=============================================================================
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, 1999
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)
(256) 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: 48,902,404 shares
outstanding as of June 30, 1999
=============================================================================
INTERGRAPH CORPORATION
FORM 10-Q*
June 30, 1999
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999 and
December 31, 1998 2
Consolidated Statements of Operations for the quarters
and six months ended June 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13 - 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26 - 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
*Information contained in this Form 10-Q includes statements that
are forward looking as defined in Section 21-E of the Securities
Exchange Act of 1934. Actual results may differ materially from
those projected in the forward looking statements. Information
concerning factors that could cause actual results to differ
materially from those in the forward looking statements is
described in the Company's filings with the Securities and Exchange
Commission, including its most recent Annual Report on Form 10-K,
its Form 10-Q for the quarter ended March 31, 1999, and this Form
10-Q.
PART I. FINANCIAL INFORMATION
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -----------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 75,244 $ 95,473
Accounts receivable, net 274,605 312,123
Inventories 51,359 38,001
Other current assets 38,455 48,928
- -----------------------------------------------------------------------------
Total current assets 439,663 494,525
Investments in affiliates 9,191 12,841
Other assets 74,150 61,240
Property, plant, and equipment, net 115,819 127,368
- -----------------------------------------------------------------------------
Total Assets $638,823 $695,974
=============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 60,763 $ 64,545
Accrued compensation 45,558 42,445
Other accrued expenses 77,126 79,160
Billings in excess of sales 57,822 68,137
Short-term debt and current
maturities of long-term debt 16,754 23,718
- -----------------------------------------------------------------------------
Total current liabilities 258,023 278,005
Deferred income taxes 3,073 3,142
Long-term debt 57,983 59,495
- -----------------------------------------------------------------------------
Total liabilities 319,079 340,642
- -----------------------------------------------------------------------------
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 220,267 222,705
Retained earnings 220,158 249,808
Accumulated other comprehensive income
- cumulative translation adjustment ( 3,138) 4,161
- -----------------------------------------------------------------------------
443,023 482,410
Less - cost of 8,458,958 treasury shares
at June 30, 1999 and 8,719,612 treasury
shares at December 31, 1998 (123,279) (127,078)
- -----------------------------------------------------------------------------
Total shareholders' equity 319,744 355,332
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $638,823 $695,974
=============================================================================
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, Six Months Ended
June 30,
1999 1998 1999 1998
- -----------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $158,263 $168,314 $328,571 $336,697
Maintenance and services 75,381 78,299 157,150 155,734
- -----------------------------------------------------------------------------
Total revenues 233,644 246,613 485,721 492,431
- -----------------------------------------------------------------------------
Cost of revenues
Systems 108,324 121,358 228,283 242,346
Maintenance and services 45,981 48,785 94,755 95,692
- -----------------------------------------------------------------------------
Total cost of revenues 154,305 170,143 323,038 338,038
- -----------------------------------------------------------------------------
Gross profit 79,339 76,470 162,683 154,393
Product development 17,620 22,249 34,789 45,949
Sales and marketing 48,872 59,306 96,785 119,244
General and administrative 29,848 24,436 56,013 50,970
Nonrecurring operating
charges (credit) 2,472 ( 859) 2,472 13,902
- -----------------------------------------------------------------------------
Loss from operations (19,473) (28,662) (27,376) (75,672)
Gains on sales of assets 11,505 8,275 11,505 111,042
Arbitration settlement --- --- ( 8,562) ---
Interest expense ( 1,410) ( 1,861) ( 2,828) ( 4,050)
Other income (expense) - net ( 2,714) 1,260 ( 2,389) 634
- -----------------------------------------------------------------------------
Income (loss) before
income taxes (12,092) (20,988) (29,650) 31,954
Income tax expense --- --- --- 3,500
- -----------------------------------------------------------------------------
Net income (loss) $(12,092) $(20,988) $(29,650) $ 28,454
=============================================================================
Net income (loss) per share -
basic and diluted $( .25) $( .43) $( .61) $ .59
=============================================================================
Weighted average shares outstanding -
basic and diluted (1) 48,831 48,311 48,765 48,265
=============================================================================
(1) Diluted shares were 48,358 for the six months ended June 30, 1998.
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, 1999 1998
- -----------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net income (loss) $(29,650) $ 28,454
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Gains on sales of assets (11,505) (111,042)
Depreciation and amortization 23,940 26,921
Noncash portion of arbitration settlement 3,530 ---
Noncash portion of nonrecurring operating charges 2,472 11,947
Net changes in current assets and liabilities 7,112 21,181
- -----------------------------------------------------------------------------
Net cash used for operating activities ( 4,101) ( 22,539)
- -----------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of assets 22,983 118,002
Purchases of property, plant, and equipment ( 5,723) ( 8,008)
Capitalized software development costs ( 9,627) ( 5,037)
Capitalized internal use software costs ( 2,967) ( 239)
Business acquisition, net of cash acquired ( 1,874) ---
Purchase of software rights --- ( 26,292)
Other ( 311) 253
- -----------------------------------------------------------------------------
Net cash provided by investing activities 2,481 78,679
- -----------------------------------------------------------------------------
Financing Activities:
Gross borrowings 45 168
Debt repayment (17,897) ( 18,196)
Proceeds of employee stock purchases and exercise
of stock options 1,361 1,449
- -----------------------------------------------------------------------------
Net cash used for financing activities (16,491) ( 16,579)
- -----------------------------------------------------------------------------
Effect of exchange rate changes on cash ( 2,118) ( 750)
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (20,229) 38,811
Cash and cash equivalents at beginning of period 95,473 46,645
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 75,244 $ 85,456
=============================================================================
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 statements of operations and cash
flows for the quarter and six months ended June 30, 1998
to provide comparability with the current period
presentation.
NOTE 2: Litigation. As further described in the Company's Form 10-
K filing for its year ended December 31, 1998 and its Form
10-Q for the quarter ended March 31, 1999, the Company has
ongoing litigation with Intel Corporation. See
Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q for
a discussion of developments in the second quarter of
1999.
NOTE 3: Arbitration Settlement. The Company maintains an equity
ownership position in Bentley Systems, Incorporated
("BSI"), the developer and owner of MicroStation, a
software product utilized in many of the Company's
software applications and for which the Company serves as
a nonexclusive distributor. In March 1996, BSI commenced
arbitration against the Company with the American
Arbitration Association, Atlanta, Georgia, relating to the
respective rights of the companies under their April 1987
Software License Agreement and other matters, including
the Company's alleged failure to properly account for and
pay to BSI certain royalties on its sales of BSI software
products, and seeking significant damages.
On March 26, 1999, the Company and BSI executed a
Settlement Agreement and Mutual General Release ("the
Agreement") to settle this arbitration and mutually
release all claims related to the arbitration or
otherwise, except for a) certain litigation between the
companies that is the subject of a separate settlement
agreement and b) payment for products and services
obtained or provided in the normal course of business
since January 1, 1999. Both the Company and BSI expressly
deny any fault, liability, or wrongdoing concerning the
claims that were the subject matter of the arbitration and
have settled solely to avoid continuing litigation with
each other.
Under the terms of the Agreement, the Company on April 1,
1999 made payment to BSI of $12,000,000 and transferred to
BSI ownership of three million of the shares of BSI's
Class A common stock owned by the Company. The
transferred shares were valued at approximately $3,500,000
on the Company's books, and the Company's investment in
BSI (reflected in "Investments in affiliates" in the June
30, 1999 consolidated balance sheet) has been reduced
accordingly. As a result of the settlement, Intergraph's
equity ownership in BSI has been reduced to approximately
33%. Additionally, the Company had a $1,200,000 net
receivable from BSI relating to business conducted prior
to January 1, 1999 which was written off in connection
with the settlement.
In first quarter 1999, the Company accrued a nonoperating
charge to earnings of $8,562,000 ($.18 per share) in
connection with the settlement, representing the portion
of settlement costs not previously accrued. This charge
is included in "Arbitration settlement" in the
consolidated statement of operations for the six months
ended June 30, 1999.
The April 1st $12,000,000 payment to BSI was funded
primarily from existing cash balances. For further
discussion regarding the Company's liquidity, see
Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q.
NOTE 4: Zydex. On January 15, 1998, the Company's litigation with
Zydex, Inc. was settled, resulting in the Company's
purchase of 100% of the common stock of Zydex for
$26,300,000 with $16,000,000 paid at closing of the
agreement and the remaining amount to be paid in 15 equal
monthly installments, including interest. In March 1998,
the Company prepaid in full the remaining amount payable
to Zydex. The former owner of Zydex retains certain
rights to use, but not sell or sublicense, plant design
system application software ("PDS") for a period of 15
years following the date of closing. In addition to the
purchase price of common stock, the Company was required
to pay additional royalties to Zydex in the amount of
$1,000,000 at closing of the agreement. These royalties
were included in the Company's 1997 results of operations
and therefore did not affect 1998 results. The first
quarter 1998 cash payments to Zydex were funded by the
Company's primary lender and by proceeds from the sale of
the Company's Solid Edge and Engineering Modeling System
product lines. See Management's Discussion and Analysis
of Financial Condition and Results of Operations in this
Form 10-Q for a discussion of the Company's liquidity.
The Company capitalized the $26,300,000 cost of the PDS
software rights and is amortizing it over an estimated
useful life of seven years. The unamortized balance,
approximately $20,700,000 at June 30, 1999, is included in
"Other assets" in the June 30, 1999 consolidated balance
sheet.
