=============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 49,059,066 shares
outstanding as of September 30, 1999
=============================================================================
INTERGRAPH CORPORATION
FORM 10-Q*
September 30, 1999
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 2
Consolidated Statements of Operations for
the quarters and nine months ended
September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 4
Notes to Consolidated Financial Statements 5 - 13
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
----------------------------------- 14 - 26
Item 3. Quantitive and Qualitive Disclosures About
------------------------------------------
Market Risk 27
-----------
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
*Information contained in this Form 10-Q includes statements that
are forward looking as defined in Section 21E 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 filings for the quarters ended March 31, 1999 and
June 30, 1999, and this Form 10-Q.
PART I. FINANCIAL INFORMATION
---------------------
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- -----------------------------------------------------------------------------
September 30, December 31,
1999 1998
- -----------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 53,073 $ 95,473
Accounts receivable, net 282,657 312,123
Inventories 37,687 38,001
Other current assets 33,120 48,928
- -----------------------------------------------------------------------------
Total current assets 406,537 494,525
Investments in affiliates 9,641 12,841
Other assets 70,492 61,240
Property, plant, and equipment, net 110,961 127,368
- -----------------------------------------------------------------------------
Total Assets $597,631 $695,974
=============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 63,689 $ 64,545
Accrued compensation 44,433 42,445
Other accrued expenses 76,973 79,160
Billings in excess of sales 62,720 68,137
Short-term debt and current maturities
of long-term debt 15,008 23,718
- -----------------------------------------------------------------------------
Total current liabilities 262,823 278,005
Deferred income taxes 3,076 3,142
Long-term debt 57,200 59,495
- -----------------------------------------------------------------------------
Total liabilities 323,099 340,642
- -----------------------------------------------------------------------------
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 218,659 222,705
Retained earnings 174,657 249,808
Accumulated other comprehensive income -
cumulative translation adjustment ( 3,525) 4,161
- -----------------------------------------------------------------------------
395,527 482,410
Less - cost of 8,302,296 treasury shares
at September 30, 1999 and 8,719,612
treasury shares at December 31, 1998 (120,995) (127,078)
- -----------------------------------------------------------------------------
Total shareholders' equity 274,532 355,332
- -----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $597,631 $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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $150,622 $173,698 $472,522 $504,710
Maintenance and services 69,926 73,391 219,712 221,859
- ------------------------------------------------------------------------------
Total revenues 220,548 247,089 692,234 726,569
- ------------------------------------------------------------------------------
Cost of revenues
Systems 115,295 124,483 341,590 364,115
Maintenance and services 47,668 47,906 138,713 139,295
- ------------------------------------------------------------------------------
Total cost of revenues 162,963 172,389 480,303 503,410
- ------------------------------------------------------------------------------
Gross profit 57,585 74,700 211,931 223,159
Product development 15,857 18,630 47,200 60,608
Sales and marketing 40,821 53,665 130,221 163,990
General and administrative 28,743 24,960 83,120 74,321
Nonrecurring operating
charges (credit) 13,124 ( 120) 15,596 13,782
- ------------------------------------------------------------------------------
Loss from operations (40,960) (22,435) (64,206) (89,542)
Gains on sales of assets --- --- 11,505 111,042
Arbitration settlement --- --- ( 8,562) ---
Interest expense ( 1,501) ( 1,800) ( 4,340) ( 5,839)
Other income (expense) - net 427 856 ( 1,554) 1,479
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations before income
taxes (42,034) (23,379) (67,157) 17,140
Income tax expense 1,500 1,000 1,500 4,500
- ------------------------------------------------------------------------------
Income (loss) from continuing
operations (43,534) (24,379) (68,657) 12,640
Loss from discontinued
operations ( 1,967) ( 2,794) ( 6,494) (11,359)
- ------------------------------------------------------------------------------
Net income (loss) $(45,501) $(27,173) $(75,151) $ 1,281
==============================================================================
Income (loss) per share -
basic and diluted:
Continuing operations $( .89) $( .50) $( 1.41) $ .26
Discontinued operations ( .04) ( .06) ( .13) ( .23)
- ------------------------------------------------------------------------------
Total $( .93) $( .56) $( 1.54) $ .03
==============================================================================
Weighted average shares
outstanding - basic
and diluted (1) 48,971 48,416 48,834 48,316
==============================================================================
(1) Diluted shares were 48,355 for the nine months ended September 30, 1998.
The accompanying notes are an integral part of these
consolidated financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -----------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- -----------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net income (loss) $(75,151) $ 1,281
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 36,174 39,604
Noncash portion of arbitration settlement 3,530 ---
Noncash portion of nonrecurring operating
charges 12,694 11,353
Net changes in current assets and liabilities 9,701 12,023
- -----------------------------------------------------------------------------
Net cash used for operating activities (24,557) ( 46,781)
- -----------------------------------------------------------------------------
Investing Activities:
Proceeds from sales of assets 28,868 118,002
Purchases of property, plant, and equipment ( 7,915) ( 12,392)
Capitalized software development costs (14,669) ( 8,647)
Capitalized internal use software costs ( 3,648) ( 578)
Business acquisition, net of cash acquired ( 1,917) ---
Purchase of software rights --- ( 26,292)
Other ( 2,614) 250
- -----------------------------------------------------------------------------
Net cash provided by (used for)
investing activities ( 1,895) 70,343
- -----------------------------------------------------------------------------
Financing Activities:
Gross borrowings 45 182
Debt repayment (16,956) ( 16,303)
Proceeds of employee stock purchases and
exercise of stock options 2,037 2,173
- -----------------------------------------------------------------------------
Net cash used for financing activities (14,874) ( 13,948)
- -----------------------------------------------------------------------------
Effect of exchange rate changes on cash ( 1,074) 504
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (42,400) 10,118
Cash and cash equivalents at beginning of period 95,473 46,645
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 53,073 $ 56,763
=============================================================================
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 nine months ended September 30, 1998 to provide
comparability with the current year presentation.
NOTE 2: Discontinued Operations. On October 31, 1999, the Company sold
its VeriBest, Inc. operating segment to Mentor Graphics
Corporation, a global provider of electronic hardware and
software design solutions and consulting services. The total assets
and liabilities of VeriBest at the date of the sale were $11,600,000
and $8,400,000, respectively. Under the terms of the agreement,
the Company retained ownership of VeriBest's outstanding accounts
receivable as of the date of the sale. The settlement of this
transaction was primarily in the form of cash. The resulting
gain, estimated to be in the range of $14,000,000 to
$15,000,000, will be recorded in the Company's fourth quarter
results of operations.
