==================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
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
incorporation or organization) Identification No.)
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: 49,380,467 shares
outstanding as of June 30, 2000
==================================================================
INTERGRAPH CORPORATION
FORM 10-Q*
June 30, 2000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets at June 30,
2000 and December 31, 1999 2
Consolidated Statements of Operations
for the quarters and six months
ended June 30, 2000 and 1999 3
Consolidated Statements of Cash Flows
for the six months ended June 30,
2000 and 1999 4
Notes to Consolidated Financial Statements 5 - 13
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14 - 25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of
Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
*Information contained in this Form 10-Q includes statements that
are forward looking as defined in Section 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 for the quarter ended March 31, 2000,
and this Form 10-Q.
PART I. FINANCIAL INFORMATION
---------------------
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------------------------------------------------
June 30, December 31,
2000 1999
--------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 92,544 $ 88,513
Accounts receivable, net 217,675 258,768
Inventories 31,429 35,918
Other current assets 27,776 28,744
--------------------------------------------------------------------
Total current assets 369,424 411,943
Investments in affiliates 9,593 9,940
Other assets 64,709 68,154
Property, plant, and equipment, net 71,898 94,907
--------------------------------------------------------------------
Total Assets $515,624 $584,944
====================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 36,195 $ 50,963
Accrued compensation 35,425 35,848
Other accrued expenses 55,599 71,052
Billings in excess of sales 53,928 66,051
Income taxes payable 8,164 8,175
Short-term debt and current
maturites of long-term debt 7,643 11,547
--------------------------------------------------------------------
Total current liabilities 196,954 243,636
Deferred income taxes 2,304 2,620
Long-term debt 33,066 51,379
Other noncurrent liabilities 10,766 10,609
--------------------------------------------------------------------
Total liabilities 243,090 308,244
--------------------------------------------------------------------
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 215,428 216,943
Retained earnings 175,594 178,231
Accumulated other comprehensive
income (7,920) (5,506)
--------------------------------------------------------------------
388,838 395,404
Less - cost of 7,980,895 treasury
shares at June 30, 2000 and
8,145,149 treasury shares at
December 31, 1999 (116,304) (118,704)
--------------------------------------------------------------------
Total shareholders' equity 272,534 276,700
--------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $515,624 $584,944
====================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
--------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
--------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $123,242 $154,521 $257,580 $321,900
Maintenance 41,505 45,608 83,813 95,276
Services 23,234 26,947 45,993 54,510
--------------------------------------------------------------------------
Total revenues 187,981 227,076 387,386 471,686
--------------------------------------------------------------------------
Cost of revenues
Systems 76,456 107,373 162,547 226,295
Maintenance 22,493 22,402 45,090 48,437
Services 20,025 21,881 38,514 42,608
--------------------------------------------------------------------------
Total cost of revenues 118,974 151,656 246,151 317,340
--------------------------------------------------------------------------
Gross profit 69,007 75,420 141,235 154,346
Product development 16,002 15,790 29,963 31,343
Sales and marketing 31,866 45,412 64,803 89,400
General and administrative 23,867 28,987 48,839 54,377
Nonrecurring operating
charges --- 2,472 --- 2,472
--------------------------------------------------------------------------
Loss from operations (2,728) (17,241) (2,370) (23,246)
Gain on sale of assets --- 11,505 --- 11,505
Arbitration settlement --- --- --- ( 8,562)
Interest expense (1,112) ( 1,423) (2,288) ( 2,839)
Other income (expense) - net 2,678 ( 2,489) 5,921 ( 1,981)
--------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes (1,162) ( 9,648) 1,263 (25,123)
Income tax expense 2,500 --- 3,900 ---
--------------------------------------------------------------------------
Loss from continuing
operations (3,662) ( 9,648) (2,637) (25,123)
Loss from discontinued
operation, net of
income taxes --- ( 2,444) --- ( 4,527)
--------------------------------------------------------------------------
Net loss $ (3,662) $(12,092) $ (2,637) $(29,650)
==========================================================================
Loss per share - basic
and diluted:
Continuing operations $ ( .07) $( .20) $ ( .05) $( .52)
Discontinued operation --- ( .05) --- ( .09)
--------------------------------------------------------------------------
Net loss $ ( .07) $( .25) $ ( .05) $( .61)
==========================================================================
Weighted average shares
outstanding -
basic and diluted 49,330 48,831 49,292 48,765
==========================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------------------------------------------------------
Six Months Ended June 30, 2000 1999
---------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net loss $( 2,637) $(29,650)
Adjustments to reconcile net loss to net
cash provided by (used for) operating
activities:
Gain on sale of subsidiary --- (11,505)
Gains on sales of capital assets ( 7,181) ( 1,392)
Depreciation 8,083 10,778
Amortization 11,079 13,162
Noncash portion of arbitration settlement --- 3,530
Noncash portion of nonrecurring operating
charges --- 2,472
Net changes in current assets and
liabilities 7,688 8,504
---------------------------------------------------------------------
Net cash provided by (used for) operating
activities 17,032 ( 4,101)
---------------------------------------------------------------------
Investing Activities:
Net proceeds from sales of assets 16,667 24,631
Purchases of property, plant, and equipment ( 4,171) ( 5,723)
Capitalized software development costs ( 8,520) ( 9,627)
Capitalized internal use software costs ( 760) ( 2,967)
Business acquisition, net of cash acquired ( 1,051) ( 1,874)
Other ( 229) ( 1,959)
---------------------------------------------------------------------
Net cash provided by investing activities 1,936 2,481
---------------------------------------------------------------------
Financing Activities:
Gross borrowings --- 45
Debt repayment (13,016) (17,897)
Proceeds of employee stock purchases and
exercise of stock options 885 1,361
---------------------------------------------------------------------
Net cash used for financing activities (12,131) (16,491)
---------------------------------------------------------------------
Effect of exchange rate changes on cash ( 2,806) ( 2,118)
---------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,031 (20,229)
Cash and cash equivalents at beginning
of period 88,513 95,473
---------------------------------------------------------------------
Cash and cash equivalents at end of period $ 92,544 $ 75,244
=====================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of normal recurring items) necessary for a
fair presentation of results for the interim periods
presented.
Certain reclassifications have been made to the
previously reported consolidated statements of operations
and cash flows for the quarter and six months ended June
30, 1999 to provide comparability with the current period
presentation.
NOTE 2: Discontinued Operation. On October 31, 1999, the Company
sold its VeriBest, Inc. operating segment. Accordingly,
the Company's consolidated statements of operations for
the quarter and six months ended June 30, 1999 have been
restated to reflect VeriBest's business as a discontinued
operation. The discontinued operation has not been
presented separately in the consolidated statement of
cash flows for the six months ended June 30, 1999. Other
than its operating losses for the periods presented, the
discontinued operation did not have a significant impact
on the Company's consolidated cash flow or financial
position.
For the quarter ended June 30, 1999, VeriBest incurred a
net loss of $2,444,000, including a loss from operations
of $2,232,000, on revenues from unaffiliated customers of
$6,568,000. For the six months ended June 30, 1999,
VeriBest incurred a net loss of $4,527,000, including a
loss from operations of $4,130,000, on revenues from
unaffiliated customers of $14,035,000.
NOTE 3: Litigation. As further described in the Company's Annual
Report on Form 10-K for its year ended December 31, 1999
and its Form 10-Q for the quarter ended March 31, 2000,
the Company has extensive 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 during second
quarter 2000.
