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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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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 August 8, 2000, there were 5,051,207 outstanding 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.
--------
<S> <C>
Part I -- Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations......................................................... 3
Condensed Consolidated Balance Sheets................................................................. 4
Condensed 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.............................................................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks............................................. 14
Part II -- Other Information
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 15
Item 5. Other Information....................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................................ 15
Signatures............................................................................................................ 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Software $ 53,651 $ 47,667 $ 106,815 $ 88,256
Services 70,593 56,390 135,009 109,163
Hardware 3,776 6,293 7,424 18,737
------------- ------------- ------------- -------------
Total revenue 128,020 110,350 249,248 216,156
------------- ------------- ------------- -------------
Cost of revenue:
Software
Amortization 2,659 6,139 5,182 12,279
Royalties, distribution and other 8,718 8,432 16,311 13,461
Services 27,844 18,680 56,708 39,272
Hardware 3,664 5,612 6,146 15,410
------------- ------------- ------------- -------------
Total cost of revenue 42,885 38,863 84,347 80,422
------------- ------------- ------------- -------------
Gross profit 85,135 71,487 164,901 135,734
------------- ------------- ------------- -------------
Operating expenses:
Selling, general and administrative 47,735 41,801 92,369 77,062
Research and development 18,738 16,743 38,098 33,648
------------- ------------- ------------- -------------
Total operating expenses 66,473 58,544 130,467 110,710
------------- ------------- ------------- -------------
Operating income 18,662 12,943 34,434 25,024
Other income (expense), net (53) 1,280 367 3,498
------------- ------------- ------------- -------------
Income before income taxes 18,609 14,223 34,801 28,522
Provision for income taxes 6,699 5,118 12,528 10,266
------------- ------------- ------------- -------------
Net income $ 11,910 $ 9,105 $ 22,273 $ 18,256
============= ============= ============= =============
Earnings per share:
Basic $ 0.33 $ 0.25 $ 0.61 $ 0.50
============= ============= ============= =============
Diluted $ 0.32 $ 0.25 $ 0.61 $ 0.50
============= ============= ============= =============
Weighted average number of
common shares outstanding:
Basic 36,314,439 36,265,132 36,310,138 36,265,066
============= ============= ============= =============
Diluted 36,657,239 36,344,791 36,693,671 36,342,734
============= ============= ============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 18,707 $ 20,696
Accounts receivable, net of allowance for doubtful accounts of $3,626 and $5,312 123,574 125,698
Prepaid expenses 9,745 7,615
Other current assets 5,602 1,566
---------------- --------------
Total current assets 157,628 155,575
---------------- --------------
Property and equipment, net 30,194 33,110
---------------- --------------
Operating and other assets
Goodwill, software and other intangibles, net 68,182 63,038
Deferred income taxes 17,259 22,554
---------------- --------------
Total operating and other assets 85,441 85,592
---------------- --------------
Total assets $ 273,263 $ 274,277
================ ==============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 61,068 $ 59,108
Deferred revenue 17,642 12,886
Income taxes payable 32,816 38,901
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Total current liabilities 111,526 110,895
---------------- --------------
Intercompany note 18,442 39,980
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; 5,049,541
and 5,034,337 shares issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 50 50
Class B common stock, $.01 par value; 31,265,000 shares authorized; 31,265,000
issued and outstanding at June 30, 2000 and December 31,1999 313 313
Additional paid-in capital 148,963 148,925
Retained earnings (deficit) (2,741) (25,013)
Accumulated other comprehensive income (loss) (3,290) (873)
---------------- --------------
Total stockholders' equity 143,295 123,402
---------------- --------------
Total liabilities and stockholders' equity $ 273,263 $ 274,277
================ ==============
</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>
Six Months Ended
June 30
--------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Net Cash Provided By Operating Activities $ 38,495 $ 50,877
------------- -------------
Cash flows from investing activities
Proceeds from sale of marketable securities -- 3,825
Payments for purchases of property and equipment (7,769) (6,769)
Payments for purchases of software and other intangibles (11,922) (6,281)
------------- -------------
Net cash used in investing activities (19,691) (9,225)
------------- -------------
Cash flows from financing activities
Borrowings under intercompany credit agreements and notes 19,652 12,461
Payments on intercompany credit agreements and notes (40,484) (58,957)
Other 39 --
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Net cash used in financing activities (20,793) (46,496)
------------- -------------
Effect of exchange rate changes on cash and cash equivalents -- 1
------------- -------------
Net decrease in cash and cash equivalents (1,989) (4,843)
Cash and cash equivalents at beginning of period 20,696 20,740
------------- -------------
Cash and cash equivalents at end of period $ 18,707 $ 15,897
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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UNIGRAPHICS SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed 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. Certain
reclassifications have been made to the December 31, 1999 financial statements
to be consistent with the presentations as of June 30, 2000. 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, 1999.
