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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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: 49,450,448 shares
outstanding as of September 30, 2000
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INTERGRAPH CORPORATION
FORM 10-Q*
September 30, 2000
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2000 and
December 31, 1999 2
Consolidated Statements of Operations for the quarters
and nine months ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5 - 16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17 - 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
*Information contained in this Form 10-Q includes statements that
are forward looking as defined in Section 21E of the Securities
Exchange Act of 1934. Actual results may differ materially from
those projected in the forward looking statements. Information
concerning factors that could cause actual results to differ
materially from those in the forward looking statements is
described in the Company's filings with the Securities and
Exchange Commission, including its most recent Annual Report on
Form 10-K, its Form 10-Q filings for the quarters ended March 31,
2000 and June 30, 2000, and this Form 10-Q.
PART I. FINANCIAL INFORMATION
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
----------------------------------------------------------------------------
September 30, December 31,
2000 1999
----------------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $106,421 $ 88,513
Accounts receivable, net 195,444 258,768
Inventories 22,911 35,918
Other current assets 30,986 28,744
----------------------------------------------------------------------------
Total current assets 355,762 411,943
Investments in affiliates 17,381 9,940
Other assets 63,213 68,154
Property, plant, and equipment, net 59,010 94,907
----------------------------------------------------------------------------
Total Assets $495,366 $584,944
============================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 31,872 $ 50,963
Accrued compensation 35,087 35,848
Other accrued expenses 60,923 71,052
Billings in excess of sales 50,176 66,051
Income taxes payable 9,628 8,175
Short-term debt and current maturities of
long-term debt 7,898 11,547
----------------------------------------------------------------------------
Total current liabilities 195,584 243,636
Deferred income taxes 2,360 2,620
Long-term debt 25,437 51,379
Other noncurrent liabilities 10,971 10,609
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Total liabilities 234,352 308,244
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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 214,797 216,943
Retained earnings 170,315 178,231
Accumulated other comprehensive loss ( 14,539) ( 5,506)
----------------------------------------------------------------------------
376,309 395,404
Less - cost of 7,910,914 treasury shares at
September 30, 2000 and 8,145,149 treasury
shares at December 31, 1999 (115,295) (118,704)
----------------------------------------------------------------------------
Total shareholders' equity 261,014 276,700
----------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $495,366 $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 Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
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(In thousands except per share amounts)
Revenues
Systems $91,988 $150,622 $349,568 $472,522
Maintenance 39,650 45,806 123,463 141,082
Services 27,299 24,120 73,292 78,630
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Total revenues 158,937 220,548 546,323 692,234
----------------------------------------------------------------------------
Cost of revenues
Systems 61,417 115,295 223,964 341,590
Maintenance 20,623 27,122 65,713 75,559
Services 22,448 20,546 60,962 63,154
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Total cost of revenues 104,488 162,963 350,639 480,303
-----------------------------------------------------------------------------
Gross profit 54,449 57,585 195,684 211,931
Product development 12,887 15,857 42,850 47,200
Sales and marketing 28,767 40,821 93,570 130,221
General and administrative 22,320 28,743 71,159 83,120
Nonrecurring operating charges 3,362 13,124 3,362 15,596
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Loss from operations (12,887) (40,960) (15,257) (64,206)
Gains on sales of assets 12,018 --- 19,111 12,471
Arbitration settlement --- --- --- ( 8,562)
Interest expense ( 953) ( 1,501) ( 3,241) ( 4,340)
Other income (expense) - net ( 2,457) 427 ( 3,629) ( 2,520)
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Loss from continuing
operations before income taxes ( 4,279) (42,034) ( 3,016) (67,157)
Income tax expense 1,000 1,500 4,900 1,500
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Loss from continuing operations ( 5,279) (43,534) ( 7,916) (68,657)
Loss from discontinued operation,
net of income taxes --- ( 1,967) --- ( 6,494)
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Net loss $( 5,279) $(45,501) $( 7,916) $(75,151)
=============================================================================
Loss per share - basic and diluted:
Continuing operations $( .11) $( .89) $( .16) $( 1.41)
Discontinued operation --- ( .04) --- ( .13)
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Net loss $( .11) $( .93) $( .16) $( 1.54)
============================================================================
Weighted average shares outstanding -
basic and diluted 49,435 48,971 49,331 48,834
============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
----------------------------------------------------------------------------
Nine Months Ended September 30, 2000 1999
----------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net loss $( 7,916) $(75,151)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Gains on sales of assets (19,111) (12,471)
Depreciation 11,727 15,838
Amortization 15,125 20,336
Exchange loss 2,695 406
Noncash portion of arbitration settlement --- 3,530
Noncash portion of nonrecurring operating charges 2,921 12,694
Net changes in current assets and liabilities 32,184 10,261
----------------------------------------------------------------------------
Net cash provided by (used for) operating
activities 37,625 (24,557)
----------------------------------------------------------------------------
Investing Activities:
Net proceeds from sales of assets 22,348 28,868
Purchases of property, plant, and equipment ( 5,492) ( 7,915)
Capitalized software development costs ( 9,775) (14,669)
Capitalized internal use software costs ( 904) ( 3,648)
Business acquisition, net of cash acquired ( 1,093) ( 1,917)
Other 227 ( 2,614)
----------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 5,311 ( 1,895)
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Financing Activities:
Gross borrowings --- 45
Debt repayment (20,969) (16,956)
Proceeds of employee stock purchases and exercise
of stock options 1,263 2,037
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Net cash used for financing activities (19,706) (14,874)
----------------------------------------------------------------------------
Effect of exchange rate changes on cash ( 5,322) ( 1,074)
----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 17,908 (42,400)
Cash and cash equivalents at beginning of period 88,513 95,473
----------------------------------------------------------------------------
Cash and cash equivalents at end of period $106,421 $ 53,073
============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
(consisting of normal recurring items) necessary for a
fair presentation of results for the interim periods
presented.