NOTE 5: Inventories are stated at the lower of average cost or
market and are summarized as follows:
-----------------------------------------------------------
June 30, December 31,
1999 1998
-----------------------------------------------------------
(In thousands)
Raw materials $ 7,580 $ 2,739
Work-in-process 11,839 3,594
Finished goods 16,387 15,597
Service spares 15,553 16,071
-----------------------------------------------------------
Totals $51,359 $38,001
===========================================================
On June 30, 1999, the Company repurchased inventory from
SCI having a value of approximately $10,200,000, the
majority of which is classified as raw materials and work-
in-process. For a complete discussion of this
transaction, see Note 8.
NOTE 6: Property, plant, and equipment - net includes allowances
for depreciation of $246,557,000 and $259,074,000 at June
30, 1999 and December 31, 1998, respectively.
NOTE 7: In January 1999, the Company acquired the assets of PID,
an Israeli software development company, for $5,655,000.
At closing, the Company paid $2,180,000 in cash, with the
remainder due in varying installments through February
2002. The accounts and results of operations of PID have
been combined with those of the Company since the date of
acquisition using the purchase method of accounting. This
acquisition did not materially affect the Company's
revenues, net loss, or loss per share for the six months
ended June 30, 1999, nor is it expected to have a
significant impact on results for the remainder of the
year.
NOTE 8: In November 1998, the Company sold substantially all of
its U.S. manufacturing inventory and assets to SCI
Technology, Inc. (SCI) a wholly-owned subsidiary of SCI
Systems, Inc., and SCI assumed responsibility for
manufacturing of substantially all of the Company's
hardware products. The total purchase price was
$62,404,000, $42,485,000 of which was received during
fourth quarter 1998. The final purchase price installment
of $19,919,000 (included in "Other current assets" in the
December 31, 1998 consolidated balance sheet) was received
on January 12, 1999. For a complete discussion of the SCI
transaction and its anticipated impact on future operating
results and cash flows, see the Company's Form 10-K annual
report for the year ended December 31, 1998.
As part of this transaction, SCI retained the option to
sell to the Company any inventory included in the initial
sale which had not been utilized in the manufacture and
sale of finished goods within six months of the date of
the sale (the "unused inventory"). On June 30, 1999, SCI
exercised this option and sold to the Company unused
inventory having a value of approximately $10,200,000 in
exchange for a cash payment of $2,000,000 and a short-term
installment note payable in the principal amount of
$8,200,000. This note is payable in three monthly
installments due August 2, September 1, and October 1,
1999 and bears interest at a rate of 9%. At June 30,
1999, the Company has increased the value of its
inventories by the amount repurchased from SCI. The
$8,200,000 note payable is included in "Short-term debt
and current maturities of long-term debt" in the June 30,
1999 consolidated balance sheet. The Company plans to
fund its payments to SCI with existing cash balances. For
further discussion regarding the Company's liquidity, see
Management's Discussion and Analysis of Financial
Condition and Results of Operations in this Form 10-Q.
NOTE 9: In first quarter 1998, the Company sold its Solid Edge and
Engineering Modeling System product lines to Electronic
Data Systems Corporation and its Unigraphics Solutions,
Inc. subsidiary for $105,000,000 in cash. The Company
recorded a gain on this transaction of $102,767,000 ($2.13
per share). This gain is included in "Gains on sales of
assets" in the consolidated statement of operations for
the six months ended June 30, 1998.
In second quarter 1998, the Company sold the assets of its
printed circuit board manufacturing facility for
$16,002,000 in cash. The Company recorded a gain on this
transaction of $8,275,000 ($.17 per share). This gain is
included in "Gains on sales of assets" in the consolidated
statements of operations for the quarter and six months
ended June 30, 1998. The Company is now outsourcing its
printed circuit board needs. This operational change did
not materially impact the Company's results of operations
in 1998.
NOTE 10: Nonrecurring Operating Charges. In second quarter
1999, in response to continued operating losses in its
Intergraph Computer Systems (ICS) operating segment, the
Company implemented a resizing of its European computer
hardware sales organization. This resizing involved
closing most of the Company's ICS subsidiaries in Europe
and consolidating the European hardware sales efforts
within the Intergraph subsidiaries in that region. The
associated cost of $2,500,000, primarily for employee
severance pay, is included in "Nonrecurring operating
charges (credit)" in the consolidated statements of
operations for the quarter and six months ended June 30,
1999. Approximately 46 European positions were
eliminated, all in the sales and marketing area. There
were no cash outlays during the second quarter related to
this charge. This amount is expected to be paid over the
remainder of 1999. The Company estimates that this
resizing will result in annual savings of up to
$3,000,000.
In first quarter 1998, the Company reorganized its
European operations to reflect the organization of the
Company into four distinct business units and to align
operating expenses more closely with revenue levels in
that region. The cost of this reorganization, primarily
for employee severance pay and related costs, was
originally estimated at $5,400,000 and recorded as a
nonrecurring operating charge in the first quarter 1998
consolidated statement of operations. In second quarter
1998, $900,000 of the costs accrued in the first quarter
were reversed as the result of incurrence of lower
severance costs than originally anticipated. The second
quarter credit and year-to-date charge of $4,500,000 are
included in "Nonrecurring operating charges (credit)" in
the consolidated statements of operations for the quarter
and six months ended June 30, 1998. During the remainder
of 1998, an additional $1,300,000 of the costs accrued in
the first quarter were reversed. In fourth quarter 1998,
additional European reorganization costs of $2,000,000
were recorded for further headcount reductions.
Approximately 80 European positions were eliminated in the
sales and marketing, general and administrative, and pre-
and post-sales support areas. Cash outlays to date
related to this charge approximate $4,000,000, with
$2,000,000 and $900,000 expended in the first six months
of 1998 and 1999, respectively. The remaining costs are
expected to be paid over the remainder of 1999. The
Company estimates the European reorganization will result
in annual savings of approximately $7,000,000.
The remainder of first quarter 1998 nonrecurring operating
charges consists primarily of write-offs of a) certain
intangible assets, primarily capitalized business system
software no longer in use, b) goodwill recorded on a prior
acquisition of a domestic subsidiary and determined to be
of no value, and c) a noncompete agreement with a former
third party consultant. Prior to the write-off,
amortization of these intangibles accounted for
approximately $3,400,000 of the Company's annual operating
expenses.
NOTE 11: Supplementary cash flow information is summarized as
follows:
Changes in current assets and liabilities, net of the
effects of business acquisitions, divestitures, and
nonrecurring operating charges, in reconciling net income
(loss) to net cash used for operations are as follows:
-----------------------------------------------------------
Cash Provided By (Used For) Operations
Six Months Ended June 30, 1999 1998
-----------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $27,871 $31,249
Inventories (3,341) ( 2,732)
Other current assets (3,712) ( 1,888)
Increase (decrease) in:
Trade accounts payable (2,303) (10,737)
Accrued compensation and other
accrued expenses (4,273) 216
Billings in excess of sales (7,130) 5,073
-----------------------------------------------------------
Net changes in current assets
and liabilities $ 7,112 $21,181
-----------------------------------------------------------
Investing and financing transactions in the first half of
1999 that did not require cash included the acquisition of
a business in part for future obligations totaling
approximately $3,475,000 (see Note 7), the sale of a
subsidiary in part for future receivables of $8,297,000
(see Note 16), the purchase of inventory for future
obligations totaling $10,200,000 (see Note 8), the sale of
fixed assets in part for a $2,100,000 short-term note
receivable, and the financing of new financial and
administrative systems with a long-term note payable of
approximately $2,000,000. There were no significant
noncash investing and financing transactions in the first
half of 1998.
NOTE 12: Basic income (loss) per share is computed using the
weighted average number of common shares outstanding.
Diluted income (loss) per share is computed using the
weighted average number of common and equivalent common
shares outstanding. Employee stock options are the
Company's only common stock equivalent and are included in
the calculation only if dilutive.
NOTE 13: Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related
Information. This Statement replaces previous
requirements that segment information be reported along
industry lines with a new operating segment approach.
Operating segments are defined as components of a business
for which separate financial information is regularly
evaluated in determining resource allocation and operating
performance. The Company's operating segments are
Intergraph Computer Systems (ICS), Intergraph Public
Safety, Inc. (IPS), VeriBest, Inc. (VeriBest) and the
Software and Federal Systems ("Federal") business
(collectively, the Software and Federal businesses form
what is termed "Intergraph"), none of which were
considered to be reportable segments under previous
external reporting standards.
The Company's reportable segments are strategic business
units which are organized by the types of products sold
and the specific markets served. They are managed
separately due to unique technology and marketing strategy
resident in each of the Company's markets.
ICS supplies high performance Windows NT-based graphics
workstations and PCs, 3D graphics subsystems, servers, and
other hardware products. IPS develops, markets, and
implements systems for public safety agencies. VeriBest
serves the electronic design automation market, providing
software design tools, design processes, and consulting
services for developers of electronic systems. Intergraph
supplies software and solutions, including hardware
purchased from ICS, consulting, and services to the
process and building and infrastructure industries and
provides services and specialized engineering and
information technology to support Federal government
programs.
The Company evaluates performance of the operating
segments based on revenue and income from operations.
Sales among the operating segments, the most significant
of which are sales of hardware products from ICS to the
other segments, are accounted for under a transfer pricing
policy. Transfer prices approximate prices that would be
charged for the same or similar property to similarly
situated unrelated buyers. In the U.S., intersegment
sales of products and services to be used for internal
purposes are charged at cost. For international
subsidiaries, transfer price is charged on intersegment
sales of products and services to be used for either
internal purposes or sale to customers.
