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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1996
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 0-9722
INTERGRAPH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 63-0573222
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Intergraph Corporation
Huntsville, Alabama 35894-0001
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(205) 730-2000
-----------------
(Telephone Number)
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
Common stock, par value $.10 per share: 47,044,424 shares
outstanding as of June 30, 1996
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INTERGRAPH CORPORATION
FORM 10-Q
June 30, 1996
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1996 and 2
December 31, 1995
Consolidated Statements of Operations for the quarters
ended June 30, 1996 and 1995 3
Consolidated Statements of Operations for the six months
ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I. FINANCIAL INFORMATION
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- ------------------------------------------------------------------------------
June 30, December 31,
1996 1995
- ------------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 37,081 $ 56,407
Accounts receivable, net 295,735 324,051
Inventories 104,032 111,813
Refundable income taxes 5,715 6,391
Other current assets 37,619 43,190
- ------------------------------------------------------------------------------
Total current assets 480,182 541,852
Investments in affiliated companies 15,167 11,636
Other assets 61,539 59,900
Property, plant, and equipment, net 195,317 212,657
- ------------------------------------------------------------------------------
Total Assets $752,205 $826,045
==============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 36,758 $ 54,352
Accrued compensation 52,398 51,301
Other accrued expenses 59,643 72,479
Billings in excess of sales 53,911 63,707
Income taxes payable 4,793 6,720
Short-term debt and current maturities
of long-term debt 27,585 32,153
- ------------------------------------------------------------------------------
Total current liabilities 235,088 280,712
Deferred income taxes 3,850 3,881
Long-term debt 33,062 37,388
- ------------------------------------------------------------------------------
Total liabilities 272,000 321,981
- ------------------------------------------------------------------------------
Shareholders' equity:
Common stock, par value $.10 per share -
100,000,000 shares authorized;
57,361,362 shares issued 5,736 5,736
Additional paid-in capital 233,428 233,940
Retained earnings 387,221 408,791
Cumulative translation adjustment 4,185 8,650
- ------------------------------------------------------------------------------
630,570 657,117
Less - cost of 10,316,938 treasury shares at
June 30, 1996 and 10,501,309 treasury
shares at December 31, 1995 (150,365) (153,053)
- ------------------------------------------------------------------------------
Total shareholders' equity 480,205 504,064
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $752,205 $826,045
==============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- ------------------------------------------------------------------------------
Quarter Ended June 30, 1996 1995
- ------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $ 174,915 $ 161,646
Maintenance and services 93,251 98,521
- ------------------------------------------------------------------------------
Total revenues 268,166 260,167
- ------------------------------------------------------------------------------
Cost of revenues
Systems 112,973 101,326
Maintenance and services 53,823 57,454
- ------------------------------------------------------------------------------
Total cost of revenues 166,796 158,780
- ------------------------------------------------------------------------------
Gross profit 101,370 101,387
Product development 25,914 29,530
Sales and marketing 67,076 69,490
General and administrative 23,129 23,983
Restructuring charge --- 7,470
- ------------------------------------------------------------------------------
Loss from operations ( 14,749) ( 29,086)
Interest expense ( 1,182) ( 870)
Interest income 395 348
Gains on sales of investments in
affiliated companies --- 5,596
Equity in earnings of affiliated companies 1,738 1,454
Other income (expense) - net ( 1,381) 600
- ------------------------------------------------------------------------------
Loss before income taxes ( 15,179) ( 21,958)
Income taxes --- ---
- ------------------------------------------------------------------------------
Net loss $( 15,179) $( 21,958)
==============================================================================
Net loss per share $( .32) $( .48)
==============================================================================
Weighted average shares outstanding 46,922 45,929
==============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended June 30, 1996 1995
- ------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $ 338,099 $ 325,688
Maintenance and services 186,773 191,808
- ------------------------------------------------------------------------------
Total revenues 524,872 517,496
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Cost of revenues
Systems 218,481 206,336
Maintenance and services 109,620 111,625
- ------------------------------------------------------------------------------
Total cost of revenues 328,101 317,961
- ------------------------------------------------------------------------------
Gross profit 196,771 199,535
Product development 51,249 59,670
Sales and marketing 129,454 136,808
General and administrative 47,554 47,269
Restructuring charge --- 7,470
- ------------------------------------------------------------------------------
Loss from operations ( 31,486) ( 51,682)
Interest expense ( 2,405) ( 1,830)
Interest income 880 889
Gains on sales of investments in
affiliated companies 9,373 5,596
Equity in earnings of affiliated companies 3,918 2,403
Other income (expense) - net ( 1,850) 194
- ------------------------------------------------------------------------------
Loss before income taxes ( 21,570) ( 44,430)
Income taxes --- ---
- ------------------------------------------------------------------------------
Net loss $( 21,570) $( 44,430)
==============================================================================
Net loss per share $( .46) $( .97)
==============================================================================
Weighted average shares outstanding 46,947 45,766
==============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended June 30, 1996 1995
- ------------------------------------------------------------------------------
(In thousands)
Cash provided by (used for):
Operating Activities:
Net loss $(21,570) $(44,430)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 38,211 39,379
Non-cash portion of restructuring charge --- 6,900
Collection of income tax refunds 1,811 22,109
Gains on sales of investments in
affiliated companies ( 9,373) ( 5,596)
Equity in earnings of affiliated companies ( 3,918) ( 2,403)
Net changes in current assets and liabilities 81 9,837
- -----------------------------------------------------------------------------
Net cash provided by operating activities 5,242 25,796
- -----------------------------------------------------------------------------
Investing Activities:
Purchase of property, plant, and equipment (17,092) (21,223)
Capitalized software development costs ( 9,882) (13,470)
Proceeds from sales of investments in
affiliated companies 9,761 7,028
Other ( 652) ( 3,810)
- -----------------------------------------------------------------------------
Net cash used for investing activities (17,865) (31,475)
- -----------------------------------------------------------------------------
Financing Activities:
Gross borrowings 10,197 13,639
Debt repayment (19,636) (32,620)
Proceeds of employee stock purchases 1,822 1,976
Proceeds of exercise of stock options 244 1,571
- -----------------------------------------------------------------------------
Net cash used for financing activities ( 7,373) (15,434)
- -----------------------------------------------------------------------------
Effect of exchange rate changes on cash 670 2,190
- -----------------------------------------------------------------------------
Net decrease in cash and cash equivalents (19,326) (18,923)
Cash and cash equivalents at beginning of period 56,407 61,393
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 37,081 $ 42,470
=============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the
interim periods presented.