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. The following is the calculation for both basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30 June 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net income $ 11,910 $ 9,105 $ 22,273 $ 18,256
========= ========= ========= =========
Weighted-average shares outstanding 36,314 36,265 36,310 36,265
Dilutive effect of employee and director stock options 343 80 384 78
--------- --------- --------- ---------
Diluted shares outstanding 36,657 36,345 36,694 36,343
========= ========= ========= =========
Earnings per share:
Basic $ 0.33 $ 0.25 $ 0.61 $ 0.50
========= ========= ========= =========
Diluted $ 0.32 $ 0.25 $ 0.61 $ 0.50
========= ========= ========= =========
</TABLE>
Note 3. Comprehensive Income
Comprehensive income for the three months ended June 30, 2000 and 1999
was $10.4 million and $7.2 million, respectively. Comprehensive income for the
six months ended June 30, 2000 and 1999 was $19.9 million and $13.1 million,
respectively. The difference between comprehensive income and net income for the
three months and the six months ended June 30, 2000 arose from foreign currency
translation adjustments. For the three months and the six months ended June 30,
1999, the difference arose from foreign currency translation adjustments and
unrealized holding gains on certain of the Company's investments.
6
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Note 4. Segment Information
Industry Segments
The Company's business involves operations principally in 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 and six months
ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
-------------------------- -------------------------
Operating Operating
Revenues Income Revenues Income
------------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Americas $ 67,032 $ 11,954 $ 56,687 $ 9,614
Europe 43,649 7,086 40,079 6,987
Asia Pacific 17,339 2,281 13,584 2,481
------------- ------------ ------------ -----------
Total $ 128,020 $ 21,321 $ 110,350 $ 19,082
============= ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30, Six months ended December 31,
June 30, 2000 2000 June 30, 1999 1999
-------------------------- ------------ ------------------------- -------------
Operating Total Operating Total
Revenues Income Assets Revenues Income Assets
------------- ------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Americas $ 136,385 $ 24,679 $ 167,491 $ 112,551 $ 24,052 $ 164,411
Europe 83,506 12,845 79,110 79,869 11,897 81,463
Asia Pacific 29,357 2,092 26,662 23,736 1,354 28,403
------------- ------------ ------------ ------------ ----------- -------------
Total $ 249,248 $ 39,616 $ 273,263 $ 216,156 $ 37,303 $ 274,277
============= ============ ============ ============ =========== =============
</TABLE>
7
<PAGE>
Reconciliation of operating income for the three and six months ended
June 30, 2000 and 1999 follows (in thousands)
<TABLE>
<CAPTION>
Three months ended
June 2000 June 1999
----------- -----------
<S> <C> <C>
Total operating income for reportable segments $ 21,321 $ 19,082
Unallocated software amortization costs (2,659) (6,139)
----------- -----------
Operating income $ 18,662 $ 12,943
=========== ===========
<CAPTION>
Six months ended
June 2000 June 1999
----------- -----------
Total operating income for reportable segments $ 39,616 $ 37,303
Unallocated software amortization costs (5,182) (12,279)
----------- -----------
Operating income $ 34,434 $ 25,024
=========== ===========
</TABLE>
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
$41.5 million and $37.1 million at June 30, 2000 and December 31, 1999,
respectively. Additionally, software, goodwill and other intangibles are stated
net of accumulated amortization of $35.5 million and $25.3 million at June 30,
2000 and December 31, 1999, respectively. Depreciation and amortization expense
for the three months ended June 30, 2000 and 1999 was $10.7 million and $8.8
million, respectively. Depreciation and amortization expense for the six months
ended June 30, 2000 and 1999 was $16.7 million and $17.0 million, respectively.
8
<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, 1999.