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 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 certain
litigation between the companies that was the subject of
a separate settlement agreement and payment for products
and services obtained or provided in the normal course of
business since January 1, 1999. Both the Company and BSI
expressly denied any fault, liability, or wrongdoing
concerning the claims that were the subject matter of the
arbitration and 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. As a result of the
settlement, Intergraph's equity ownership in BSI was
reduced from approximately 50% to approximately 33%.
Additionally, the Company had a $1,200,000 net receivable
from BSI relating to business conducted prior to January
1, 1999 which was written off in connection with the
settlement.
In first quarter 1999, the Company accrued a nonoperating
charge to earnings of $8,562,000 ($.18 per share) in
connection with the settlement, representing the portion
of settlement costs not previously accrued. This charge
is included in "Arbitration settlement" in the
consolidated statement of operations for the six months
ended June 30, 1999.
The $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: Inventories are stated at the lower of average cost or
market and are summarized as follows:
----------------------------------------------------------
June 30, December 31,
2000 1999
----------------------------------------------------------
(In thousands)
Raw materials $ 9,985 $12,888
Work-in-process 3,668 5,739
Finished goods 7,619 5,895
Service spares 10,157 11,396
----------------------------------------------------------
Totals $31,429 $35,918
==========================================================
The Company's December 31, 1999 raw materials and work-in-
process balances have been restated to reflect certain
parts as raw materials rather than work-in-process as the
Company is no longer manufacturing or assembling these
products at its facilities. Amounts reflected as work-in-
process relate primarily to contracts accounted for under
the percentage-of-completion method.
NOTE 6: Property, plant, and equipment - net includes allowances
for depreciation of $202,450,000 and $214,219,000 at June
30, 2000 and December 31, 1999, respectively.
NOTE 7: In January 1999, the Company acquired 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. Installment payments totaling $1,051,000 were made
in the first six months of 2000 and are included in
"Business acquisition, net of cash acquired" in the
Company's consolidated statement of cash flows for the
six months ended June 30, 2000. 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 has not had a
material effect on the Company's results of operations.
NOTE 8: In November 1998, the Company sold substantially all of
its U.S. manufacturing assets to SCI Technology, Inc.
("SCI") a wholly-owned subsidiary of SCI Systems, Inc.,
and SCI assumed responsibility for the 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 was received on
January 12, 1999 and is included in "Net proceeds from
sales of assets" in the Company's consolidated statement
of cash flows for the six months ended June 30, 1999. 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 on July 2, 1999
and a short-term installment note payable in the
principal amount of $8,200,000. This note was payable in
three monthly installments concluding October 1, 1999 and
bore interest at a rate of 9%. The Company funded its
payments to SCI 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.
For a complete discussion of the SCI transaction, see the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
NOTE 9: Nonrecurring Operating Charges. During 1998 and 1999,
the Company implemented various restructuring actions in
an effort to restore the Company to profitability. For a
complete discussion, see the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
Restructuring activity during the first six months of
1999 and 2000 is discussed below.
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 effort 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" in the
consolidated statements of operations for the quarter and
six months ended June 30, 1999. Approximately 46
European positions were eliminated, all in the sales and
marketing area. The Company estimates that this resizing
has resulted in annual savings of approximately
$3,000,000.
Cash outlays for severance related to the 1998 and 1999
actions approximated $3,500,000 and $900,000 in the first
six months of 2000 and 1999, respectively. At June 30,
2000, the total remaining accrued liability for severance
relating to the 1999 reductions in force was
approximately $1,400,000 compared to approximately
$5,000,000 at December 31, 1999. These liabilities are
reflected in "Other accrued expenses" in the Company's
consolidated balance sheets. The related costs are
expected to be paid over the remainder of 2000 and relate
primarily to severance liabilities in European countries,
where typically several months are required for
settlement.
Severance payments to date have been funded from existing
cash balances and from 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 10: 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 loss
to net cash provided by (used for) operations are as
follows:
----------------------------------------------------------
Cash Provided By
(Used For) Operations
Six Months Ended June 30, 2000 1999
----------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $35,732 $27,871
Inventories 4,232 (3,341)
Other current assets 4,871 (2,320)
Increase (decrease) in:
Trade accounts payable (14,321) (2,303)
Accrued compensation and
other accrued expenses (12,715) (3,123)
Income taxes payable 85 (1,150)
Billings in excess of sales (10,196) (7,130)
----------------------------------------------------------
Net changes in current assets
and liabilities $ 7,688 $ 8,504
==========================================================
Investing and financing transactions in the first half of
2000 that did not require cash included the termination
of a long-term lease on one of the Company's facilities.
The Company accounted for this lease as a financing, and
upon termination, long-term debt of $8,300,000 and
property, plant, and equipment of $6,500,000 were removed
from the Company's books. Significant noncash investing
and financing transactions in the first half of 1999
included the acquisition of a business in part for future
obligations totaling approximately $3,475,000 (see Note
7), the sale of a subsidiary in part for deferred
payments and debt of $8,297,000 (see Note 16), the
purchase of inventory for future obligations totaling
$10,200,000 (see Note 8), the sale of fixed assets in
part for a $2,100,000 short-term note receivable, and the
financing of new financial and administrative systems
with a long-term note payable of approximately
$2,000,000.
NOTE 11: Basic loss per share is computed using the weighted
average number of common shares outstanding. Diluted
loss per share is computed using the weighted average
number of common and equivalent common shares
outstanding. Employee stock options are the Company's
only common stock equivalent and are included in the
calculation only if dilutive.
NOTE 12: The Company's operating segments are Intergraph
Computer Systems ("ICS"), Intergraph Public Safety, Inc.
("IPS"), the Software and Intergraph Government Solutions
businesses (collectively, the Software and Government
Solutions businesses form what is termed "Intergraph"),
and Z/I Imaging Corporation ("Z/I Imaging"), a 60%-owned
subsidiary of the Company formed October 1, 1999.
Effective October 31, 1999, the Company sold its VeriBest
operating segment and, accordingly, its operating results
are reflected in "Loss from discontinued operation, net
of income taxes" in the Company's consolidated statements
of operations for the quarter and six months ended June
30, 1999. Certain VeriBest financial information for the
quarter and six months ended June 30, 1999 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 is historically a supplier of high performance Windows
NT-based graphics workstations and 3D graphics subsystems.
IPS develops, markets, and implements systems for the public
safety and utilities industries. 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. Z/I Imaging
supplies end-to-end photogrammetry solutions for front-
end data collection to mapping related and engineering
markets.
The Company evaluates performance of the operating
segments based on revenue and income from operations.
The accounting policies of the reportable segments are
the same as those used in preparation of the consolidated
financial statements of Intergraph Corporation (see Note
1 of Notes to Consolidated Financial Statements included
in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999). Sales between the operating
segments, the most significant of which are sales of
hardware products and maintenance from ICS to the other
segments, are accounted for under a transfer pricing
policy. Transfer prices approximate prices that would be
charged for the same or similar property to similarly
situated unrelated buyers. In the U.S., intersegment
sales of products and services to be used for internal
purposes are charged at cost. For international
subsidiaries, transfer price is charged on intersegment
sales of products and services to be used for either
internal purposes or sale to customers.
The following table sets forth revenues and operating
income (loss) by operating segment for the quarters and
six months ended June 30, 2000 and 1999.