Certain reclassifications have been made to the previously
reported consolidated balance sheet at December 31, 1995
and to the consolidated statements of operations and cash
flows for the six months ended June 30, 1995 to provide
comparability with the current period presentation.
NOTE 2: In October 1995, the Company entered into a three
year, $100 million revolving credit agreement with a group
of lenders. This line of credit represents the Company's
primary source of external funding. At May 31, 1996, the
Company did not meet the cumulative minimum required level
of earnings before income taxes, interest, and non-cash
items required by the agreement, and by terms of the agreement
the line of credit was reduced to $75 million. As of June 30,
1996, the Company was not in compliance with the capital
expenditure covenant of the agreement. The lenders have
stated their desire to renegotiate the financial covenants
prior to providing a waiver of default for failure to
comply with the capital expenditure covenant. The Company
expects to successfully negotiate modifications to the
financial covenants resulting in the ability to comply
with the modified covenants in the future. The lenders
have also stated that an availability reserve of $25
million will be placed on the line of credit until the
Company has met the modified financial covenants for a
consecutive six month period, effectively reducing the
line to $50 million for that period. The lenders have
stated that they do not plan to exercise any remedies of
the default condition, which include but are not limited
to termination of the agreement with all obligations under
the agreement becoming immediately due and payable.
An international subsidiary of the Company has a $21
million term loan agreement with a bank, guaranteed by the
parent company, which includes cross-default provisions
with the Company's revolving credit agreement. As such,
the Company was not in compliance with the cross-default
provisions included in the term loan agreement as of June
30, 1996. The bank has agreed to waive its remedies of
this default condition.
NOTE 3: Inventories are stated at the lower of average cost or
market and are summarized as follows:
------------------------------------------------------------
June 30, December 31,
1996 1995
------------------------------------------------------------
(In thousands)
Raw materials $ 30,132 $ 36,336
Work-in-process 23,153 25,037
Finished goods 20,808 17,140
Service spares 29,939 33,300
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Totals $104,032 $111,813
============================================================
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: Property, plant, and equipment - net includes
allowances for depreciation and amortization of
$304.5 million and $304.6 million at June 30, 1996 and
December 31, 1995, respectively.
NOTE 5: In the quarter ended March 31, 1996, the Company sold
its stock investment in an affiliated company at a gain of
$9.4 million ($.20 per share). The gain is included in
"Gains on sales of investments in affiliated companies" in
the consolidated statement of operations for the six
months ended June 30, 1996.
In the quarter ended June 30, 1995, the Company sold one
of its subsidiaries at a gain of $5.0 million ($.11 per
share). The subsidiary was not significant to the
Company's results of operations. The gain is included in
"Gains on sales of investments in affiliated companies" in
the consolidated statements of operations for the quarter
and six months ended June 30, 1995.
NOTE 6: During the second quarter of 1995, the Company
undertook a restructuring program designed to further
adapt the Company's cost structure to changed industry and
market conditions. The program, as originally planned,
consisted of direct reductions in workforce, other
workforce reductions through attrition, and disposition of
four unprofitable non-core business units over the twelve
month period ending June 30, 1996. The program, had it
been fully executed with respect to the four business
units, would have provided an operating expense reduction
of approximately $100 million annually on a prospective
basis. Of this total anticipated annual savings,
approximately $66 million was to be derived from
disposition of the business units. As of June 30, 1996,
the Company does not have committed buyers for these
business units. The Company is continuing its efforts to
sell these businesses and does not anticipate incurrence
of a loss on the sale of any of the units. Revenues and
losses of the four business units totaled $31 million and
$15 million, respectively, for the first half of 1996 ($39
million and $20 million, respectively, for the first half
of 1995), and their total assets are approximately $45
million. The Company estimates annual savings related to
restructuring actions taken thus far under the plan of $35
million, derived primarily from reduced employee
headcount.
The second quarter 1995 restructuring charge totaled $7.5
million, primarily for employee severance pay and related
costs. Approximately 450 positions were eliminated
through direct reductions in workforce, with approximately
350 others eliminated through attrition. All employee
groups were affected, but the majority of eliminated
positions derived from the research and development,
systems engineering and support, and sales and marketing
areas. The total cash expenditure through December 31,
1995 was $3.6 million. Cash expenditures during the first
half of 1996 were insignificant. The $7.5 million charge
is included in "Restructuring charge" in the 1995
consolidated statement of operations.