The following table sets forth revenues and operating
income (loss) by operating segment for the quarters and
six months ended June 30, 1999 and 1998.
--------------------------------------------------------------------
Quarter Ended June 30, Six Months
Ended June 30,
1999 1998 1999 1998
--------------------------------------------------------------------
(In thousands)
Revenues
ICS:
Unaffiliated customers $52,844 $62,169 $115,021 $116,402
Intersegment revenues 33,261 45,351 64,409 102,128
--------------------------------------------------------------------
86,105 107,520 179,430 218,530
--------------------------------------------------------------------
IPS:
Unaffiliated customers 22,198 13,035 42,532 25,410
Intersegment revenues 2,547 69 3,504 134
--------------------------------------------------------------------
24,745 13,104 46,036 25,544
--------------------------------------------------------------------
VeriBest:
Unaffiliated customers 6,568 6,046 14,035 12,951
Intersegment revenues 48 7 101 192
--------------------------------------------------------------------
6,616 6,053 14,136 13,143
--------------------------------------------------------------------
Intergraph Software:
Unaffiliated customers 114,406 128,746 235,300 268,230
Intersegment revenues 3,953 370 8,566 1,001
--------------------------------------------------------------------
118,359 129,116 243,866 269,231
--------------------------------------------------------------------
Intergraph Federal:
Unaffiliated customers 37,628 36,617 78,833 69,438
Intersegment revenues 2,147 1,053 3,706 2,477
--------------------------------------------------------------------
39,775 37,670 82,539 71,915
--------------------------------------------------------------------
275,600 293,463 566,007 598,363
--------------------------------------------------------------------
Eliminations (41,956) (46,850) (80,286) (105,932)
--------------------------------------------------------------------
Total revenues $233,644 $246,613 $485,721 $492,431
====================================================================
--------------------------------------------------------------------
Operating income (loss) before nonrecurring charges
ICS $(12,839) $(19,832) $(19,506) $(39,383)
IPS 3,259 446 5,186 1,303
VeriBest ( 2,261) ( 3,761) ( 4,062) ( 8,459)
Intergraph Software 4,137 1,934 7,530 2,359
Intergraph Federal 1,402 ( 858) 5,635 ( 3,316)
Corporate (10,699) ( 7,450) (19,687) (14,274)
--------------------------------------------------------------------
Total $(17,001) $(29,521) $(24,904) $(61,770)
====================================================================
Effective January 1, 1999, the Utilities business of
Intergraph was merged into IPS, increasing the operating
segment's first half 1999 revenues and operating income by
$19,711,000 and $2,734,000, respectively, and reducing
the Intergraph Software operating segment figures by those
amounts.
Amounts included in the "Corporate" column consist of
general corporate expenses, primarily general and
administrative expenses (including legal fees of
$7,595,000 and $5,215,000 for the first six months of 1999
and 1998, respectively) remaining after charges to the
operating segments based on segment usage of those
services.
Significant profit and loss items for the first six months
of 1999 that are not allocated to the segments and not
included in the analysis above include an $8,562,000
charge for an arbitration settlement agreement reached
with Bentley Systems, Inc. (see Note 3), an $11,505,000
gain on the sale of a subsidiary (see Note 16), and
nonrecurring operating charges of $2,472,000 (see Note
10). Such items for the first six months of 1998 include
gains on sales of assets of $111,042,000 (see Note 9) and
nonrecurring operating charges of $13,902,000 (see Note
10).
The Company does not evaluate performance or allocate
resources based on assets and, as such, it does not
prepare balance sheets for its operating segments, other
than those of its wholly-owned subsidiaries.
NOTE 14: Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Under this Statement, all
nonowner changes in equity during a period are reported as
a component of comprehensive income (loss). During the
first six months of 1999 and 1998, the Company's
comprehensive income (loss) totaled $(36,949,000) and
$28,172,000, respectively. Comprehensive income (loss)
differs from net income (loss) due to foreign currency
translation adjustments.
NOTE 15: Effective January 1, 1999, the Company adopted American
Institute of Certified Public Accountants Statement of
Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which
defines computer software costs to be capitalized or
expensed to operations. Implementation of this new
accounting standard did not significantly affect the
Company's results of operations for the six months ended
June 30, 1999, nor is it expected to have a significant
impact on results for the remainder of the year, as the
Company has historically been in substantial compliance
with the practice required by the Statement.
NOTE 16: On April 16, 1999, the Company completed the sale of
InterCAP Graphics Systems, Inc., a wholly owned
subsidiary, to Micrografx, a global provider of enterprise
graphics software, for $12,150,000, consisting of
$3,853,000 in cash received at closing, a deferred payment
of $2,500,000 due in August 1999 (included in "Other
current assets" in the June 30, 1999 consolidated balance
sheet), and a $5,797,000 convertible subordinated
debenture due in March 2002 (included in "Other assets" in
the June 30, 1999 consolidated balance sheet). The
resulting gain on this transaction of $11,505,000 is
included in "Gains on sales of assets" in the consolidated
statements of operations for the quarter and six months
ended June 30, 1999. InterCAP's revenues and losses for
1998 were $4,660,000 and $1,144,000, respectively,
($3,600,000 and $1,853,000 for 1997). Assets of the
subsidiary at December 31, 1998 totaled $1,550,000. The
subsidiary did not have a material effect on the Company's
results of operations for the period in 1999 prior to the
sale.
NOTE 17: In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivatives and Hedging Activities
(SFAS 133), requiring companies to recognize all
derivatives as either assets or liabilities on the balance
sheet and to measure the instruments at fair value. In
July 1999, the FASB delayed the implementation of this new
accounting standard to fiscal years beginning after June
15, 2000 (calendar year 2001 for the Company). The
Company is evaluating the effects of adopting SFAS 133,
but does not anticipate that it will have a material
impact on its consolidated operating results or financial
position.
INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
- -------
Earnings. In second quarter 1999, the Company incurred a net loss
of $.25 per share on revenues of $233.6 million, including an
$11.5 million ($.24 per share) gain on the sale of a subsidiary
company and a $2.5 million ($.05 per share) nonrecurring operating
charge for the resizing of its European computer hardware sales
organization. The second quarter 1998 loss was $.43 per share on
revenues of $246.6 million, including an $8.3 million ($.17 per
share) gain on the sale of its printed circuit board manufacturing
facility. The second quarter 1999 loss from operations was $.40
per share versus a loss of $.59 per share for the second quarter
of 1998. This loss improvement resulted primarily from a 9%
decline in operating expenses and a 3.7 point improvement in
systems gross margin. For the first half of 1999, the Company
incurred a net loss of $.61 per share on revenues of $485.7
million, including an $8.6 million ($.18 per share) charge for
settlement of its arbitration proceedings with Bentley Systems,
Inc. (See "Arbitration Settlement" following), the $.24 per share
gain on the sale of a subsidiary, and the $.05 per share charge
for resizing of the European computer hardware sales organization.
For the first half of 1998, the Company earned net income of $.59
per share on revenues of $492.4 million, including a $102.8
million ($2.13 per share) gain on the sale of its Solid Edge and
Engineering Modeling System product lines, a $13.9 million ($.29
per share) charge for nonrecurring operating expenses (primarily
employee termination costs and write-off of certain intangible
assets), and the $.17 per share gain on the sale of the printed
circuit board facility. Excluding nonrecurring charges and one
time gains, the first half 1999 loss from operations was $.51 per
share versus a loss of $1.28 per share for the first half of 1998.
The improvement is the result of a 13% decline in operating
expenses and a 2.1 point increase in gross margin. While the
Company has realized considerable improvements in its operating
expense levels and gross margin, they have been insufficient to
return the Company to profitability, as revenue levels remain
suppressed and inadequate to cover the current level of expenses.
Remainder of the Year. The Company expects that the industry will
continue to be characterized by higher performance and lower
priced products, intense competition, rapidly changing
technologies, shorter product cycles, and development and support
of software standards that result in less specific hardware and
software dependencies by customers. The Company believes that its
operating system and hardware architecture strategies are the
correct choices. However, competing operating systems and
products are available in the market, and competitors of the
Company offer Windows NT and Intel as the systems for their
products. The Company has lost significant market share in this
generic undifferentiated market due to the actions of Intel and is
attempting to recover from the resulting loss of momentum.
Improvement in the Company's operating results will depend on its
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, offer enhanced performance, and meet customers'
requirements for standardization and interoperability, and will
further depend on its ability to successfully implement its
strategic direction. In addition, the Company faces significant
operational and financial uncertainty of unknown duration due to
its dispute with Intel. (See the Company's Form 10-K annual
report for the year ended December 31, 1998 and "Intel litigation"
following for a complete description of the Company's dispute with
Intel and for a discussion of the effects of this dispute on the
Company's operations.) To achieve and maintain profitability, the
Company must increase its sales volume and/or align its operating
expenses more closely with the level of revenue and gross margin
currently being generated. The Company is currently evaluating
the performance of each of its operating segments relative to
recovery plans developed in January 1999 and may implement
corrective actions during the third quarter, which could result in
significant operating charges during that quarter. There can be
no assurance that any actions taken by the Company will restore
profitability.
Nonrecurring Operating Charges. In second quarter 1999, in
response to continued operating losses in its Intergraph Computer
Systems (ICS) operating segment, the Company implemented a
resizing of its European computer hardware sales organization.
This resizing involved closing most of the Company's ICS
subsidiaries in Europe and consolidating the European hardware
sales efforts within the Intergraph subsidiaries in that region.
