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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 Identification No.)
incorporation or organization)
Intergraph Corporation
Huntsville, Alabama 35894-0001
----------------------------- ------------------
(Address of principal executive (Zip Code)
offices)
(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: 49,302,572 shares
outstanding as of March 31, 2000
=============================================================================
INTERGRAPH CORPORATION
FORM 10-Q *
March 31, 2000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets at March 31,
2000 and December 31, 1999 2
Consolidated Statements of Operations for
the quarters ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for
the quarters ended March 31, 2000 and 1999 4
Notes to Consolidated Financial Statements 5 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
* 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 Exchange
Commission, including its most recent Annual Report on Form 10-K
and this Form 10-Q.
PART I. FINANCIAL INFORMATION
---------------------
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- ----------------------------------------------------------------------------
March 31, December 31,
2000 1999
- ----------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 93,412 $ 88,513
Accounts receivable, net 237,720 258,768
Inventories 30,587 35,918
Other current assets 28,266 28,744
- ----------------------------------------------------------------------------
Total current assets 389,985 411,943
Investments in affiliates 9,490 9,940
Other assets 66,018 68,154
Property, plant, and equipment, net 82,014 94,907
- ----------------------------------------------------------------------------
Total Assets $547,507 $584,944
============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 46,030 $ 50,963
Accrued compensation 35,301 35,848
Other accrued expenses 56,893 71,052
Billings in excess of sales 59,126 66,051
Income taxes payable 7,124 8,175
Short-term debt and current maturities
of long-term debt 12,039 11,547
- ----------------------------------------------------------------------------
Total current liabilities 216,513 243,636
Deferred income taxes 2,518 2,620
Long-term debt 41,661 51,379
Other noncurrent liabilities 10,596 10,609
- ----------------------------------------------------------------------------
Total liabilities 271,288 308,244
- ----------------------------------------------------------------------------
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 216,146 216,943
Retained earnings 179,256 178,231
Accumulated other comprehensive loss -
cumulative translation adjustment (7,474) (5,506)
- ----------------------------------------------------------------------------
393,664 395,404
Less - cost of 8,058,790 treasury
shares at March 31, 2000 and
8,145,149 treasury shares at
December 31, 1999 (117,445) (118,704)
- ----------------------------------------------------------------------------
Total shareholders' equity 276,219 276,700
- ----------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $547,507 $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 March 31, 2000 1999
- ----------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $134,338 $167,379
Maintenance 42,308 49,668
Services 22,759 27,563
- ----------------------------------------------------------------------------
Total revenues 199,405 244,610
- ----------------------------------------------------------------------------
Cost of revenues
Systems 86,091 118,922
Maintenance 22,597 26,035
Services 18,489 20,727
- ----------------------------------------------------------------------------
Total cost of revenues 127,177 165,684
- ----------------------------------------------------------------------------
Gross profit 72,228 78,926
Product development 13,961 15,553
Sales and marketing 32,937 43,988
General and administrative 24,972 25,390
- ----------------------------------------------------------------------------
Income (loss) from operations 358 ( 6,005)
Arbitration settlement --- ( 8,562)
Interest expense (1,176) ( 1,416)
Other income (expense) - net 3,243 508
- ----------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes 2,425 (15,475)
Income tax expense 1,400 ---
- ----------------------------------------------------------------------------
Income (loss) from continuing operations 1,025 (15,475)
Loss from discontinued operation, net of
income taxes --- ( 2,083)
- ----------------------------------------------------------------------------
Net income (loss) $ 1,025 $(17,558)
============================================================================
Income (loss) per share -
basic and diluted:
Continuing operations $ .02 $( .32)
Discontinued operation --- ( .04)
- ----------------------------------------------------------------------------
Net income (loss) $ .02 $( .36)
============================================================================
Weighted average shares outstanding
- basic 49,254 48,697
- diluted 49,475 48,697
============================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- ----------------------------------------------------------------------------
Quarter Ended March 31, 2000 1999
- ----------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net income (loss) $ 1,025 $(17,558)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 4,198 5,555
Amortization 6,352 6,041
Arbitration settlement --- 8,562
Net changes in current assets and liabilities (1,587) 181