Unrelated to the 1995 restructuring plan, the Company
announced in July 1996 its intention to sell its 50%
ownership interest in Bentley Systems, Inc. See
Management's Discussion and Analysis of Financial
Condition and Results of Operations for further
description of the Company's relationship with Bentley.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7: Supplementary cash flow information is summarized as follows:
Changes in current assets and liabilities, net of the
effects of a business acquisition and divestiture and
restructuring charges, in reconciling net loss to net cash
provided by operations are as follows:
-----------------------------------------------------------------
Cash Provided By (Used For) Operations
Six Months Ended June 30, 1996 1995
-----------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $23,187 $53,258
Inventories 8,718 ( 7,495)
Refundable income taxes ( 425) ( 1,685)
Other current assets 5,728 ( 7,036)
Increase (decrease) in:
Trade accounts payable (17,036) 66
Accrued compensation and other
accrued expenses ( 8,510) ( 611)
Billings in excess of sales ( 9,012) (24,984)
Income taxes payable ( 2,569) ( 1,676)
-----------------------------------------------------------------
Net changes in current assets
and liabilities $ 81 $ 9,837
=================================================================
Cash payments for income taxes totaled $2,784,000 and
$2,136,000 for the six months ended June 30, 1996 and
1995, respectively. Cash payments for interest during
those periods totaled $2,286,000 and $1,396,000,
respectively.
There were no significant non-cash investing and financing
transactions in the first half of 1996. Investing and
financing transactions in the first half of 1995 that did
not require cash consisted of acquisition of a business
for total consideration of $7,500,000, consisting of
issuance of 797,931 shares of the Company's common stock
and the granting of options on 148,718 of the Company's
shares to employees of the acquired company.
NOTE 8: Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of. For long-lived
assets and certain intangible assets to be held and used
by an entity, including goodwill, the Statement requires a
review for impairment whenever events or changes in
circumstances indicate that the carrying amount of an
asset may not be recoverable, including an estimate of the
future cash flows expected to result from use of the asset
and its eventual disposition. An impairment loss, based
on a comparison of the carrying value to the fair value of
the asset, must be recognized if the sum of the expected
future cash flows from the asset is less than the carrying
amount of the asset. For long-lived assets and certain
identifiable intangible assets to be disposed of, the
Statement requires financial statement reporting at the
lower of the carrying amount or fair value of the asset
less cost to sell. Application of this Statement did not
materially affect the Company's results of operations or
financial position in the first half of 1996.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9: Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, which is
effective for transactions entered into during calendar
year 1996 for the Company, establishes accounting and
reporting standards for stock-based employee compensation
plans including, with respect to the Company, stock
options and employee stock purchase plans.
The Statement defines a fair value-based method of
accounting for employee stock options under which
compensation cost is measured at the date options are
granted and recognized by charges to expense over the
employees' service periods, and it encourages entities to
adopt that method of accounting. It also allows entities
to continue to measure compensation cost using the method
prescribed under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, under
which compensation expense is recognized for the excess,
if any, of the market price of the stock at grant date
over the amount the employee must pay to acquire the
stock. The Company, under the provisions of APB No. 25,
recognizes no compensation expense for employee stock
options when options are granted to employees at a price
equal to the market price of the Company's stock at the
date of grant, and recognizes no compensation expense for
the price discount given its employees under its employee
stock purchase plan. The Company has elected to remain
under the provisions of APB No. 25 with respect to its
employee stock options that are granted at market price at
date of grant, and with respect to its employee stock
purchase plan. This decision will result in recognition
of no compensation expense for stock options or employee
stock purchases in 1996 and future years. However, in
accordance with the disclosure provisions of the
Statement, and commencing with its 1996 Annual Report to
Shareholders, the Company will provide proforma basis
information to reflect results of operations and earnings
per share had compensation expense been recognized for
these items.
NOTE 10: In January 1995, the Company acquired all of the
outstanding stock of InterCAP Graphics Systems, Inc. for
total consideration of $7.5 million, consisting of
issuance of 797,931 shares of the Company's common stock
and the granting of stock options on 148,718 of the
Company's shares to employees of InterCAP. InterCAP is
engaged in the business of designing and producing
computer software systems that assist in creating,
editing, converting and presenting technical illustrations
used by large manufacturing firms. The accounts and
results of operations of InterCAP have been combined with
those of the Company since the date of acquisition using
the purchase method of accounting. The acquisition has
not had a material effect on the Company's results of
operations.
INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings. In the second quarter of 1996 the Company incurred a
net loss of $.32 per share on revenues of $268.2 million versus a
loss in the second quarter of 1995 of $.48 per share on revenues
of $260.2 million. For the first half of 1996, the Company lost
$.46 per share on revenues of $524.9 million versus a loss of
$.97 per share on revenues of $517.5 million for the same prior
year period. The first half 1996 loss included a $9.4 million
($.20 per share) gain on the sale of an investment in an
affiliated company. The second quarter and first half 1995 loss
included a $7.5 million ($.16 per share) restructuring charge
(see "Restructuring" below) and a $5.0 million gain ($.11 per
share) on the sale of a subsidiary operation. Losses excluding
these non-recurring items and all other items of non-operating
income and expense totaled $.67 per share in the first half of
1996 versus $.97 per share for the first half of 1995. This $.30
per share improvement results primarily from a 6% decline in
operating expenses. The Company's first half 1996 loss from
operations results primarily from a revenue shortfall and from
declining gross margins. The Company believes its new operating
system, software application offerings, and hardware architecture
strategies will prove to be the correct choices; however, revenue
to date associated with new software product offerings has not
met expectations, resulting in a revenue base that is not
adequate to cover operating expenses.