Because the sale was completed before the Company filed this
quarterly report on Form 10-Q for third quarter 1999, the
Company's consolidated statements of operations for the quarters
and nine months ended September 30, 1999 and 1998 reflect
VeriBest's business as a discontinued operation in accordance
with Accounting Principles Board Opinion No. 30 "Reporting the
Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions." No interest
expense has been allocated to discontinued operations for any of
the periods presented due to the immateriality of the amounts.
Discontinued operations have not been presented separately in the
consolidated balance sheets or statements of cash flows. Other
than their operating losses for the periods presented, the
discontinued operations did not have a significant impact on the
Company's consolidated cash flow or financial position.
Summarized financial information for VeriBest is as follows:
-------------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------------
(In thousands)
Revenues:
Unaffiliated customers $ 7,911 $ 6,535 $21,946 $19,486
Intercompany revenues 40 50 141 242
-------------------------------------------------------------------
Total revenues 7,951 6,585 22,087 19,728
Operating loss before
nonrecurring charges (1,203) (3,084) (5,333) (11,662)
Nonrecurring operating
charges 871 --- 871 ---
Loss before income taxes (1,965) (2,794) ( 6,485) (11,355)
Net loss $(1,967) $(2,794) $( 6,494) $(11,359)
-------------------------------------------------------------------
-------------------------------------------------------------------
September 30, December 31,
1999 1998
-------------------------------------------------------------------
(In thousands)
Cash and cash equivalents (1) $2,227 $1,951
Accounts receivable (1) 6,240 7,690
Other current assets 462 813
Other assets 4,111 4,820
Current liabilities (9,497) (11,064)
-------------------------------------------------------------------
Net assets of VeriBest $3,543 $4,210
===================================================================
(1) These assets were specifically excluded from the sale.
NOTE 3: Litigation. As further described in the Company's Annual Report
on Form 10-K for its year ended December 31, 1998, and its Form
10-Q filings for the quarters ended March 31, 1999 and June 30,
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 third quarter of 1999.
NOTE 4: 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 Company's consolidated balance sheets) was
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
nine months ended September 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 5: 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 $19,700,000
at September 30, 1999, is included in "Other assets" in the
September 30, 1999 consolidated balance sheet.
NOTE 6: Inventories are stated at the lower of average cost or market and
are summarized as follows:
-----------------------------------------------------------------
September 30, December 31,
1999 1998
-----------------------------------------------------------------
(In thousands)
Raw materials $ 2,109 $ 2,739
Work-in-process 14,902 3,594
Finished goods 7,144 15,597
Service spares 13,532 16,071
-----------------------------------------------------------------
Totals $37,687 $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 9.
In third quarter 1999, as a result of the Company's exit from the
personal computer (PC) and generic server business, the Company
recorded an inventory write-down of approximately $7,000,000,
primarily related to its finished goods inventory. See Note 11
for further discussion.
NOTE 7: Property, plant, and equipment - net includes allowances for
depreciation of $239,517,000 and $259,074,000 at September 30,
1999 and December 31, 1998, respectively.
NOTE 8: 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 nine
months ended September 30, 1999, nor is it expected to have a
significant impact on results for the remainder of the year.
NOTE 9: 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 was payable in three
monthly installments due August 2, September 1, and October 1,
1999 and bore interest at a rate of 9%. The Company's payments
to SCI were funded primarily 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 10: 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 nine months ended September 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 statement of operations for
the nine months ended September 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 11: Nonrecurring Operating Charges. In first quarter 1998, the
Company reorganized its European operations to reflect the
organization of the Company into 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 the
second and third quarters of 1998, $859,000 and $120,000,
respectively, of the costs accrued in the first quarter were
reversed as the result of incurrence of lower severance costs
than originally anticipated. The third quarter credit and year-
to-date charge of approximately $4,500,000 are included in
"Nonrecurring operating charges (credit)" in the consolidated
statements of operations for the quarter and nine months ended
September 30, 1998. During the remainder of 1998, an additional
$1,200,000 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 $4,100,000,
with $2,400,000 and $1,000,000 expended in the first nine months
of 1998 and 1999, respectively. The Company estimates this
European reorganization has resulted in an annualized savings of
approximately $7,000,000.
The remainder of the 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.
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 nine months ended September 30,
1999. Approximately 46 European positions were eliminated, all
in the sales and marketing area. Cash outlays to date related to
this charge approximate $1,100,000. The Company estimates that
this resizing will result in annual savings of up to $3,000,000.
In third quarter 1999, the Company took further actions to reduce
expenses in its unprofitable business units and restructure the
Company to fully support the vertical markets in which the
Company operates. These actions included eliminating
approximately 400 positions worldwide, consolidating offices,
completing the worldwide vertical market alignment of the sales
force, and narrowing the focus of the Company's Intergraph
Computer Systems (ICS) business unit to high-end workstations,
specialty servers, digital video products and 3D graphics cards.
As a result of these actions, the Company recorded a nonrecurring
charge to operations of $20,124,000, $7,000,000 of which is
recorded as a component of "Cost of revenues - Systems" in the
consolidated statements of operations for the quarter and nine
months ended September 30, 1999. This $7,000,000 charge
represents the costs of inventory write-offs incurred as a result
of ICS's exit from the PC and generic server business. The
Company estimates that this change in ICS's product offerings
will reduce its annual systems revenues by approximately
$70,000,000 to $80,000,000. The associated margin for these
products ranges from 15.5% to 17.5%. The Company has announced a
new line of workstations and speciality servers and endeavers to
replace revenue associated with its discontinued products with
increased sales volume of its new offerings. Additionally, the
Company believes these new offerings will produce higher product
margins resulting from certain product design changes at the
component level.