Certain reclassifications have been made to the previously
reported consolidated statements of operations and cash
flows for the quarter and nine months ended September 30,
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 nine months ended September 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 nine months ended
September 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 September 30, 1999, VeriBest
incurred a net loss of $1,967,000, including a loss from
operations of $2,074,000, on revenues from unaffiliated
customers of $7,911,000. For the nine months ended
September 30, 1999, VeriBest incurred a net loss of
$6,494,000, including a loss from operations of
$6,204,000, on revenues from unaffiliated customers of
$21,946,000. VeriBest's third quarter 1999 loss from
operations included nonrecurring operating charges of
$871,000. See Note 4.
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 filings for the quarters ended March 31,
2000 and June 30, 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 third quarter 2000.
NOTE 4: 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 nine 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
statement of operations for the nine months ended
September 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.
In third quarter 1999, the Company took further actions to
reduce expenses in its unprofitable business units and
restructure the Company to support the vertical markets in
which it operates. These actions included eliminating
approximately 400 positions worldwide, consolidating
offices, completing the worldwide vertical market
alignment of the sales force, and narrowing the focus of
the Company's ICS business unit to high-end workstations,
specialty servers, digital video products and 3D graphics
cards. As a result of these actions, the Company recorded
a nonrecurring charge to operations of $20,124,000,
$7,000,000 of which is recorded as a component of "Cost of
revenues - Systems" in the consolidated statements of
operations for the quarter and nine months ended September
30, 1999. This $7,000,000 charge represents the costs of
inventory write-offs incurred as a result of ICS's exit
from the PC and generic server business.
Severance costs associated with the third quarter 1999
restructuring totaled approximately $8,700,000, $7,846,000
of which is included in "Nonrecurring operating charges"
in the consolidated statements of operations for the
quarter and nine months ended September 30, 1999. The
remaining severance costs related to headcount reductions
in the Company's VeriBest operating segment, and
accordingly, they are reflected in "Loss from discontinued
operation, net of income taxes" in the Company's
consolidated statements of operations for the quarter and
nine months ended September 30, 1999. Approximately 400
positions company-wide were eliminated through direct
reductions in workforce. All employee groups were
affected, but the majority of eliminated positions derived
from the sales and marketing, general and administrative,
and customer support areas. The Company estimates the
annual savings resulting from this reduction in force
approximated $22,000,000.
The remainder of the third quarter 1999 nonrecurring
operating charges consisted of write-offs of capitalized
business system software no longer required as a result of
the verticalization of the Company's business units and
resulting decentralization of portions of the corporate
financial and administrative functions.
Cash outlays for severance related to the 1998 and 1999
restructuring actions approximated $4,000,000 and
$4,400,000 in the first nine months of 2000 and 1999,
respectively. Additionally, in third quarter 2000,
European severance liabilities of $400,000 related to the
1999 actions were reversed as some of the affected
employees left the Company voluntarily. This expense
reversal is reflected in "Nonrecurring operating charges"
in the consolidated statements of operations for the
quarter and nine months ended September 30, 2000. At
September 30, 2000, the total remaining accrued liability
for severance relating to the 1999 reductions in force was
approximately $500,000 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.
In first quarter 2000, the Company announced its intention
to exit the development and design of hardware products.
The Company completed this exit in third quarter 2000 with
the sales of its Intense3D graphics accelerator division
and its high end workstation and server business (see Note
5). Upon completion of these transactions, the Company
closed the remainder of its hardware development
operations and incurred a nonrecurring charge to
operations of approximately $8,500,000 in relation to this
closure, including amounts reflected in "Cost of revenues
- Systems" and "Cost of revenues - Maintenance" of
$4,531,000 and $210,000, respectively. The amounts
reflected in cost of revenues represent the costs of
inventory write-offs incurred as a result of the shutdown.
With the exception of these costs, all expenses associated
with the shutdown are reflected in "Nonrecurring operating
charges" in the Company's consolidated statements of
operations for the quarter and nine months ending
September 30, 2000. Severance costs associated with the
shutdown totaled approximately $1,659,000. Approximately
50 positions were eliminated worldwide, primarily in the
sales and marketing area, with the majority of the related
expense incurred in Europe. The remaining exit costs
consist primarily of fixed asset write-offs of $1,541,000
and accruals for lease cancellations and idle building
space. Related cash outlays during third quarter 2000
totaled approximately $842,000, primarily for severance
payments. At September 30, 2000, the remaining accrued
liability related to this charge was $1,380,000 and is
reflected in "Other accrued expenses" in the Company's
September 30, 2000 consolidated balance sheet. These
costs are expected to be paid over the remainder of 2000.
The closure of the hardware development organization will
allow the Company's operating segments to focus on
providing software, systems integration, and services to
the industries in which Intergraph is a market leader.
The Company will continue to sell hardware products from
other vendors and perform hardware maintenance services
for its installed customer base. The Company estimates
that its exit from the development and sale of its own
hardware products will reduce its annual revenues to
approximately $600,000,000. The Company expects to incur
additional charges in fourth quarter 2000 as it completes
its worldwide verticalization process and restructures its
international operations to align their cost structure
with the projected level of revenue. The Company
estimates that the charges incurred will approximate
$15,000,000.
Severance payments to date have been funded from existing
cash balances and from proceeds from the sale of assets.