Remainder of the Year. The Company expects that current industry
conditions characterized by rapidly changing technologies, demand
for higher performance and lower priced products, intense
competition, shorter product cycles, and by development and
support of software standards that result in less specific
hardware and software dependencies by customers will continue in
1996 and beyond. The Company believes the life cycle of its
products to be less than two years, and it is therefore engaged
in continuous product development activity. The operating
results of the Company and others in the industry will continue
to depend on the ability to accurately anticipate customer
requirements and technological trends and to rapidly and
continuously develop and deliver new hardware and software
products that are competitively priced, deliver enhanced
performance, and meet customer requirements for standardization
and interoperability. The Company believes that its new
operating system and hardware architecture strategies, the
availability of new products, and the cost benefits of the 1995
restructuring of its business will act to improve its operating
results. However, to achieve profitability, the Company must
substantially increase sales volume while continuing to control
cost.
Restructuring. During the second quarter of 1995, the Company
undertook a restructuring program designed to further adapt the
Company's cost structure to changed industry and market
conditions. The program, as originally planned, consisted of
direct reductions in workforce, other workforce reductions
through attrition, and disposition of four unprofitable non-core
business units over the twelve month period ending June 30, 1996.
The program, had it been fully executed with respect to the four
business units, would have provided an operating expense
reduction of approximately $100 million annually on a prospective
basis. Of this total anticipated annual savings, approximately
$66 million was to be derived from disposition of the business
units. As of June 30, 1996, the Company does not have committed
buyers for these business units. The Company is continuing its
efforts to sell these business units and does not anticipate
incurrence of a loss on the sale of any of the units. Revenues
and losses of the four business units totaled $31 million and $15
million, respectively, for the first half of 1996 ($39 million
and $20 million, respectively, for the first half of 1995), and
their total assets are approximately $45 million. The Company
estimates annual savings related to restructuring actions taken
thus far under the plan of $35 million, derived primarily from
reduced employee headcount.
The second quarter 1995 restructuring charge totaled $7.5
million, primarily for employee severance pay and related costs.
Approximately 450 positions were eliminated through direct
reductions in workforce, with approximately 350 others eliminated
through attrition. All employee groups were affected, but the
majority of eliminated positions derived from the research and
development, systems engineering and support, and sales and
marketing areas. The total cash expenditure through December 31,
1995 was $3.6 million. Cash expenditures during the first half
of 1996 were insignificant. The $7.5 million charge is included
in "Restructuring charge" in the 1995 consolidated statement of
operations.
Bentley Systems, Inc. The Company has a non-exclusive license
agreement with Bentley Systems, Inc. (BSI), a 50%-owned affiliate
of the Company, under which the Company has a right to sell
MicroStation, a software product developed and maintained by BSI
and utilized in many of the Company's software applications, via
its direct sales force, and to sell MicroStation via its indirect
sales channels if MicroStation is sold with other Intergraph
products. During the first half of 1996, the Company's sales of
MicroStation declined by 45% from the prior year level to
approximately $14 million. Effective January 1, 1996, the per
copy royalty payable by the Company to BSI was increased 31%. In
addition, in 1995 BSI was obligated to pay the Company a per copy
distribution fee based on BSI's MicroStation sales to resellers.
In 1996, the Company no longer has the right to receive per copy
distribution fees from BSI. The Company estimates that the
effect of reduced revenues, increased royalties and discontinued
distribution fees on first half 1996 results of operations was a
3% reduction in revenues and an increase in net loss of
approximately $11 million or $.24 per share. In July 1996, the
Company announced that it has engaged an investment banking firm
to value and sell its 50% ownership interest in Bentley.
New Products. During the first quarter of 1996, the Company
announced a complete line of workstations and servers based on
Intel Corporation's Pentium Pro microprocessor, including the TD
desktop and high-end TDZ workstations for graphics-intensive
applications, the StudioZ workstation for manipulation of video
and film imagery, and a line of Web servers for meeting the heavy
demand of visitors to a web site. These products began shipping
in the first quarter with the exception of the StudioZ
workstation, which will begin shipping in the third quarter.
During the second quarter of 1996, the Company announced a new
add-in 3D graphics card, Intense 3D, which delivers workstation
class 3D graphics to the Pentium- or Pentium Pro-based personal
computer. In addition, the Company has entered into a joint
marketing and sales relationship with MCI Telecommunications
Corporation for the Internet/Intranet connectivity market.
In late 1995, the Company announced its Jupiter technology, a
Windows-based component software architecture that is the
foundation of many new computer-aided-design/computer-aided
manufacturing/computer-aided-engineering (CAD/CAM/CAE) and
geographic information systems (GIS) applications software
developed by the Company. The first two products built on
Jupiter technology began shipping in the second quarter. Initial
sales of these products did not meet Company expectations or
contribute substantially to revenues for the quarter due in part
to the offering of these products on a "try and buy" basis and
resulting delays in sales, and to certain performance issues in
the initial release of the software. The Company continues to
believe that these products will be key contributors to the long-
term success of the Company.