Severance costs associated with the third quarter 1999
restructuring totaled approximately $8,700,000, $7,846,000 of
which is included in "Nonrecurring operating charges (credit) in
the consolidated statements of operations for the quarter and
nine months ended September 30, 1999. The remaining severance
costs relate to headcount reductions in the Company's VeriBest
operating segment. This segment was sold on October 31, 1999,
and accordingly, its operating results are reflected in "Loss
from discontinued operations" in the Company's consolidated
statements of operations for the quarters and nine months ended
September 30, 1999 and 1998. (For further discussion of this
transaction and its impact on the Company's results of operations
and financial position, see Note 2.) Approximately 400 positions
were eliminated through direct reductions in workforce. All
employee groups were affected, but the majority of eliminated
positions derived from the sales and marketing, general and
administrative, and customer support areas. Cash expenditures
during the third quarter related to this restructuring totaled
approximately $2,300,000. The Company estimates the annual
savings resulting from this reduction in force will approximate
$22,000,000.
The remainder of the third quarter 1999 nonrecurring operating
charges consists of write-offs of capitalized business system
software no longer required as a result of the verticalization of
the Company's business units and resulting decentralization of
parts of the corporate financial function.
At September 30, 1999, the total remaining accrued liability for
severance relating to the 1998 and 1999 headcount reductions was
approximately $8,500,000 and is included in "Other accrued
expenses" in the September 30, 1999 consolidated balance sheet.
These costs are expected to be paid over the remainder of 1999,
with the exception of severance liabilities in certain European
countries, which typically take several months to be settled.
Severance payments to date have been funded from existing cash
balances. The fourth quarter severance payments will be funded
from existing cash balances and proceeds from the sale of VeriBest.
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 12: 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
Nine Months Ended September 30, 1999 1998
------------------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $21,753 $32,305
Inventories 1,734 (11,940)
Other current assets (1,990) 2,820
Increase (decrease) in:
Trade accounts payable ( 298) ( 8,427)
Accrued compensation and other
accrued expenses (8,869) ( 454)
Billings in excess of sales (2,629) ( 2,281)
------------------------------------------------------------------------
Net changes in current assets
and liabilities $ 9,701 $12,023
========================================================================
Investing and financing transactions in the first nine months of
1999 that did not require cash include the acquisition of a
business in part for future obligations totaling approximately
$3,300,000 (see Note 8), the purchase of inventory for future
obligations totaling $2,700,000 (see Note 9), 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 nine
months of 1998.
NOTE 13: Basic income (loss) per share is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding. Dilutive income (loss) per share is computed by
dividing net income (loss) by 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 14: 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. Prior to October 31, 1999, the Company's operating
segments consisted of 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"). Effective October 31, 1999, the Company
sold the assets of its VeriBest operating segment (see Note 2),
and accordingly, its operating results have been removed from
continuing operations and are reflected in "Loss from
discontinued operations" in the Company's consolidated statements
of operations for the quarters and nine months ended September
30, 1999 and 1998. A complete description of this transaction
and its impact on the Company's results of operations and
financial position, including summarized financial information
for the quarters and nine months ended September 30, 1999 and
1998, is included in Note 2.
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, 3D graphics subsystems, servers, and other hardware
products. IPS develops, markets, and implements systems for
public safety agencies. 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) before nonrecurring charges by operating segment for the
quarters and nine months ended September 30, 1999 and 1998.
------------------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------------------------------------------------------------
(In thousands)
Revenues
ICS:
Unaffiliated customers $53,644 $69,311 $168,665 $185,713
Intersegment revenues 32,140 45,019 96,549 147,147
------------------------------------------------------------------------
85,784 114,330 265,214 332,860
------------------------------------------------------------------------
IPS:
Unaffiliated customers 19,245 11,951 61,777 37,361
Intersegment revenues 4,871 39 8,375 173
------------------------------------------------------------------------
24,116 11,990 70,152 37,534
------------------------------------------------------------------------
Intergraph Software:
Unaffiliated customers 108,786 125,611 344,086 393,841
Intersegment revenues 2,487 462 11,796 1,463
------------------------------------------------------------------------
111,273 126,073 355,882 395,304
------------------------------------------------------------------------
Intergraph Federal:
Unaffiliated customers 38,873 40,216 117,706 109,654
Intersegment revenues 1,240 840 4,946 3,317
------------------------------------------------------------------------
40,113 41,056 122,652 112,971
------------------------------------------------------------------------
261,286 293,449 813,900 878,669
------------------------------------------------------------------------
Eliminations (40,738) (46,360) (121,666) (152,100)
------------------------------------------------------------------------
Total revenues $220,548 $247,089 $692,234 $726,569
========================================================================
------------------------------------------------------------------------
Operating income (loss) before nonrecurring charges
ICS $(20,237) $(15,617) $(39,743) $(55,000)
IPS 2,400 658 7,586 1,961
Intergraph Software ( 2,765) 4,954 4,765 7,313
Intergraph Federal 3,496 ( 3,958) 9,131 ( 7,274)
Corporate (10,730) ( 8,592) (30,349) (22,760)
------------------------------------------------------------------------
Total $(27,836) $(22,555) $(48,610) $(75,760)
========================================================================
Effective January 1, 1999, the Utilities business of Intergraph
was merged into IPS, increasing the operating segment's revenues
and operating income for the first nine months of 1999 by
$31,180,000 and $3,850,000, 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 $14,456,000 and $7,656,000 for the first
nine 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 nine 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 4), an $11,505,000 gain on the sale of a
subsidiary (see Note 17), and nonrecurring operating charges of
$15,596,000 (see Note 11). Such items for the first nine months
of 1998 include gains on sales of assets of $111,042,000 (see
Note 10) and nonrecurring operating charges of $13,782,000 (see
Note 11).
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 15: 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 to be reported as a component of
comprehensive income (loss). During the nine months ended
September 30, 1999 and 1998, the Company's comprehensive income
(loss) totaled ($82,837,000) and $4,396,000, respectively.
Comprehensive income (loss) differs from net income (loss) due to
foreign currency translation adjustments.
NOTE 16: 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 nine months ended
September 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 17: 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, and
a $5,797,000 convertible subordinated debenture due in March 2002
(included in "Other assets" in the September 30, 1999
consolidated balance sheet). The August 1999 payment was not
received, and as a result, an alternative payment installment
plan was established. Under this plan, two monthly installment
payments of $1,250,000 plus interest were received on September
28, and October 28, 1999. The receivable for the October 28
payment is included in "Other current assets" in the September
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 statement of operations for the nine
months ended September 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 18: 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. On October 31, 1999, the Company sold substantially all of
the assets of its VeriBest operating segment. Because this sale was
completed before the Company filed its quarterly report on Form 10-
Q for third quarter 1999, the Company's consolidated statements of
operations for the quarters and nine months ended September 30,
1999 and 1998 reflect VeriBest's business as a discontinued
operation in accordance with Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations - Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual,
and Infrequently Occurring Events and Transactions." As such,
except where noted otherwise, the following discussion of the
Company's results of operations excludes the impact of the VeriBest
business and addresses only results of continuing operations.