The Company generates revenue primarily from the licensing of mechanical
computer-aided-design ("CAD"), computer-aided manufacturing ("CAM"), computer-
aided engineering ("CAE"), and product data management ("PDM") software
products, and the provision of software consulting, support services and
computer equipment to users of the Company's products (CAD, CAM, CAE and PDM are
collectively referred to as "MCAD"). 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.
In 1996 EDS and General Motors ("GM") signed the Unigraphics Software
Corporate License Agreement (the "Initial UCL") for Unigraphics software and
related services. The Initial UCL was a service agreement under the umbrella
EDS/GM Master Service Agreement pursuant to which EDS and its subsidiaries
(including the Company) provided a perpetual license of the Unigraphics software
for up to 10,000 seats, maintenance services and other services. GM and the
Company have negotiated a renewal of the Initial UCL ("Renewal"), which expired
in June 1999. The Renewal is a three year agreement covering software
maintenance services, software development services, contract management
services, and new iMAN software products and services.
The agreed to contract price, excluding any additional GM product and
services charges, GM supplier purchases, and performance penalties, is $139
million. The Renewal also excludes similar products and services being provided
to Delphi Automotive Systems, which was spun off from GM. Approximately $74
million is attributable to software maintenance, $43 million will be paid for
software development, $16 million will be charged for additional iMAN software,
and the remainder will be paid for contract management and other services. The
Renewal also includes penalties for missing service levels, key measurements,
and critical deliverables. Approximately 20% of the $139 million expected
revenues are at-risk because of performance penalties. The inability of the
Company to perform in areas subject to performance penalties and any resulting
assessment of penalties could have a material adverse affect on the Company's
results of operations and financial condition in fiscal year 2000, 2001 and/or
2002.
During the six months ending June 30, 2000, approximately 14% of the
Company's revenues were attributable to products and services provided to GM
under the Initial UCL, the Renewal, and other agreements.
Effective as of January 1, 1998, the Company entered into a Management
Services Agreement ("MSA") 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 annual total revenues up to
a recently negotiated fixed fee cap of $2.5 million. MSA services to be
provided and associated charges are negotiated annually. The Company paid EDS
$6.4 million for such services in 1999, and has concluded negotiations with EDS
relative to the 2000 services and charges. For the six month period ended June
30, 2000, EDS has invoiced the Company approximately $2.3 million for services
provided during such period. 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.
9
<PAGE>
Pursuant to the Intercompany Credit Agreement dated January 1, 1998 between
the Company and EDS and similar credit agreements between EDS Finance, PLC and
certain non-U.S. subsidiaries of the Company (collectively, 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 June 30,
2000 approximately $18.4 million remains payable under the Intercompany Note.
See "Liquidity and Capital Resources" for further discussion.
Forward-looking Statements
All statements other than historical statements contained in this Quarterly
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, the European currency decline trend, the
sufficiency of liquidity and capital resources over the next twelve months,
concerns regarding performance under the Renewal agreement with GM, and any
other statements of Company's plans, objectives, expectations or intentions.
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: vigorous 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 $128.0 million during the three months ended June
30, 2000, an increase of $17.6 million from $110.4 million for the corresponding
period in 1999. Revenues were $249.2 million during the six months ended June
30, 2000, an increase of $33.0 million from $216.2 million for the corresponding
period in 1999.
Software revenues increased $6.0 million, or 13%, to $53.7 million for the
three month period ended June 30, 2000, from $47.7 million for the corresponding
period in 1999. Software revenues increased $18.5 million, or 21%, to $106.8
million for the six month period ended June 30, 2000, from $88.3 million for the
corresponding period in 1999. The increase for the three month period resulted
from strong sales performance in the Americas and Asia Pacific while European
software sales reflected modest growth period over period. The declining value
of the Euro and strong growth in the comparable period in 1999 impacted Europe's
growth for the three months ended June 30, 2000. The increase for the six month
period resulted from strong sales performance, particularly in the Americas and
Europe.
10
<PAGE>
Services revenues increased $14.2 million, or 25%, to $70.6 million for the
three month period ended June 30, 2000, from $56.4 million for the corresponding
period in 1999. Services revenues increased $25.8 million, or 24%, to $135.0
million for the six month period ended June 30, 2000, from $109.2 million for
the corresponding period in 1999. The increase resulted from professional
services growth in all geographic areas, along with software maintenance growth,
particularly in Europe and Asia Pacific. The growth in professional services
revenue has resulted from greater demand for special software development
services. Also, software maintenance revenue growth coincides with increases in
software revenue.