- ----------------------------------------------------------------------------
Net cash provided by operating activities 9,988 2,781
- ----------------------------------------------------------------------------
Investing Activities:
Net proceeds from sales of assets 5,821 19,919
Purchases of property, plant, and equipment (2,259) ( 2,752)
Capitalized software development costs (5,857) ( 4,580)
Business acquisition, net of cash acquired (1,009) ( 1,742)
Other ( 402) ( 935)
- ----------------------------------------------------------------------------
Net cash provided by (used for) investing
activities (3,706) 9,910
- ----------------------------------------------------------------------------
Financing Activities:
Gross borrowings --- 45
Debt repayment ( 437) (15,282)
Proceeds of employee stock purchases and
exercise of stock options 462 653
- ----------------------------------------------------------------------------
Net cash provided by (used for) financing
activities 25 (14,584)
- ----------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,408) ( 2,313)
- ----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 4,899 ( 4,206)
Cash and cash equivalents at beginning of period 88,513 95,473
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of period $93,412 $ 91,267
============================================================================
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 ended March 31, 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 statement of operations for the
quarter ended March 31, 1999 has 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
quarter ended March 31, 1999. Other than its operating
loss for the period, the discontinued operation did not
have a significant impact on the Company's consolidated
cash flow or financial position.
For the quarter ended March 31, 1999, VeriBest incurred a
net loss of $2,083,000, including a loss from operations
of $1,898,000, on revenues from unaffiliated customers of
$7,467,000.
NOTE 3: Litigation. As further described in the Company's Annual
Report on Form 10-K for its year ended December 31, 1999,
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 first 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 is the subject of a separate
settlement agreement and payment for products and services
obtained or provided in the normal course of business from
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 quarter ended
March 31, 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:
-----------------------------------------------------------
March 31, December 31,
2000 1999
-----------------------------------------------------------
(In thousands)
Raw materials $10,532 $12,888
Work-in-process 2,270 5,739
Finished goods 6,775 5,895
Service spares 11,010 11,396
-----------------------------------------------------------
Totals $30,587 $35,918
===========================================================
The Company's December 31, 1999 raw materials and work-in-
process balances have been restated to reflect certain
parts as work-in-process rather than raw materials 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 $208,422,000 and $214,219,000 at March
31, 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 $1,009,000 were made in
first quarter 2000 and are included in "Business
acquisition, net of cash acquired" in the Company's
consolidated statement of cash flows for the quarter ended
March 31, 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 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 quarter ended March 31, 1999. 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: 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. Cash outlays for severance related to
these actions approximated $2,800,000 and $600,000 in the
first quarters of 2000 and 1999, respectively. At March
31, 2000, the total remaining accrued liability for
severance relating to the 1999 reductions in force was
approximately $2,000,000 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 and divestitures, in
reconciling net income (loss) to net cash provided by
operations are as follows:
---------------------------------------------------------------
Cash Provided By (Used For) Operations
Quarter Ended March 31, 2000 1999
---------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $ 18,226 $ 6,377
Inventories 5,368 (1,242)
Other current assets ( 715) (4,723)
Increase (decrease) in:
Trade accounts payable ( 4,545) (3,981)
Accrued compensation and
other accrued expenses (12,916) 6,093
Income taxes payable ( 998) ( 242)
Billings in excess of sales ( 6,007) (2,101)
-----------------------------------------------------------
Net changes in current assets
and liabilities $( 1,587) $ 181
===========================================================
Significant noncash investing and financing transactions
in first quarter 2000 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. Investing and financing transactions in
first quarter 1999 that did not require cash included the
acquisition of a business in part for future obligations
totaling approximately $3,475,000, 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 income (loss) per share is computed using the
weighted average number of common shares outstanding.
Diluted income (loss) per share is computed using the
weighted average number of common and equivalent common
shares outstanding. Employee stock options are the
Company's only common stock equivalent and are included in
the calculation only if dilutive.