VeriBest's results of operations for the quarters and nine months
ended September 30, 1999 and 1998 are discussed separately. (See
"Discontinued Operations" following.) Discontinued operations have
not been presented separately in the consolidated balance sheets or
statements of cash flows, and as such, they are not segregated from
the related discussions. Other than their operating losses for the
periods presented, the discontinued operations did not have a
significant impact on the Company's consolidated cash flow or
financial position.
In third quarter 1999, the Company incurred a net loss from continuing
operations of $.89 per share on revenues of $220.5 million,
including nonrecurring charges to operations of $20.1 million ($.41
per share) for the cost of actions taken during the quarter to
reduce expenses in its unprofitable business units and restructure
the Company to fully support the vertical markets in which the
Company operates. These actions included eliminating approximately
400 positions worldwide, consolidating offices, completing the
worldwide vertical market alignment of the sales force, and
narrowing the focus of the Company's Intergraph Computer Systems
(ICS) business unit to high-end workstations, specialty servers,
digital video products and 3D graphics cards. The third quarter
1998 net loss from continuing operations was $.50 per share on
revenues of $247.1 million. Excluding the nonrecurring operating
charges, the third quarter 1999 loss from operations was $.43 per
share versus a loss of $.47 per share for the third quarter of
1998. This loss improvement resulted primarily from a 12% decline
in operating expenses.
For the first nine months of 1999, the Company incurred a net loss from
continuing operations of $1.41 per share on revenues of $692.2
million, including an $11.5 million ($.24 per share) gain on the
sale of a subsidiary, an $8.6 million charge ($.18 per share) for
the settlement of its arbitration proceedings with Bentley Systems,
Inc., and nonrecurring operating charges of $22.6 million ($.46 per
share), primarily for employee termination costs and asset write-
offs recorded in connection with the Company's new business
strategy. (See "Nonrecurring Operating Charges" following.) For
the same period in 1998, the Company earned net income from
continuing operations of $.26 per share on revenues of $726.6
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 $13.8 million ($.29 per share) charge for nonrecurring
operating expenses (primarily employee termination costs and write-
off of certain intangible assets), and an $8.3 million ($.17 per
share) gain on the sale of its printed circuit board manufacturing
facility. Excluding the nonrecurring charges and one time gains,
the year to date 1999 operating loss is $.85 per share versus a
loss of $1.57 per share for the same prior year period. The
improvement is the result of a 13% decline in operating expenses.
While the Company has realized considerable improvement in its
operating expense levels, the Company has not returned to
profitability, as revenue levels remain suppressed and inadequate
to cover the current expense level.
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 (Windows NT) and hardware architecture (Intel) 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. The
Company is actively engaged in discussions with potential business
partners for Intergraph Computer Systems to help stem the losses in
this business unit.
Improvement in the Company's operating results will continue to 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. 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. During the third quarter, the Company
has taken actions to reduce expenses in its unprofitable business
units and restructure the Company to fully support the vertical
industries where it operates. (For a complete description of these
actions, see "Nonrecurring Operating Charges" following.) However,
there can be no assurance that these actions will restore it to
profitability.
Discontinued Operations. On October 31, 1999, the Company sold its
VeriBest, Inc. operating segment to Mentor Graphics Corporation, a
global provider of electronic hardware and software design
solutions and consulting services. The total assets and liabilities
of VeriBest at the date of the sale were $11.6 million and $8.4 million,
respectively. Under the terms of the agreement, the Company retained
ownership of VeriBest's outstanding accounts receivable as of the date
of the sale. The settlement of this transaction was primarily in the
form of cash. The resulting gain, estimated to be in the range of $14
to $15 million, will be recorded in the Company's fourth quarter
results of operations.
VeriBest incurred operating losses of $2.1 million and $3.1 million
in the third quarters of 1999 and 1998, respectively, on revenues of
$8 million and $6.6 million. In the first nine months of 1999 and
1998, VeriBest incurred operating losses of $6.2 million and $11.7
million, respectively, on revenues of $22.1 million and $19.7
million. VeriBest's operating loss for third quarter 1999 includes
nonrecurring operating charges of approximately $.9 million
incurred for employee terminations as part of a company-wide
restructuring plan. (See "Nonrecurring Operating Charges"
following.) Systems gross margin increased by 13 points from the
first nine months of 1998 as the result of a 23% increase in
revenues combined with declining royalty costs. Operating expenses
declined by 12% from the first nine months of 1998, primarily as
the result of restructuring actions taken in fourth quarter 1998.
Average employee headcount declined by approximately 10% from the
prior year-to-date level.
VeriBest's results of operations have been reported as discontinued
operations in the Company's consolidated statements of operations
for the quarters and nine months ended September 30, 1999 and 1998
in accordance with Accounting Principles Board Opinion No. 30. For
further information regarding this discontinued operation,
including summarized financial information for all periods
presented, see Note 2 of Notes to Consolidated Financial Statements
contained in this Form 10-Q.
Nonrecurring Operating Charges. In first quarter 1998, the Company
reorganized its European operations to reflect the organization of
the Company into 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 the second and third
quarters of 1998, $.9 million and $.1 million, respectively, of the
costs accrued in the first quarter were reversed as the result of
incurrence of lower severance costs than originally anticipated.
The third quarter credit and year-to-date charge of approximately
$4.5 million are included in "Nonrecurring operating charges
(credit)" in the consolidated statements of operations for the
quarter and nine months ended September 30, 1998. During the
remainder of 1998, an additional $1.2 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 $4.1
million, with $2.4 million and $1 million expended in the first
nine months of 1998 and 1999, respectively. The Company estimates
the European reorganization has resulted in an annualized savings
of approximately $7 million.
The remainder of the 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.
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 nine
months ended September 30, 1999. Approximately 46 European
positions were eliminated, all in the sales and marketing area.
Cash outlays to date related to this charge approximate $1.1
million. The Company estimates that this resizing will result in
annual savings of up to $3 million.
