
product line.
Gross profit on services revenues increased $9.0 million, or 39%, to
$32.2 million for the three month period ended March 31, 1999, from $23.2
million for the corresponding period in 1998. The increases resulted primarily
from higher software maintenance revenues.
Gross profit on hardware revenues decreased $0.5 million, or 17%, to $2.6
million for the three month period ended March 31, 1999, from $3.1 million for
the corresponding period in 1998. This is a continuation of the trends of lower
finders fees, a change in the mix of hardware sales to lower margin computers
and lower overall volume resulting from reduced emphasis on selling hardware.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $35.2 million during the three months ended March
31, 1999, an increase of $8.0 million from $27.2 million for the corresponding
period in 1998. Selling, general and administrative expenses represented 33% and
31% of total revenues for the three months ended March 31, 1999 and 1998,
respectively. Selling costs comprise salesperson salaries, commissions and
benefits, travel, sales office occupancy and other related costs. Higher
selling, general and administrative expenses resulted from, among other factors,
increased selling costs associated with the addition of the Solid Edge product
line, implementation of the new enterprise software systems, and expenses
associated with being a public company.
Research and Development Costs. Research and development costs were $16.9
million for the three months ended March 31, 1999, an increase of $2.6 million
from $14.3 million for the same period in 1998. Research and development costs
as a percentage of total revenues were 16% and 17% for the three months ended
March 31, 1999 and 1998, respectively. The increase in research and development
costs resulted principally from the Solid Edge Acquisition and support of
initiatives related to the Company's IMAN and ProductVision software products.
In-Process Research and Development Costs. In-process research and
development for the three months ended March 31, 1998 includes the write off of
in-process research and development costs of $39.4 million associated with the
acquisition of the Solid Edge product line in the first quarter of 1998.
Operating Income (Loss). Operating income (loss) was $12.1 million and
$(30.9) million for the three months ended March 31, 1999 and 1998,
respectively.
Other Income, Net. Other income, net was $2.2 million and $9.7 million
for the three months ended March 31, 1999 and 1998, respectively. The decrease
resulted from differences in the amount of gain realized from the sale of
marketable equity securities in each of the respective quarters. These
securities were obtained through the exercise of warrants in the quarter ended
March 31, 1998. The warrants were received in exchange for reduced royalty fees
from a private software company that was acquired by a public company in 1998.
The Company anticipates that additional gains on similar transactions will
continue to be reflected in its results of operations in the second quarter
1999. The amount of such gains will depend on existing market conditions at the
time of sale. Interest expense associated with the intercompany loan was $0.4
million for the three months ended March 31, 1999.
Provision for Income Taxes. The provision for income taxes was $5.1
million and $(9.1) million for the three months ended March 31, 1999 and 1998,
respectively. The Company's effective tax rate was 36.0% and 42.8% for the three
months ended March 31, 1999 and 1998, respectively. The Company's effective tax
rate was higher than normal in the first quarter of 1998 as a result of the
write-off of in-process research and development costs discussed above.
11
<PAGE>
Net Income (Loss). Net income (loss) for the three months ended March 31,
1999, was $9.2 million compared to $(12.2) million for the corresponding quarter
in 1998. Basic and diluted earnings (loss) per share of common stock was $0.25
and $(0.39) for the three months ended March 31, 1999 and 1998, respectively.
Segment Information. In the aggregate, revenues for the geographic areas
were higher in the three months ended March 31, 1999 compared with the three
months ended March 31, 1998. Operating income increased in Americas and Europe
but fell in Asia Pacific in the three months ended March 31, 1999 as compared
with the three months ended March 31, 1998.
Inflation. The Company believes that inflation generally had little
effect on its results of operations for the periods presented.
Recent Accounting Pronouncements. In June 1998, Statement of financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
provisions of SFAS No. 133 are effective for financial statements beginning
after June 15, 1999, although early adoption is allowed. The Company will adopt
this statement on January 1, 2000. The financial impact of adopting this
statement has not been determined.