NOTE 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 statement of
operations for the quarter ended March 31, 1999. Certain
VeriBest financial information for the quarter ended March
31, 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 supplies 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 ended
March 31, 2000 and 1999.
-----------------------------------------------------------
Quarter Ended March 31,
2000 1999
-----------------------------------------------------------
(In thousands)
Revenues
ICS:
Unaffiliated customers $ 42,361 $ 62,177
Intersegment revenues 16,166 31,148
-----------------------------------------------------------
58,527 93,325
-----------------------------------------------------------
IPS:
Unaffiliated customers 19,147 20,334
Intersegment revenues 2,718 957
-----------------------------------------------------------
21,865 21,291
-----------------------------------------------------------
Intergraph Software:
Unaffiliated customers 91,758 120,715
Intersegment revenues 2,160 1,830
-----------------------------------------------------------
93,918 122,545
-----------------------------------------------------------
Intergraph Government Solutions:
Unaffiliated customers 38,201 41,384
Intersegment revenues 1,141 1,380
-----------------------------------------------------------
39,342 42,764
-----------------------------------------------------------
Z/I Imaging:
Unaffiliated customers 7,938 ---
Intersegment revenues 4,132 ---
-----------------------------------------------------------
12,070 ---
-----------------------------------------------------------
225,722 279,925
-----------------------------------------------------------
Eliminations (26,317) (35,315)
-----------------------------------------------------------
Total revenues $199,405 $244,610
===========================================================
-----------------------------------------------------------
Operating income (loss):
ICS $(4,080) $(6,667)
IPS 1,454 1,927
Intergraph Software 3,495 3,393
Intergraph Government Solutions 3,430 4,233
Z/I Imaging 2,737 ---
Corporate (6,678) (8,891)
-----------------------------------------------------------
Total $ 358 $(6,005)
===========================================================
Prior to October 1999, a portion of the Z/I Imaging
business was included in the Intergraph Software operating
segment. Revenues and operating income for first quarter
1999 were insignificant to the Software segment as a
whole.
Amounts included in the "Corporate" segment 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 $2,736,000 and $4,282,000 for first quarter
2000 and 1999, respectively.
Not allocated to the segments and not included in the
analysis above is the first quarter 1999 charge of
$8,562,000 for an arbitration settlement agreement reached
with Bentley Systems, Inc. (See Note 4.)
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: Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Under this Statement, all
nonowner changes in equity during a period are reported as
a component of comprehensive income (loss). During the
first quarters of 2000 and 1999, the Company's
comprehensive losses totaled $943,000 and $20,816,000,
respectively. These comprehensive losses differ from net
income (loss) due 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 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. SAB
101 is effective for the Company's second quarter 2000.
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 second quarter results of
operations.
NOTE 16: Subsequent Events. On April 7, 2000, the Company
signed an agreement with 3Dlabs, Inc. Ltd. ("3Dlabs"), a
leading supplier of integrated hardware and software
graphics accelerator solutions for workstations and design
professionals, under which 3Dlabs will acquire certain
assets of the Intense3D graphics accelerator division of
ICS. Under the terms of the agreement, 3Dlabs will issue
approximately 3,700,000 common shares of 3Dlabs to the
Company as initial consideration for the acquired assets,
with an earn-out provision totaling up to an additional
$25,000,000 payable in stock and/or cash at the option of
3Dlabs. The earn-out will be based on various performance
measures for the Intense3D operations for the remainder of
2000 following the closing of the transaction. Full year
1999 revenue for the Intense3D division approximated
$55,000,000, including approximately $17,000,000 in sales
to other Intergraph operating segments, with operating
results at an approximate breakeven level. Approximately
95 employees of the Company will be employed by 3Dlabs as
part of the transaction. The acquisition, which is
subject to regulatory approval, is expected to close by
the end of second quarter 2000.
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 regulatory approval, 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.