In third quarter 1999, the Company took further actions to reduce
expenses in its unprofitable business units and restructure the
Company to fully support the vertical markets in which the Company
operates. These actions included eliminating approximately 400
positions worldwide, consolidating offices, completing the worldwide
vertical market alignment of the sales force, and narrowing the focus
of the Company's ICS business unit to high-end workstations, specialty
servers, digital video products and 3D graphics cards. As a result
of these actions, the Company recorded a nonrecurring charge to
operations of approximately $20.1 million, $7 million of which is
recorded as a component of "Cost of revenues - Systems" in the
consolidated statement of operations. This $7 million charge
represents the costs of inventory write-offs incurred as a result
of ICS's exit from the PC and generic server business. The Company
estimates that this change in ICS's product offerings will reduce
its annual systems revenues by approximately $70 to $80 million.
The associated margin for these products ranges from 15.5% to
17.5%. The Company has announced a new line of workstations and
speciality servers and endeavers to replace revenue associated with
its discontinued products with increased sales volume of its new
offerings. Additionally, the Company believes these new offerings
will produce higher product margins resulting from certain product
design changes at the component level.
Severance costs associated with the third quarter 1999 restructuring
totaled approximately $8.7 million, $7.8 million of which is
included in "Nonrecurring operating charges (credit)" in the
consolidated statements of operations for the quarter and nine
months ended September 30, 1999. The remaining severance costs
relate to headcount reductions in the Company's VeriBest operating
segment. This segment was sold on October 31, 1999, and
accordingly, its operating results are reflected in "Loss from
discontinued operations" in the Company's consolidated statements
of operations for the quarters and nine months ended September 30,
1999 and 1998. (For further discussion of this transaction and its
impact on the Company's results of operations and financial
position, see "Discontinued Operations" preceding and Note 2 of Notes
to Consolidated Financial Statements contained in this Form 10-Q.)
Approximately 400 positions company-wide were eliminated through
direct reductions in workforce. All employee groups were affected,
but the majority of eliminated positions derived from the sales and
marketing, general and administrative, and customer support areas.
Cash expenditures during the third quarter related to this
restructuring totaled approximately $2.3 million. The Company
estimates the annual savings resulting from this reduction in force
will approximate $22 million.
The remainder of the third quarter 1999 nonrecurring operating charges
consists of write-offs of capitalized business system software no
longer required as a result of the verticalization of the Company's
business units and resulting decentralization of parts of the
corporate financial function.
At September 30, 1999, the total remaining accrued liability for
severance relating to the 1998 and 1999 headcount reductions was
approximately $8.5 million and is included in "Other accrued
expenses" in the September 30, 1999 consolidated balance sheet.
These costs are expected to be paid over the remainder of 1999,
with the exception of severance liabilities in certain European
countries, which typically take several months to be settled.
Severance payments to date have been funded from existing cash balances.
The fourth quarter severance payments will be funded from existing cash
balances and proceeds from the sale of VeriBest. For further discussion
regarding the Company's liquidity, see "Liquidity and Capital Resources"
following.
Litigation. As further described in the Company's Form 10-K filing
for its year ended December 31, 1998 and its Form 10-Q filings for the
quarters ended March 31, 1999 and June 30, 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 third quarter of
1999 are discussed below.
Intel Litigation. On October 12, 1999, the U.S. District Court, the
Northern District of Alabama, Northeastern Division (the "Alabama
Court") reversed its June 4, 1999 order which had ruled that Intel
had no license to use the Company's Clipper patents. The order
dismissed the Company's patent claims against Intel. (For further
background information regarding this patent dispute and the
Company's other complaints against Intel, see the Company's Form
10-K annual report for the year ended December 31, 1998.) The Company
is confident that Intel has no license to use the Clipper patents
and believes that the court's original decision on this issue was
correct. On October 15, 1999, the Company filed a Notice of Appeal
with the Court of Appeals for the Federal Circuit (the "Appeals
Court"). No decision has been entered.
On November 5, 1999, the Appeals Court vacated the Preliminary
Injunction that had been entered by the Alabama Court April 10, 1998
which had enjoined Intel from cutting off shipments to the Company of
chips and advanced product information. The Company is unable to
determine at this time whether this ruling will have a material
effect on the Company's operations.
During the course of the Intel Litigation, the Company has employed
a variety of experts to prepare estimates of the damages suffered by
the Company under various claims of injury brought by the Company
in this litigation. The following damage estimates were provided to
Intel in the August/September 1999 time frame in due course of the
litigation process: estimated damages for injury covered under non-
patent claims through June, 1999 - $100 million; estimated
additional damages for injury covered under non-patent claims
through December, 2003 - $400 million subject to present-value
reduction. These numbers are estimates only and any recovery of
damages in this litigation could be substantially less than these
estimates or substantially greater than these estimates depending
on a variety of factors that cannot be determined at this time.
Factors that could lead to recovery substantially less that these
estimates include, but are not limited to: the failure of the
Alabama Court or the Appeals Court to sustain the legal basis for
one or more of the Company's claims; the failure of the jury to
award amounts consistent with these estimates; the failure of the
Alabama Court or the Appeals Court to sustain any jury award in
amounts consistent with these estimates; the settlement by the
Company of the Intel Litigation which settlement includes payment
to the Company in an amount inconsistent with these estimates; the
failure of the Company to successfully defend itself from Intel's
patent counterclaims in the Alabama Court and in the Appeals Court
and a consequential recovery by Intel for damages and/or a
permanent injunction against the Company. Factors that could lead
to recovery substantially greater than these estimates include, but
are not limited to, success by the Company in recovering punitive
damages on one or more of its non-patent claims.
The trial is scheduled for 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 Company's
consolidated balance sheets) was 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 nine months ended September 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
filings for the quarters ended March 31, 1999 and June 30, 1999,
the Company has implemented 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 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 have been upgraded to compliant versions of the Company's
software, and selected hardware remedies have been completed where
appropriate. The Company has also developed plans to make support
available to its customers during the end of 1999 holiday period.
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
has been 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. The Company believes that it has successfully
implemented all internal systems changes and replacements necessary
to ensure 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 business systems are nearing completion.
All Year 2000 efforts with respect to these systems are scheduled
to be completed before the end of the year, and the Company has not
identified any significant risks in this area. The Company plans
to have a full operations staff working on January 1, 2000 in case
any problems arise with respect to its internal systems. 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 has conducted 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 consisted 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. No substantial
contingency plans have been developed in this area as the Company
is relying on the vendors' representations that they are Year 2000
compliant. If problems arise due to the failure of critical
suppliers or other third party providers to achieve Year 2000
compliance, the Company will be forced to seek alternative sources
of supply.