Purchase Business Combination. In January 1995, the Company
acquired all of the outstanding stock of InterCAP Graphics
Systems, Inc. for total consideration of $7.5 million, consisting
of issuance of 797,931 shares of the Company's common stock and
the granting of stock options on 148,718 of the Company's shares
to employees of InterCAP. InterCAP is engaged in the business of
designing and producing computer software systems that assist in
creating, editing, converting and presenting technical
illustrations used by large manufacturing firms. The accounts
and results of operations of InterCAP have been combined with
those of the Company since the date of acquisition using the
purchase method of accounting. This acquisition has not had a
material effect on the Company's results of operations.
ORDERS/REVENUES
- ---------------
Orders. Second quarter and first half 1996 systems orders
totaled $185.4 million and $329.7 million, respectively, an
increase of approximately 6% and 1%, respectively, from the same
prior year periods. U.S. systems orders were down 8% and 4%,
respectively, from the second quarter and first half 1995 levels.
The decrease in first half 1996 U.S. systems orders results from
an orders decline in one of the Company's non-core business units
that is part of the Company's restructuring plan. Excluding this
business unit, U.S. systems orders were up 3% from the first half
1995 level. International systems orders were up 19% and 6%,
respectively, from the second quarter and first half 1995 levels.
European systems order levels were up slightly; other
international systems orders increased 10% over the first half of
1995 due primarily to orders for the Company's Public Safety
software product and related consulting services. Second quarter
systems orders were up 29% from the first quarter 1996 level,
with all regions showing improvement.
NAVAIR/SPAWAR Contract. In July 1994, the U.S. Navy awarded the
Company the Naval Air Systems Command and Space and Naval
Warfare Command contract ("NAVAIR and SPAWAR") to provide
CAD/CAM/CAE systems and services for electronics and mechanical
applications. The estimated maximum value of the NAVAIR/SPAWAR
contract is $398 million, and the term of the contract is twelve
years, assuming all optional annual renewals of the contract are
exercised. Under the terms of the contract, the customer is
obligated to purchase only $1 million in systems and services,
and there can be no assurance that the Company will receive
orders for the maximum value of the contract. Given the nature
of the contract, the Company cannot determine the amount of
orders that will be received or anticipate the level of annual
revenues over the term of the contract. Orders and revenues
under this contract in the first half of 1996 were not
significant.
Soon after the original award, the NAVAIR/SPAWAR contract was
formally protested by one of the losing bidders. The Company
supported the efforts of the Navy in defending against the
protest, and in October 1994, the Company was notified that the
original award was upheld. This holding was appealed through the
federal court system, and in July 1996, the Company was notified
that the contract would stand as originally awarded. No further
protests of this contract are expected.
Revenues. Total revenues for second quarter and first half of
1996 were $268.2 million and $524.9 million, respectively, up
slightly from comparable 1995 levels. Sales outside the U.S.
represented 54% of total revenues in the first half of 1996,
relatively unchanged from the first half and full year 1995
levels. European revenues were 34% of total revenues for the
first half of 1996, also relatively unchanged from the first half
and full year 1995 levels.
Systems. Systems revenue for the second quarter and first half
of 1996 was $174.9 million and $338.1 million, respectively, up
8% and 4%, respectively, from the same prior year periods.
Federal government systems revenues were up 17% from the first
half 1995 level, while U.S. commercial systems revenue declined
3%, resulting in an overall 3% systems revenue increase in the
U.S. The decrease in first half 1996 U.S. commercial systems
revenues results from a revenue decline in one of the Company's
non-core business units that is part of the Company's
restructuring plan. Excluding this business unit, U.S. systems
revenues were up 7% from the first half 1995 level.
International systems revenues were up 4% from the first half
1995 level. European and other international systems revenues
increased by 1% and 10%, respectively.
First half 1996 total hardware revenues increased 14% from the
prior year period. Workstation and server unit sales in the
first half of 1996 were up 53% from the prior year period, while
workstation and server revenues increased only 29% due to a 6%
decline in the average per unit sales price. Software revenues
were down 4% from the prior year level, including a 45% decline
in MicroStation revenues (for further discussion of this impact
on the Company, see "Bentley Systems, Inc." above). Excluding
MicroStation, software revenues increased 9% from the first half
1995 level due primarily to an increase in plant design and
electronics software applications sales. Sales of Windows-based
software represented approximately 74% of total software revenues
in the first half of 1996, up from approximately 64% in the first
half of 1995.
For the first half of 1996, hardware revenues were in line with
planned revenue levels; however, software revenues were well
below plan. The software revenue shortfall can be attributed to
slower than anticipated orders for the Company's new Jupiter
Windows-based software products, soft demand in Europe, less than
expected effectiveness in indirect sales channels, and loss of
MicroStation sales.
Maintenance and Services. Maintenance and services revenue
consists of revenues from maintenance of Company systems and from
Company-provided training, consulting, and other services. These
forms of revenue totaled $93.3 million for the second quarter
and $186.8 million for the first half of 1996, a decrease of 5%
and 3%, respectively, from the comparable prior year periods.