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 statement of operations for the quarter ended March
31, 1999 reflects 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 quarter ended March 31, 1999 and it is not segregated from
the related discussions. Other than its operating loss for the
period, 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 first quarter 2000, the Company earned a net income
of $.02 per share on revenues of $199.4 million. In first quarter
1999, the Company incurred a loss from continuing operations of
$.32 per share on revenues of $244.6 million, including an $8.6
million ($.18 per share) charge for settlement of its arbitration
proceedings with Bentley Systems, Inc. (See "Arbitration
Settlement" following.) First quarter 2000 income from operations
was $.01 per share versus a $.12 per share loss for first quarter
1999. The improvement is the result of a 15% decline in operating
expenses.
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. The Company has announced its
intention to exit the hardware business and is actively engaged in
discussions with potential business partners for Intergraph
Computer Systems. The Company is also considering all other
available alternatives to help stem the losses in this business
unit. In April 2000, the Company announced an agreement to sell
the Intense3D graphics accelerator division of ICS to 3Dlabs, Inc.
Ltd. See "Subsequent Events" following for a complete discussion.
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
implementation, of unknown duration, of independent business
units. In addition, the Company faces significant operational and
financial uncertainty of unknown duration due to its dispute with
Intel. To 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. Cash outlays for severance related to these actions
approximated $2.8 million and $.6 million in the first quarters of
2000 and 1999, respectively. At March 31, 2000, the total
remaining accrued liability for severance relating to the 1999
reductions in force was approximately $2 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. 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, the Company is
subject to certain risks and uncertainties and has extensive
ongoing litigation with Intel Corporation. Litigation
developments during first 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 has been scheduled for June 7, 2000.
At an oral hearing held February 25, 2000, the Alabama Court
indicated that the trial date for this case, previously scheduled
for June 2000, will be continued. A formal schedule has not been
entered, but the Company believes it likely that trial may be re-
scheduled for the summer of 2001.
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.
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 is the subject of a separate settlement
agreement and payment for products and services obtained or
provided in the normal course of business from 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 quarter ended March 31, 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.
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. First quarter systems and services orders totaled $142.4
million, down 18% from the first quarter 1999 level. First
quarter 1999 orders included $4 million in orders of the Company's
discontinued VeriBest operation. U.S. and international orders
declined by 21% and 16%, respectively, from the prior year period.
The U.S. decline is primarily attributable to weakening demand for
the Company's hardware products reflecting the Company's decision
to exit this market in the near future, 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 on the software side, but may also be indirectly
related to the announced exit from the hardware business. The
international orders decline was concentrated primarily in Europe,
where orders declined by approximately 44% from the first quarter
1999 level. European orders have been adversely affected by
weakening demand for the Company's hardware product offerings as
well as by the strengthening of the dollar against the currencies
of that region. The Company estimates that this strengthening of
the dollar accounted for approximately 13% of the European orders
decline.
Revenues. Total revenues for first quarter 2000 were $199.4
million, down approximately 18.5% from first quarter 1999. Sales
outside the U.S. represented approximately 53% of total revenues
in first quarter 2000, up slightly from the first quarter and full
year 1999 levels. European revenues were 30% of total revenues
for first quarter 2000, down from 32% in first quarter 1999 and
31% for the full year 1999.
Systems. Systems revenue for the first quarter was $134.3
million, down 20% from the corresponding prior year period.
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 28%, 20%, and 17%, respectively, from
the first quarter 1999 level. Revenues in the Asia Pacific and
Middle East regions were basically flat with the prior year
period. Excluding the impact of a stronger dollar, European
revenues declined by 22%.
The Company has announced that it will exit the hardware business.
Hardware revenues for first quarter 2000 were down 37% from the
corresponding prior year period. Unit sales of workstations and
servers were down 62%, while workstation and server revenues
declined by 54%, as the average per unit selling price increased
by 20%. Software revenues were basically flat with the first
quarter 1999 level. Significant increases in sales of Geomedia
and Utilities software were offset by declines in revenues from
plant design and other software products. Plant design is
currently the Company's highest volume software offering,
representing approximately 28% of total software sales for first
quarter 2000.
Maintenance. Revenues from maintenance of Company systems totaled
$42.3 million in first quarter 2000, down 15% 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 in the future.