As planned, hardware revenues decreased $2.5 million, or 40%, to $3.8
million for the three month period ended June 30, 2000, from $6.3 million for
the corresponding period in 1999. Hardware revenues decreased $11.3 million, or
60%, to $7.4 million for the six month period ended June 30, 2000, from $18.7
million for the corresponding period in 1999. All geographic areas experienced
decreases for both the three month and six month periods. The Company expects
hardware revenues to become a smaller portion of its business.
Revenues from international operations represented 51% and 52% of total
revenues for the three months ended June 30, 2000 and 1999. Revenues from
international operations represented 48% and 51% of total revenues for the six
months ended June 30, 2000 and 1999.
Gross Profit. Gross profit was $85.1 million during the three months ended
June 30, 2000, an increase of $13.6 million from $71.5 million for the
corresponding period in 1999. Gross profit was $164.9 million during the six
months ended June 30, 2000, an increase of $29.2 million from $135.7 million for
the corresponding period in 1999. Gross profit margin was 66% for the three
months ended June 30, 2000 and 65% for the three months ended June 30, 1999.
Gross profit margin was 66% and 63% for the six months ended June 30, 2000 and
1999, respectively.
Gross profit on software revenues increased $9.2 million, or 28%, to $42.3
million for the three month period ended June 30, 2000, from $33.1 million for
the corresponding period in 1999. Gross profit on software revenues increased
$22.8 million, or 36%, to $85.3 million for the six month period ended June 30,
2000, from $62.5 million for the corresponding period in 1999. The increases
resulted primarily from strong revenue growth and lower amortization costs which
offset an increase in the Company's accrual rates for software vendor royalties
during this period.
Gross profit on services revenues increased $5.0 million, or 13%, to $42.7
million for the three month period ended June 30, 2000, from $37.7 million for
the corresponding period in 1999. Gross profit on services revenues increased
$8.4 million, or 12%, to $78.3 million for the six month period ended June 30,
2000, from $69.9 million for the corresponding period in 1999. Services gross
profit increase resulted from the increased sale of professional services and
software maintenance services.
Gross profit on hardware revenues decreased $0.6 million, or 86%, to $.1
million for the three month period ended June 30, 2000, from $.7 million for the
corresponding period in 1999. Gross profit on hardware revenues decreased $2.0
million, or 61%, to $1.3 million for the six month period ended June 30, 2000,
from $3.3 million for the corresponding period in 1999. Hardware gross profit
declined because of the Company's reduced emphasis on hardware sales resulting
in lower hardware sales volumes.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $47.7 million during the three months ended June
30, 2000, an increase of $5.9 million from $41.8 million for the corresponding
period in 1999. Selling, general and administrative expenses were $92.4 million
during the six months ended June 30, 2000, an increase of $15.3 million from
$77.1 million for the corresponding period in 1999. Selling, general and
administrative expenses represented 37% and 38% of total revenues for the three
months ended June 30, 2000 and 1999, respectively, and 37% and 36% of total
revenues for the six months ended June 30, 2000 and 1999, respectively. Selling
costs comprise salesperson salaries, commissions, benefits, travel, sales office
occupancy and other related costs. The higher selling expenses resulted from
increases in commissions and bonuses
11
<PAGE>
because of continued strong sales growth over 1999 and increased staffing to
support higher revenue growth. General and administrative costs as a percentage
of revenues were constant year-over-year.
Research and Development Costs. Research and development costs were $18.7
million for the three months ended June 30, 2000, an increase of $2.0 million
from $16.7 for the corresponding period in 1999. Research and development costs
were $38.1 million and $33.6 million for the six months ended June 30, 2000 and
1999, respectively. Research and development costs as a percentage of total
revenues were 15% for the three months ended June 30, 2000 and 1999, and 15% and
16% for the six months ended June 30, 2000 and 1999, respectively. The increase
in research and development costs have related primarily to new initiatives in
the iMAN and Collaborative Product Commerce ("CPC") areas.