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: Gains on sales of assets. "Gains on sales of assets" in
the consolidated statements of operations and cash flows
consists of the net gains and losses recognized by the
Company on sales of various noncore subsidiaries and
divisions and of gains recorded on real estate
transactions. Significant components of the 1999 and 2000
year to date gains are discussed below.
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 September 30, 2000 and December 31, 1999
consolidated balance sheets). The resulting gain on this
transaction of $11,505,000 is included in "Gains on sales
of assets" in the consolidated statement of operations for
the nine months ended September 30, 1999. InterCAP's
revenues and losses for 1998 were $4,660,000 and
$1,144,000, respectively, ($3,600,000 and $1,853,000 for
1997). Assets of the subsidiary at December 31, 1998
totaled $1,550,000. The subsidiary did not have a
material effect on the Company's results of operations for
the period in 1999 prior to its sale.
On July 21, 2000 (but with effect from July 1, 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, subject to a
registration rights agreement and a three year irrevocable
proxy granted to 3Dlabs, with an aggregate market value of
approximately $13,200,000 on the date of closing. As of
September 30, 2000, the market value of these shares had
declined by approximately $4,000,000. Fifteen percent of
the shares have been placed in escrow for one year to
cover any potential claims against the Company by 3Dlabs.
The agreement also contains an earn-out provision based on
various performance measures for Intense3D operations for
the remainder of 2000. These performance measures include
the financial contribution of the division, the retention
of key employees by the division, the delivery schedules
of new products, and the performance of products developed
by the division. The earn-out provision 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 recorded a pretax gain from the initial proceeds
of the sale of approximately $7,000,000 in third quarter
2000. This gain is included in "Gains on sales of assets"
in the Company's consolidated statements of operations for
the quarter and nine months ended September 30, 2000. The
market value of the Company's investment in 3Dlabs,
excluding the shares held in escrow, of approximately
$7,800,000 is included in "Investments in affiliates" in
the Company's September 30, 2000 consolidated balance
sheet, and the revaluation adjustment for the decline in
the market value of the stock since the date of closing
has been recorded as a component of "Accumulated other
comprehensive loss" (see Note 14). Full year 1999 third-
party revenue for the Intense3D division approximated
$38,000,000, with operating results at an approximate
breakeven level. For the six months ended June 30, 2000,
the division earned an operating income of approximately
$8,500,000 on third party revenues of $34,000,000. There
is no Intense3D activity reflected in the Company's third
quarter 2000 results of operations.
Significant contingencies associated with the Intense3D
sale include potential penalties for the failure of ICS or
its successor to meet its forecasted level of purchases
from 3Dlabs and potential liability for inventory included
in the sale, including inventory on order from SCI (the
Company's contract manufacturer), that proves to be
obsolete or in excess, if any. In addition, the Company
serves as the intermediary between 3Dlabs and SCI for
manufacturing performed by SCI for 3Dlabs, and as such, is
exposed should 3Dlabs be unable to meet its obligations to
SCI, though such exposure is mitigated by a certain
payment guarantee in favor of the Company. See the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999 for a discussion of the Company's
business relationship with SCI.
On September 6, 2000, the Company sold several of the
buildings on its Huntsville, Alabama campus to a real
estate investment company for net cash proceeds of
approximately $7,200,000. The Company's gain on this
transaction of $1,335,000 is included in "Gains on sales
of assets" in the consolidated statements of operations
for the quarter and nine months ended September 30, 2000.
The resulting consolidation of the Company's Huntsville-
based personnel and operations into fewer buildings is
expected to reduce the Company's future overhead expenses.
Cash proceeds from the sale were used to repay a portion
of the Company's term loan with its primary lender. For
further discussion regarding the Company's borrowings and
liquidity, see Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Form
10-Q.
On September 8, 2000, the Company completed a strategic
alliance agreement with Silicon Graphics, Inc. ("SGI"), a
worldwide provider of high-performance computing and
advanced graphics solutions, in which SGI acquired certain
of the Company's hardware business assets, including ICS's
Zx10 family of workstations and servers. Under the
alliance, the Company has become a reseller for SGI and
offers its application solutions on the SGI platform. The
Company received $299,000 as initial cash consideration
for the acquired assets. The agreement also contains an
earn-out provision based on the revenues generated by the
product lines sold for a period of one year after the
closing date. The Company recorded a loss from the
initial proceeds of this transaction of approximately
$280,000. This loss is included in "Gains on sales of
assets" in the Company's consolidated statements of
operations for the quarter and nine months ended September
30, 2000. As with 3Dlabs, the Company serves as the
intermediary between SGI and SCI for manufacturing
performed by SCI for SGI.
Other significant components of the Company's "Gains on
sales of assets" for the nine months ended September 30,
2000 include an aggregate gain of $5,230,000 recognized on
the sales of land and an office building in the
Netherlands, a $2,002,000 gain recognized on the sale of a
noncore software division, a $1,544,000 gain on the sale
of an investment in an affiliate, and a $1,463,000 gain on
the termination of a long-term capital lease (see Note
10). The proceeds from the sales of the noncore software
division and the investment in the affiliate, $3,547,000
in the aggregate, were not received until fourth quarter
2000 and are reflected in "Other current assets" in the
Company's September 30, 2000 consolidated balance sheet.