Maintenance revenues for the first half of 1996 totaled $145.3
million, a 10% decline from the same prior year period. The
trend in the industry toward lower priced products and longer
warranty periods has resulted in a decline in maintenance
revenues. Services revenue represents approximately 8% of total
first half 1996 revenues and has increased 36% from the same
prior year period.
GROSS MARGIN
- ------------
The Company's total gross margin for the second quarter and first
half of 1996 was approximately 37.5% versus 38.6% for the first
half of 1995 and 39.1% for the full year 1995.
Systems margin for the second quarter and first half of 1996 was
35.4%, down 1.9 points from the second quarter 1995 level, down
1.2 points from the first half 1995 level, and down 2.7 points
from the full year 1995 level. The decline is due primarily to a
higher hardware content in the product. Additionally, in 1996,
the Company no longer is due per copy distribution fees on BSI's
MicroStation sales to resellers, and the Company is paying per
copy royalties to BSI at a 31% higher rate (for further
discussion of this impact on the Company, see "Bentley Systems,
Inc." above).
In general, systems margin may be lowered by price competition, a
stronger dollar in international markets, effects of
technological changes on the value of existing inventories, and a
higher mix of federal government sales, which generally produce
lower margins than commercial sales, to total systems sales.
Systems margins may be improved by higher software content in the
product, a weaker dollar in international markets, a higher mix
of international systems sales to total systems sales, and by
reductions in prices of component parts, which generally tend to
decline over time in the industry. The Company is unable to
predict the effects that many of these factors may have, but
expects continuing pressure on its systems margin due primarily
to industry price competition.
Maintenance and services margin for the second quarter and first
half of 1996 was 42.3% and 41.3%, respectively, relatively flat
with the comparable prior year periods. Full year 1995
maintenance and services margin was 41%.
OPERATING EXPENSES (exclusive of restructuring charges)
- -------------------------------------------------------
Operating expenses for the second quarter and first half of 1996
decreased 6% from the comparable prior year periods. Total
employee headcount has declined 5% from the first half 1995
level.
Product development expense for the second quarter and first half
of 1996 declined 12% and 14%, respectively, from the same prior
year periods. Sales and marketing expense for the second quarter
and first half of 1996 declined 4% and 5%, respectively. These
declines from 1995 levels are due primarily to a decline in
headcount and related overhead expenses resulting from
restructuring actions taken in the second quarter of 1995. The
decline in sales and marketing expense was offset to a degree by
increased product advertising and promotional expenses associated
with the Company's new product offerings. General and
administrative expenses for the first half of 1996 are flat with
the prior year level.
NONOPERATING INCOME AND EXPENSE
- -------------------------------
Interest expense was $1.2 million for the second quarter and $2.4
million for the first half of 1996 versus $.9 million and $1.8
million, respectively, for the same prior year periods. The
Company's outstanding debt increased in comparison to the same
prior year periods. See "Liquidity and Capital Resources" below
for discussion of the Company's current financing requirements.
In the first quarter of 1996, the Company sold a stock investment
in an affiliated company, resulting in a gain of $9.4 million
($.20 per share). In the second quarter of 1995, the Company
sold one of its subsidiary operations, resulting in a gain of $5
million ($.11 per share). These gains are included in "Gains on
sales of investments in affiliated companies" in the consolidated
statements of operations.
"Other income (expense) - net" in the consolidated statements of
operations consists primarily of aggregate foreign exchange
gains/losses, other miscellaneous items of nonoperating income
and expense, and nonrecurring charges/credits.
IMPACT OF CURRENCY FLUCTUATIONS AND CURRENCY RISK MANAGEMENT
- ------------------------------------------------------------
Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results
of operations. For the first half of 1996 and the full year
1995, approximately 54% of the Company's revenues were derived
from customers outside the United States, primarily through
subsidiary operations. Most subsidiaries sell to customers and
incur and pay operating expenses in local currency. These local
currency revenues and expenses are translated to dollars for U.S.
reporting purposes. A stronger U.S. dollar will decrease the
level of reported U.S. dollar orders and revenues, decrease the
dollar gross margin, and decrease reported dollar operating
expenses of the international subsidiaries. A weaker U.S. dollar
will have the opposite effect. The currency effect of the
slightly stronger U.S. dollar thus far in 1996 has not materially
affected the Company's results of operations.
The Company conducts business in all major markets outside of the
U.S., but the most significant of these operations with respect
to currency risk are located in Europe, specifically Germany,
U.K., The Netherlands, France and Spain. Primarily but not
exclusively in these locations, the Company has certain currency
related asset and liability exposures against which certain
measures, primarily hedging, are taken to reduce currency risk.
With respect to these exposures, the objective of the Company is
to protect against financial statement volatility arising from
changes in exchange rates with respect to amounts denominated for
balance sheet purposes in a currency other than the functional
currency of the local entity. The Company therefore enters into
forward exchange contracts primarily related to these balance
sheet items (intercompany receivables, payables, and formalized
intercompany debt). Periodic changes in the value of these
contracts offset exchange rate-related changes in the financial
statement value of these balance sheet items. Forward exchange
contracts are purchased with maturities reflecting the expected
settlement dates of these balance sheet items (generally three
months or less), and only in amounts sufficient to offset
possible significant currency rate related changes in the
recorded values of these balance sheet items, which represent a
calculable exposure for the Company from period to period. Since
this risk is calculable and these contracts are purchased only in
offsetting amounts, neither the contracts themselves nor the
exposed foreign currency denominated balance sheet items are
likely to have a significant effect on the Company's financial
position or results of operations. The Company's positions in
these derivatives are continuously monitored to ensure protection
against the known balance sheet exposures described above. By
policy, the Company is prohibited from market speculation via
such instruments and therefore does not take currency positions
exceeding its known financial statement exposures, and does not
otherwise trade in currencies.