The associated cost of $2.5 million, primarily for employee
severance pay, is included in "Nonrecurring operating charges
(credit)" in the consolidated statements of operations for the
quarter and six months ended June 30, 1999. Approximately 46
European positions were eliminated, all in the sales and marketing
area. There were no cash outlays during the second quarter
related to this charge, and as such, the entire cost is included
in "Other accrued expenses" in the June 30, 1999 consolidated
balance sheet. This amount is expected to be paid over the
remainder of 1999. The Company estimates that this resizing will
result in annual savings of up to $3 million.
In first quarter 1998, the Company reorganized its European
operations to reflect the organization of the Company into four
distinct business units and to align operating expenses more
closely with revenue levels in that region. The cost of this
reorganization, primarily for employee severance pay and related
costs, was originally estimated at $5.4 million and recorded as a
nonrecurring operating charge in the first quarter 1998
consolidated statement of operations. In second quarter 1998, $.9
million of the costs accrued in the first quarter were reversed as
the result of incurrence of lower severance costs than originally
anticipated. The second quarter credit and year-to-date charge of
$4.5 million are included in "Nonrecurring operating charges
(credit)" in the consolidated statements of operations for the
quarter and six months ended June 30, 1998. During the remainder
of 1998, an additional $1.3 million of the costs accrued in the
first quarter were reversed. In fourth quarter 1998, additional
European reorganization costs of $2 million were recorded for
further headcount reductions. Approximately 80 European positions
were eliminated in the sales and marketing, general and
administrative, and pre- and post-sales support areas. Cash
outlays to date related to this charge approximate $4.0 million,
with $2.0 million and $.9 million expended in the first six months
of 1998 and 1999, respectively. The remaining costs are expected
to be paid over the remainder of 1999 and are included in "Other
accrued expenses" in the June 30, 1999 consolidated balance sheet.
The Company estimates the European reorganization will result in
annual savings of approximately $7 million.
The remainder of the first quarter 1998 nonrecurring operating
charges consists primarily of write-offs of a) certain intangible
assets, primarily capitalized business system software no longer
in use, b) goodwill recorded on a prior acquisition of a domestic
subsidiary and determined to be of no value, and c) a noncompete
agreement with a former third party consultant. Prior to the
write-off, amortization of these intangibles accounted for
approximately $3.4 million of the Company's annual operating
expenses.
Litigation. As further described in the Company's Form 10-K
filing for its year ended December 31, 1998 and its Form 10-Q for
the quarter ended March 31, 1999, the Company has extensive
ongoing litigation with Intel Corporation, and its business is
subject to certain risks and uncertainties. Significant
litigation developments during the second quarter of 1999 are
discussed below.
Intel Litigation. On June 17, 1998, Intel filed a motion before
the U.S. District Court, the Northern District of Alabama,
Northeastern Division (the "Alabama Court") seeking a summary
judgment holding that Intel is licensed to use the patents that
the Company asserted against Intel in the Company's original
complaint. This "license defense" was based on Intel's
interpretation of the facts surrounding the acquisition by the
Company of the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. (For further background
information regarding the Company's complaints against Intel, see
the Company's Form 10-K annual report for the year ended December
31, 1998.) The Company filed a cross motion with
the Alabama Court September 15, 1998 requesting summary
adjudication in favor of the Company. On June 4, 1999, the
Alabama Court granted the Company's motion and ruled that Intel
has no license to use the Company's Clipper patents as Intel had
claimed in its motion for summary judgment. Intel has requested
leave of the Alabama Court to appeal this ruling, but no further
decision has been entered. The Company is confident of its sole
ownership of the Clipper patents.
In a separate order on June 15, 1999, the Alabama Court has
extended the discovery phase of the lawsuit through October 11,
1999 and rescheduled the trial date to June 12, 2000.
The Company has other ongoing litigation, none of which is
considered to represent a material contingency for the Company at
this time. However, any unanticipated unfavorable ruling in any
of these proceedings could have an adverse impact on the Company's
results of operations and cash flow.
Arbitration Settlement. The Company maintains an equity ownership
position in Bentley Systems, Incorporated ("BSI"), the developer
and owner of MicroStation, a software product utilized in many of
the Company's software applications and for which the Company
serves as a nonexclusive distributor. In March 1996, BSI
commenced arbitration against the Company with the American
Arbitration Association, Atlanta, Georgia, relating to the
respective rights of the companies under their April 1987 Software
License Agreement and other matters, including the Company's
alleged failure to properly account for and pay to BSI certain
royalties on its sales of BSI software products, and seeking
significant damages.
On March 26, 1999, the Company and BSI executed a Settlement
Agreement and Mutual General Release ("the Agreement") to settle
this arbitration and mutually release all claims related to the
arbitration or otherwise, except for a) certain litigation between
the companies that is the subject of a separate settlement
agreement and b) payment for products and services obtained or
provided in the normal course of business since January 1, 1999.
Both the Company and BSI expressly deny any fault, liability, or
wrongdoing concerning the claims that were the subject matter of
the arbitration and have settled solely to avoid continuing
litigation with each other.
Under the terms of the Agreement, the Company on April 1, 1999
made payment to BSI of $12 million and transferred to BSI
ownership of three million of the shares of BSI's Class A common
stock owned by the Company. The transferred shares were valued at
approximately $3.5 million on the Company's books, and the
Company's investment in BSI (reflected in "Investments in
affiliates" in the June 30, 1999 consolidated balance sheet) has
been reduced accordingly. As a result of the settlement,
Intergraph's equity ownership in BSI has been reduced to
approximately 33%. Additionally, the Company had a $1.2 million
net receivable from BSI relating to business conducted prior to
January 1, 1999 which was written off in connection with the
settlement.
In first quarter 1999, the Company accrued a nonoperating charge
to earnings of approximately $8.6 million ($.18 per share) in
connection with the settlement, representing the portion of
settlement costs not previously accrued. This charge is included
in "Arbitration settlement" in the consolidated statement of
operations for the six months ended June 30, 1999.
The April 1st $12 million payment to BSI was funded primarily from
existing cash balances. For further discussion regarding the
Company's liquidity, see "Liquidity and Capital Resources"
following.
Year 2000 Issue. As further described in the Company's Form 10-K
annual report for the year ended December 31, 1998 and its Form 10-
Q for the quarter ended March 31, 1999, the Company has initiated
a program to mitigate and/or prevent the possible adverse effects
on its operations of Year 2000 problems in its software and
hardware products sold to customers and in its internally used
software and hardware.
The Company's efforts to identify and resolve Year 2000 issues
related to its hardware and software product offerings are
substantially complete. All products currently offered in the
Company's standard price list have a Year 2000 compliant version
available. In addition, the Company has completed a significant
effort to contact its customers and business partners to ensure
that customers are aware of how to acquire detailed Year 2000
information regarding any Intergraph-produced product. The
Company's Web site allows customers to request specific product
information related to the Year 2000 issue, and provides a
mechanism for requesting specific product upgrade paths.
Customers under maintenance contract with the Company are being
upgraded to compliant versions of the Company's software, and
selected hardware remedies have been completed where appropriate.
Accordingly, the Company does not believe that any Year 2000
problems in its installed base of products or in its current
product offerings present a material exposure for the Company.
However, the Company could suffer a loss of maintenance revenue
should its customers discontinue any noncompliant products and not
replace them with other products of the Company, and product sales
could be lost should customers replace any noncompliant products
with products of other companies. In addition, any liability
claims by customers would increase the Company's legal expenses
and, if successful, could have an adverse impact on the results of
operations and financial position of the Company. The Company's
product compliance costs have not had and are not anticipated to
have a material impact on its results of operations or financial
condition.
Year 2000 readiness of the Company's business critical internal
systems is a top priority of the Company's Year 2000 program team.
All U.S. business critical internal systems upgrades and
programming changes have been implemented and tested as of the end
of second quarter 1999. Remaining Year 2000 efforts related to
the Company's U.S. internal systems involve only non-critical
business systems and are expected to be completed by the end of
the third quarter. The Company believes that it has successfully
implemented all internal systems changes and replacements
necessary to ensure the Year 2000 compliance of these internal
systems, but has contingency plans to perform further upgrades to
existing systems if unanticipated problems occur. The majority of
the Company's business systems were developed internally, and as a
result, the Company has the available source code and staff to
correct any problems which might arise. Efforts to upgrade and
replace noncompliant international accounting systems are nearing
completion. All Year 2000 efforts with respect to these systems
are scheduled to be completed by October 31, 1999, and the Company
has not identified any significant risks in this area. The
Company has employed no additional resources to perform the
upgrades and programming changes necessary for its internal
systems, and as such, the related costs have not had and are not
anticipated to have a material impact on its results of operations
or financial condition.
The Company is conducting a program of investigation with its
critical suppliers to ensure continuous and uninterrupted supply,
and includes Year 2000 provisions in its new supplier agreements.
This program consists primarily of a major survey campaign and
follow-up with significant suppliers to monitor compliance. The
Company has also initiated discussions with other entities with
which it interacts electronically, including customers and
financial institutions, to ensure those parties have appropriate
plans to remedy any Year 2000 issues. To date, responses to third
party Year 2000 surveys provide assurance that these third parties
will achieve Year 2000 compliance, and no significant risks have
been identified. There cannot be complete assurance that the
systems of other companies on which the Company relies will be
timely converted, and the Company could be adversely impacted by
any suppliers, customers, and other businesses who do not
successfully address this issue. The Company continues to assess
these risks in order to reduce any potential adverse impact.