NOTE 6: 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 nine months
ended September 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 7: 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 8: Inventories are stated at the lower of average cost or
market and are summarized as follows:
-----------------------------------------------------------
September 30, December 31,
2000 1999
-----------------------------------------------------------
(In thousands)
Raw materials $ 5,812 $12,888
Work-in-process 4,716 5,739
Finished goods 1,854 5,895
Service spares 10,529 11,396
-----------------------------------------------------------
Totals $22,911 $35,918
===========================================================
The Company's raw materials and finished goods inventory
balances have declined steadily as the result of the
Company's decision to exit the development of hardware
products. In third quarter 2000, as this exit was
completed, the Company recorded an inventory write-down of
approximately $4,741,000, primarily related to these
balances. See Note 4 for further discussion.
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 currently reflected
as work-in-process relate primarily to contracts accounted
for under the percentage-of-completion method.
NOTE 9: Property, plant, and equipment - net includes allowances
for depreciation of $178,601,000 and $214,219,000 at
September 30, 2000 and December 31, 1999, respectively.
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
Nine Months Ended
September 30, 2000 1999
-----------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $52,997 $21,753
Inventories 12,121 1,734
Other current assets 3,139 (1,430)
Increase (decrease) in:
Trade accounts payable (17,839) ( 298)
Accrued compensation and other
accrued expenses ( 7,271) (6,788)
Income taxes payable 1,628 (2,081)
Billings in excess of sales (12,591) (2,629)
-----------------------------------------------------------
Net changes in current assets and
liabilities $32,184 $10,261
===========================================================
Investing and financing transactions in the first nine
months 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. Other
significant noncash investing and financing transactions
in the first nine months of 2000 included the sale of a
division of the Company for initial consideration of
$11,248,000 paid in common stock of the acquirer, a
$3,431,000 unfavorable mark-to-market adjustment on the
stock received in this transaction, and the sale of
various assets of the Company for future receivables
totaling $3,547,000 (see Note 5). Significant noncash
investing and financing transactions in the first nine
months of 1999 included the acquisition of a business in
part for future obligations totaling approximately
$3,300,000 (see Note 11), the sale of a subsidiary in part
for deferred payments and debt of $7,047,000 (see Note 5),
the purchase of inventory for future obligations totaling
$2,700,000 (see Note 12), and the financing of new
financial and administrative systems with a long-term note
payable of approximately $2,000,000.
NOTE 11: 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 $1,093,000 were made in the
first nine months of 2000 and are included in "Business
acquisition, net of cash acquired" in the Company's
consolidated statement of cash flows for the nine months
ended September 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 12: 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 nine months ended September 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 13: Segment Information. The year 2000 has been and
continues to be a transitional year for the Company during
which it has focused its efforts on organizing the Company
into six vertical business segments. In third quarter
2000, the Company substantially completed the U.S. portion
of this process. The international portion of this
process is expected to be completed by the end of first
quarter 2001. The segment presentation below provides
operating segment information based on the Company's new
business structure for the year 2000 and, as required,
comparative information based on the Company's previous
segment structure. The Company is unable to restate its
prior year data in a format that would provide an accurate
comparison to the new business structure. However, two of
the Company's segments, Intergraph Public Safety, Inc. and
Z/I Imaging Corporation, did not change as a result of the
new structure, and their prior year information is
comparable to the new presentation.
The Company's reportable segments are strategic business
units which are organized by the types of products sold
and the specific markets served.
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 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.
New Segments. The Company's new operating segments
consist of Process and Building Solutions ("PBS"),
Intergraph Public Safety, Inc. ("IPS"), Mapping and
Geographic Information Systems ("GIS") Solutions,
Intergraph Government Solutions ("IGS"), Z/I Imaging
Corporation ("Z/I Imaging"), and Intergraph Computer
Systems ("ICS"). Also included as a segment on a
temporary basis is the International Distribution
operation which will be verticalized into the other
operating segments by the end of first quarter 2001.
PBS supplies software and services to the process, power,
offshore, and marine industries. Amounts presented for
PBS below represent the Company's complete domestic and
international operations for this business. These amounts
were previously included in the Intergraph Software
operating segment.
IPS develops, markets, and implements systems for the
public safety and utilities and communications industries.
Unchanged from the previous presentation, IPS includes the
domestic and international public safety operations and
the domestic utilities and communications operations.
Mapping and GIS Solutions develops, markets, and supports
geospatial solutions for business GIS, land records
management, rail transportation, environmental management,
utilities and communications companies, and commercial map
production. Amounts presented below for Mapping and GIS
Solutions include the domestic operations for both the
federal and commercial mapping organizations. The results
for these organizations were previously included in the
Intergraph Government Solutions and Intergraph Software
operating segments, respectively.
IGS provides specially developed software and hardware,
commercial off-the-shelf products, and professional
services to federal, state, and local governments
worldwide. The new IGS business segment is not comparable
to the previous Intergraph Government Solutions segment.
Amounts presented for the new IGS below include the
previously reported federal operations of IGS, excluding
the mapping organization which is now included in Mapping
and GIS Solutions, as well as the domestic operations for
the transportation industry, previously included in the
Intergraph Software operating segment. Additionally,
hardware maintenance and network services, previously
included in the ICS business unit, are now consolidated
into IGS.
Z/I Imaging, a 60%-owned subsidiary of the Company formed
October 1, 1999, supplies end-to-end photogrammetry
solutions for front-end data collection to mapping related
and engineering markets. Z/I Imaging includes the
domestic and international operations reported previously.
ICS includes the domestic and international operations of
the Company's hardware division prior to the end of third
quarter shutdown of hardware development activities. The
new presentation is not comparable to the previous
presentation as it excludes the Company's ongoing hardware
maintenance and network services operations which have
been moved to IGS. Third quarter 2000 will be the last
quarter reflecting operations for ICS as an operating
segment. Going forward, the only hardware sold by the
Company will be purchased by the operating segments from
third party vendors for resale.
