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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 September 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
------------------------------------------------------
(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: 47,590,587 shares
outstanding as of September 30, 1996
===============================================================================
INTERGRAPH CORPORATION
FORM 10-Q
September 30, 1996
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996 and 2
December 31, 1995
Consolidated Statements of Operations for the quarters
ended September 30, 1996 and 1995 3
Consolidated Statements of Operations for the nine
months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
PART I. FINANCIAL INFORMATION
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -------------------------------------------------------------------------------
September 30, December 31,
1996 1995
- -------------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 38,595 $ 56,407
Accounts receivable, net 308,292 324,051
Inventories 95,269 111,813
Refundable income taxes 5,810 6,391
Other current assets 35,171 43,190
- -------------------------------------------------------------------------------
Total current assets 483,137 541,852
Investments in affiliated companies 21,141 11,636
Other assets 63,133 59,900
Property, plant, and equipment, net 187,898 212,657
- -------------------------------------------------------------------------------
Total Assets $755,309 $826,045
===============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 38,579 $ 54,352
Accrued compensation 49,796 51,301
Other accrued expenses 64,364 72,479
Billings in excess of sales 49,768 63,707
Income taxes payable 4,373 6,720
Short-term debt and current
maturities of long-term debt 32,562 32,153
- -------------------------------------------------------------------------------
Total current liabilities 239,442 280,712
Deferred income taxes 3,804 3,881
Long-term debt 31,319 37,388
- -------------------------------------------------------------------------------
Total liabilities 274,565 321,981
- -------------------------------------------------------------------------------
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 230,394 233,940
Retained earnings 373,291 408,791
Cumulative translation adjustment 4,950 8,650
Unrealized holding gain on
available-for-sale securities 8,745 ---
- -------------------------------------------------------------------------------
623,116 657,117
Less - cost of 9,770,775 treasury shares at
September 30, 1996 and 10,501,309 treasury
shares at December 31, 1995 (142,372) (153,053)
- -------------------------------------------------------------------------------
Total shareholders' equity 480,744 504,064
- -------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $755,309 $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 September 30, 1996 1995
- -------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $185,310 $181,143
Maintenance and services 91,003 98,088
- -------------------------------------------------------------------------------
Total revenues 276,313 279,231
- -------------------------------------------------------------------------------
Cost of revenues
Systems 117,210 115,300
Maintenance and services 56,102 57,959
- -------------------------------------------------------------------------------
Total cost of revenues 173,312 173,259
- -------------------------------------------------------------------------------
Gross profit 103,001 105,972
Product development 26,563 26,561
Sales and marketing 60,482 64,486
General and administrative 25,325 23,752
- -------------------------------------------------------------------------------
Loss from operations ( 9,369) ( 8,827)
Interest expense ( 1,318) ( 896)
Interest income 453 396
Gains on sales of investments in
affiliated companies 316 376
Equity in earnings (losses) of
affiliated companies ( 2,941) 863
Other income (expense) - net ( 1,071) 39
- -------------------------------------------------------------------------------
Loss before income taxes (13,930) ( 8,049)
Income taxes --- ---
- -------------------------------------------------------------------------------
Net loss $(13,930) $( 8,049)
===============================================================================
Net loss per share $( .29) $( .17)
===============================================================================
Weighted average shares outstanding 47,243 46,146
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 1995
- -------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $523,409 $506,831
Maintenance and services 277,776 289,896
- -------------------------------------------------------------------------------
Total revenues 801,185 796,727
- -------------------------------------------------------------------------------
Cost of revenues
Systems 335,691 321,636
Maintenance and services 165,722 169,584
- -------------------------------------------------------------------------------
Total cost of revenues 501,413 491,220
- -------------------------------------------------------------------------------
Gross profit 299,772 305,507
Product development 77,812 86,231
Sales and marketing 189,936 201,294
General and administrative 72,879 71,021
Restructuring charge --- 7,470
- -------------------------------------------------------------------------------