---------------------------------------------------------------------
Quarter Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
---------------------------------------------------------------------
(In thousands)
Revenues
ICS:
Unaffiliated customers $ 41,179 $ 52,844 $ 83,540 $115,021
Intersegment revenues 11,660 33,261 27,826 64,409
---------------------------------------------------------------------
52,839 86,105 111,366 179,430
---------------------------------------------------------------------
IPS:
Unaffiliated customers 19,836 22,198 38,983 42,532
Intersegment revenues 1,909 2,547 4,627 3,504
---------------------------------------------------------------------
21,745 24,745 43,610 46,036
---------------------------------------------------------------------
Intergraph Software:
Unaffiliated customers 85,602 114,406 177,360 235,300
Intersegment revenues 1,971 3,953 4,131 8,566
---------------------------------------------------------------------
87,573 118,359 181,491 243,866
---------------------------------------------------------------------
Intergraph Government Solutions:
Unaffiliated customers 35,755 37,628 73,956 78,833
Intersegment revenues 1,508 2,147 2,649 3,706
---------------------------------------------------------------------
37,263 39,775 76,605 82,539
---------------------------------------------------------------------
Z/I Imaging:
Unaffiliated customers 5,609 --- 13,547 ---
Intersegment revenues 5,762 --- 9,894 ---
---------------------------------------------------------------------
11,371 --- 23,441 ---
---------------------------------------------------------------------
210,791 268,984 436,513 551,871
---------------------------------------------------------------------
Eliminations (22,810) (41,908) (49,127) (80,185)
---------------------------------------------------------------------
Total revenues $187,981 $227,076 $387,386 $471,686
=====================================================================
---------------------------------------------------------------------
Operating income (loss) before nonrecurring charges:
ICS $ 514 $(12,839) $( 3,566) $(19,506)
IPS 1,107 3,259 2,561 5,186
Intergraph Software (1,526) 4,137 1,969 7,530
Intergraph Government
Solutions 1,441 1,402 4,871 5,635
Z/I Imaging 2,480 --- 5,217 ---
Corporate (6,744) (10,728) (13,422) (19,619)
---------------------------------------------------------------------
Total $ (2,728) $(14,769) $( 2,370) $(20,774)
=====================================================================
Prior to October 1999, a portion of the Z/I Imaging
business was included in the Intergraph Software
operating segment. The Company believes the associated
revenues and operating income for the second quarter and
first half of 1999 were insignificant to the Software
segment as a whole.
Amounts included in the "Corporate" category consist of
general corporate expenses, primarily general and
administrative expenses remaining after charges to the
operating segments based on segment usage of
administrative services. Included in these amounts are
legal fees of $4,404,000 and $7,595,000 for the first six
months of 2000 and 1999, respectively.
Significant profit and loss items that were not allocated
to the segments and not included in the analysis above
include a charge of $8,562,000 for an arbitration
settlement agreement reached with Bentley Systems, Inc.
in first quarter 1999 (see Note 4), an $11,505,000 gain
on the sale of a subsidiary in second quarter 1999 (see
Note 16), and nonrecurring operating charges of
$2,472,000 incurred in second quarter 1999 (see Note 9).
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 13: Comprehensive income (loss). The Company's
comprehensive losses for the second quarter and first six
months of 2000 totaled $4,108,000 and $5,051,000,
respectively, compared to comprehensive losses of
$16,133,000 and $36,949,000, respectively, for the
comparable prior year periods. These comprehensive
losses differ from net loss due mainly to foreign
currency translation adjustments.
NOTE 14: In June 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), requiring companies
to recognize 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 a
significant impact on its consolidated operating results
or financial position.
NOTE 15: In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements ("SAB
101"), which provides guidance on the recognition,
presentation, and disclosure of revenue in financial
statements. SAB 101 outlines basic criteria that must be
met prior to recognition of revenue, including persuasive
evidence of the existence of an arrangement, the delivery
of products and performance of services, a fixed and
determinable sales price, and reasonable assurance of
collection. In June 2000, the SEC delayed the
implementation date of SAB 101 until no later than the
fourth fiscal quarter of fiscal years beginning after
December 15, 1999 (fourth quarter 2000 for the Company).
The Company is currently evaluating the effects of
adopting SAB 101 and will record any material impact on
prior periods as the cumulative effect of a change in
accounting principle in its fourth quarter results of
operations, with a restatement of prior interim quarters
of 2000, if necessary. The SEC has indicated that it
will issue further guidance with respect to the
implementation of SAB 101. Until this additional
guidance is issued, the Company cannot fully evaluate the
impact, if any, that this SAB will have on its
consolidated operating results or financial position.
NOTE 16: In April 1999, the Company sold 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, deferred payments received in September and
October 1999 totaling $2,500,000, and a $5,797,000
convertible subordinated debenture due March 2002
(included in "Other assets" in the June 30, 2000 and
December 31, 1999 consolidated balance sheets). The
resulting gain on this transaction of $11,505,000 is
included in "Gain on sale of assets" in the consolidated
statements of operations for the quarter and six months
ended June 30, 1999. InterCAP's revenues and losses for
1998 were $4,660,000 and $1,144,000, respectively,
($3,600,000 and $1,853,000 for 1997). Assets of the
subsidiary at December 31, 1998 totaled $1,550,000. The
subsidiary did not have a material effect on the
Company's results of operations for the period in 1999
prior to its sale.
NOTE 17: On April 27, 2000, the Company and BSI announced an
agreement under which BSI will acquire Intergraph's
MicroStation-based civil engineering, networked
plotservers, and raster conversion software product
lines, and the Company will sell and support MicroStation
and certain other BSI products. The agreement, valued at
approximately $42,000,000, is subject to the execution of
definitive documents and is expected to close by the end
of third quarter 2000. Full year 1999 revenues for the
product lines to be sold to BSI approximated $35,000,000.
The agreement will allow the Company to increase its
focus on its core vertical businesses and is expected to
improve the business relationship between the Company and
BSI.
NOTE 18: On May 25, 2000, the Company reached an agreement,
subject to inspection and final documents, to sell
several of the buildings on its Huntsville, Alabama
campus to an Alabama-based real estate investment company
for $7,600,000. The resulting consolidation of the
Company's Huntsville-based personnel and operations into
fewer buildings is expected to reduce the Company's
overhead expenses. The closing of the sale is scheduled
for completion in September 2000. The Company expects to
record a nonoperating gain on this transaction of
approximately $2,000,000 in its third quarter results of
operations.
NOTE 19: Subsequent Events. On July 21, 2000, the Company
completed the sale of the Intense3D graphics accelerator
division of ICS to 3Dlabs, Inc. Ltd. ("3Dlabs"), a
leading supplier of integrated hardware and software
graphics accelerator solutions for workstations and
design professionals. As initial consideration for the
acquired assets, 3Dlabs issued to the Company
approximately 3,600,000 of its common shares with an
aggregate market value of approximately $13,200,000 on
the date of closing. The agreement also contains an earn-
out provision based on various performance measures for
Intense3D operations for the remainder of 2000 following
the July 1 effective date of the sale. This earn-out
provides an opportunity for additional proceeds of up to
$25,000,000, payable in stock and/or cash at the option
of 3Dlabs. The Company expects to record a pretax gain
from initial proceeds of the sale of approximately
$9,000,000 in third quarter 2000. Full year 1999 third-
party revenue for the Intense3D division approximated
$38,000,000, with operating results at an approximate
breakeven level.