The International Distribution operation includes
international operations for information technology,
Mapping and GIS Solutions, utilities and communications,
transportation, and international corporate expenses.
These operations were previously reflected in
the Intergraph Software operating segment. The IGS,
Mapping and GIS Solutions, and IPS operating segments sell
to the International Distribution operation (essentially
subsidiaries of the Company located outside the United
States) at transfer price. These transfer price revenues
are included in the intersegment revenues reported below
for each of these operating segments.
The following table sets forth revenues and operating
income (loss) for the Company's new reportable segments
for the quarter and nine months ended September 30, 2000.
---------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
2000 2000
---------------------------------------------------------------
(In thousands)
Revenues
PBS:
Unaffiliated customers $ 28,905 $ 86,769
Intersegment revenues 1,946 6,637
---------------------------------------------------------------
30,851 93,406
---------------------------------------------------------------
IPS:
Unaffiliated customers 20,331 59,314
Intersegment revenues 2,030 6,657
---------------------------------------------------------------
22,361 65,971
---------------------------------------------------------------
Mapping and GIS Solutions:
Unaffiliated customers 11,522 37,807
Intersegment revenues 6,715 25,725
---------------------------------------------------------------
18,237 63,532
---------------------------------------------------------------
IGS:
Unaffiliated customers 25,948 111,032
Intersegment revenues 3,327 12,504
---------------------------------------------------------------
29,275 123,536
---------------------------------------------------------------
Z/I Imaging:
Unaffiliated customers 6,745 20,292
Intersegment revenues 2,906 12,800
---------------------------------------------------------------
9,651 33,092
---------------------------------------------------------------
ICS:
Unaffiliated customers 14,521 87,512
Intersegment revenues 8,166 24,854
---------------------------------------------------------------
22,687 112,366
---------------------------------------------------------------
International Distribution:
Unaffiliated customers 50,965 143,104
Intersegment revenues 1,499 4,785
---------------------------------------------------------------
52,464 147,889
---------------------------------------------------------------
Corporate --- 493
---------------------------------------------------------------
185,526 640,285
---------------------------------------------------------------
Eliminations (26,589) (93,962)
---------------------------------------------------------------
Total revenues $158,937 $546,323
===============================================================
---------------------------------------------------------------
Operating income (loss) before nonrecurring charges:
PBS $ 3,033 $ 6,573
IPS 1,134 3,695
Mapping and GIS Solutions 1,753 4,987
IGS 2,463 10,507
Z/I Imaging 1,118 6,335
ICS (11,379) (15,521)
International Distribution ( 1,484) ( 5,763)
Corporate ( 6,163) (22,708)
---------------------------------------------------------------
Total $( 9,525) $(11,895)
===============================================================
Previous Segments. Prior to third quarter 2000, the
Company's operating segments consisted of ICS, IPS, the
Software and Intergraph Government Solutions businesses
(collectively, the Software and Government Solutions
businesses formed what was termed "Intergraph"), and Z/I
Imaging. 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
nine months ended September 30, 1999. Certain VeriBest
financial information for these periods is included in
Note 2.
ICS supplied high performance Windows NT-based graphics
workstations, 3D graphics subsystems, and solutions,
including hardware maintenance and network services.
Intergraph supplied software and solutions, including
hardware purchased from ICS, consulting, and services to
the process and building and infrastructure industries and
provided services and specialized engineering and
information technology to support federal government
programs. The IPS and Z/I Imaging segments are consistent
with the new presentation. 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 third quarter and first nine months of 1999 were
insignificant to the Software segment as a whole.
The following table sets forth revenues and operating
income (loss) for the Company's previous operating
segments for the quarters and nine months ended September
30, 2000 and 1999. Differences between the information
provided in this table and that provided for the new
segments for the same periods are the result of the
reorganization described under "New Segments" above, and
the Company considers the new segment information to be
determinative.
----------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------
(In thousands)
Revenues
ICS:
Unaffiliated customers $ 18,757 $ 53,644 $102,297 $168,665
Intersegment revenues 12,412 32,140 40,238 96,549
----------------------------------------------------------------
31,169 85,784 142,535 265,214
----------------------------------------------------------------
IPS:
Unaffiliated customers 20,331 19,245 59,314 61,777
Intersegment revenues 2,030 4,871 6,657 8,375
----------------------------------------------------------------
22,361 24,116 65,971 70,152
----------------------------------------------------------------
Intergraph Software:
Unaffiliated customers 79,757 108,786 257,117 344,086
Intersegment revenues 1,224 2,487 5,355 11,796
----------------------------------------------------------------
80,981 111,273 262,472 355,882
----------------------------------------------------------------
Intergraph Government Solutions:
Unaffiliated customers 33,347 38,873 107,303 117,706
Intersegment revenues 1,037 1,240 3,686 4,946
----------------------------------------------------------------
34,384 40,113 110,989 122,652
----------------------------------------------------------------
Z/I Imaging:
Unaffiliated customers 6,745 --- 20,292 ---
Intersegment revenues 2,906 --- 12,800 ---
----------------------------------------------------------------
9,651 --- 33,092 ---
----------------------------------------------------------------
178,546 261,286 615,059 813,900
----------------------------------------------------------------
Eliminations (19,609) (40,738) (68,736) (121,666)
----------------------------------------------------------------
Total revenues $158,937 $220,548 $546,323 $692,234
================================================================
----------------------------------------------------------------
Quarter Ended, Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------------------
(In thousands)
Operating income (loss) before nonrecurring charges:
ICS $(13,382) $(20,237) $(16,948) $(39,743)
IPS 1,134 2,400 3,695 7,586
Intergraph Software 4,305 ( 2,765) 6,274 4,765
Intergraph Government
Solutions 2,113 3,496 6,984 9,131
Z/I Imaging 1,118 --- 6,335 ---
Corporate ( 4,813) (10,730) (18,235) (30,349)
----------------------------------------------------------------
Total $( 9,525) $(27,836) $(11,895) $(48,610)
================================================================
Amounts included in the "Corporate" category in both the
new segment and previous segment presentations above
consist of general corporate expenses, primarily general
and administrative expenses remaining after charges to the
operating segments based on segment usage of administrative
services. Some of these expenses were previously allocated
to the Intergraph Software operating segment but have been
moved to the Corporate category in the new presentation
since they are not specifically allocable to any of the
new operating segments. In both presentations, the
Corporate category includes legal fees. In the first nine
months of 2000 and 1999, the Company's legal fees totaled
$4,990,000 and $14,456,000, respectively.