INCOME TAXES
- ------------
The Company incurred a loss before income tax benefit of $21.6
million in the first half of 1996 versus $44.4 million in the
first half of 1995. The 1996 loss generated minimal net
financial statement tax benefit, as the majority of available tax
benefits were offset by tax expenses in individual profitable
international subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1996, cash and short-term investments totaled $37.1
million compared to $56.4 million at December 31, 1995. Cash
generated from operations in the first half of 1996 totaled
$5.2 million ($25.8 million in the first half of 1995, including
$22.1 million in refunds of prior years' U.S. federal income tax
payments as the result of carryback of the 1994 U.S. tax return
loss).
Net cash used for investing activities totaled $17.9 million in
the first half of 1996 versus $31.5 million in the first half of
1995. Included in investing activities were capital expenditures
of $17.1 million ($21.2 million in the first half of 1995),
primarily for Intergraph products used in hardware and software
development. The Company expects that capital expenditures for
the full year 1996 will require $35 to $40 million, primarily for
computer equipment manufactured by the Company for use in
hardware and software development. The Company's revolving
credit agreement contains certain restrictions on the level of
the Company's capital expenditures. The Company slightly
exceeded the level of capital expenditures allowed under the
agreement for the twelve month period ended June 30, 1996 (for
further discussion of the impact on the Company, see "Revolving
Credit Agreement" below). Other significant investing activities
included $9.9 million for capitalizable software development
costs ($13.5 million in the first half of 1995) and $9.8 million
in proceeds from sales of investments in affiliated companies ($7
million in the first half of 1995).
Net cash used for financing activities totaled $7.4 million in
the first half of 1996 versus $15.4 million in the first half of
1995. First half 1996 financing activities included $9.4 million
for net repayment of short- and long-term debt, compared with $19
million in the first half of 1995.
Historically the Company's collection period for accounts
receivable has approximated 100 days. Approximately 69% of the
Company's sales are derived from the U.S. government and
international customers, both of which traditionally carry longer
collection periods. The Company endeavors to enforce its payment
terms with these and other customers, and grants extended payment
terms only in very limited circumstances.
Revolving Credit Agreement. In October 1995, the Company entered
into a three-year revolving credit agreement with a group of
lenders. Borrowings available under the agreement are determined
by the amounts of eligible assets of the Company, as defined in
the agreement, including cash, accounts receivable, inventory,
and property, plant, and equipment, with maximum borrowings of
$100 million. Borrowings are secured by a pledge of substantially
all of the Company's assets in the U.S. and Canada and, under
certain circumstances, the accounts receivable of some European
subsidiaries of the Company. The rate of interest on all
borrowings under the agreement is, at the Company's option, the
Citibank base rate of interest plus 1.75% or the Eurodollar rate
plus 2.75%. The average effective rate of interest was 10.23%
for the period of time in the first half of 1996 during which the
Company had outstanding borrowings under the agreement. The
agreement requires the Company to pay a commitment fee of .5%
annually on the average unused daily portion of the revolving
credit commitment. Outstanding borrowings were $12 million under
this agreement at June 30, 1996, with an additional $19 million
of the available credit line allocated to support letters of
credit issued by the Company.
The revolving credit agreement contains certain financial
covenants of the Company, including minimum net worth, minimum
fixed charge coverage, minimum interest coverage, and maximum
levels of capital expenditures, including capitalized software
development costs. In addition, the agreement requires minimum
levels of earnings before income taxes, interest, and non-cash items
and includes restrictive covenants that limit various business transactions
(including repurchases of the Company's stock, dividend payments,
mergers, acquisitions of or investments in other businesses, and
disposal of assets including individual businesses, subsidiaries,
and divisions) and limit or prevent certain other business changes.
At May 31, 1996, the Company did not meet the minimum required level
of earnings before income taxes, interest, and non-cash items,
and in accordance with the agreement, the line of credit was reduced
from $100 million to $75 million. As of June 30, 1996, the Company
was not in compliance with the capital expenditure financial covenant
of the agreement. The lenders have stated their desire to renegotiate
the financial covenants prior to providing a waiver of default for
failure to comply with the capital expenditure covenant. The
Company expects to successfully negotiate modifications to the financial
covenants resulting in the ability to comply with the modified
covenants in the future. The lenders have also stated that an
availability reserve of $25 million will be placed on the line of
credit until the Company has met the modified financial covenants
for a consecutive six month period, effectively reducing the line
to $50 million for that period. The lenders have stated that
they do not plan to exercise any remedies of the default
condition, which include but are not limited to termination of
the agreement with all obligations under the agreement becoming
immediately due and payable.
An international subsidiary of the Company has a $21 million term
loan agreement with a bank, guaranteed by the parent company,
which includes cross-default provisions with the Company's
revolving credit agreement. As such, the Company was not in
compliance with the cross-default provisions included in the term
loan agreement as of June 30, 1996. The bank has agreed to waive
its remedies of this default condition.