On July 21, 2000, the Company announced its intent to
form a strategic alliance with Silicon Graphics, Inc.
("SGI"), a worldwide provider of high-performance
computing and advanced graphics solutions, in which SGI
will acquire certain of the Company's hardware business
assets, including ICS's Zx10 family of workstations and
servers. Under the proposed alliance, the Company will
become a reseller for SGI and will offer its application
solutions on the SGI platform. In connection with this
agreement, the Company plans to purchase $100,000,000 in
SGI products and services over a three year period. The
terms of the sale are still being finalized. The
transaction is expected to close in third quarter 2000.
These two transactions signal completion of the Company's
exit of the development, design, and manufacture of
hardware products, allowing the Company's operating
segments to focus on providing software, systems
integration, and services to the industries in which
Intergraph is a market leader. Upon completion of these
transactions, the Company expects to incur a nonrecurring
charge to operations in the range of $10,000,000 to
$12,000,000, primarily for inventory and fixed asset
write-offs, employee severance, and other costs incurred
in connection with the shutdown of the remainder of the
hardware development business. The Company will continue
to sell hardware products from other vendors, including
SGI, and to perform hardware maintenance services for its
installed customer base. However, the Company anticipates
that revenues from both of these sources will continue to
decline over time as hardware will no longer be a primary
focus of the Company.
INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
-------
Discontinued Operation. In fourth quarter 1999, the Company sold
its VeriBest operating segment. Accordingly, the Company's
consolidated statements of operations for the quarter and six
months ended June 30, 1999 reflect VeriBest's business as a
discontinued operation. Except where noted otherwise, the
following discussion of the Company's results of operations
addresses only results of continuing operations. The discontinued
operation has not been presented separately in the consolidated
statement of cash flows for the six months ended June 30, 1999,
and it is not segregated from the related discussions. Other
than its operating losses for the periods presented, the
discontinued operation did not have a significant impact on the
Company's consolidated cash flow or financial position. See Note
2 of Notes to Consolidated Financial Statements contained in this
Form 10-Q for summarized financial information for the VeriBest
operating segment.
Earnings. In second quarter 2000, the Company incurred a net
loss of $.07 per share on revenues of $188 million, including a
$.07 per share gain on the sale of a European office building.
In second quarter 1999, the Company incurred a loss from
continuing operations of $.20 per share on revenues of $227.1
million, including an $11.5 million ($.24 per share) gain on the
sale of a subsidiary and a $2.5 million ($.05 per share)
nonrecurring operating charge for the resizing of its European
computer hardware sales organization. Exclusive of these
nonrecurring charges, the second quarter 2000 loss from
operations improved to $.06 per share from $.30 per share for
second quarter 1999. This loss improvement resulted primarily
from a 20% decline in operating expenses and a 7.5 point
improvement in systems gross margin. For the first half of 2000,
the Company incurred a net loss of $.05 per share on revenues of
$387.4 million, including $.15 per share earned on the sale of
various capital assets, including the aforementioned building
sale. For the first half of 1999, the Company incurred a net
loss from continuing operations of $.52 per share on revenues of
$471.7 million, including an $8.6 million ($.18 per share) charge
for settlement of its arbitration proceedings with Bentley
Systems, Inc. (See "Arbitration Settlement" following), the $.24
per share gain on the sale of a subsidiary, and the $.05 per
share charge for resizing of the European computer hardware sales
organization. Exclusive of these nonrecurring charges, the first
half 2000 loss from operations improved to $.05 per share from
$.43 per share for first half 1999. This improvement was the
result of an 18% decline in operating expenses and a 7.2 point
improvement in systems gross margin. Though the Company has
realized considerable improvements in its operating expense
levels and gross margin, they have not yet been sufficient to
return the Company to sustained profitability as the Company's
operating results continue to be negatively impacted by operating
losses incurred by the Intergraph Computer Systems ("ICS")
operating segment, legal fees associated with the Intel trial,
and temporary duplication of administrative expenses in
connection with verticalization of the Company's operating
segments.
Remainder of the Year. The Company expects that the industries
in which it competes 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 and has announced its
intentions to exit the hardware business. Subsequent to the
close of the second quarter, the Company completed the sale of
its graphics accelerator division to 3Dlabs, Inc. Ltd. and announced
an agreement with Silicon Graphics, Inc. with respect to its
workstation and server business that should complete its exit
from the hardware development and design business. (See
"Subsequent Events" following.) The Company will continue to
sell hardware products from other vendors through its vertical
operating segments and perform hardware maintenance services for
its installed customer base.
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 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, which includes the creation and
operation of independent business units. In addition, the
Company faces significant operational and financial uncertainty
of unknown duration due to its dispute with Intel. To achieve
and maintain profitability, the Company must continue to align
its operating expenses with the reduced levels of revenue being
generated.
Nonrecurring Operating Charges. During 1998 and 1999, the Company
implemented various restructuring actions in an effort to restore
the Company to profitability. For a complete discussion, see the
Company's Annual Report on Form 10-K for the year ended December
31, 1999. Restructuring activity during the first six months of
1999 and 2000 is discussed below.
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 effort 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" in the consolidated statements of operations
for the quarter and six months ended June 30, 1999.
Approximately 46 European positions were eliminated, all in the
sales and marketing area. The Company estimates that this
resizing has resulted in annual savings of approximately $3
million.
Cash outlays for severance related to the 1998 and 1999 actions
approximated $3.5 million and $.9 million in the first six months
of 2000 and 1999, respectively. At June 30, 2000, the total
remaining accrued liability for severance relating to the 1999
reductions in force was approximately $1.4 million compared to
approximately $5 million at December 31, 1999. These liabilities
are reflected in "Other accrued expenses" in the Company's
consolidated balance sheets. The related costs are expected to
be paid over the remainder of 2000 and relate primarily to
severance liabilities in European countries, where typically
several months are required for settlement.
Severance payments to date have been funded from existing cash
balances and from 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 Annual Report
on Form 10-K for the year ended December 31, 1999 and its Form 10-
Q for the quarter ended March 31, 2000, the Company is subject to
certain risks and uncertainties and has extensive ongoing
litigation with Intel Corporation. Significant litigation
developments during second quarter 2000 are discussed below.
Intel Litigation. On June 4, 1999, the U.S. District Court, the
Northern District of Alabama, Northeastern Division (the "Alabama
Court") granted the Company's September 15, 1998 motion
requesting summary adjudication in favor of the Company on its
patent infringement claims and ruled that Intel has no license to
use the Company's Clipper patents as Intel had claimed in its
motion for summary judgment. On October 12, 1999, the Alabama
Court reversed its June 4, 1999 order and dismissed the Company's
patent claims against Intel. 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 appealed the Alabama Court's October 12,
1999 order. Oral argument for this appeal was heard on June 7,
2000. No decision has been entered.
On March 10, 2000, the Alabama Court entered an order dismissing
the antitrust claims of the Company against Intel, based in part
upon a February 17, 2000 decision by the Appeals Court in another
case (CSU v. Xerox). The Company considers this dismissal to be
in error and intends to vigorously pursue its antitrust case
against Intel. On April 26, 2000, the Company appealed this
dismissal to the United States Court of Appeals for the Federal
Circuit.
On March 17, 2000, Intel filed a series of motions in the Alabama
Court to dismiss certain Alabama state law claims of the
Company. The Company filed its responses to Intel's motions on
July 17, 2000, together with its own motions to dismiss certain
Intel counter-claims. Intel's responses are not due until
October 13, 2000, and no decision on either party's motion is
expected before fourth quarter 2000.