LIQUIDITY AND CAPITAL RESOURCES
The Company's central cash management function is performed by EDS. The
Company has Intercompany Credit Agreements with EDS under which there were no
amounts outstanding at March 31, 1999. The maximum amount that the Company may
borrow at any time from EDS under the Intercompany Credit Agreements is $70
million. Amounts outstanding under the Intercompany Credit Agreements bear
interest, payable quarterly at a rate equal to one-month LIBOR plus 0.5%. The
Intercompany Credit Agreements restrict 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
Agreements. The Intercompany Credit Agreements terminate on December 31, 2002,
unless terminated earlier at the election of one of the parties upon occurrence
of certain events, and require that the Company lend to EDS all excess cash of
the Company at a rate of one-month LIBID minus 0.5%.
The Company also has outstanding an Intercompany Note in the principal
amount of $37.2 million payable to EDS on March 6, 2001. The Intercompany Note
bears interest, payable semiannually, at a rate equal to one-month LIBID minus
0.5%.
The Company's net cash provided by operations for the three months ended
March 31, 1999 increased $0.4 million to $29.5 million from $29.1 million in the
comparable period in the prior year. The Company's net cash used in investing
activities for the three months ended March 31, 1999 decreased $93.5 million to
$3.8 million from $97.3 million in the same prior year period. The decrease
resulted primarily from cash payments made in the first quarter of 1998 in
connection with the acquisition of the Solid Edge product line. Cash flows
provided by (used in) financing activities decreased $101.1 million to $(18.0)
million for the three months ended March 31, 1999 from $83.1 million, primarily
because of $107.7 million of borrowings under the Intercompany Credit Agreements
during the first quarter 1998. The Company believes currently available sources
of liquidity, including the Intercompany Credit Agreements and cash generated
from operations, will be sufficient for its operations for at least the next
twelve months.
YEAR 2000
The Year 2000 ("Y2K") problem refers to the concern that many existing
computer programs may fail to accurately process date information beyond the
year 1999 because such programs do not properly recognize and/or process years
that begin with "20" instead of the familiar "19."
12
<PAGE>
With respect to the Company's current software product offerings, the
Company believes that its product offerings are "Year 2000 compliant." The
Company has conducted Y2K compliance reviews of Company-developed code for the
current versions of Unigraphics, IMAN, Parasolid, Solid Edge and EMS software
and believes this software to be compliant. Additionally, regarding third-party-
supplied software contained within, or offered in conjunction with, Company-
developed software, the Company has either tested such code for Y2K compliance
or has received assurances from third party suppliers that such code will be
compliant prior to the Year 2000.
Regarding the installed base of Company-supported software products,
customers using older software product versions which are found to be non-
compliant, in most cases, can purchase upgrades that are Y2K compliant. However,
customers who have written their own programs that manipulate, calculate, store
or display dates represented as two digits may need to modify such internal
programs to avoid Y2K problems.
While there can be no assurances that the Company will not be exposed to
potential claims resulting from software product problems associated with the
Y2K problem, the Company does not currently believe that the effects of any Y2K
non-compliance in the Company's current software products or in the Company's
installed base of software will result in any material adverse impact on the
Company's business or results of operations.
The Company, in conjunction with its parent EDS and separately, is in the
process of reviewing, remediating, upgrading, and/or acquiring new internal
business systems and services, including the implementation of the SAP
enterprise resource planning software system. In accordance with the Management
Services Agreement between the Company and EDS, the Company will continue using
certain business systems of EDS in the near term. The business systems of EDS
utilized by the Company principally include those that EDS has identified as
"mission critical" systems, such as payroll, accounts receivable, accounts
payable, tax administration and corporate administration. The Company has been
advised by EDS that through January 25, 1999, EDS had completed assessment of
approximately 97% of its mission critical projects, renovation of approximately
85% of such projects, testing of approximately 15% of such projects and
implementation of approximately 35% of such projects. EDS has advised the
Company that it expects to complete the Y2K remediation of its mission critical
projects by the end of the second quarter of 1999 and substantially all of its
non-mission critical projects by the end of the third quarter of 1999.