Development of contingency plans to address potential third party
noncompliance issues is underway and will be completed by the end
of third quarter 1999.
The Company believes it has effectively resolved the Year 2000
issue with respect to its internal systems in a timely manner;
however, there cannot be complete assurance that unforeseen
problems will not occur, which could conceivably result in delays
in sales order processing, shipping, invoicing, and collections,
among other areas. The Company believes its most reasonably
likely worst case scenarios, however, relate to the potential
noncompliance of third parties. If Year 2000 compliance is not
achieved by significant vendors and other third parties, including
utilities and transportation providers, among others, the Company
could experience interruptions in its normal business activities,
potentially resulting in material adverse effects on its operating
results.
The costs of the Year 2000 project and the Company's state of
readiness are based on management's best estimates, which have
been derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third
party modification plans, and other factors. There can be no
assurance that these estimates will be achieved, and actual
results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant
computer codes in a timely manner, and similar uncertainties.
ORDERS/REVENUES
- ---------------
Orders. Second quarter and first half 1999 systems orders totaled
$163.7 million and $307.7 million, respectively, reflecting
declines of approximately 27% and 19% from the same prior year
periods. Order volumes have declined worldwide, primarily in the
Company's hardware business, though some weakness occurred in the
Company's software segments as well. U.S. systems orders
decreased 30% and 24%, respectively, from the second quarter and
first half 1998 levels as a result of weakness in both commercial
and federal product sectors. The decline in orders from the
federal government was also the result of weakening demand for the
Company's hardware product offerings. International systems
orders declined by 21% and 12% from the second quarter and first
half 1998 levels.
Revenues. Total revenues for second quarter and first half 1999
were $233.6 million and $485.7 million, respectively, down 5% and
1%, from the comparable prior year periods. The factors noted
previously as contributing to the orders decline have had a
similar impact on the Company's revenues. Year-to-date declines
in systems and maintenance revenues of 2% and 6%, respectively,
were partially offset by a 16% increase in professional services
revenue. Geographically, the composition of the Company's
revenues has remained consistent with the first half and full year
1998 levels, with European revenues representing 31% of total
revenues and total international revenues representing 50% of the
consolidated total. Currency fluctuations did not have a
significant impact on revenues for the first half of 1999 as
weakening of the U.S. dollar in the Company's Asian markets was
offset by strengthening of the dollar in Europe and other
international regions.
Systems. Systems revenue for the second quarter and first half of
1999 was $158.3 million and $328.6 million, respectively, down 6%
and 2%, respectively, from the same prior year periods.
Competitive conditions manifested in declining per unit sales
prices continue to adversely affect the Company's systems revenues
and margin. In addition, the Company's hardware revenues remain
low as the recovery of momentum lost due to Intel's actions
continues to be slow. U.S. systems revenues were flat with both
second quarter 1998 and first half 1998 levels. International
systems revenues were down approximately 12% from second quarter
1998 and 6% from the first half of 1998. Asia Pacific revenues
remained relatively flat with the first half of 1998, while
European revenues have declined by 2%. Excluding the impact of a
weaker dollar, the revenue decline in the Asia Pacific region was
5%. Currency fluctuations did not significantly affect the
decline in European revenues. Revenues for the Americas declined
by approximately 22% primarily due to weak economic conditions in
Latin America. Currency devaluation accounted for approximately
one third of this decline.
Hardware revenues for the first half of 1999 declined 15% from the
prior year period. Unit sales of workstations and servers were up
8% from first half 1998, while workstation and server revenues
declined by 8% due to a 15% decline in the average per unit
selling price. Price competition in the industry continues to
erode per unit selling prices. Sales of peripheral hardware
products declined by 25% from the prior year period due primarily
to a 44% decline in sales of storage devices and memory and a 47%
decline in sales of Intel options and upgrades, as well as the
loss of revenue resulting from the April 1998 sale of the
Company's printed circuit board manufacturing facility. Software
revenues declined 6% from the prior year level. Significant
increases in sales of Geomedia, photogrammetry, ICS and Federal
software were offset by declines in revenues from
interoperability, Microstation, and other software products.
Plant design remains the Company's highest volume software
offering, representing 29% of total software sales for the first
half of 1999. Sales of Windows-based software represented
approximately 90% of total software revenues in the first half of
1999 and 1998.
Maintenance and Services. Maintenance and services revenue
consists of revenues from maintenance of Company systems and from
Company provided services, primarily training and consulting.
These forms of revenue totaled $75.4 million for the second
quarter and $157.2 million for the first half of 1999, down 4% and
1%, respectively, from the comparable prior year periods.
Maintenance revenues for the first half of 1999 totaled $100.2
million, down 6% from the same prior year period. The trend in
the industry toward lower priced products and longer warranty
periods has limited the growth potential for maintenance revenue,
and the Company believes this trend will continue in the future.
Services revenue represents approximately 12% of total first half
1999 revenues and has increased 16% from the same prior year
period. Growth in services revenue has acted to offset the
decline in maintenance revenue. The Company is endeavoring to
grow its services business and has redirected the efforts of its
hardware maintenance organization to focus increasingly on systems
integration. Revenues from these services, however, typically
produce lower gross margins than maintenance revenues.
GROSS MARGIN
- ------------
The Company's total gross margin for the second quarter of 1999
was 34%, up 3 points from the second quarter 1998 level. For the
first half of 1999, total gross margin was 33.5%, up 2.1 points
from the first half of 1998 and 2 points from the full year 1998
level.
Systems margin for the second quarter was 31.6%, up 3.7 points
from second quarter 1998. First half 1999 margin was 30.5%, up
2.5 points from the first half of 1998 and 1.3 points from the
full year 1998 level primarily due to an increased software
content in the product mix and a decline in unfavorable
manufacturing variances as the result of outsourcing the
Company's manufacturing operations to SCI in fourth quarter 1998.
In general, the Company's systems margin may be lowered by price
competition, a higher hardware content in the product mix, a
stronger U.S. dollar in international markets, the 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. 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 reductions in prices of
component parts, which generally tend to decline over time in the
industry. While the Company is unable to predict the effects that
many of these factors may have on its systems margins, it expects
continuing pressure on its systems margin as the result of
increasing industry price competition.
Maintenance and services margin for the second quarter of 1999 was
39%, up 1.3 points from the second quarter of 1998. Year to date
maintenance and services margin is 39.7%, up 1.1 point from the
same prior year period and 2.8 points from the full year 1998
level primarily due to significant improvement in services
revenues without a corresponding increase in cost. The Company
continues to monitor its maintenance and services cost closely and
has taken certain measures, including reductions in headcount, to
align these costs with the current revenue level. The Company
believes that the trend in the industry toward lower priced
products and longer warranty periods will continue to curtail its
maintenance revenue, which will pressure maintenance margin in the
absence of corresponding cost reductions.
OPERATING EXPENSES
- ------------------
Operating expenses for the second quarter and first half of 1999
declined by 9% and 13%, respectively, from the comparable prior
year periods. In response to the level of its operating losses,
the Company has taken various actions, including employee
terminations and sales of unprofitable business operations, to
reduce its average employee headcount by approximately 12% from
first half 1998.
Product development expense for the second quarter and first half
of 1999 declined by 21% and 24%, respectively, from the same prior
year periods due primarily to decreases in labor and overhead
expenses resulting from the headcount decline and to an increase
in software development projects qualifying for capitalization,
primarily related to the Company's federal shipbuilding effort.
Sales and marketing expense for the second quarter and first half
of 1999 declined by 18% and 19%, respectively, from the same prior
year periods. Sales and marketing expenses have declined across
the board, with the largest decreases occurring in salaries,
commissions, advertising, trade shows, and public relations
expenses. The Company's sales and marketing expenses are
inherently activity based and can be expected to increase in
quarters of higher activity levels. General and administrative
expense for the second quarter and first half of 1999 increased by
22% and 10%, respectively, from the same prior year periods due to
an increase in legal fees and U.S. bad debts expense.
NONOPERATING INCOME AND EXPENSE
- -------------------------------
Interest expense was $1.4 million for second quarter and $2.8
million for the first half of 1999 versus $1.9 million and $4.1
million, respectively, for the corresponding prior year periods.
The Company's average outstanding debt has declined in comparison
to the same prior year periods due primarily to repayment of
borrowings under the Company's revolving credit facility utilizing
proceeds from sales of assets. See "Liquidity and Capital
Resources" following for a discussion of the Company's current
financing arrangements.
In second quarter 1999, the Company completed the sale of InterCAP
Graphics Systems, Inc., a wholly owned subsidiary, to Micrografx,
a global provider of enterprise graphics software, for $12.2
million, consisting of $3.9 million in cash received at closing, a
deferred payment of $2.5 million due in August 1999, and a $5.8
million convertible subordinated debenture due in March 2002. The
resulting gain on this transaction of $11.5 million is included in
"Gains on sales of assets" in the consolidated statements of
operations for the quarter and six months ended June 30, 1999.
InterCAP's revenues and losses for 1998 were $4.7 million and $1.1
million, respectively ($3.6 million and $1.9 million for 1997).
Assets of the subsidiary at December 31, 1998 totaled $1.6
million. The subsidiary did not have a material effect on the
Company's results of operations for the period in 1999 prior to
the sale.