Services. Services revenue consists primarily of revenues from
Company provided training and consulting. Services revenues
totaled $22.8 million for the quarter, down 17% from the prior
year period, with the largest declines occurring in Europe and in
the IPS Utilities division. Services are becoming increasingly
significant to the Company's business, representing approximately
11% of total revenue for first quarter 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 produce lower gross
margins than systems or maintenance revenues.
GROSS MARGIN
- ------------
The Company's total gross margin for first quarter 2000 was 36.2%,
up 3.9 points and 4.5 points from the first quarter 1999 and full
year 1999 levels, respectively.
Systems margin was 35.9%, up 6.9 points and 5.9 points,
respectively, from the first quarter 1999 and full year 1999
levels, primarily due to an increased software content in the
product as the Company's hardware revenues continue to decline.
Additionally, Z/I Imaging, a company formed in fourth quarter
1999, has had a positive impact on the Company's systems margin
due to the 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.
First quarter systems margin was down slightly from the fourth
quarter 1999 level of 37.3%.
In general, the Company's systems margin may be improved by higher
software content in the product, 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 the Company is unable to predict the
effects that many of these factors may have on its systems
margins, it expects continuing pressure on its systems margin as
the result of increasing industry price competition.
Maintenance margin was 46.6%, down 1 point from first quarter 1999
and up .6 points from the full year 1999 level. The decline from
first quarter 1999 is due primarily to a significant decline in
U.S. and European revenues without a corresponding reduction in
costs. 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 was 18.8%, down 6 points from first quarter 1999
and up 2.8 points from the full year 1999 level. The decline from
the first quarter 1999 level was 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.
OPERATING EXPENSES
- ------------------
Operating expenses for first quarter 2000 were $71.9 million, down
15% from the comparable prior year period. 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 quarter 1999. Product development
expense was down 10% from the first quarter 1999 level due
primarily to declines in labor and overhead expenses resulting
from the headcount decline and from an increase in software
development projects qualifying for capitalization, primarily
related to the Company's federal shipbuilding effort. Sales and
marketing expense declined 25% from the corresponding prior year
period. Sales and marketing expenses have declined across the
board due primarily to reduction in headcount. The Company's
sales and marketing expenses are inherently activity based and can
be expected to fluctuate with activity levels. General and
administrative expense was basically flat with the prior year
period. A decline in legal fees due to the low level of activity
in the Intel litigation during the quarter was offset by increased
bad debt expenses in the U.S., primarily related to the Intergraph
Government Solutions business. 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
connection with its efforts to verticalize its operating segments
and decentralize portions of the corporate finance and
administrative function. The Company expects that these expenses
will decline by the end of 2000.
NONOPERATING INCOME AND EXPENSE
- -------------------------------
Interest expense was $1.2 million for first quarter 2000, compared
to $1.4 million for first quarter 1999. The Company's average
outstanding debt has declined in comparison to the first quarter
1999 level due primarily to repayment of borrowings under the
Company's revolving credit facility utilizing proceeds from sales
of various businesses and assets. See "Liquidity and Capital
Resources" following for a discussion of the Company's current
financing arrangements.
"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 these amounts
are gains on sales of capital assets of $2.2 million and $1.4
million in first quarter 2000 and 1999, respectively, a $1.5
million gain on termination of a long-term lease in first quarter
2000 (see Note 10), and a foreign exchange loss of $1.7 million in
first quarter 1999.
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 quarter of 2000, approximately 53% of
the Company's revenues were derived from customers outside the
United States, primarily through subsidiary operations, compared
to 52% for the full year 1999. 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 reported dollar
operating expenses of the international subsidiaries. During
first quarter 2000, the U.S. dollar strengthened on average from
its first quarter 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, reduced its
first quarter 2000 results of operations by approximately $.02 per
share in comparison to first quarter 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 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 March 31, 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 quarter 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 $2.4 million in first quarter
2000 versus a pretax loss from continuing operations of $15.5
million in first quarter 1999. Income tax expense for first
quarter 2000 resulted primarily from taxes on individually
profitable majority owned subsidiaries. The first quarter 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 first quarter 2000, Intergraph Computer Systems incurred an
operating loss of $4.1 million on revenues of $58.5 million,
compared to a first quarter 1999 operating loss of $6.7 million on
revenues of $93.3 million. ICS's operating loss improvement
resulted primarily from a 39% 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. Though
total revenues declined by 37%, ICS's gross margin has remained
relatively flat with the first quarter 1999 level at approximately
15%. The ICS business has been significantly adversely impacted
by factors associated with the 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.)