EDS and the Company have also identified projects related to the Company
which are deemed to be non-mission critical. Non-mission critical systems
include non-IT systems such as elevator operations, HVAC, and security systems.
The Company believes that such system failures would not materially impact the
business. Many of the non-mission critical projects will not be remediated for
Y2K compliance for one or more reasons including retirement of the system and
redundancy with other systems, among other reasons. EDS and/or the Company plan
to complete the remediation process for most non-mission critical projects
identified for remediation by the end of the third quarter of 1999. The
remediation of certain non-mission critical systems may extend into the fourth
quarter of 1999.
The failure by EDS to timely complete the Y2K remediation process for
those EDS mission-critical systems which the Company plans to continue using may
have a material adverse impact on the Company's business or results of
operation.
Concurrently with EDS' remediation of mission-critical and other systems
used by the Company, the Company has implemented in the United States enterprise
application software systems that have replaced many EDS mission critical
systems. Such Y2K compliant enterprise application software packages, including
general ledger, accounting, accounts payable and receivable, payroll, and
others, were implemented in April 1999 in the United States. Certain new
financial systems also will be installed in Canada, Germany and the United
Kingdom during 1999. The Company plans to phase in new enterprise systems in its
other non-U.S. operations during and after 1999. If implementation of any such
new internal system were delayed, the Company would rely on remediated EDS or
Y2K compliant previous Company systems until such time as new systems can be
installed. The Company had planned to install such new enterprise systems
regardless of the Y2K problem; therefore, costs
13
<PAGE>
associated with these new systems have not been reflected in the costs
associated with addressing the Company's YZK issues.
The Company also is in the process of reviewing for Y2K compliance other
unique, internal business systems not included in the EDS systems or the new
enterprise systems mentioned above. Systems being reviewed include certain end
user hardware, operating systems and applications, server hardware and software,
telecommunications hardware, software and services, and other Company
applications. Y2K reviews of most of these systems and services used in the
United States have been completed. Y2K reviews of such systems and services used
at international locations are in progress. In many cases compliance will be
achieved by installing upgrades or revisions provided by third parties in
accordance with existing agreements. In other cases, compliance will be achieved
through Company remediation efforts or planned technology refresh purchases.
Finally, with respect to suppliers and vendors of key products and
services, in many cases the Company acquires such products and services using
existing EDS purchase arrangements. The Company understands that EDS has queried
its vendors regarding Y2K compliance. Using the results of its contacts with
suppliers, EDS has compiled a database listing thousands of products and
services and indicating which items are compliant. The Company has relied on
this information in an attempt to ensure that certain items acquired from third
party suppliers pursuant to EDS purchase agreements are Y2K ready. Although the
Company cannot be certain that all mission critical and non-mission critical
supplier products and services are Y2K ready, the Company will continue to study
and evaluate the Y2K compliance of key vendors.
The costs incurred by the Company to achieve Y2K compliance will be
expensed as incurred. Costs incurred to make EDS' systems Y2K compliant will be
paid by EDS, however such costs may be reflected in charges EDS bills to
internal users such as the Company. The Company is still analyzing the
additional costs to make its internal hardware and software systems Y2K ready.
At this time, the Company estimates the historical and future costs of
remediation and planned technology upgrades or replacements are not more than
$500,000.
The Company believes the worst case scenario would be the Company's
inability to effectively implement the enterprise systems coupled with EDS'
failure to upgrade certain mission critical internal systems upon which the
Company would have to rely until the enterprise system is implemented. If these
events were to occur, the Company would have to rely, in part, on manual
processes or reinstallation of older systems resulting in increased costs and
perhaps a material adverse impact on overall financial performance.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the "euro" as their common legal currency and established
fixed conversion rates between their existing sovereign currencies and the euro.
The euro now trades on currency exchanges and is available for non-cash
transactions. The existing sovereign currencies will remain legal tender in the
participating countries during the transition period ending on January 1, 2002.