Significant profit and loss items for the first nine
months of 2000 that were not allocated to the segments and
not included in the presentations above include gains on
sales of assets of $19,111,000 and nonrecurring operating
charges of $3,362,000. Such items for the first nine
months of 1999 include an $8,562,000 charge for
arbitration settlement, gains on sales of assets of
$12,471,000, and nonrecurring operating charges of
$15,596,000.
The Company does not evaluate performance or allocate
resources based on assets and, as such, it does not
prepare balance sheets for its operating segments, other
than those of its wholly-owned subsidiaries.
NOTE 14: Comprehensive loss. The Company's comprehensive losses
for the third quarter and first nine months of 2000
totaled $11,898,000 and $16,949,000, respectively,
compared to comprehensive losses of $45,888,000 and
$82,837,000, respectively, for the comparable prior year
periods. These comprehensive losses differ from net loss
due mainly to foreign currency translation adjustments.
Comprehensive losses for the third quarter and first nine
months of 2000 also include a $3,431,000 unrealized
holding loss on the Company's shareholdings in 3Dlabs (see
Note 5).
NOTE 15: 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. As of September 30, 2000, the Company had no
freestanding derivatives.
NOTE 16: 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.
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,
under which 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 in fourth
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: Subsequent Event. On October 30, 2000, the Company's Board
of Directors approved a stock repurchase plan which will
allow the Company under certain circumstances to repurchase
up to $30,000,000 of its outstanding common stock. The
Plan is not expected to commence until the completion of
certain transactions, including sale of the Company's
Microstation-based software products to BSI, sale of
remaining idle building space on the Company's Huntsville,
Alabama campus, and completion of the restructuring of the
Company's international organization into the vertical
business units. However, the Board in its discretion may
approve purchases prior to completion of these
transactions. The Plan may be suspended at any time
after its commencement and will terminate on December 31,
2002. The Company has no obligation to purchase any
specific number of shares under the Plan.
INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
-------
Earnings. In third quarter 2000, the Company incurred a net loss
of $.11 per share on revenues of $158.9 million, including gains
on sales of assets of $.24 per share and nonrecurring operating
charges of $.17 per share for exit of the hardware development
business. In third quarter 1999, the Company incurred a loss from
continuing operations of $.89 per share on revenues of $220.5
million, including nonrecurring operating charges of $.41 per
share for the cost of actions taken during the quarter to reduce
expenses in the Company's unprofitable business units and
restructure the Company to support the vertical markets in which
it operates. For the first nine months of 2000, the Company
incurred a net loss of $.16 per share on revenues of $546.3
million, including gains on sales of assets of $.39 per share and
the $.17 nonrecurring charge for exit of the hardware development
business. For the first nine months of 1999, the Company incurred
a net loss from continuing operations of $1.41 per share on
revenues of $692.2 million, including gains on sales of assets of
$.26 per share, an $.18 per share charge for the settlement of its
arbitration proceedings with Bentley Systems, Inc. (see
"Arbitration Settlement" following), and nonrecurring operating
charges of $.46 per share, primarily for employee termination
costs and asset write-offs recorded in connection with the
Company's changing business strategy. See "Nonrecurring Operating
Charges" following for a complete description of the nonrecurring
charges incurred in the first nine months of 1999 and 2000.
Exclusive of nonrecurring charges and one time gains, the third
quarter and year to date 2000 operating losses improved to $.10
per share and $.15 per share, respectively, compared to $.43 per
share and $.85 per share, respectively, for the comparable prior
year periods. These loss improvements are the result of the
continuing decline in the Company's operating expenses. Third
quarter and year to date 2000 operating expenses have declined by
25% and 20%, respectively, from the comparable prior year levels.
The Company has also realized considerable improvements in its
gross margin levels as the result of the increasing software
content in its product mix. However, the resulting positive
impact has been more than offset by the significant declines in
revenues resulting from the Company's exit of the hardware
development business. The improvements in the Company's operating
expense and gross margin levels have not yet been sufficient to
return the Company to sustained profitability as operating results
have been negatively impacted by operating losses incurred by the
Intergraph Computer Systems ("ICS") operating segment, legal fees
associated with the Intel trial, and a temporary duplication of
administrative expenses in connection with verticalization of the
Company's operating segments.
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 nine
months ended September 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 nine months ended September 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.