The Company believes it has effectively resolved the Year 2000 issue
with respect to its business critical 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 Company also believes it may have some risk related
to the internal systems of its international subsidiaries.
However, these efforts are being monitored closely, and the
subsidiaries all believe that they will effectively resolve any
remaining Year 2000 issues by the end of the year.
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. Systems orders for the third quarter and first nine months
of 1999 totaled $154.9 million and $462.6 million, respectively,
reflecting declines of approximately 10% and 16%, respectively, from
the same prior year periods. Included in these totals are orders
for the Company's discontinued VeriBest operation of $3.7 million and
$9.8 million, respectively, as compared to $2.9 million and $8.2
million, respectively, for the same prior year periods. Order
volumes have declined worldwide, primarily in the Company's
hardware business, though weakness has been noted in the Company's
software segments as well, particularly in the Company's
international markets. U.S. systems orders increased by 9% from
the third quarter of 1998 and decreased 14% from the first nine
months of 1998. The third quarter improvement is primarily
attributable to a 54% increase in federal government orders. Most
of this increase was due to government funding delays in second
quarter 1999. Year-to-date, federal orders have improved by 4%
from the prior year-to-date level. The year-to-date decline in
U.S. systems orders is due to the weakened demand for the Company's
hardware product offerings. International systems orders declined
by 33% and 19% from the third quarter and first nine months of
1998, respectively, with declines across the board in all regions.
Revenues. Total revenues from continuing operations for the third
quarter and first nine months of 1999 were $220.5 million and $692.2
million, respectively, down approximately 11% and 5%, respectively,
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 6% and 8%, respectively, were partially
offset by a 14% improvement in services revenue. Geographically,
the composition of the Company's revenues has remained consistent
with the prior year level, with European revenues representing
approximately 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 nine months 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 from continuing operations for the third
quarter and first nine months of 1999 was $150.6 million and $472.5
million, respectively, down 13% and 6%, 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 Company has lost momentum in this market
due to the actions of Intel.
Systems revenues have declined in all geographic markets served by the
Company. U.S. systems revenues were down 13% from third quarter
1998 and 5% from the first nine months of 1998. International
systems revenues were down approximately 13% from third quarter
1998 and 8% from the first nine months of 1998. European and Asia
Pacific revenues have declined by 4% and 3%, respectively, from the
prior year to date level.
Hardware revenues for the first nine months of 1999 declined 20% from
the prior year period. Unit sales of workstations and servers were
down 5% while workstation and server revenues declined by 17% due
to a 12% 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 41% decline in sales of
storage devices and memory and a 58% 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 8% 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, plant design, and
other software products. Plant design remains the Company's
highest volume software offering, representing 29% of total
software sales for the first nine months of 1999.
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 from continuing operations totaled $69.9 million for the
third quarter and $219.7 million for the first nine months of 1999,
down 5% and 1%, respectively, from the comparable prior year
periods. Maintenance revenues for the first nine months of 1999
totaled $141.1 million, down 8% from the same prior year period.
The trend in the industry toward lower priced products and longer
warranty periods has resulted in reduced levels of maintenance
revenue, and the Company believes this trend will continue into the
future. Services revenue represents approximately 11% of year to
date 1999 revenues and has increased 14% from the same prior year
period. Growth in services revenue has acted to partially 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 on revenues from continuing operations
for the third quarter of 1999 was 26.1%, down 4.1 points from the third
quarter 1998 level. For the first nine months of 1999, total gross
margin was 30.6%, relatively flat with the same prior year period.
Systems margin on revenues from continuing operations for the third
quarter was 23.5%, down 4.8 points from the third quarter 1998 level.
The third quarter 1999 margin was negatively impacted by a $7 million
manufacturing inventory write-off resulting from the Company's
decision to exit the PC and generic server business. (See
"Nonrecurring Operating Charges" preceding.) For the first nine
months of 1999, systems margin was 27.7%, down .2 points from the
same prior year period. The impact of the $7 million inventory
write-off has been partially offset by an increased software
content in the product mix.
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 margin, it expects continuing
pressure on its systems margin as the result of increasing industry
price competition.
Maintenance and services margin on revenues from continuing operations
for the third quarter of 1999 was 31.8%, down 2.9 points from the third
quarter of 1998 due primarily to the decline in maintenance
revenue. Year to date maintenance and services margin is 36.9%,
down .3 points from the same prior year period. Declining
maintenance revenues and margins have been partially offset by
improved professional services margins. Professional services
revenues have increased by 14% from the prior year-to-date level
without a corresponding increase in costs. 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 continuing operations for the third quarter
and first nine months of 1999 declined by 12% 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 the prior year level.
Product development expense for the third quarter and first nine months
of 1999 declined by 15% and 22%, respectively, from the same prior
year periods due primarily to decreases in labor and related
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 third
quarter and first nine months of 1999 declined by 24% and 21%,
respectively, from the corresponding prior year periods. Sales and
marketing expenses have declined across the board, with the largest
decreases noted in salaries, commissions, advertising, trade shows
and public relations expenses. General and administrative expense
for the third quarter and first nine months of 1999 increased by
15% and 12%, respectively, from the same prior year periods
primarily due to an increase in legal fees and U.S. bad debt
expense.
NONOPERATING INCOME AND EXPENSE
- -------------------------------
Interest expense was $1.5 million for the third quarter and $4.3 million
for the first nine months of 1999 versus $1.8 million and $5.8
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 August
1999 payment was not received, and as a result, an alternative
payment installment plan was established. Under this plan, two
monthly installment payments of approximately $1.3 million plus
interest were received on September 28, and October 28, 1999. The
receivable for the October 28 payment is included in "Other current
assets" in the September 30, 1999 consolidated balance sheet. The
resulting gain on this transaction of $11.5 million is included in
"Gains on sales of assets" in the consolidated statement of
operations for the nine months ended September 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 nine
months ended September 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
statement of operations for the nine months ended September 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 nine months 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 into dollars for U.S.
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. Currency fluctuations did not have a
significant impact on the Company's results of operations for the
first nine months 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. Operating results for
the first nine months of 1998 were reduced by approximately $.13
per share from the same period in 1997 as a result of strengthening
of the U.S. dollar, primarily in Europe and Asia.
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 September 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 third quarter or first nine months
of 1999.