Loss from operations (40,855) (60,509)
Interest expense ( 3,723) ( 2,726)
Interest income 1,333 1,285
Gains on sales of investments in
affiliated companies 9,689 5,972
Equity in earnings of affiliated companies 977 3,266
Other income (expense) - net ( 2,921) 233
- -------------------------------------------------------------------------------
Loss before income taxes (35,500) (52,479)
Income taxes --- ---
- -------------------------------------------------------------------------------
Net loss $(35,500) $(52,479)
===============================================================================
Net loss per share $( .75) $( 1.14)
===============================================================================
Weighted average shares outstanding 47,046 45,894
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 1995
- -------------------------------------------------------------------------------
(In thousands)
Cash provided by (used for):
Operating Activities:
Net loss $(35,500) $(52,479)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 57,569 59,632
Non-cash portion of restructuring charge --- 4,110
Collection of income tax refunds 1,932 22,146
Gains on sales of investments in affiliated
companies ( 9,689) ( 5,972)
Equity in earnings of affiliated companies ( 977) ( 3,266)
Net changes in current assets and liabilities ( 1,733) 22,101
- -------------------------------------------------------------------------------
Net cash provided by operating activities 11,602 46,272
- -------------------------------------------------------------------------------
Investing Activities:
Purchase of property, plant, and equipment (23,974) (37,885)
Capitalized software development costs (12,093) (20,476)
Proceeds from sales of investments in
affiliated companies 10,077 7,408
Other ( 605) (11,036)
- -------------------------------------------------------------------------------
Net cash used for investing activities (26,595) (61,989)
- -------------------------------------------------------------------------------
Financing Activities:
Gross borrowings 11,439 34,139
Debt repayment (17,715) (46,518)
Proceeds of employee stock purchases 2,685 2,856
Proceeds of exercise of stock options 285 2,770
- -------------------------------------------------------------------------------
Net cash used for financing activities ( 3,306) ( 6,753)
- -------------------------------------------------------------------------------
Effect of exchange rate changes on cash 487 2,067
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (17,812) (20,403)
Cash and cash equivalents at beginning of period 56,407 61,393
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 38,595 $ 40,990
===============================================================================
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, the consolidated statement of cash
flows for the nine months ended September 30, 1995, and
to the consolidated statements of operations for the
quarter and nine months ended September 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 as a result the
lenders reduced credit available under the agreement to
$75 million. At June 30, 1996, the Company was not in
compliance with the capital expenditure covenant of the
agreement and at July 31, 1996, the Company did not meet
the minimum net worth financial covenant. On September
11, 1996, the lenders granted a waiver of default for
failure to comply with these covenants and amended the
agreement to revise certain financial covenants. In
addition, the lenders have placed an availability reserve
of $25 million on the line of credit until the Company
has met the amended financial covenants for a consecutive
six month period, effectively reducing the line to $50
million for that period. The Company was in compliance
with all covenants as of September 30, 1996.
An international subsidiary of the Company has a $20
million term loan agreement with a bank, guaranteed by
the parent company, which includes cross-default
provisions with the Company's revolving credit agreement
and various other restrictive covenants.
NOTE 3: Inventories are stated at the lower of average cost or
market and are summarized as follows:
----------------------------------------------------------
September 30, December 31,
1996 1995
----------------------------------------------------------
(In thousands)
Raw materials $26,254 $ 36,336
Work-in-process 23,998 25,037
Finished goods 16,073 17,140
Service spares 28,944 33,300
----------------------------------------------------------
Totals $95,269 $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 $311.8 million and
$304.6 million at September 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 nine
months ended September 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 statement of operations for the nine
months ended September 30, 1995.
NOTE 6: In the quarter ended September 30, 1996, a company in
which the Company holds a minority interest underwent an
initial public offering of its stock. In accordance with
Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities", the Company measures its investment in this
affiliate at market value. The Company's unrealized
gain of $8.7 million on this investment is included in
"Unrealized holding gain on available-for-sale securities"
in the shareholders' equity section of the consolidated
balance sheet at September 30, 1996.