Though, as discussed below, the Company exited the hardware
development business in third quarter 2000, these operations have
not been presented as discontinued operations in the Company's
consolidated statements of operations primarily due to a lack of
discrete financial information for them on a comparative basis as
the hardware development assets were never segregated from those
of the consolidated business. Additionally, the Company's
operating segments continue to sell hardware products of other
vendors and perform limited specialized hardware development
activity, primarily in the Intergraph Government Solutions and Z/I
Imaging operating segments. Information regarding results of
operations for the hardware development business for the nine
months ended September 30, 2000 is presented in Note 13 of Notes
to Consolidated Financial Statements contained in this Form 10-Q.
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 lost significant market share in a generic
undifferentiated hardware market due to the actions of 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 the Company), and in
third quarter 2000, it completed its exit of the hardware
development business. During the quarter, the Company sold its
graphics accelerator division to 3Dlabs, Inc. Ltd. ("3Dlabs"),
sold its high-end workstation and server business to Silicon
Graphics, Inc. ("SGI"), and shutdown the remainder of its hardware
development operation. 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, but going forward does not expect to
incur any significant losses related to hardware.
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 vertical business units. To date, the Company's
verticalization efforts have been concentrated in the U.S. In
fourth quarter 2000, the Company plans to align its international
operations with the new vertical businesses and bring the cost of
the international operations in line with the current level of
revenue being generated. The Company expects to incur a charge to
operations of approximately $15 million in connection with these
international restructuring efforts. As part of this process,
several international subsidiaries, primarily in the Middle East
and Asia, will be converted into distributorships in which the
Company will have little or no direct ownership interest. While
the sales of these subsidiaries are not expected to provide
significant cash flow to the Company, they should reduce the
Company's operating costs. In addition, the Company continues to
pursue further real estate sales and facilities consolidation on
its Huntsville, Alabama campus and at international subsidiary
locations. If completed as planned, these sales may provide
substantial cash to the Company as well as reductions in operating
costs. The majority of the real estate and subsidiary sales
transactions are expected to close in fourth quarter 2000 and
first quarter 2001.
The Company estimates that its exit from the development and sale of its own
hardware products will reduce its annual revenues to approximately
$600 million. To achieve and maintain profitability, the Company
must successfully complete its efforts to align operating expenses
with this projected level of revenue. In addition, the Company
continues to face significant operational and financial
uncertainty of unknown duration due to its dispute with Intel.
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 nine 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 statement of operations for the nine
months ended September 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.
In third quarter 1999, the Company took further actions to reduce
expenses in its unprofitable business units and restructure the
Company to support the vertical markets in which it operates.
These actions included eliminating approximately 400 positions
worldwide, consolidating offices, completing the worldwide
vertical market alignment of the sales force, and narrowing the
focus of the Company's ICS business unit to high-end workstations,
specialty servers, digital video products and 3D graphics cards.
As a result of these actions, the Company recorded a nonrecurring
charge to operations of $20.1 million, $7 million of which is
recorded as a component of "Cost of revenues - Systems" in the
consolidated statements of operations for the quarter and nine
months ended September 30, 1999. This $7 million charge
represents the costs of inventory write-offs incurred as a result
of ICS's exit from the PC and generic server business.
Severance costs associated with the third quarter 1999
restructuring totaled approximately $8.7 million, $7.8 million of
which is included in "Nonrecurring operating charges" in the
consolidated statements of operations for the quarter and nine
months ended September 30, 1999. The remaining severance costs
related to headcount reductions in the Company's VeriBest
operating segment, and accordingly, they are reflected in "Loss
from discontinued operation, net of income taxes" in the Company's
consolidated statements of operations for the quarter and nine
months ended September 30, 1999. Approximately 400 positions
company-wide were eliminated through direct reductions in
workforce. All employee groups were affected, but the majority of
eliminated positions derived from the sales and marketing, general
and administrative, and customer support areas. The Company
estimates the annual savings resulting from this reduction in
force approximated $22 million.
The remainder of the third quarter 1999 nonrecurring operating
charges consisted of write-offs of capitalized business system
software no longer required as a result of the verticalization of
the Company's business units and resulting decentralization of
portions of the corporate financial and administrative functions.
Cash outlays for severance related to the 1998 and 1999
restructuring actions approximated $4 million and $4.4 million in
the first nine months of 2000 and 1999, respectively.
Additionally, in third quarter 2000, European severance
liabilities of $.4 million related to the 1999 actions were
reversed as some of the affected employees left the Company
voluntarily. This expense reversal is reflected in "Nonrecurring
operating charges" in the consolidated statements of operations
for the quarter and nine months ended September 30, 2000. At
September 30, 2000, the total remaining accrued liability for
severance relating to the 1999 reductions in force was
approximately $.5 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.
In first quarter 2000, the Company announced its intention to exit
the development and design of hardware products. The Company
completed this exit in third quarter 2000 with the sales of its
Intense3D graphics accelerator division and its high end
workstation and server business (see "Gains on sales of assets"
following). Upon completion of these transactions, the Company
closed the remainder of its hardware development operations and
incurred a nonrecurring charge to operations of approximately $8.5
million in relation to this closure, including amounts reflected
in "Cost of revenues - Systems" and "Cost of revenues -
Maintenance" of $4.5 million and $.2 million, respectively. The
amounts reflected in cost of revenues represent the costs of
inventory write-offs incurred as a result of the shutdown. With
the exception of these costs, all expenses associated with the
shutdown are reflected in "Nonrecurring operating charges" in the
Company's consolidated statements of operations for the quarter
and nine months ending September 30, 2000. Severance costs
associated with the shutdown totaled approximately $1.7 million.