Operating Income. Operating income was $18.7 million and $12.9 million for
the three months ended June 30, 2000 and 1999, respectively. Operating income
was $34.4 million and $25.0 million for the six months ended June 30, 2000 and
1999, respectively.
Other Income (Expense), Net. Other income (expense), net was ($0.1)
million and $1.3 million for the three months ended June 30, 2000 and 1999,
respectively. Other income, net was $0.4 million and $3.5 million for the six
months ended June 30, 2000 and 1999, respectively. The decrease for the three
months and six months ended June 30, 1999 in other income (expense), net
resulted from differences in the amounts of gain realized from the sale of
marketable equity securities. These securities were obtained through the
exercise of warrants in the quarter ended March 31, 1998. The warrants were
received in exchange for reduced royalty fees from a private software company
that was acquired by a public company in 1997. All such securities had been
sold as of December 31, 1999.
Provision for Income Taxes. The provision for income taxes was $6.7
million and $5.1 million for the three months ended June 30, 2000 and 1999,
respectively. The provision for income taxes was $12.5 million and $10.3
million for the six months ended June 30, 2000 and 1999, respectively. The
Company's effective tax rate was 36.0% for the three months ended June 30, 2000
and 1999, and the six months ended June 30, 2000 and 1999.
Net Income. Net income for the three months ended June 30, 2000, was $11.9
million compared to $9.1 million for the corresponding period in 1999. Net
income for the six months ended June 30, 2000, was $22.3 million and $18.3
million for the corresponding period in 1999. Basic and diluted earnings per
share of common stock were $.33 and $.32, respectively for the three months
ended June 30, 2000. Basic and diluted earnings per share of common stock were
$.25 for the three months ended June 30, 1999. Basic and diluted earnings per
share of common stock were $.61 for the six months ended June 30, 2000. Basic
and diluted earnings per share of common stock were $.50 for the six months
ended June 30, 1999.
Recent Accounting Pronouncements. Statement of Financial Accounting
Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging
Activities, which was issued in June 1998, establishes accounting and reporting
standards for derivative instruments and hedging activities. Under SFAS 133,
derivatives are recognized on the balance sheet at fair value as an asset or
liability. Changes in the fair value of derivatives are reported as a component
of other comprehensive income or recognized as earnings through the income
statement depending on the nature of the instrument. In June 1999, the FASB
issued SFAS 137 - Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133, which defers the effective date of SFAS 133 from fiscal years
beginning after June 15, 1999 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued SFAS 138 - Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an Amendment of FASB Statement No.
133, which further modifies SFAS 137. Initial application should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated and documented pursuant to the provisions of SFAS 133, as
amended. Earlier application of all of the provisions is encouraged but is
permitted only as of the beginning of any fiscal quarter that begins after the
issuance date of SFAS 133, as amended. Additionally, SFAS 133, as amended,
should not be applied retroactively to financial statements of prior periods.
The Company is currently evaluating the requirements of SFAS 133, as amended, to
determine its potential impact on the consolidated financial statements.
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Liquidity and Capital Resources
The Company's central cash management function is performed by EDS. The
Company has an Intercompany Credit Agreement with EDS under which there was no
amount outstanding at June 30, 2000. The maximum amount that the Company may
borrow at any time from EDS under the Intercompany Credit Agreement (including
certain other credit agreements between EDS Finance PLC, a wholly-owned
subsidiary of EDS, and certain non-U.S. subsidiaries of the Company) is $70
million. Amounts outstanding under the Intercompany Credit Agreement bear
interest, payable quarterly at a rate equal to one-month LIBOR plus 0.5%. The
Intercompany Credit Agreement restricts the Company from obtaining financing
from any party other than EDS without written consent from EDS, unless EDS fails
to provide funding available to the Company under the Intercompany Credit
Agreement. The Intercompany Credit Agreement terminates on December 31, 2002,
unless terminated earlier at the election of one of the parties upon occurrence
of certain events, and requires that the Company lend to EDS all excess cash of
the Company at a rate of one-month LIBID minus 0.5%.