NOTE 7: 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 ended 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 September 30,
1996, the Company does not have committed buyers for
these business units. The Company is continuing its
efforts to sell these businesses.
Revenues and losses of the four business units totaled
$47 million and $21 million, respectively, for the first
nine months of 1996 ($59 million and $28 million,
respectively, for the first nine months of 1995), and
their total assets are approximately $39 million. The
Company estimates annual savings related to restructuring
actions taken to date of $35 million, derived primarily
from reduced employee headcount.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 nine months of 1996 were not
significant. The $7.5 million charge is included in
"Restructuring charge" in the consolidated statement of
operations for the nine months ended September 30, 1995.
Unrelated to the 1995 restructuring plan, the Company
announced in July 1996 its intention to sell its 50%
ownership interest in Bentley Systems, Inc. The Company
does not have a committed buyer for its ownership
interest as of September 30, 1996. See Management's
Discussion and Analysis of Financial Condition and
Results of Operations for further description of the
Company's relationship with Bentley.
NOTE 8: 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
Nine Months Ended
September 30, 1996 1995
----------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $ 10,570 $ 51,144
Inventories 18,889 17,152
Refundable income taxes ( 536) ( 1,708)
Other current assets 7,686 ( 6,182)
Increase (decrease) in:
Trade accounts payable (15,197) (10,587)
Accrued compensation and other
accrued expenses ( 6,749) 3,669
Billings in excess of sales (13,282) (27,988)
Income taxes payable ( 3,114) ( 3,399)
----------------------------------------------------------
Net changes in current assets
and liabilities $( 1,733) $ 22,101
==========================================================
Cash payments for income taxes totaled $3,719,000 and
$3,128,000 for the nine months ended September 30, 1996
and 1995, respectively. Cash payments for interest
during those periods totaled $3,494,000 and $2,673,000,
respectively.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investing and financing transactions in the first nine
months of 1996 that did not require cash included the
issuance of 438,357 shares of the Company's common stock
to two individuals in connection with the Company's efforts
to build its Public Safety business in the Asia Pacific
region and an $8.7 million favorable mark-to-market
adjustment of an investment (see Note 6). Investing and
financing transactions in the first nine months 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 9: 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
nine months of 1996.
NOTE 10: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 11: 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. The Company incurred a net loss of $.29 per share on
revenues of $276.3 million in the third quarter of 1996 versus a
loss of $.17 per share on revenues of $279.2 million in the third
quarter of 1995. For the first nine months of 1996, the Company
lost $.75 per share on revenues of $801.2 million versus a loss of
$1.14 per share on revenues of $796.7 million for the same prior
year period. The loss for the first nine months of 1996 included
a $9.4 million ($.20 per share) gain on the sale of an investment
in an affiliated company. The loss for the first nine months of
1995 included a $7.5 million ($.16 per share) restructuring charge
(see "Restructuring" below) and a $5.0 million ($.11 per share)
gain on the sale of a subsidiary operation. Losses excluding
these non-recurring items and all other items of non-operating
income and expense totaled $.87 per share in the first nine months
of 1996 versus $1.16 per share in the first nine months of 1995.
This $.29 per share improvement results primarily from a 5%
decline in operating expenses.
The Company's losses from operations in the third quarter and first
nine months of 1996 result primarily from a revenue shortfall and
from declining gross margins.
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 through the end of 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 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 product offerings has
not met expectations, resulting in a revenue base that is not
adequate to cover operating expenses. 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 ended 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
September 30, 1996, the Company does not have committed buyers for
these business units. The Company is continuing its efforts to
sell these business units.
Revenues and losses of the four business units totaled $47 million
and $21 million, respectively, for the first nine months of 1996
($59 million and $28 million, respectively, for the first nine
months of 1995), and their total assets are approximately $39
million. The Company estimates annual savings related to
restructuring actions taken thus far 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 nine
months of 1996 were insignificant. The $7.5 million charge is
included in "Restructuring charge" in the consolidated statement
of operations for the nine months ended September 30, 1995.