The Company has announced its intention to exit the hardware
business and is actively engaged in discussions with potential
business partners for ICS. The Company is also considering all
other available alternatives to help stem the losses in this
business unit. In April 2000, the Company announced an agreement
to sell the Intense3D graphics accelerator division of ICS to
3Dlabs, Inc. Ltd. See "Subsequent Events" following for a
complete discussion.
In first quarter 2000, Intergraph Public Safety earned operating
income of $1.5 million on revenues of $21.9 million, compared to a
first quarter 1999 operating income of $1.9 million on revenues of
$21.3 million. Improvements in the segment's systems and
maintenance margins were offset by a decline in services margins,
due primarily to a 15% decline in services revenue from the first
quarter 1999 level, and a 28% increase in operating expenses. The
Utilities division of IPS has increased its headcount by
approximately 34% from the first quarter 1999 level, primarily in
the product development and marketing areas. First quarter 2000
was a record bookings quarter for IPS with systems and services
orders totaling $24.3 million. However, most of these orders were
not received until late in the quarter and as such, they did not
impact first quarter revenues. The Company expects improvement in
IPS's second quarter revenues and operating results as a result of
the significant first quarter bookings.
In first quarter 2000, the Software business earned operating
income of $3.5 million on revenues of $93.9 million, compared to a
first quarter 1999 operating income of $3.4 million on revenues of
$122.5 million. Operating income excludes 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. The impact of the 23% decline
in revenues was offset by a 23% decline in operating expenses from
the first quarter 1999 level. During 1999, the segment reduced
and reorganized its sales force to align expenses with the lower
volume of revenue being generated. Total gross margin remained
flat with the corresponding prior year period at 40%.
Improvements in systems margins were offset by declines in
maintenance and services margins.
In first quarter 2000, Intergraph Government Solutions earned
operating income of $3.4 million on revenues of $39.3 million,
compared to a first quarter 1999 operating income of $4.2 million
on revenues of $42.8 million. Though revenues declined by 8%,
total gross margin improved by 5.6 points from the first quarter
1999 level to 28.1%, due primarily to improvements in the
segment's systems margin. This improvement was offset by a 41%
increase in the segment's operating expenses, primarily the result
of an increase in bad debt expenses from the corresponding prior
year period.
In first quarter 2000, Z/I Imaging earned operating income of $2.7
million on revenues of $12.1 million. This was the segment's
second 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 revenues and operating income for first quarter
1999 were insignificant to the Software segment as a whole.
Revenues were higher than expected for the first quarter 2000 as
sales of reconnaissance cameras were strong. Total gross margin
for the quarter was 52%, 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 of the Company's segment reporting.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 2000, cash totaled $93.4 million compared to $88.5
million at December 31, 1999. Cash provided by operations in
first quarter 2000 totaled $10 million compared to $2.8 million in
first quarter 1999.
Net cash used for investing activities totaled $3.7 million in
first quarter 2000, compared to a $9.9 million generation of cash
in first quarter 1999. First quarter 2000 investing activities
included $5.8 million in proceeds from sales of various assets,
primarily property, plant, and equipment. First quarter 1999
investing activities included $19.9 million in proceeds from the
fourth quarter 1998 sale of the Company's manufacturing assets.