In first quarter 1998, the Company sold its Solid Edge and
Engineering Modeling System product lines to Electronic Data
Systems Corporation and its Unigraphics Solutions, Inc. subsidiary
for $105 million in cash. The Company recorded a gain on this
transaction of $102.8 million. This gain is included in "Gains on
sales of assets" in the consolidated statement of operations for
the six months ended June 30, 1998. Full year 1997 revenues and
operating loss for these product lines were $35.2 million and $4.1
million, respectively. The Company estimates the sale of this
business has resulted in an annual improvement in its operating
results of approximately $5 million.
In second quarter 1998, the Company sold the assets of its printed
circuit board manufacturing facility for $16 million in cash. The
Company recorded a gain on this transaction of $8.3 million. This
gain is included in "Gains on sales of assets" in the consolidated
statements of operations for the quarter and six months ended June
30, 1998. The Company is now outsourcing its printed circuit
board needs. This operational change did not materially impact
the Company's results of operations in 1998.
"Other income (expense) - net" in the consolidated statements of
operations consists primarily of interest income, foreign exchange
gains (losses), equity in the earnings of investee companies, and
other miscellaneous items of nonoperating income and expense.
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 1999, approximately 50% (51%
for the full year 1998) 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 U.S. dollars for
reporting purposes. A weaker U.S. dollar will increase the level
of reported U.S. dollar orders and revenues, increase the dollar
gross margin, and increase reported dollar operating expenses of
the international subsidiaries. For the first half of 1999, the
U.S. dollar weakened on average from its first half 1998 level,
which increased reported dollar revenues, orders, and gross
margin, but also increased reported dollar operating expenses in
comparison to the prior year period. The Company estimates that
this weakening of the U.S. dollar in its international markets,
primarily in Asia, improved its results of operations for the
first half of 1999 by approximately $.03 per share in comparison
to the first half of 1998. Operating results for first half 1998
were reduced by $.10 per share from first half 1997 as a result of
strengthening of the U.S. dollar.
The Company conducts business in all major markets outside the
U.S., but the most significant of these operations with respect to
currency risk are located in Europe and Asia. Local currencies
are the functional currencies for the Company's European
subsidiaries. The U.S. dollar is the functional currency for all
other international subsidiaries. With respect to the currency
exposures in these regions, 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 will therefore enter
into forward exchange contracts related to certain balance sheet
items, primarily intercompany receivables, payables, and
formalized intercompany debt, when a specific risk has been
identified. 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,
generally less than three months in duration, are purchased with
maturities reflecting the expected settlement dates of the balance
sheet items being hedged, 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 does not generally
hedge exposures related to foreign currency denominated assets and
liabilities that are not of an intercompany nature, unless a
significant risk has been identified. It is possible the Company
could incur significant exchange gains or losses in the case of
significant, abnormal fluctuations in a particular currency. By
policy, the Company is prohibited from market speculation via
forward exchange contracts and therefore does not take currency
positions exceeding its known financial statement exposures, and
does not otherwise trade in currencies.
At June 30, 1999, the Company's only outstanding forward contracts
related to formalized intercompany loans between the Company's
European subsidiaries and are immaterial to the Company's present
financial position. The Company is not currently hedging any of
its foreign currency risks in the Asia Pacific region or its U.S.
exposures related to foreign currency denominated intercompany
loans.
Euro Conversion. On January 1, 1999, eleven member countries of
the European Monetary Union (EMU) fixed the conversion rates of
their national currencies to a single common currency, the "Euro".
The national currencies of the participating countries will
continue to exist through July 1, 2002. Euro currency will begin
to circulate on January 1, 2002. With respect to the Company,
U.S. and European business systems are being upgraded to
accommodate the Euro. Conversion of all financial systems will be
completed at various times through the remainder of 1999. The
Company is prepared to conduct business in Euros during 1999 with
those customers and vendors who choose to do so. While the
Company continues to evaluate the potential impacts of the common
currency, at present, it has not identified any significant risks
related to the Euro and does not anticipate that full Euro
conversion in 2002 will have a material impact on its results of
operations or financial condition. To date, the conversion to one
common currency has not impacted the Company's pricing in its
European markets. The Euro did not have a significant impact on
the Company's results of operations or cash flows in the second
quarter or first half of 1999.
INCOME TAXES
- ------------
The Company incurred a pretax loss of $29.7 million in the first
half of 1999 versus pretax income of $32 million in the first half
of 1998. The first half 1999 loss generated no net financial
statement tax benefit, as tax expenses in individually profitable
international subsidiaries offset available tax benefits. Income
tax expense for the first half of 1998 resulted primarily from
taxes on individually profitable international subsidiaries and
U.S. federal alternative minimum tax. The sale of the Solid Edge
and Engineering Modeling System product lines did not create a
significant regular tax liability for the Company due to the
availability of net operating loss carryforwards to offset
earnings.
RESULTS BY OPERATING SEGMENT
- ----------------------------
In second quarter 1999, Intergraph Computer Systems incurred an
operating loss of $12.8 million on revenues of $86.1 million,
compared to a second quarter 1998 operating loss of $19.8 million
on revenues of $107.5 million. Year-to-date, ICS has incurred an
operating loss of $19.5 million on revenues of $179.4 million,
compared to an operating loss of $39.4 million on revenues of
$218.5 million for first half 1998. These operating losses
exclude the impact of certain nonrecurring income and operating
expense items associated with ICS's operations, including the
second quarter 1998 gain of $8.3 million on the sale of the
printed circuit board manufacturing facility and nonrecurring
operating charges of $2.5 million incurred in second quarter 1999.
ICS's operating loss improvement for both the second quarter and
first half of 1999 resulted primarily from an approximate 25%
decline in operating expenses due to headcount reductions achieved
in 1998. During 1998, ICS's headcount was reduced by
approximately 33% as the result of employee terminations, the
outsourcing of manufacturing, and normal attrition. ICS's first
half 1998 results of operations were significantly adversely
impacted by factors associated with the Company's dispute with
Intel, the effects of which included lost momentum, lost revenue
and margin as well as increased operating expenses, primarily for
marketing and public relations expenses. (See the Company's Form
10-K annual report for the year ended December 31, 1998 for a
complete description of the Company's dispute with Intel and its
effects on the operations of ICS and the Company.) ICS's first
half 1998 margins were also severely impacted by volume and
inventory value related manufacturing variances incurred prior to
the outsourcing of its manufacturing to SCI in fourth quarter
1998. In 1999, this outsourcing has contributed to a 7.6 point
improvement in ICS's systems margins. However, systems gross
margin remains insufficient to cover the operating segment's
current level of operating expenses, and the recovery of lost
momentum caused by Intel's actions continues to be slow. In
response to these negative circumstances, in second quarter 1999,
the Company incurred a $2.5 million charge to consolidate its ICS
operations with Intergraph operations in most European locations
in order to reduce duplicate expenses. (See "Nonrecurring
Operating Charges" preceding.) The Company is continuing to
investigate possibilities for further expense reductions in ICS
and may take additional actions in third quarter 1999.
In second quarter 1999, Intergraph Public Safety earned operating
income of $3.3 million on revenues of $24.7 million, compared to
operating income in second quarter 1998 of $.4 million on revenues
of $13.1 million. Year-to-date, IPS has earned operating income
of $5.2 million on revenues of $46 million versus operating income
of $1.3 million on revenues of $25.5 million in first half 1998.
Effective January 1, 1999, the Utilities business of Intergraph
was merged into IPS, increasing the operating segment's first
half 1999 revenues and operating income by $19.7 million and $2.7
million, respectively. First half 1998 operating results for the
Utilities business are reflected in the Intergraph Software
operating segment.
VeriBest incurred operating losses of $2.3 million and $3.8
million in the second quarters of 1999 and 1998, respectively, on
revenues of $6.6 million and $6.1 million. In the first six
months of 1999 and 1998, VeriBest incurred operating losses of
$4.1 million and $8.5 million, respectively, on revenues of $14.1
million and $13.1 million. Systems gross margin has increased by
18 points from the first half 1998 level as the result of a 16%
increase in revenues combined with declining royalty costs.
Operating expenses have declined by 14% from the first half of
1999, primarily as the result of restructuring actions taken in
fourth quarter 1998. Average employee headcount has declined by
approximately 10% from the first half 1998 level. VeriBest
continues to direct its selling efforts toward a newly developed
line of proprietary products and monitor its operating expenses
versus the level of revenues being generated.
In second quarter 1999, the Software business earned operating
income of $4.1 million on revenues of $118.4 million, compared to
second quarter 1998 operating income of $1.9 million on revenues
of $129.1 million. Year-to-date, the Software business has earned
operating income of $7.5 million on revenues of $243.9 million
versus operating income of $2.4 million on revenues of $269.2
million in first half 1998. Operating income excludes the impact
of certain nonrecurring income and operating expense items
associated with Software operations, including the first quarter
1999 arbitration settlement charge of $8.6 million and the second
quarter 1999 gain on the sale of InterCAP. Year-to-date 1998
operating income excludes the $102.8 million gain on the sale of
the business unit's Solid Edge and Engineering Modeling System
product lines and nonrecurring operating charges of $13.9 million,
primarily for asset write-offs and employee terminations. Margins
have remained relatively stable in this operating segment while
operating expenses have declined by 15% from the 1998 year-to-date
level. This decline is due in part to the transfer of the
Utilities organization to IPS, but the majority of the expense
savings is the result of headcount reductions, particularly in the
sales and marketing area as the operating segment has reorganized
its sales force to align expenses with the volume of revenue
generated.
In second quarter 1999, Federal earned operating income of $1.4
million on revenues of $39.8 million, compared to a second quarter
1998 operating loss of $.9 million on revenues of $37.7 million.