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 nine months of 1996, the Company's
sales of MicroStation declined by 44% from the same prior year
period to approximately $21 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 these reduced revenues, increased royalties and
discontinued distribution fees increased its net loss by
approximately $20 million or $.42 per share for the first nine
months of 1996.
The Company's business relationship with BSI is the subject of
three arbitration proceedings, the outcome
of which cannot currently be predicted. In July 1996, the Company
announced the engagement of an investment banking firm to value
and sell its ownership interest in BSI. The Company did not have
a committed buyer at September 30, 1996.
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 began 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.
These graphics cards began shipping in the third quarter.
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 products under
development by the Company. The first two products built on
Jupiter technology began shipping in the second quarter. Initial
sales of these products have not met Company expectations and have
not contributed substantially to 1996 revenues, due in part to the
offering of these products on a "try and buy" basis with resulting
delays in sales, and to certain performance issues in the initial
release of the software. The second release of these products is
scheduled for November 1996. The Company continues to believe
that these products will be key contributors to the long- term
success of the Company.
ORDERS/REVENUES
- ---------------
Orders. Systems orders for the third quarter and first nine
months of 1996 totaled $182.1 million and $511.7 million,
respectively, a decrease of 4% and 1%, respectively, from the same
prior year periods. U.S. systems orders were down 18% and 10%,
respectively, from the third quarter and first nine months of
1995. The decline in U.S. orders results primarily from a
decrease in Federal government orders and in one of the Company's
non-core business units that is part of the Company's
restructuring plan. International systems orders for the third
quarter and first nine months of 1996 were up 13% and 8%,
respectively, from the same prior year periods. Soft demand in
Europe was offset by increased orders in other international
regions, primarily the Asia Pacific region. International orders
outside of Europe for the third quarter and first nine months of
1996 were up 84% and 31%, respectively, from the same prior year
periods due in large part to orders for the Company's Public
Safety software products and related consulting services.
European orders for the first nine months of 1996 are down 6% from
the same prior year period.
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 nine months 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 the third quarter and first nine
months of 1996 were $276.3 million and $801.2 million,
respectively, down approximately 1% from the third quarter of 1995
and flat with the first nine months of 1995. Sales outside the
U.S. represented 54% of total revenues in the first nine months of
1996, relatively unchanged from the first nine months of 1995.
European revenues were 33% of total revenues for the first nine
months of 1996, also relatively unchanged from the comparable 1995
period.
Systems. Systems revenues for the third quarter and first nine
months of 1996 were $185.3 million and $523.4 million,
respectively, up 2% and 3%, respectively, from the same prior year
periods. Federal government systems revenues were up 13% from the
first nine months of 1995, while U.S. commercial revenues declined
7%, resulting in an overall unchanged level of systems revenue in
the U.S. The decrease in 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 4% from the first
nine months of 1995. International systems revenues for first nine
months of 1996 were up 7% from the same prior year period.
European revenues were flat with the prior year level, while
systems revenues for the other international regions, primarily the
Asia Pacific region, have increased by 18%, due in part to increased
activity in Public Safety software products and consulting.
Hardware revenues for the first nine months of 1996 have increased
10% from the prior year period. Workstation and server unit sales
in the first nine months of 1996 were up 38% from the prior year
period; however, workstation and server revenues increased only
22% due to a 5% decline in the average per unit selling price.
Software revenues were down 7% from the prior year level,
including a 44% decline in MicroStation revenues (for further
discussion of this impact on the Company, see "Bentley Systems, Inc."
above). Excluding MicroStation, software revenues increased 5%
from the first nine months of 1995 due primarily to an increase in
sales of plant design and electronics software applications. Sales
of Windows based software represented approximately 76% of total
software revenues during the first nine months of 1996, up from
approximately 67% for the comparable prior year period.
Hardware revenues for 1996 have increased at less than the planned
rate. Software revenues have declined and are well below plan due
to slower than anticipated orders for the Company's new Jupiter
Windows-based software products, soft demand in Europe and in the
Company's federal government business, 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 $91.0 million for the third quarter and
$277.8 million for the first nine months of 1996, a decline of 7%
and 4%, respectively, from the comparable prior year periods.