At June 30, 1996, the Company had $50 million in debt on which
interest is charged under various floating rate arrangements,
primarily under short-term credit facilities, mortgages, and a
term loan. The Company is exposed to market risk of future
increases in interest rates on a total of $29 million of these
loans.
The Company believes that existing cash balances, together with
cash generated by operations and cash available under its
revolving credit agreement, will be adequate to meet cash
requirements for the remainder of 1996. Cash may also be
generated through sale of the Company's non-core businesses
though the timing of any such sale is at present uncertain.
INTERGRAPH CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders
Intergraph Corporation's Annual Meeting of
Shareholders was held on May 16, 1996. The results of
the meeting follow.
(1) Seven directors were elected to the Board of
Directors to serve for the ensuing year and until
their successors are duly elected and qualified.
All nominees, with the exception of Richard K.
Snelling, were serving as Directors of the Company
at the time of their nomination.
Votes
----------------------------------
For Against/Withheld
------------- ------------------
Roland E. Brown 38,691,885 612,368
Larry J. Laster 38,859,989 444,263
James W. Meadlock 38,851,224 453,029
Richard K. Snelling 38,847,449 456,804
Keith H. Schonrock, Jr. 38,683,769 620,483
James F. Taylor, Jr. 38,786,230 518,023
Robert E. Thurber 38,839,110 465,143
Mr. Snelling resigned as a Director of the Company
August 1, 1996, for personal reasons.
(2) Ratification of the appointment by the Board of
Directors of Ernst & Young LLP as the Company's
independent auditors for the current year was
approved by a vote of 39,170,810 for, 69,429
against, and 64,014 abstentions.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 11, Computations of loss per share,
pages 19 to 20.
(b) There were no reports on Form 8-K filed during the
quarter ended June 30, 1996.
INTERGRAPH CORPORATION 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 thereunto
duly authorized.
INTERGRAPH CORPORATION
----------------------
(Registrant)
By: /s/ Larry J. Laster By: /s/ John W. Wilhoite
- ------------------------------- ------------------------------------
Larry J. Laster John W. Wilhoite
Executive Vice President, Vice President and Controller
Chief Financial Officer and (Principal Accounting Officer)
Director
Date: August 13, 1996 Date: August 13, 1996
Exhibit 11
- ----------
INTERGRAPH CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF LOSS PER SHARE
- ------------------------------------------------------------------------
Quarter Ended June 30, 1996 1995
- ------------------------------------------------------------------------
(In thousands except per share amounts)
NET LOSS $(15,179) $(21,958)
========= =========
PRIMARY
Weighted average common shares outstanding 46,922 45,929
Net common shares issuable on exercise of
certain stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 46,922 45,929
========= =========
Net loss per share $( .32) $( .48)
========= =========
FULLY DILUTED (2)
Weighted average common shares outstanding 46,922 45,929
Net common shares issuable on exercise of
certain stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 46,922 45,929
========= =========
Net loss per share $( .32) $( .48)
========= =========
(1) Net common shares issuable on exercise of certain stock
options is calculated based on the treasury stock method using
the average market price for the primary calculation and the
ending market price, if higher than the average, for the fully
diluted calculation.
(2) This calculation is submitted in accordance with
Securities Exchange Act of 1934 Release No. 9083 although not
required by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in dilution of less than 3%.
Exhibit 11
- ----------
INTERGRAPH CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF LOSS PER SHARE
- ----------------------------------------------------------------------
Six Months Ended June 30, 1996 1995
- ----------------------------------------------------------------------
(In thousands except per share amounts)
NET LOSS $(21,570) $(44,430)
========= =========
PRIMARY
Weighted average common shares outstanding 46,947 45,766
Net common shares issuable on exercise of
certain stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 46,947 45,766
========= =========
Net loss per share $( .46) $( .97)
========= =========
FULLY DILUTED (2)
Weighted average common shares outstanding 46,947 45,766
Net common shares issuable on exercise of
certain stock options (1) --- ---
--------- --------
Average common and equivalent common
shares outstanding 46,947 45,766
========= ========
Net loss per share $( .46) $( .97)
========= ========
(1) Net common shares issuable on exercise of certain stock
options is calculated based on the treasury stock method using
the average market price for the primary calculation and the
ending market price, if higher than the average, for the fully
diluted calculation.
(2) This calculation is submitted in accordance with
Securities Exchange Act of 1934 Release No. 9083 although not
required by footnote 2 to paragraph 14 of APB Opinion No. 15
because it results in dilution of less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 37,081
<SECURITIES> 0
<RECEIVABLES> 295,735
<ALLOWANCES> 0
<INVENTORY> 104,032
<CURRENT-ASSETS> 37,619
<PP&E> 499,808
<DEPRECIATION> 304,491
<TOTAL-ASSETS> 752,205
<CURRENT-LIABILITIES> 235,088
<BONDS> 33,062
0
0
<COMMON> 5,736
<OTHER-SE> 474,469
<TOTAL-LIABILITY-AND-EQUITY> 752,205
<SALES> 338,099
<TOTAL-REVENUES> 524,872
<CGS> 218,481
<TOTAL-COSTS> 328,101
<OTHER-EXPENSES> 228,257<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,405
<INCOME-PRETAX> (21,570)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,570)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,570)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
<FN>
<F1>Other expenses include Product development expenses, Sales and marketing
expenses, and general and administrative expenses.
</FN>
</TABLE>