Beginning on that date, the participating countries will issue new euro-
denominated currency for use in cash transactions and the existing sovereign
currencies will no longer be legal tender. The Company operates in the countries
which have adopted the euro ("Eurozone") and in most of the other countries of
the European Union that initially are not participating in the euro conversion.
In the near term, EDS will continue to provide many internal systems
services to the Company (including purchasing, accounting, and billing system
services) throughout Europe under the Master Services Agreement between EDS and
the Company. As of January 1, 1999, EDS is providing systems with the capability
to trade with customers and suppliers in the euro currency. The Company has also
been informed that, by the fourth quarter of 1999, EDS' European systems will be
updated to provide for dual reporting in euro currency and to allow migration
from the existing currencies to the euro over the following two-year period.
Concurrently, the Company is in the process of replacing and upgrading many of
the internal systems currently provided by EDS. The new Company systems are
planned to be operational throughout Europe on or before January 1, 2002, the
end of the euro transition period, and will accommodate business in euros.
Assuming timely upgrade of current systems and
14
<PAGE>
implementation of relevant replacement systems, the Company does not expect to
incur any material incremental costs to update current systems or to install new
systems having euro-related functionality. Although the Company currently has no
reason to believe that relevant system improvements will be not be timely
implemented, a failure to timely install internal systems to handle business in
euros could have a material impact on the Company's financial condition or
results of operation.
Within the Eurozone, the Company prices its products on an individual
country basis. Effective January 1, 1999 and periodically thereafter during the
transition period, the Company will establish product prices and quote such
prices in both local currencies and the euro. The pricing in euros for similar
products and services is not expected to be identical in the different
countries; however the price differentials are not expected to be significant,
thereby minimizing any negative competitive impact as a result of pricing
transparency. At this time, the Company does not believe the conversion will
have a material adverse impact on its competitiveness in Europe. However, the
Company will continue to analyze euro-related developments; and there can be no
assurance that the euro-conversion program will not have a material adverse
effect on the Company's financial condition or results of operations.
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 three months ended
December 31, 1998, international revenue represented 51% of total Company
revenue. The Company's most significant international operations are located in
Germany and the United Kingdom, which comprised 27% and 14%, respectively, of
total international revenue for the three months ended March 31, 1999. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has market risks primarily relating to changes in the value
of marketable securities and changes in foreign exchange rates. The Company has
entered into various agreements for the purpose of hedging against these risks.
The hedging agreements are in the form of puts and calls which establish the
lowest and highest prices that the Company may sell the securities. These
agreements expire at various dates through 1999. The Company does not enter into
financial instrument transactions for trading purposes. Additional information
about the Company's risk related to changes in foreign exchange rates is
contained in Item 2., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under "Euro Conversion" and "Impact of
Changes in Exchange Rates."
15
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
-------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Unigraphics Solutions Inc.,
incorporated herein by reference to Exhibit 3.1 to Amendment No. 1
to the Registration Statement on Form S-1 of the Company (File No.
333-48261).
3.2 Amended and Restated Bylaws of Unigraphics Solutions Inc., as
amended, incorporated herein by reference to Exhibit 3.2 to
Amendment No. 1 to the Registration Statement on Form S-1 of the
Company (File No. 333-48261).
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
None.
16
<PAGE>
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized and in his capacity as Chief Financial
Officer.
UNIGRAPHICS SOLUTIONS INC.
---------------------------------------
(Registrant)
By /s/ Douglas E. Barnett
---------------------------------------
(Douglas E. Barnett, Vice President and
Date: May 13, 1999 Chief Financial Officer)
17
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<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> MAR-31-1999 MAR-31-1998
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<LOSS-PROVISION> 493 181
<INTEREST-EXPENSE> 418 0
<INCOME-PRETAX> 14,299 (21,242)
<INCOME-TAX> 5,147 (9,091)
<INCOME-CONTINUING> 9,152 (12,151)
<DISCONTINUED> 0 0
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