Maintenance revenues for the first nine months of 1996 totaled
$214.7 million, down 12% from the same prior year period due to
the trend within the industry toward lower priced products and
longer warranty periods. Services revenue represents
approximately 8% of total revenues and has increased 34% from the
same prior year period.
GROSS MARGIN
- ------------
The Company's total gross margin for the third quarter and first
nine months of 1996 was approximately 37.4% versus 38.3% for the
first nine months of 1995 and 39.1% for the full year 1995.
Systems margin for the third quarter and first nine months of 1996
was 36.7% and 35.9%, respectively, relatively flat with the same
prior year periods. Systems margin for the first nine months of
1996 was down 2.2 points from the full year 1995 level. This
decline is due primarily to the higher hardware content of the
Company's products that results from declining software sales.
Additionally, in 1996, the Company no longer receives 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 third quarter was 38.4%,
down 2.5 points from the third quarter 1995 level. Maintenance
and services margin for the first nine months of 1996 was 40.3%,
down 1.2 points from the same prior year period and down .7 points
from the full year l995 level.
OPERATING EXPENSES (exclusive of restructuring charges)
- -------------------------------------------------------
Operating expenses for the third quarter and first nine months of
1996 decreased 2% and 5%, respectively, from the same prior year
periods. Average total Company headcount has declined by 5% since
September 30, 1995.
Product development expense for the third quarter of 1996 was
relatively flat with the prior year period, and for the first nine
months of 1996 was down 10% from the same period last year. Sales
and marketing expense for both the third quarter and first nine
months of 1996 decreased approximately 6% from the same prior year
periods. These declines are due primarily to declines in headcount
and related overhead expenses resulting from restructuring actions
taken in the second quarter of 1995. Partially offsetting these
declines are a decrease in the amount of new software product
development expenses qualifying for capitalization and increased
product advertising and promotional expenses associated with the
Company's new product offerings. General and administrative expense
for the third quarter and first nine months of 1996 increased 7%
and 3%, respectively, from the same prior year periods due primarily
to an increase in U.S. legal expenses, expenses associated with the
Company's revolving credit agreement, and the costs of
implementation of new business systems software.
NONOPERATING INCOME AND EXPENSE
- -------------------------------
Interest expense was $1.3 million for the third quarter and $3.7
million for the first nine months of 1996 versus $.9 million and
$2.7 million, respectively, for the same prior year periods. The
Company's average outstanding debt has increased in comparison to
the same prior year periods. See "Liquidity and Capital
Resources" below for a 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 nine months 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 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 in 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 $35.5
million in the first nine months of 1996 versus $52.5 million in
the first nine months 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 September 30, 1996, cash and cash equivalents totaled $38.6
million compared to $56.4 million at December 31, 1995. Cash
generated from operations in the first nine months of 1996 totaled
$11.6 million ($46.3 million in the first nine months 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 $26.6 million in
the first nine months of 1996 versus $62.0 million in the first
nine months of 1995. Included in investing activities were
capital expenditures of $24.0 million ($37.9 million in the first
nine months 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 $30 to
$35 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 (see "Revolving
Credit Agreement" below). Other significant investing activities
included $12.1 million for capitalizable software development
costs ($20.5 million in the first nine months of 1995) and $10.1
million in proceeds from sales of investments in affiliated
companies ($7.4 million in the first nine months of 1995).
Net cash used for financing activities totaled $3.3 million in the
first nine months of 1996 ($6.8 million in the first nine months
of 1995), including $6.3 million for net repayment of short- and
long-term debt ($12.4 million in the first nine months of 1995).
Historically, the Company's collection period for accounts
receivable has approximated 100 days. Approximately 70% 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 $75
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 agreement requires the Company to pay a
commitment fee of .5% annually on the average unused daily portion
of the revolving credit commitment. The average effective rate of
interest was 10.72% for the period of time in the first nine
months of 1996 during which the Company had outstanding borrowings
under the agreement. Outstanding borrowings were $15.5 million
under this agreement at September 30, 1996 ($20 million as of
November 8, 1996) with an additional $21 million of the available
credit line allocated to support letters of credit issued by the
Company.