The trial date for this case, previously scheduled for June 2000,
has been continued. A formal schedule has not yet been entered,
but the Company believes it likely that trial may be rescheduled
for the summer of 2001.
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 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
certain litigation between the companies that was the subject of
a separate settlement agreement and payment for products and
services obtained or provided in the normal course of business
since January 1, 1999. Both the Company and BSI expressly denied
any fault, liability, or wrongdoing concerning the claims that
were the subject matter of the arbitration and 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. As a
result of the settlement, Intergraph's equity ownership in BSI
was reduced from approximately 50% to approximately 33%.
Additionally, the Company had a $1.2 million net receivable from
BSI relating to business conducted prior to January 1, 1999 which
was written off in connection with the settlement.
In first quarter 1999, the Company accrued a nonoperating charge
to earnings of approximately $8.6 million ($.18 per share) in
connection with the settlement, representing the portion of
settlement costs not previously accrued. This charge is included
in "Arbitration settlement" in the consolidated statement of
operations for the six months ended June 30, 1999.
The $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. The Company successfully completed all aspects
of its Year 2000 readiness program with respect to both its
internal systems and its products. As of the date of this
filing, the Company has encountered no significant Year 2000
problems. However, any undetected errors or defects in the
current product offerings of the Company or its suppliers could
result in increased costs for the Company and potential
litigation over Year 2000 compliance issues.
The Company employed no additional resources to complete its Year
2000 readiness program, and as a result, the related costs, which
were funded from operations and expensed as incurred, did not
have a material impact on its results of operations or financial
condition. Year 2000 related changes in customer spending
patterns have not had, and are not anticipated to have, a
material impact on the Company's orders or revenues.
ORDERS/REVENUES
---------------
Orders. Second quarter and first half 2000 systems and services
orders totaled $173.6 million and $316 million, respectively,
reflecting declines of approximately 10% and 14% from the same
prior year periods. Second quarter and first half 1999 orders
included $4.5 million and $8.4 million, respectively, in orders
of the Company's discontinued VeriBest operation. U.S. orders
declined by 7% and 13%, respectively, and international orders
declined by 13% and 14%, respectively, from the second quarter
and first half 1999 levels. The orders decline is attributed
primarily to the weakening demand for the Company's hardware
products as the result of the Company's decision to exit this
market, though weakness was noted in the Company's software
segments as well. The Company believes the weakness in software
orders is due in part to transitioning to vertical units in the
software businesses, but may also be related to the announced
exit from the hardware business. Second quarter orders improved
by 22% from the first quarter 2000 level. International orders,
particularly in Europe, have also been adversely affected by the
strengthening of the U.S. dollar. The Company estimates that this
strengthening of the dollar resulted in an approximate 2% decline
in its reported systems and services orders from the first half
1999 level.
Revenues. Total revenues for second quarter and first half 2000
were $188 million and $387.4 million, respectively, down 17% and
18%, respectively, from the comparable prior year periods due to
the expected decline in hardware revenues and first quarter order
softness in the vertical software businesses. Sales outside the
U.S. represented approximately 53% of total revenues for the six
months ended June 30, 2000, up from 51% for the comparable prior
year period and 52% for the full year 1999, despite the
strengthening of the dollar. European revenues comprised 28% of
total revenues for first half 2000 compared to 31% for the first
half and full year 1999.
Systems. Systems revenue for the second quarter and first half
of 2000 was $123.2 million and $257.6 million, respectively, down
20% from the comparable prior year periods. Factors cited
previously as contributing to the decline in orders have also
adversely affected systems revenues, and competitive conditions
manifested in declining per unit sales prices continue to
adversely affect the Company's systems revenues and margin.
Systems revenues in Europe, the U.S., and the Americas (Canada
and Latin America) declined by 31%, 22%, and 16%, respectively,
from first half 1999 levels, while MidWorld and Asia Pacific
systems revenues increased by 23% and 8%, respectively.
Excluding the impact of a stronger dollar, the European revenue
decline was 24%. Asia Pacific revenues, however, were positively
impacted by weakening of the dollar against the currencies of
that region. The improvement in MidWorld revenues is attributed
primarily to sales made by Z/I Imaging, a 60%-owned subsidiary of
the Company formed in fourth quarter 1999.
Hardware revenues for the first half of 2000 declined by 34% from
the comparable prior year period. Unit sales of workstations and
servers were down 68%, while workstation and server revenues
declined by 57%, as the average per unit selling price increased
by 35%. The Company has announced that it will exit the hardware
development and design business and has taken actions in an
effort to complete this exit by the end of 2000. See "Subsequent
Events" following. Software revenues declined by 16% from the
first half 1999 level. Declines in sales of plant design,
information management, photogrammetry and government software
were partially offset by a significant improvement in sales of
Geomedia software. Plant design remains the Company's highest
volume software offering, representing 29% of total software
sales for the first half of 2000.
Maintenance. Revenue from maintenance of Company systems totaled
$41.5 million for the second quarter and $83.8 million for the
first half of 2000, down 9% and 12%, respectively, from the
comparable prior year periods. This decline was concentrated
primarily in the U.S. and Europe. 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 in the future.
Services. Services revenue, consisting primarily of revenues from
Company provided training and consulting, totaled $23.2 million
for the second quarter and $46 million for the first half of
2000, down 14% and 16%, respectively, from the comparable prior
year periods with the largest declines occurring in the U.S.,
Europe, and MidWorld. Services are becoming increasingly
significant to the Company's business, representing approximately
12% of total revenue for the second quarter and first half of
2000. The Company is endeavoring to grow its services business
and has redirected efforts to focus increasingly on systems
integration. Revenues from these services, however, typically
fluctuate significantly from quarter to quarter and produce lower
gross margins than systems or maintenance revenues.
GROSS MARGIN
------------
The Company's total gross margin for second quarter 2000 was
36.7%, up 3.5 points from the second quarter 1999 level. For the
first half of 2000, total gross margin was 36.5%, up 3.8 points
from the first half of 1999 and 4.8 points from the full year
1999 level.
Systems margin for the second quarter was 38%, up 2.1 points
from the first quarter level and 7.5 points from second quarter
1999. First half 2000 systems margin was 36.9 %, up 7.2 points
from first half 1999 and 6.9 points from the full year 1999.
The upward trend in the Company's systems margin is primarily
due to an increasing software content in the product mix as the
Company's hardware revenues continue to decline. Additionally,
Z/I Imaging, a subsidiary formed in fourth quarter 1999, has had
a positive impact on the Company's systems margin due to high
margins earned on sales of reconnaissance cameras. Full year
1999 systems margin was negatively impacted by a $7 million
inventory write-off incurred in connection with the Company's
decision to exit the PC and generic server businesses.
In general, the Company's systems margin may be improved by a
higher software content in the product mix, a weaker U.S. 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. Systems margins 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. While unable to predict the effects that
many of these factors may have on its systems margin, the Company
expects continued improvement as the Company completes its exit
of the hardware development and design business, derived
primarily from an increased software content in the product mix
and a reduction in inventory carrying and obsolescence costs.
However, third quarter 2000 margins will be negatively impacted
by a one time charge to write down the value of any inventory
remaining after the exit from the hardware development business
is complete. Due to a number of uncertainties associated with
this exit, including closing of the transaction with SGI, the
Company is at present unable to estimate the amount of the charge
that will be incurred. Additionally, the Company continues to
expect pressure on its systems margin as the result of increasing
industry price competition.