INCOME TAXES
- ------------
The Company incurred a pretax loss from continuing operations of $67.2
million in the first nine months of 1999 versus pretax income of
$17.1 million for the same prior year period. Income tax expense
for the first nine months of 1999 and 1998 resulted primarily from
estimated taxes on individually profitable international
subsidiaries. The 1998 gain on the sale of the Company's Solid
Edge and Engineering Modeling System product lines did not create a
significant tax liability for the Company due to the availability
of net operating loss carryforwards to offset earnings.
RESULTS BY OPERATING SEGMENT
- ----------------------------
On October 31, 1999, the Company sold its VeriBest, Inc. operating
segment to Mentor Graphics Corporation. Accordingly, VeriBest's
results of operations have been reported as discontinued operations
in the Company's consolidated statements of operations for the quarters
and nine months ended September 30, 1999 and 1998 in accordance
with Accounting Principles Board Opinion No. 30 and have been
excluded from the Company's segment disclosures. For further
information regarding this sale and VeriBest's operating results
for the periods presented, see "Discontinued Operations" preceding
and Note 2 of Notes to Consolidated Financial Statements contained
in this Form 10-Q.
In third quarter 1999, Intergraph Computer Systems incurred an operating
loss of $20.2 million on revenues of $85.8 million, compared to a
third quarter 1998 operating loss of $15.6 million on revenues of
$114.3 million. Year-to-date, ICS has incurred an operating loss
of $39.7 million on revenues of $265.2 million, compared to an
operating loss of $55 million on revenues of $332.9 million for
the first nine months of 1998. These operating losses exclude the
impact of certain nonrecurring income and operating expense items
associated with ICS's operations, including the 1998 gain of $8.3
million on the sale of the printed circuit board manufacturing
facility and nonrecurring operating charges of approximately $4.5
million incurred in 1999, primarily for employee termination costs.
ICS's operating loss for third quarter 1999 included the $7 million
inventory write-off resulting from the segment's exit from the PC
and generic server business. Excluding this charge, third quarter
and year-to-date operating losses were $13.2 million and $32.7
million, respectively, compared to operating losses of $15.6
million and $55 million, respectively, for the comparable prior
year periods. These loss improvements resulted primarily from an
approximate 28% decline in operating expenses as the result of
headcount reductions achieved in 1998 and 1999. During 1998, ICS's
headcount was reduced by approximately 33% as the result of
employee terminations, the outsourcing of manufacturing, and normal
attrition. Employee terminations and attrition during the first
nine months of 1999 have reduced ICS's headcount by an additional
33%. Additional savings of approximately $2 million are
anticipated in fourth quarter 1999 as the result of headcount
reductions achieved in the third quarter. ICS's 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 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. Systems gross margin remains
insufficient to cover the operating segment's current level of
operating expenses, and revenue levels remain suppressed due to the
loss of momentum caused by Intel's actions. The Company is
actively engaged in discussions with potential business partners
for Intergraph Computer Systems to help stem the losses in this
business unit.
In third quarter 1999, Intergraph Public Safety earned operating
income of $2.4 million on revenues of $24.1 million, compared to third
quarter 1998 operating income of $.7 million on revenues of $12
million. Year-to-date, IPS has earned operating income of $7.6
million on revenues of $70.2 million versus operating income of
$2 million on revenues of $37.5 million in the first nine months
of 1998. Effective January 1, 1999, the Utilities business of
Intergraph was merged into IPS, increasing the operating segment's
revenues and operating income for the first nine months of 1999 by
$31.2 million and $3.9 million, respectively. 1998 operating
results for the Utilities business are reflected in the Intergraph
Software operating segment.
In third quarter 1999, the Software business realized an operating
loss of $2.8 million on revenues of $111.3 million, compared to third
quarter 1998 operating income of $5 million on revenues of $126.1
million. Year-to-date, the Software business has earned operating
income of $4.8 million on revenues of $355.9 million versus
operating income of $7.3 million on revenues of $395.3 million in
the first nine months of 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, the second
quarter 1999 gain on the sale of InterCAP of $11.5 million, and
third quarter 1999 nonrecurring operating charges of approximately
$5.8 million, primarily for employee severance costs. 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 $13.8 million,
primarily for asset write-offs and employee terminations. Declines
in systems revenues and margins, due in part to weakened demand for
ICS hardware products, have been partially offset by a 14% decline
in operating expenses 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 third quarter 1999, Federal earned operating income of $3.5 million
on revenues of $40.1 million, compared to a third quarter 1998
operating loss of $4 million on revenues of $41.1 million. Year-
to-date, Federal has earned operating income of $9.1 million on
revenues of $122.7 million, compared to an operating loss of $7.3
million on revenues of $113 million in the same prior year
period. The improvement from the prior year-to-date period
resulted primarily from a 36% 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 2% from the prior year-to-date level, while
systems cost of revenues was down 5%, contributing to a 5 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.
See Note 14 of Notes to Consolidated Financial Statements for further
explanation and details of the Company's segment reporting.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1999, cash totaled $53.1 million as compared to $95.5
million at December 31, 1998. Cash consumed by operations in the
first nine months of 1999 totaled $24.6 million, compared to a
consumption of $46.8 million in the first nine months of 1998, both
generally reflecting the negative cash flow effects of operating
losses. Cash consumption in the first nine months of 1999 also
included the payment of $12 million to Bentley Systems,
Incorporated (See "Arbitration Settlement" preceding) and severance
payments of approximately $4.4 million. In the first nine months
of 1998, inventory build-ups consumed $11.9 million in anticipation
of an order level which did not materialize.
Net cash used for investing activities totaled $1.9 million in the
first nine months of 1999, compared to a $70.3 million net cash
generation in the same prior year period. Year to date 1999
investing activities included $19.9 million in proceeds from the
fourth quarter 1998 sale of the Company's manufacturing assets (See
Note 9 of Notes to Consolidated Financial Statements) and $4.1
million net proceeds from the sale of InterCAP. Year to date 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
expenditure of $26.3 million for the purchase of Zydex software
rights. Other significant investing activities in the first nine
months of 1999 included expenditures for capitalizable software
development costs of $14.7 million ($8.6 million for the same
period in 1998) and capital expenditures of $7.9 million ($12.4
million in the first nine months 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 $12 to $15 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 $14.9 million and $13.9
million, respectively, in the first nine months of 1999 and 1998.