The original revolving credit agreement contained 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 original agreement
required minimum levels of earnings before income taxes, interest,
and non-cash items and included restrictive covenants that limited
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 limited or
prevented 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 original agreement, the line of credit was reduced from $100
million to $75 million. At June 30, 1996, the Company was not in
compliance with the capital expenditure financial covenant of the
original agreement, and at July 31, 1996, the Company did not meet
the minimum net worth financial covenant. On September 11, 1996,
the lenders granted a waiver of default for failure to comply with
these covenants and amended the agreement to revise certain
financial covenants. The lenders have placed an availability
reserve of $25 million on the line of credit until the Company has
met the amended financial covenants for a consecutive six month
period, effectively reducing the line to $50 million for that
period. The Company was in compliance with all covenants as of
September 30, 1996.
An international subsidiary of the Company has a $20 million term
loan agreement with a bank, guaranteed by the parent company,
which includes cross-default provisions with the Company's
revolving credit agreement and various other restrictive
covenants.
At September 30, 1996, the Company had $54 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 $34 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 are adequate to meet current cash
requirements. The Company's results of operations must improve
substantially via increased revenues and/or further expense
reductions to avoid further increases in debt over the long term.
INTERGRAPH CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 11, Computations of loss per share,
pages 21 to 22.
(b) There were no reports on Form 8-K filed during
the quarter ended September 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: November 13, 1996 Date: November 13, 1996
Exhibit 11
- ----------
INTERGRAPH CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF LOSS PER SHARE
- -----------------------------------------------------------------------------
Quarter Ended September 30, 1996 1995
- -----------------------------------------------------------------------------
(In thousands except per share amounts)
NET LOSS $(13,930) $( 8,049)
PRIMARY
Weighted average common shares outstanding 47,243 46,146
Net common shares issuable on exercise of certain
stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 47,243 46,146
========= =========
Net loss per share $( .29) $( .17)
========= =========
FULLY DILUTED (2)
Weighted average common shares outstanding 47,243 46,146
Net common shares issuable on exercise of certain
stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 47,243 46,146
========= =========
Net loss per share $( .29) $( .17)
========= =========
(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
- ------------------------------------------------------------------------------
Nine Months Ended September 30, 1996 1995
- ------------------------------------------------------------------------------
(In thousands except per share amounts)
NET LOSS $(35,500) $(52,479)
PRIMARY
Weighted average common shares outstanding 47,046 45,894
Net common shares issuable on exercise of certain
stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 47,046 45,894
========= =========
Net loss per share $( .75) $( 1.14)
========= =========
FULLY DILUTED (2)
Weighted average common shares outstanding 47,046 45,894
Net common shares issuable on exercise of certain
stock options (1) --- ---
--------- ---------
Average common and equivalent common
shares outstanding 47,046 45,894
========= =========
Net loss per share $( .75) $( 1.14)
========= =========
(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 September 30,
1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 38,595
<SECURITIES> 0
<RECEIVABLES> 308,292
<ALLOWANCES> 0
<INVENTORY> 95,269
<CURRENT-ASSETS> 35,171
<PP&E> 499,711
<DEPRECIATION> 311,813
<TOTAL-ASSETS> 755,309
<CURRENT-LIABILITIES> 239,442
<BONDS> 31,319
0
0
<COMMON> 5,736
<OTHER-SE> 475,008
<TOTAL-LIABILITY-AND-EQUITY> 755,309
<SALES> 523,409
<TOTAL-REVENUES> 801,185
<CGS> 335,691
<TOTAL-COSTS> 501,413
<OTHER-EXPENSES> 340,627<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,723
<INCOME-PRETAX> (35,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,500)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
<FN>
<F1>Other expenses includes Product development expenses, Sales and marketing
expenses, and General and administrative expenses.
</FN>
</TABLE>