Maintenance margin for the second quarter of 2000 was 45.8%, down
5.1 points from the second quarter of 1999. Year to date
maintenance margin is 46.2%, down 3 points from the same prior
year period and up .2 points from the full year 1999 level. The
decline from first half 1999 is due primarily to the decline in
revenues discussed previously. The Company continues to monitor
its maintenance cost closely and has taken certain measures,
including reductions in headcount, to align these costs with the
current level of revenue. 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.
Services margin for the second quarter of 2000 was 13.8%, down 5
points from the second quarter of 1999. Year to date services
margin is 16.3%, down 5.5 points from the corresponding prior
year period and up .3 points from the full year 1999 level. The
decline from first half 1999 is due primarily to the decline in
services revenue from the prior year period. Significant
fluctuations in services revenues and margins from period to
period are not unusual as the incurrence of costs on certain
types of service contracts may not coincide with the recognition
of revenue. For contracts other than those accounted for under
the percentage-of-completion method, costs are expensed as
incurred, with revenues recognized either at the end of the
performance period or based on milestones specified in the
contract. Year to date 2000 margins have been negatively
impacted by a large services contract which is nearing
completion. Costs continue to be incurred, but the remaining
revenue on the contract will not be recognized until contract
completion, which is anticipated to occur in third quarter 2000.
OPERATING EXPENSES
------------------
Operating expenses, exclusive of nonrecurring charges, for the
second quarter and first half of 2000 declined by 20% and 18%,
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 18% from first half 1999.
Sales and marketing expense for the second quarter and first half
of 2000 declined by 30% and 28%, respectively, from the same
prior year periods as the result of reductions in headcount and
reduced public relations expenses. The Company's sales and
marketing expenses are inherently activity based and can be
expected to fluctuate with activity levels. General and
administrative expense for the second quarter and first half of
2000 decreased by 18% and 10%, respectively, from the same prior
year periods due to a decline in legal fees as the result of
reduced activity related to the Intel litigation and a decline in
European compensation expenses as the result of reduced
headcount. The Company expects that its legal expenses will
continue to fluctuate with the activity level associated with the
Intel trial. Additionally, the Company is experiencing a
temporary duplication of administrative expenses in the U.S. in
connection with its efforts to verticalize its operating segments
and decentralize portions of the corporate administrative
function. The Company expects that these expenses will decline
by the end of 2000. Product development expense for the second
quarter was basically flat with the second quarter 1999 level
while such expense for the first half of 2000 declined by 4% from
the corresponding prior year period. The decline from the first
half 1999 level was primarily the result of the decline in
headcount.
NONOPERATING INCOME AND EXPENSE
-------------------------------
Interest expense was $1.1 million for the second quarter and $2.3
million for the first half of 2000 versus $1.4 million and $2.8
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 utilizing proceeds from the sales of various
businesses and assets. See "Liquidity and Capital Resources"
following for a discussion of the Company's current financing
arrangements.
In April 1999, the Company sold 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, deferred payments
received in September and October 1999 totaling $2.5 million, and
a $5.8 million convertible subordinated debenture due March 2002
(included in "Other assets" in the June 30, 2000 and December 31,
1999 consolidated balance sheets). The resulting gain on this
transaction of $11.5 million is included in "Gain on sale of
assets" in the consolidated statements of operations for the
quarter and six months ended June 30, 1999. InterCAP's revenues
and losses for 1998 were $4.7 million and $1.1 million,
respectively, ($3.6 million and $1.9 million for 1997). Assets
of the subsidiary at December 31, 1998 totaled $1.6 million. The
subsidiary did not have a material effect on the Company's
results of operations for the period in 1999 prior to its sale.
"Other income (expense) - net" in the consolidated statements of
operations consists primarily of interest income, foreign
exchange gains and losses, and other miscellaneous items of
nonoperating income and expense. Significant items included in
this amount for the first half of 2000 are gains on sales of
capital assets of $7.2 million, including a $1.5 million gain on
termination of a long-term capital lease (see Note 10 of Notes to
Consolidated Financial Statements contained in this Form 10-Q),
and a foreign exchange loss of $1.5 million. Similar items for
the first half of 1999 include gains on sales of capital assets
of $1.4 million and an exchange loss of $2.4 million.
IMPACT OF CURRENCY FLUCTUATIONS AND CURRENCY RISK MANAGEMENT
------------------------------------------------------------
Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results of
operations. For the first half of 2000, approximately 53% (52%
for the full year 1999) of the Company's revenues were derived
from customers outside the United States, primarily through
subsidiary operations. Most subsidiaries sell to customers and
incur and pay operating expenses in local currency. These local
currency revenues and expenses are translated to U.S. dollars for
reporting purposes. A stronger U.S. dollar will decrease the
level of reported U.S. dollar orders and revenues, decrease the
dollar gross margin, and decrease the reported dollar operating
expenses of the international subsidiaries. For the first half
of 2000, the U.S. dollar strengthened on average from its first
half 1999 level, which decreased reported dollar revenues,
orders, and gross margin, but also decreased reported dollar
operating expenses in comparison to the prior year period. The
Company estimates that this strengthening of the U.S. dollar in
its international markets, primarily in Europe, negatively
impacted its results of operations for the first half of 2000 by
approximately $.05 per share in comparison to the first half of
1999.
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 possibly 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 that 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 December 31, 1999, the Company's only outstanding forward
contracts related to formalized intercompany loans between the
Company's European subsidiaries and were immaterial to the
Company's financial position. The Company had no forward
contracts outstanding at June 30, 2000.
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, and Euro currency
will begin to circulate on January 1, 2002. All of the Company's
financial systems currently accommodate the Euro, and during 1999
and first half 2000, the Company conducted business in Euros with
its customers and vendors who chose to do so without encountering
significant problems. While the Company continues to evaluate
the potential impacts of the common currency, it at present has
not identified 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.
INCOME TAXES
------------
The Company earned pretax income of $1.3 million in the first
half of 2000 versus a pretax loss from continuing operations of
$25.1 million in the first half of 1999. Income tax expense for
the first half of 2000 resulted primarily from taxes on
individually profitable majority owned subsidiaries, including
the Company's 60% ownership interest in Z/I Imaging. The first
half 1999 loss from continuing operations generated no net
financial statement tax benefit, as tax expenses in individually
profitable international subsidiaries offset available tax
benefits. There was no material income tax expense or benefit
related to the Company's discontinued operation.