(See Note 8 of Notes to Consolidated Financial Statements.) Other
significant investing activities in first quarter 2000 included
expenditures for capitalizable software development costs of $5.9
million ($4.6 million in first quarter 1999) and capital
expenditures of $2.3 million ($2.8 million in first quarter 1999),
primarily for Intergraph products used in hardware and software
development and sales and marketing activities. The Company
expects that capital expenditures will require $10 to $20 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 $14.6 million in
first quarter 1999, including a net repayment of debt of
approximately $15.2 million. Financing cash flows in first
quarter 2000 were not significant.
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 $100 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% at March
31, 2000) plus .625%. The amended agreement contains provisions
which 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 March 31, 2000, 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 $24.8 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 $72.7 million. Effective May 1, 2000, the
maximum availability under the credit line was reduced from $100
million to $80 million to align the facility more closely with the
Company's current borrowing base.
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 amended
agreement has reduced the Company's net worth covenant to $216
million at March 31, 2000, with a subsequent reduction to $200
million at June 30, 2000. Additionally, the amended agreement
requires 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.
At March 31, 2000, the Company had approximately $52 million in
debt on which interest is charged under various floating rate
arrangements, primarily its six year term loan and revolving
credit agreement, mortgages, and an Australian term loan. The
Company is exposed to market risk of future increases in interest
rates on these loans, with the exception of the Australian term
loan, on which the Company has entered into an interest rate swap
agreement.
The Company has generated positive operating cash flow for its
second 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 amended 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 operating issues that will require the use of cash,
and correspondingly the adequacy of its cash reserves will be
dependent on improvement in its operating results.
SUBSEQUENT EVENTS
- -----------------
On April 7, 2000, the Company signed an agreement with 3Dlabs,
Inc. Ltd. ("3Dlabs"), a leading supplier of integrated hardware
and software graphics accelerator solutions for workstations and
design professionals, under which 3Dlabs will acquire certain
assets of the Intense3D graphics accelerator division of ICS.
Under the terms of the agreement, 3Dlabs will issue approximately
3.7 million common shares of 3Dlabs to the Company as initial
consideration for the acquired assets, with an earn-out provision
totaling up to an additional $25 million, payable in stock and/or
cash at the option of 3Dlabs. The earn-out will be based on
various performance measures for the Intense3D operations for the
remainder of 2000 following the closing of the transaction. Full
year 1999 revenue for the Intense3D division approximated $55
million, including approximately $17 million in sales to other
Intergraph operating segments, with operating results at an
approximate breakeven level. Approximately 95 employees of the
Company will be employed by 3Dlabs as part of the transaction.
The acquisition, which is subject to regulatory approval, is
expected to close by the end of second quarter 2000.
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 million, is subject to the execution of
definitive documents and regulatory approval, 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 million.
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.
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.
INTERGRAPH CORPORATION AND SUBSIDIARIES
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 has been
scheduled for June 7, 2000.
At an oral hearing held February 25, 2000, the Alabama
Court indicated that the trial date for this case,
previously scheduled for June, 2000, will be continued. A
formal schedule has not been entered, but the Company
believes it likely that trial may be re-scheduled for the
summer of 2001.
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.
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 March 31, 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: May 12, 2000 Date: May 12, 2000
<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 March 31, 2000,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 93,412
<SECURITIES> 0
<RECEIVABLES> 237,720<F1>
<ALLOWANCES> 0
<INVENTORY> 30,587
<CURRENT-ASSETS> 389,985
<PP&E> 290,436
<DEPRECIATION> 208,422
<TOTAL-ASSETS> 547,507
<CURRENT-LIABILITIES> 216,513
<BONDS> 41,661
0
0
<COMMON> 5,736
<OTHER-SE> 270,483
<TOTAL-LIABILITY-AND-EQUITY> 547,507
<SALES> 134,338
<TOTAL-REVENUES> 199,405
<CGS> 86,091
<TOTAL-COSTS> 127,177
<OTHER-EXPENSES> 71,870<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,176
<INCOME-PRETAX> 2,425
<INCOME-TAX> 1,400
<INCOME-CONTINUING> 1,025
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,025
<EPS-BASIC> .02
<EPS-DILUTED> .02
<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, and General and administrative expenses.
</FN>
</TABLE>