Year-to-date, Federal has earned operating income of $5.6 million
on revenues of $82.5 million, compared to an operating loss of
$3.3 million on revenues of $71.9 million in first half 1998. The
improvement from the prior year-to-date period resulted primarily
from a 38% decline in operating expenses, due in part to headcount
reductions and to an increase in shipbuilding software development
costs qualifying for capitalization. Systems revenue increased by
8% from the first half 1998 level, contributing to a 1.6 point
improvement in systems gross margin. Revenues and margins in both
1998 and 1999 have been adversely impacted by weakened demand for
the Company's hardware product offerings.
The Company continues to evaluate the performance of each
operating segment relative to recovery plans established in
January 1999 and may take further actions in third quarter 1999 to
improve operating results of all segments.
See Note 13 of Notes to Consolidated Financial Statements for
further explanation and details of the Company's segment
reporting.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1999, cash totaled $75.2 million compared to $95.5
million at December 31, 1998. Cash consumed by operations in the
first half of 1999 totaled $4.1 million, compared to a consumption
of $22.5 million in the first half of 1998, both generally
reflecting the negative cash flow effects of operating losses. In
addition, first half 1999 cash consumption included the April 1st
$12 million payment to Bentley Systems, Incorporated (See
"Arbitration Settlement" preceding.)
Net cash generated by investing activities totaled $2.5 million in
the first half of 1999, compared to a $78.7 million net generation
in the first half of 1998. First half 1999 investing activities
included $19.9 million in proceeds from the fourth quarter 1998
sale of the Company's manufacturing assets (See Note 8 of Notes to
Consolidated Financial Statements) and $3.1 million net proceeds
from the sale of InterCAP. First half 1998 investing activities
included $102 million in proceeds from the sale of the Company's
Solid Edge and Engineering Modeling System product lines, $16
million in proceeds from the sale of the Company's printed circuit
board manufacturing facility, and an expenditure of $26.3 million
for the purchase of Zydex software rights. Other first half
1999 investing activities included expenditures for capitalizable
software development costs of $9.6 million ($5 million in the
first half of 1998) and capital expenditures of $5.7 million ($8
million in the first half of 1998), primarily for Intergraph
products used in hardware and software development and sales and
marketing activities. The Company expects that capital
expenditures will require $20 to $25 million for the full year
1999, primarily for these same purposes. The Company's term loan
and revolving credit agreement contains certain restrictions on
the level of the Company's capital expenditures.
Net cash used for financing activities totaled $16.5 million in
the first half of 1999, compared to $16.6 million in the first
half of 1998. Both periods included a net repayment of debt of
approximately $18 million. This activity relates primarily to
borrowings under the Company's revolving credit facility and term
loan.
Under the Company's January 1997 four year fixed term loan and
revolving credit agreement (as amended in October 1998), available
borrowings are determined by the amounts of eligible assets of the
Company (the "borrowing base"), as defined in the agreement,
primarily accounts receivable, with maximum borrowings of $125
million. The $25 million term loan portion of the agreement is
due at expiration of the agreement. Borrowings are secured by a
pledge of substantially all of the Company's assets in the U.S.
The rate of interest on all borrowings under the agreement is the
greater of 7% or the Norwest Bank Minnesota National Association
base rate of interest (7.75% at June 30, 1999) plus .625%. The
agreement requires the Company to pay a facility fee at an annual
rate of .15% of the maximum amount available under the credit
line, an unused credit line fee at an annual rate of .25% of the
average unused portion of the revolving credit line, and a monthly
agency fee. At June 30, 1999, the Company had outstanding
borrowings of $25 million (the term loan), which was classified as
long-term debt in the consolidated balance sheet, and an
additional $34.7 million of the available credit line was
allocated to support letters of credit issued by the Company and
the Company's forward exchange contracts. As of this same date,
the borrowing base, representing the maximum available credit
under the line, was approximately $71 million ($69.5 million at
July 31, 1999).
The term loan and revolving credit agreement contains certain
financial covenants of the Company, including minimum net worth,
minimum current ratio, and maximum levels of capital expenditures.
In addition, the agreement includes restrictive covenants that
limit or prevent 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.
On April 29, 1999, the term loan and security agreement was
amended to reduce the minimum net worth covenant to $300 million
through December 31, 1999. Effective January 1, 2000, the minimum
net worth will be increased back to its original level of $325
million.
At June 30, 1999, the Company had approximately $56 million in
debt on which interest is charged under various floating rate
arrangements, primarily under its four year term loan and
revolving credit agreement, mortgages, and an Australian term
loan. The Company is exposed to market risk of future increases
in interest rates on these loans, with the exception of the
Australian term loan, on which the Company has entered into an
interest rate swap agreement.
In November 1998, the Company sold substantially all of its U.S.
manufacturing inventory and assets to SCI Technology Inc. ("SCI"),
a wholly owned subsidiary of SCI Systems, Inc. As part of this
transaction, SCI retained the option to sell to the Company any
inventory included in the initial sale which had not been utilized
in the manufacture and sale of finished goods within six months of
the date of sale (the "unused inventory"). On June 30, 1999, SCI
exercised this option and sold to the Company unused inventory
having a value of approximately $10.2 million in exchange for a
cash payment of $2 million and a short-term installment note
payable in the principal amount of $8.2 million. This note is
payable in three monthly installments due August 2, September 1,
and October 1, 1999 and bears interest at a rate of 9%. At June
30, 1999, the Company has increased the value of its inventories
by the amount repurchased from SCI, with the majority of the
increase reflected in raw materials and work-in-process. The $8.2
million note payable is included in "Short-term debt and current
maturities of long-term debt" in the June 30, 1999 consolidated
balance sheet. The Company plans to fund its payments to SCI with
existing cash balances and does not anticipate that they will have
a material impact on its operating cash flow or outstanding
borrowings under its revolving credit agreement.
After generating positive operating cash flow for two consecutive
quarters, the Company did not generate sufficient cash to fund its
operations for the second quarter of 1999. As noted previously,
this second quarter shortfall is primarily attributable to the $12
million payment made in April to settle the Bentley arbitration.
The Company is managing its cash very closely; however, in the
near term, it must increase its sales volume and/or align its
operating expenses more closely with the level of revenue being
generated if it is to fund its operations and build cash reserves
without reliance on funds generated from asset sales and from
external financing.
INTERGRAPH CORPORATION AND SUBSIDIARIES
Item 3: Quantitative and Qualitative Disclosures About
Market Risk
The Company has experienced no material changes in
market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's
Form 10-K filing for its year ending December 31, 1998.
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
On June 17, 1998, Intel filed a motion before the U.S.
District Court, the Northern District of Alabama,
Northeastern Division (the "Alabama Court") seeking a
summary judgment holding that Intel is licensed to use
the patents that the Company asserted against Intel in
the Company's original complaint. This "license
defense" was based on Intel's interpretation of the
facts surrounding the acquisition by the Company of
the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. (For further
background information regarding the Company's
complaints against Intel, see the Company's Form 10-K
annual report for the year ended December 31, 1998.)
The Company filed a cross motion with the Alabama
Court September 15, 1998 requesting summary
adjudication in favor of the Company. On June 4, 1999,
the Alabama Court granted the Company's motion and
ruled that Intel has no license to use the Company's
Clipper patents as Intel had claimed in its motion
for summary judgment. Intel has requested leave of
the Alabama Court to appeal this ruling, but no
further decision has been entered. The Company is
confident of its sole ownership of the Clipper patents.
In a separate order on June 15, 1999, the Alabama Court
has extended the discovery phase of the lawsuit
through October 11, 1999 and rescheduled the trial date
to June 12, 2000.
Item 4: Submission of Matters to a Vote of Security Holders
Intergraph Corporation's Annual Meeting of Shareholders
was held on May 13, 1999. 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 were serving as
Directors of the Company at the time of their
nomination for the current year.
Votes
------------------------------
For Against/Withheld
------------ ----------------
Larry J. Laster 43,506,261 1,607,553
Thomas J. Lee 43,506,227 1,607,587
Sidney L. McDonald 43,506,100 1,607,714
James W. Meadlock 43,442,086 1,671,728
Keith H. Schonrock Jr. 43,504,557 1,609,257
James F. Taylor Jr. 43,497,558 1,616,256
Robert E. Thurber 43,502,401 1,611,413
(2) Ratification of the appointment of Ernst & Young
LLP as the Company's independent auditors for the
current year was approved by a vote of 44,529,621
for, 535,846 against, and 48,347 abstentions.
(3) Amendment One to the Intergraph Corporation 1997
Stock Option Plan was approved by a vote of
42,840,199 for, 2,149,858 against, and 123,757
abstentions.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibit 10(a), agreement between Intergraph Corporation
and Green Mountain, Inc., dated April 1, 1999. *(1)
Exhibit 10(b), Intergraph Corporation 1997 Stock
Option Plan (3) and amendment dated January 11, 1999.
* (4)
Exhibit 10(c), Loan and Security Agreement, by and
between Intergraph Corporation and Foothill Capital
Corporation, dated December 20, 1996 and amendments
dated January 14, 1997 (3), November 25, 1997 (2),
October 30, 1998 (5), and April 29, 1999.
Exhibit 27, Financial Data Schedule
*Denotes management contract or compensatory plan,
contract, or arrangement required to be filed as
an exhibit to this Form 10-Q.
(1) Incorporated by reference to exhibit filed with the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, under the Securities
Exchange Act of 1934, File No. 0-9722.