RESULTS BY OPERATING SEGMENT
----------------------------
In second quarter 2000, Intergraph Computer Systems earned
operating income of $.5 million on revenues of $52.8 million,
compared to a second quarter 1999 operating loss of $12.8 million
on revenues of $86.1 million. Year-to-date, ICS has incurred an
operating loss of $3.6 million on revenues of $111.4 million,
compared to an operating loss of $19.5 million on revenues of
$179.4 million for first half 1999. These operating results
exclude the impact of certain nonrecurring income and operating
expense items associated with ICS's operations, including the
nonrecurring operating charges of $2.5 million incurred in second
quarter 1999. ICS's operating loss improvement for the first
half of 2000 resulted primarily from an approximate 47% decline
in operating expenses as the result of headcount reductions
achieved in 1999. During 1999, ICS's headcount was reduced by
approximately 35% as the result of employee terminations and
attrition, with the majority of the reductions occurring in the
sales and marketing area. Although total revenues declined by
38%, ICS's gross margin improved 4.2 points to 18.1% for first
half 2000. In second quarter 2000, ICS's gross margin improved
to 21.8%, resulting in breakeven results for the quarter. Income
earned for the quarter was primarily attributable to the
Intense3D graphics division of ICS. The ICS business has been
significantly adversely impacted by factors associated with the
Company's dispute with Intel. (See the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 for a complete
discussion of the Company's dispute with Intel and its effects on
the operations of ICS and the Company.) As a result, in first
quarter 2000, the Company announced its intention to exit the
hardware development and design business. Subsequent to the
close of the second quarter, the Company completed the sale of
ICS's Intense3D graphics accelerator division to 3Dlabs, Inc. and
announced an agreement with Silicon Graphics, Inc. with respect
to ICS's workstation and server business that should complete its
exit from the hardware development and design business. (See
"Subsequent Events" following.) The Company will continue to
sell hardware products from other vendors through its vertical
operating segments and perform hardware maintenance services for
its installed customer base. Effective with the shutdown of ICS,
the Company's hardware maintenance operation will be combined
with Intergraph Government Solutions.
In second quarter 2000, Intergraph Public Safety earned operating
income of $1.1 million on revenues of $21.7 million, compared to
operating income in second quarter 1999 of $3.3 million on
revenues of $24.7 million. Year-to-date, IPS has earned
operating income of $2.6 million on revenues of $43.6 million
versus operating income of $5.2 million on revenues of $46
million in first half 1999. Improvements in the segment's
systems and maintenance margins were offset by a 28% increase in
operating expenses. In anticipation of increasing orders, the
Utilities division of IPS has increased its headcount by
approximately 30% from the first half 1999 level, primarily in
the product development and marketing areas. Additionally, IPS's
general and administrative expenses have increased by 24% from
the prior year period due to legal expenses incurred in Australia
for an inquiry related to a large contract award. It is too soon
to tell whether this inquiry will result in a legal proceeding of
any significance with respect to the IPS operating segment. The
IPS business is characterized by large orders that are difficult
to forecast and cause revenues to fluctuate significantly from
quarter to quarter. Second quarter 2000 was negatively impacted
by negotiation delays on several projects. Orders and revenues
are expected to increase during the second half of the year.
In second quarter 2000, the Software business incurred an
operating loss of $1.5 million on revenues of $87.6 million,
compared to second quarter 1999 operating income of $4.1 million
on revenues of $118.4 million. Year-to-date, the Software
business has earned operating income of $2 million on revenues of
$181.5 million versus operating income of $7.5 million on
revenues of $243.9 million in first half 1999. These operating
results exclude the impact of certain nonrecurring income and
operating expense items associated with Software operations,
including the first quarter 1999 arbitration settlement accrual
of $8.6 million and the second quarter 1999 gain on the sale of
InterCAP of $11.5 million. Although total gross margin remained
flat with the first half 1999 level at approximately 40%, a 26%
decline in revenues resulted in a significant reduction in
operating income, and in an operating loss for the second
quarter. The impact of the revenue decline was partially offset
by a 20% decline in operating expenses from the first half 1999
level. During 1999, the segment reduced and reorganized its
sales force to align its expenses more closely with the lower
volume of revenue being generated.
Intergraph Government Solutions earned operating income of $1.4
million on revenues of $37.3 million in second quarter 2000 and
$39.8 million in second quarter 1999. Year-to-date, Government
Solutions has earned operating income of $4.9 million on revenues
of $76.6 million, compared to operating income of $5.6 million on
revenues of $82.5 million in first half 1999. Though first half
revenues declined by 7% from the prior year period, total gross
margin improved by 3.1 points to 24.3%, due primarily to
improvements in the segment's systems margins. However, this
improvement was offset by a 16% increase in operating expenses,
primarily the result of increased general and administrative
expense resulting from verticalization of the operating segment,
including implementation of a new accounting system, and from an
increase in bad debt expenses from the corresponding prior year
period.
In second quarter 2000, Z/I Imaging earned operating income of
$2.5 million on revenues of $11.4 million. Year-to-date, Z/I has
earned operating income of $5.2 million on revenues of $23.4
million. This was the segment's third full quarter of operations
since its inception on October 1, 1999. Prior to October 1999, a
portion of this business was included in the Intergraph Software
operating segment. The Company believes the associated revenues
and operating income for the second quarter and first half of
1999 were insignificant to the Software segment as a whole.
Systems revenues were higher than expected for the first half of
2000 as sales of reconnaissance cameras were strong. Total gross
margin for the second quarter and first half of 2000 was 56.3%
and 54.2%, respectively, reflecting the high margins earned on
software as well as on sales of reconnaissance cameras.
See Note 12 of Notes to Consolidated Financial Statements for
further explanation and details of the Company's segment
reporting.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At June 30, 2000, cash totaled $92.5 million compared to $88.5
million at December 31, 1999. Cash generated by operations in
the first half of 2000 totaled $17 million, compared to a
consumption of $4.1 million in the first half of 1999. The first
half 2000 cash generation reflects the Company's improved results
of operations and increased focus on collection of accounts
receivable. The first half 1999 cash consumption included the
$12 million payment to BSI (See "Arbitration Settlement"
preceding.)
Net cash generated by investing activities totaled $1.9 million
in the first half of 2000, compared to a $2.5 million net
generation in the first half of 1999. First half 2000 investing
activities included $16.7 million in proceeds from the sale of
capital assets. First half 1999 investing activities included
$24.6 million in proceeds from sales of assets, including $19.9
million in proceeds from the fourth quarter 1998 sale of the
Company's manufacturing assets (See Note 8 of Notes to
Consolidated Financial Statements contained in this Form 10-Q)
and $3.1 million net proceeds from the sale of the InterCAP
subsidiary. Other significant first half 2000 investing
activities included expenditures for capitalizable software
development costs of $8.5 million ($9.6 million in the first half
of 1999) and capital expenditures of $4.2 million ($5.7 million
in the first half of 1999), primarily for Intergraph products
used in hardware and software development and sales and marketing
activities. The Company expects that capital expenditures will
require $8 to $10 million for the full year 2000, 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 $12.1 million in
the first half of 2000, compared to $16.5 million in the first
half of 1999. Net debt repayments during first half 2000 and
1999 totaled $13 million and $17.9 million, respectively. In
first half 2000, the Company used approximately $7 million to
repay its Australian term loan and $4 million to pay off the
mortgage on a disposed European office building. First half 1999
activity relates primarily to the Company's term loan and
revolving credit agreement.
An additional reduction in the Company's long-term debt was
achieved through the termination of a long-term lease on one of
the Company's facilities in first quarter 2000. The Company
accounted for this lease as a financing, and upon termination,
long-term debt of $8.3 million and property, plant, and equipment
of $6.5 million were removed from the Company's books.
Under the Company's January 1997 six 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 availability of $80 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. and certain
international receivables. 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
(9.5% at June 30, 2000) plus .625%, and there are provisions in
the agreement that will lower the interest rate upon achievement
of sustained profitability by the Company. The agreement
requires the Company to pay a facility fee at an annual rate of
.15% of the amount available under the credit line, an unused
credit line fee at an annual rate of .25% of the average unused
portion of the revolving credit line, and a monthly agency fee.