The Company also has outstanding an Intercompany Note in the principal
amount of approximately $18.4 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 six months ended June
30, 2000 decreased $12.4 million to $38.5 million from $50.9 million in the
comparable period in the prior year. The decrease resulted primarily due to the
timing of income tax payments in the first six months of 2000 versus the
comparable period in the prior year. The Company's net cash used in investing
activities for the six months ended June 30, 2000 increased $10.5 million to
$19.7 million from $9.2 million in the same prior year period. This increase
occurred because of expenditures for software for which the Company will have
sublicensing rights through 2004. Also, there were no sales of marketable
securities. Net cash used in financing activities decreased $25.7 million to
$20.8 million for the six months ended June 30, 2000 from $46.5 million in the
six months ended June 30, 1999. This reflects lower net repayments on cash
borrowings from EDS. The Company believes currently available sources of
liquidity, including the Intercompany Credit Agreement and cash generated from
operations, should be sufficient for its operations for at least the next twelve
months.
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. The current decline in European
currencies has had a negative effect on revenues and operating performance to
date; and any continuing decline in European currencies versus the U.S. dollar
could have a material, negative effect on the Company's revenues and operating
performance for calendar year 2000. During the six months ended June 30, 2000,
international revenue represented 50% of total Company revenue. The Company's
most significant international operations are located in Germany and the United
Kingdom, which comprised 25% and 11%, respectively, of total international
revenue for the six months ended June 30, 2000. 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.
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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 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
"Impact of Changes in Exchange Rates."
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
UGS' 2000 Annual Meeting of Shareholders was held on May 19, 2000 in
St. Louis, Missouri. A total of 4,573,852 Class A Common Shares and 31,265,000
Class B Common Shares (approximately 99.8% of all shares entitled to vote at the
meeting) were represented by proxy or ballot at the meeting. The matters voted
upon at the meeting, and the votes cast with respect to each, were:
(i) Election of three Class II directors for a three-term expiring at
the 2003 Annual Meeting of Shareholders: Richard L. deNey -- 317,040,746 shares
cast for election and 183,106 shares withheld; J. Davis Hamlin -- 317,042,233
shares cast for election and 181,619 shares withheld; William P. Weber --
317,055,432 shares cast for election and 168,420 shares withheld. The terms of
the following directors continued after the meeting: John A. Adams, Paul J.
Chiapparone, Jeffrey M. Heller, John J. Mazzola, and Leo J. Thomas.
(ii) Stockholder proposal regarding approval of the Unigraphics
Solutions Inc. 2000 Incentive Plan 314,870,916 shares cast for the proposal,
1,469,082 shares cast against the proposal and 7,978 shares abstained.
(iii) Stockholder proposal regarding approval of the Unigraphics
Solutions Inc. Executive Deferral Plan 316,263,151 shares cast for the
proposal, 73,867 shares cast against the proposal and 10,958 shares abstained.
ITEM 5. OTHER INFORMATION
At the July 12, 2000 Board of Directors Meeting, the Board elected
Anthony J. Affuso President and Chief Executive Officer of the Company replacing
John J. Mazzola who previously had announced his intent to step down from those
positions. Mr. Affuso was also elected as a Class I director replacing Mr.
Mazzola for the remainder of the term expiring in 2002. Finally, Mr. Affuso was
elected as a member of the Company's Executive Committee of the Board and as a
member and chairman of the Corporate Administrative Committee replacing Mr.
Mazzola.
Also at the July 12, 2000 Board of Directors Meeting, the Board elected
D. Gilbert Friedlander as a Class II director replacing Richard L. deNey who had
resigned from the Board of Directors. Mr. Friedlander will serve the remainder
of Mr. deNey's term expiring in 2003. Mr. Friedlander is Senior Vice President,
General Counsel, and Secretary of the Company's principal shareholder,
Electronic Data Systems Corporation.
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).
10.1 Personal Services Agreement, effective June 30, 2000, between
Unigraphics Solutions Inc. and John J. Mazzola, replacing the
Personal Services Agreement dated March 1, 1998 between
Unigraphics Solutions Inc. and John J. Mazzola, incorporated
herein by reference to Exhibit 10.12 to Amendment No. 1 to
the Registration Statement on Form S-1 of the Company (File
No. 333-90641).
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10.2 Office Lease for St. Louis facility executed as of July 7,
2000, between Duke Construction Limited Partnership and
Unigraphics Solutions Inc.
27 Financial Data Schedule (for SEC information only)
(b) Reports on Form 8-K
None
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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,
Date: August 10, 2000 Chief Financial Officer and Treasurer
17