(2) Incorporated by reference to exhibits filed with
the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, under the Securities
Exchange Act of 1934, File No. 0-9722.
(3) Incorporated by reference to exhibits filed with
the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, under the Securities
Exchange Act of 1934, File No. 0-9722.
(4) Incorporated by reference to exhibit filed with the
Company's Registration Statement on Form S-8 dated
May 24, 1999, under the Securities Exchange Act of
1933, File No. 333-79137.
(5) Incorporated by reference to exhibit filed with
the Company's Current Report on Form 8-K dated
November 13, 1998, under the Securities Exchange
Act of 1934, File No 0-9722.
(b) Reports on Form 8-K - on April 9, 1999, the Company
filed a Current Report on Form 8-K (dated April 1,
1999) which reported the settlement of an arbitration
proceeding with Bentley Systems, Incorporated. This
settlement is further described in Management's
Discussion and Analysis of Financial Condition and
Results of Operations and Note 3 of Notes to
Consolidated Financial Statements contained in this
Form 10-Q.
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/ James W. Meadlock By: /s/ John W. Wilhoite
------------------------- ---------------------------
James W. Meadlock John W. Wilhoite
Chairman of the Board and Executive Vice President
Chief Executive Officer and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 16, 1999 Date: August 16, 1999
AMENDMENT NUMBER FOUR TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER FOUR TO LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of April 29,
1999, by and between Foothill Capital Corporation, a California
corporation ("Foothill"), on the one hand, and Intergraph
Corporation, a Delaware corporation ("Borrower"), with reference
to the following facts:
A. Foothill and Borrower heretofore have entered into that
certain Loan and Security Agreement, dated as of December 20,
1996 (as heretofore amended, supplemented, or otherwise modified,
the "Agreement");
B. Borrower has requested Foothill to amend the Agreement to,
among other things, reduce the minimum Net Worth covenant for
calendar year 1999 as set forth in this Amendment;
C. Foothill is willing to so amend the Agreement in accordance
with the terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein
shall have the meanings ascribed to them in the Agreement, as
amended hereby.
NOW, THEREFORE, in consideration of the above recitals
and the mutual premises contained herein, Foothill and Borrower
hereby agree as follows:
1. Amendments to the Agreement. Section 7.20(b) of the
Agreement hereby is amended and restated in its entirety to read
as follows:
(b) Net Worth. Net Worth, measured on a fiscal
quarter-end basis, during each period set forth below
of at least the minimum amount corresponding thereto:
Period Minimum Net Worth
------ -----------------
From the Closing Date $325,000,000
through December 31,
1998
January 1, 1999 $300,000,000
through December 31,
1999
January 1, 2000 and $325,000,000
thereafter
2. Representations and Warranties; Covenants. Borrower
hereby represents and warrants to Foothill that: (a) the
execution, delivery, and performance of this Amendment and of the
Agreement, as amended by this Amendment, are within its corporate
powers, have been duly authorized by all necessary corporate action,
and are not in contravention of any law, rule, or regulation, or any
order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of
its charter or bylaws, or of any contract or undertaking to which
it is a party or by which any of its properties may be bound or
affected; and (b) this Amendment and the Agreement, as amended by
this Amendment, constitute Borrower's legal, valid, and binding
obligation, enforceable against Borrower in accordance with its
terms.
3. Conditions Precedent to Amendment. The satisfaction
of each of the following on or before April 29, 1999, shall constitute
conditions precedent to the effectiveness of this Amendment:
a. Foothill shall have received the reaffirmation and
consent of each of the Obligors (other than Borrower) attached hereto
as Exhibit A, duly executed and delivered by the respective
authorized officials thereof;
b. Foothill shall have received all required consents
of Foothill's participants in the Obligations to Foothill's
execution, delivery, and performance of this Amendment and each
such consent shall be in form and substance satisfactory to
Foothill, duly executed, and in full force and effect;
c. Foothill shall have received a certificate from the
Secretary or Assistant Secretary of Borrower attesting to the
incumbency and signatures of authorized officers of Borrower and
to the resolutions of Borrower's Board of Directors authorizing
its execution and delivery of this Amendment and the performance
of this Amendment and the Agreement as amended by this Amendment,
and authorizing specific officers of Borrower to execute and
deliver the same;
d. The representations and warranties in this
Amendment, the Agreement as amended by this Amendment, and the other
Loan Documents shall be true and correct in all respects on and as of
the date hereof, as though made on such date (except to the
extent that such representations and warranties relate solely to
an earlier date);
e. No Event of Default or event which with the giving
of notice or passage of time would constitute an Event of Default shall
have occurred and be continuing on the date hereof, nor shall
result from the consummation of the transactions contemplated
herein;
f. No injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the consummation
of the transactions contemplated herein shall have been issued
and remain in force by any governmental authority against
Borrower, Foothill, or any of their Affiliates;
g. The Collateral shall not have declined materially in
value from the values set forth in the most recent appraisals or field
examinations previously done by Foothill; and
h. All other documents and legal matters in connection
with the transactions contemplated by this Amendment shall have been
delivered or executed or recorded and shall be in form and
substance satisfactory to Foothill and its counsel.
4. Effect on Agreement. The Agreement, as amended hereby,
shall be and remain in full force and effect in accordance with
its respective terms and hereby is ratified and confirmed in all
respects. The execution, delivery, and performance of this
Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment, of any right, power,
or remedy of Foothill under the Agreement, as in effect prior to
the date hereof.
5. Further Assurances. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance
satisfactory to Foothill, and take all actions as Foothill may
reasonably request from time to time, to perfect and maintain the
perfection and priority of Foothill's security interests in the
Collateral and the Real Property, and to fully consummate the
transactions contemplated under this Amendment and the Agreement,
as amended by this Amendment.
6. Miscellaneous.
a. Upon the effectiveness of this Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "herein",
"hereof" or words of like import referring to the Agreement shall
mean and refer to the Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the
Agreement shall mean and refer to the Agreement as amended by
this Amendment.
c. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one
and the same instrument and any of the parties hereto may execute
this Amendment by signing any such counterpart. Delivery of an
executed counterpart of this Amendment by telefacsimile shall be
equally as effective as delivery of an original executed
counterpart of this Amendment. Any party delivering an executed
counterpart of this Amendment by telefacsimile also shall deliver
an original executed counterpart of this Amendment but the
failure to deliver an original executed counterpart shall not
affect the validity, enforceability, and binding effect of this
Amendment.
[Remainder of page left intentionally blank.]
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first written above.
FOOTHILL CAPITAL CORPORATION,
a California corporation
By: /s/ Victor Barwig
-----------------------------
Title: /s/ Vice President
----------------------
INTERGRAPH CORPORATION, a Delaware
corporation
By: /s/ Eugene H. Wrobel
------------------------------
Title: /s/ VP & Treasurer
------------------------
EXHIBIT A
----------
Reaffirmation and Consent
All capitalized terms used herein but not otherwise
defined herein shall have the meanings ascribed to them in that
certain Amendment Number Four to Loan and Security Agreement,
dated as of April 29, 1999 (the "Amendment"). Each of the
undersigned hereby (a) represents and warrants to Foothill that
the execution, delivery, and performance of this Reaffirmation
and Consent are within its corporate powers, have been duly
authorized by all necessary corporate action, and are not in
contravention of any law, rule, or regulation, or any order,
judgment, decree, writ, injunction, or award of any arbitrator,
court, or governmental authority, or of the terms of its charter
or bylaws, or of any contract or undertaking to which it is a
party or by which any of its properties may be bound or affected;
(b) consents to the amendment of the Agreement by the Amendment;
(c) acknowledges and reaffirms its obligations owing to Foothill
under the Pledge Agreement and any other Loan Documents to which
it is party; and (d) agrees that each of the Pledge Agreement and
any other Loan Documents to which it is a party is and shall
remain in full force and effect. Although each of the
undersigned has been informed of the matters set forth herein and
has acknowledged and agreed to same, it understands that Foothill
has no obligation to inform it of such matters in the future or
to seek its acknowledgement or agreement to future amendments,
and nothing herein shall create such a duty.
M&S COMPUTING INVESTMENTS, INC., a
Delaware corporation
By: /s/ John Wilhoite
--------------------------------
Title: John Wilhoite, Director
------------------------
INTERGRAPH DELAWARE, INC., a Delaware
corporation
By: /s/ John Wilhoite
--------------------------------
Title: John Wilhoite, Director
------------------------
<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,
1999, 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-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 75,244
<SECURITIES> 0
<RECEIVABLES> 274,605<F1>
<ALLOWANCES> 0
<INVENTORY> 51,359
<CURRENT-ASSETS> 439,663
<PP&E> 362,376
<DEPRECIATION> 246,557
<TOTAL-ASSETS> 638,823
<CURRENT-LIABILITIES> 258,023
<BONDS> 57,983
0
0
<COMMON> 5,736
<OTHER-SE> 314,008
<TOTAL-LIABILITY-AND-EQUITY> 638,823
<SALES> 328,571
<TOTAL-REVENUES> 485,721
<CGS> 228,283
<TOTAL-COSTS> 323,038
<OTHER-EXPENSES> 190,059<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,828
<INCOME-PRETAX> (29,650)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,650)
<EPS-BASIC> ( .61)
<EPS-DILUTED> ( .61)
<FN>
<F1>Accounts receivable in the Consolidated Balance Sheet is shown net of
allowances for doubtful accounts.
<F2>Other expenses include Product development expenses, Sales and marketing
expenses, General and administrative expenses, and Nonrecurring operating
charges.
</FN>
</TABLE>