At June 30, 2000, the Company had outstanding borrowings of $25
million (the term loan) which are classified as long-term debt in
the consolidated balance sheet, and an additional $23.6 million
of the available credit line was allocated to support the
Company's letters of credit and forward exchange contracts. As
of this same date, the borrowing base, representing the maximum
available credit under the line, was approximately $64.2 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, and 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 without approval. The
Company's net worth covenant was reduced to $200 million
effective June 30, 2000. Additionally, the agreement required
the Company to retain, pending a return to profitability, the
services of an investment banking firm to advise the Company
regarding potential partnering arrangements and other
alternatives for its computer hardware business. This
requirement was waived in second quarter 2000.
At June 30, 2000, the Company had approximately $40 million in
debt on which interest is charged under various floating rate
arrangements, primarily its six year term loan and revolving
credit agreement and a European mortgage. The Company is exposed
to market risk of future increases in interest rates on these
loans.
The Company has generated positive operating cash flow for the
third consecutive quarter, primarily the result of improved
accounts receivable collections and operating expense declines.
The Company expects to sustain this improvement in its operating
cash flows throughout 2000 as a result of headcount reductions
and other expense savings actions taken during 1999. The Company
is managing its cash very closely and believes that the
combination of improved cash flow from operations, its existing
cash balances, and cash available under its revolving credit
agreement will be adequate to meet cash requirements for 2000.
However, the Company must continue to align its operating
expenses with the reduced levels of revenue being generated if it
is to fund its operations and build cash reserves without
reliance on funds from external financing. For the longer term,
the Company anticipates no significant nonoperating events that
will require the use of cash.
SUBSEQUENT EVENTS
-----------------
On July 21, 2000, the Company completed the sale of the Intense3D
graphics accelerator division of ICS to 3Dlabs, Inc. Ltd.
("3Dlabs"), a leading supplier of integrated hardware and
software graphics accelerator solutions for workstations and
design professionals. As initial consideration for the acquired
assets, 3Dlabs issued to the Company approximately 3.6 million of
its common shares with an aggregate market value of approximately
$13.2 million on the date of closing. The agreement also
contains an earn-out provision based on various performance
measures for Intense3D operations for the remainder of 2000
following the July 1 effective date of the sale. This earn-out
provides an opportunity for additional proceeds of up to $25
million, payable in stock and/or cash at the option of 3Dlabs.
The Company expects to record a pretax gain from initial proceeds
of the sale of approximately $9 million in third quarter 2000.
Full year 1999 third-party revenue for the Intense3D division
approximated $38 million, with operating results at an
approximate breakeven level.
On July 21, 2000, the Company announced its intent to form a
strategic alliance with Silicon Graphics, Inc. ("SGI"), a
worldwide provider of high-performance computing and advanced
graphics solutions, in which SGI will acquire certain of the
Company's hardware business assets, including ICS's Zx10 family
of workstations and servers. Under the proposed alliance, the
Company will become a reseller for SGI and will offer its
application solutions on the SGI platform. In connection with
this agreement, the Company plans to purchase $100 million in SGI
products and services over a three year period. The terms of the
sale are still being finalized. The transaction is expected to
close in third quarter 2000.
These two transactions signal completion of the Company's exit of
the development, design, and manufacture of hardware products,
allowing the Company's operating segments to focus on providing
software, systems integration, and services to the industries in
which Intergraph is a market leader. Upon completion of these
transactions, the Company expects to incur a nonrecurring charge
to operations in the range of $10 million to $12 million,
primarily for inventory and fixed asset write-offs, employee
severance, and other costs incurred in connection with the
shutdown of the remainder of the hardware development business.
The Company will continue to sell hardware products from other
vendors, including SGI, and to perform hardware maintenance
services for its installed customer base. However, the Company
anticipates that revenues from both of these sources will continue
to decline over time as hardware will no longer be a primary focus
of the Company.
INTERGRAPH CORPORATION AND SUBSIDIARIES
Item 3: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company has experienced no material changes in
market risk exposures that affect the quantitative and
qualitative disclosures presented in the Company's Form
10-K filing for its year ending December 31, 1999.
PART II. OTHER INFORMATION
-----------------
Item 1: Legal Proceedings
-----------------
On June 4, 1999, the U.S. District Court, the Northern
District of Alabama, Northeastern Division (the "Alabama
Court") granted the Company's September 15, 1998 motion
requesting summary adjudication in favor of the Company
on its patent infringement claims and ruled that Intel
has no license to use the Company's Clipper patents as
Intel had claimed in its motion for summary judgment.
On October 12, 1999, the Alabama Court reversed its June
4, 1999 order and dismissed the Company's patent claims
against Intel. 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 appealed the Alabama
Court's October 12, 1999 order. Oral argument for this
appeal was heard on June 7, 2000. No decision has been
entered.
On March 10, 2000, the Alabama Court entered an order
dismissing the antitrust claims of the Company against
Intel, based in part upon a February 17, 2000 decision by
the Appeals Court in another case (CSU v. Xerox). The
Company considers this dismissal to be in error and
intends to vigorously pursue its antitrust case against
Intel. On April 26, 2000, the Company appealed this
dismissal to the United States Court of Appeals for the
Federal Circuit.
On March 17, 2000, Intel filed a series of motions in the
Alabama Court to dismiss certain Alabama state law claims
of the Company. The Company filed its responses to
Intel's motions on July 17, 2000, together with its own
motions to dismiss certain Intel counter-claims. Intel's
responses are not due until October 13, 2000, and no
decision on either party's motion is expected before
fourth quarter 2000.
The trial date for this case, previously scheduled for
June 2000, has been continued. A formal schedule has not
yet been entered, but the Company believes it likely that
trial may be re-scheduled for the summer of 2001.
Item 4: Submission of Matters to a Vote of Security Holders
------------------------------------------------------
Intergraph Corporation's Annual Meeting of
Shareholders was held on May 18, 2000. The results of
the meeting follow.
(1) Eight directors were elected to the Board of
Directors to serve for the ensuing year and until
their successors are duly elected and qualified. All
nominees, with the exceptions of Lawrence R. Greenwood
and Joseph C. Moquin, were serving as Directors of the
Company at the time of their nomination for the
current year.
Votes
----------------------------
For Against/Withheld
---------- ----------------
Lawrence R. Greenwood 45,823,980 830,823
Larry J. Laster 45,906,553 748,250
Thomas J. Lee 45,908,066 746,737
Sidney L. McDonald 45,896,840 757,963
James W. Meadlock 42,790,825 3,863,978
Joseph C. Moquin 45,813,149 841,654
James F. Taylor Jr. 45,912,701 742,102
Robert E. Thurber 45,243,240 1,411,563
(2) The 2000 Intergraph Corporation Employee Stock
Purchase Plan was approved by a vote of 26,867,573
for, 1,124,907 against, 126,324 abstentions, and
18,535,999 broker non-votes.
(3) Ratification of the appointment of Ernst & Young
LLP as the Company's independent auditors for the
current year was approved by a vote of 46,492,241 for,
76,342 against, and 86,220 abstentions.
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit 27, Financial Data Schedule
(b) There were no reports on Form 8-K filed during the quarter
ended June 30, 2000.
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 F. Taylor Jr. By: /s/ John W. Wilhoite
------------------------ ----------------------------
James F. Taylor Jr. John W. Wilhoite
Chief Executive Officer Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 11, 2000 Date: August 11, 2000