Year to date 1999 and 1998 financing activities included net
repayments of debt of $16.9 million and $16.1 million,
respectively. 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, 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 (8.25% at
September 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 September 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 $34.8 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 maximum available credit under the line
was approximately $78 million.
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 October 26, 1999, the
term loan and security agreement was amended such that for the
quarter ended September 30, 1999, the minimum net worth covenant
was reduced to $260 million. The Company is currently in
negotiations with its primary lender to modify the terms of the
term loan and revolving credit facility to provide the Company with
greater liquidity and reduce the associated costs of borrowing.
The Company has received the commitment of the lender for such
provisions, subject to further syndication of the revised agreement
and final negotiation of the terms. It is anticipated that a new
agreement will be in place and available during fourth quarter
1999.
At September 30, 1999, the Company had approximately $59 million in
debt on which interest is charged under various floating rate
arrangements, primarily under its 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 was
payable in three monthly installments due August 2, September 1,
and October 1, 1999 and bore interest at a rate of 9%. At
September 30, 1999, approximately $2.7 million was outstanding
under the note payable and is included in "Short-term debt and
current maturities of long-term debt" in the September 30, 1999
consolidated balance sheet. The Company's payments to SCI were
funded primarily with existing cash balances.
The Company is not currently generating cash from its operations, but
expects improvement in its operating cash flow as a result of the
headcount reductions and other expense savings actions taken during
the third quarter. However, fourth quarter 1999 cash flow will be
negatively impacted by the payment of accrued severance costs
associated with the third quarter reduction in force. 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 without reliance on funds generated from asset
sales and from external financing.
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.
INTERGRAPH CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
-----------------
On October 12, 1999, the U.S. District Court, the Northern
District of Alabama, Northeastern Division (the "Alabama
Court") reversed its June 4, 1999 order which had ruled
that Intel had no license to use the Company's Clipper
patents. The order dismissed the Company's patent claims
against Intel. (For further background information
regarding this patent dispute and the Company's other
complaints against Intel, see the Company's Form 10-K
annual report for the year ended December 31, 1998.) The
Company is confident that Intel has no license to use the
Clipper patents and believes that the court's original
decision on this issue was correct. On October 15, 1999,
the Company filed a Notice of Appeal with the Court of
Appeals for the Federal Circuit (the "Appeals Court"). No
decision has been entered.
On November 5, 1999, the Appeals Court vacated the
Preliminary Injunction that had been entered by the
Alabama Court April 10, 1998 which had enjoined Intel from
cutting off shipments to the Company of chips and advanced
product information. The Company is unable to determine
at this time whether this ruling will have a material
effect on the Company's operations.
During the course of the Intel Litigation, the Company has
employed a variety of experts to prepare estimates of the
damages suffered by the Company under various claims of
injury brought by the Company in this litigation. The
following damage estimates were provided to Intel in the
August/September 1999 time frame in due course of the
litigation process: estimated damages for injury covered
under non-patent claims through June, 1999 - $100 million;
estimated additional damages for injury covered under non-
patent claims through December, 2003 - $400 million
subject to present-value reduction. These numbers are
estimates only and any recovery of damages in this
litigation could be substantially less than these
estimates or substantially greater than these estimates
depending on a variety of factors that cannot be
determined at this time. Factors that could lead to
recovery substantially less that these estimates include,
but are not limited to: the failure of the Alabama Court
or the Appeals Court to sustain the legal basis for one or
more of the Company's claims; the failure of the jury to
award amounts consistent with these estimates; the
failure of the Alabama Court or the Appeals Court to
sustain any jury award in amounts consistent with these
estimates; the settlement by the Company of the Intel
Litigation which settlement includes payment to the
Company in an amount inconsistent with these estimates;
the failure of the Company to successfully defend itself
from Intel's patent counterclaims in the Alabama Court and
in the Appeals Court and a consequential recovery by Intel
for damages and/or a permanent injunction against the
Company. Factors that could lead to recovery
substantially greater than these estimates include, but
are not limited to, success by the Company in recovering
punitive damages on one or more of its non-patent claims.
The trial is scheduled for June 12, 2000.
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),
April 29, 1999 (6), and October 26, 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.
(6) Incorporated by reference to exhibit filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999, under the Securities Exchange Act of
1934, File No. 0-9722.
(b) There were no reports on Form 8-K filed during the
quarter ended September 30, 1999.
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 and
Chief Executive Officer Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 12, 1999 Date: November 12, 1999
AMENDMENT NUMBER FIVE TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER FIVE TO LOAN AND SECURITY
AGREEMENT (this "Amendment") is entered into as of October 26, 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 Borrower's
fiscal quarter ending September 30, 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 such that for the fiscal quarter ending September 30,
1999, the minimum Net Worth covenant amount shall be reduced from
$300,000,000 to $260,000,000.
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 October 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. 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);
d. 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;
e. 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;
f. 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
g. 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: Vice President
____________________
INTERGRAPH CORPORATION, a Delaware
corporation
By: /s/ Eugene H. Wrobel
___________________________
Title: 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 Five to Loan and Security Agreement, dated as of October 26, 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 W. Wilhoite
___________________________
Title: EVP & CFO
___________________
John W. Wilhoite
INTERGRAPH DELAWARE, INC., a Delaware
corporation
By: /s/ John W. Wilhoite
___________________________
Title: EVP & CFO
___________________
John W. Wilhoite
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1999, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 53,073
<SECURITIES> 0
<RECEIVABLES> 282,657<F1>
<ALLOWANCES> 0
<INVENTORY> 37,687
<CURRENT-ASSETS> 406,537
<PP&E> 350,478
<DEPRECIATION> 239,517
<TOTAL-ASSETS> 597,631
<CURRENT-LIABILITIES> 262,823
<BONDS> 57,200
0
0
<COMMON> 5,736
<OTHER-SE> 268,796
<TOTAL-LIABILITY-AND-EQUITY> 597,631
<SALES> 472,522
<TOTAL-REVENUES> 692,234
<CGS> 341,590
<TOTAL-COSTS> 480,303
<OTHER-EXPENSES> 276,137<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,340
<INCOME-PRETAX> (67,157)
<INCOME-TAX> 1,500
<INCOME-CONTINUING> (68,657)
<DISCONTINUED> (6,494)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75,151)
<EPS-BASIC> (1.54)
<EPS-DILUTED> (1.54)
<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>