Approximately 50 positions were eliminated worldwide, primarily in
the sales and marketing area, with the majority of the related
expense incurred in Europe. The remaining exit costs consist
primarily of fixed asset write-offs of $1.5 million and accruals
for lease cancellations and idle building space. Related cash
outlays during third quarter 2000 totaled approximately $.8
million, primarily for severance payments. At September 30, 2000,
the remaining accrued liability related to this charge was $1.4
million and is reflected in "Other accrued expenses" in the
Company's September 30, 2000 consolidated balance sheet. These
costs are expected to be paid over the remainder of 2000.
The closure of the hardware development organization will allow
the Company's operating segments to focus on providing software,
systems integration, and services to the industries in which
Intergraph is a market leader. The Company will continue to sell
hardware products from other vendors and perform hardware
maintenance services for its installed customer base. The Company
estimates that its exit from the development and sale of its own
hardware products will reduce its annual revenues to approximately
$600 million. The Company expects to incur additional charges in
fourth quarter 2000 as it completes its worldwide verticalization
process and restructures its international operations to align
their cost structure with the projected level of revenue. The
Company estimates that the charges incurred will approximate $15
million.
Severance payments to date have been funded from existing cash
balances and from proceeds from the sale of assets. For further
discussion regarding the Company's liquidity, see "Liquidity and
Capital Resources" following.
Gains on sales of assets. "Gains on sales of assets" in the
consolidated statements of operations and cash flows consists of
the net gains and losses recognized by the Company on sales of
various noncore subsidiaries and divisions and of gains recorded
on real estate transactions. Significant components of the 1999
and 2000 year to date gains are discussed below.
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 September 30, 2000 and December
31, 1999 consolidated balance sheets). The resulting gain on this
transaction of $11.5 million is included in "Gains on sales of
assets" in the consolidated statement of operations for the nine
months ended September 30, 1999. InterCAP's revenues and losses
for 1998 were $4.7 million and $1.1 million, respectively, ($3.6
million and $1.9 million for 1997). Assets of the subsidiary at
December 31, 1998 totaled $1.6 million. The subsidiary did not
have a material effect on the Company's results of operations for
the period in 1999 prior to its sale.
On July 21, 2000 (but with effect from July 1, 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, subject to
a registration rights agreement and a three year irrevocable proxy
granted to 3Dlabs, with an aggregate market value of approximately
$13.2 million on the date of closing. As of September 30, 2000,
the market value of these shares had declined by approximately $4
million. Fifteen percent of the shares have been placed in escrow
for one year to cover any potential claims against the Company by
3Dlabs. The agreement also contains an earn-out provision based on
various performance measures for Intense3D operations for the
remainder of 2000. These performance measures include the
financial contribution of the division, the retention of key
employees by the division, the delivery schedules of new products,
and the performance of products developed by the division. The
earn-out provision provides an opportunity for additional proceeds
of up to $25 million, payable in stock and/or cash at the option
of 3Dlabs. The Company recorded a pretax gain from the initial
proceeds of the sale of approximately $7 million in third quarter
2000. This gain is included in "Gains on sales of assets" in the
Company's consolidated statements of operations for the quarter
and nine months ended September 30, 2000. The market value of the
Company's investment in 3Dlabs, excluding the shares held in
escrow, of approximately $7.8 million is included in "Investments
in affiliates" in the Company's September 30, 2000 consolidated
balance sheet, and the revaluation adjustment for the decline in
the market value of the stock since the date of closing has been
recorded as a component of "Accumulated other comprehensive loss".
Full year 1999 third-party revenue for the Intense3D division
approximated $38 million, with operating results at an approximate
breakeven level. For the six months ended June 30, 2000, the
division earned an operating income of approximately $8.5 million
on third party revenues of $34 million. There is no Intense3D
activity reflected in the Company's third quarter 2000 results of
operations.
Significant contingencies associated with the Intense3D sale
include potential penalties for the failure of ICS or its
successor to meet its forecasted level of purchases from 3Dlabs
and potential liability for inventory included in the sale,
including inventory on order from SCI (the Company's contract
manufacturer), that proves to be obsolete or in excess, if any.
In addition, the Company serves as the intermediary between 3Dlabs
and SCI for manufacturing performed by SCI for 3Dlabs, and as
such, is exposed should 3Dlabs be unable to meet its obligations
to SCI, though such exposure is mitigated by a certain payment
guarantee in favor of the Company. See the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 for a
discussion of the Company's business relationship with SCI.
On September 6, 2000, the Company sold several of the buildings on
its Huntsville, Alabama campus to a real estate investment company
for net cash proceeds of approximately $7.2 million. The
Company's gain on this transaction of $1.3 million is included in
"Gains on sales of assets" in the consolidated statements of
operations for the quarter and nine months ended September 30,
2000. The resulting consolidation of the Company's Huntsville-
based personnel and operations into fewer buildings is expected to
reduce the Company's future overhead expenses. Cash proceeds from
the sale were used to repay a portion of the Company's term loan
with its primary lender. For further discussion regarding the
Company's borrowings and liquidity, see "Liquidity and Capital
Resources" following.
On September 8, 2000, the Company completed a strategic alliance
agreement with Silicon Graphics, Inc. ("SGI"), a worldwide
provider of high-performance computing and advanced graphics
solutions, in which SGI acquired certain of the Company's hardware
business assets, including ICS's Zx10 family of workstations and
servers. Under the alliance, the Company has become a reseller
for SGI and offers its application solutions on the SGI platform.
The Company received $.3 million as initial cash consideration for
the acquired assets. The agreement also contains an earn-out
provision based on the revenues generated by the product lines
sold for a period of one year after the closing date. The Company
recorded a loss from the initial proceeds of this transaction of
approximately $.3 million. This loss is included in "Gains on
sales of assets" in the Company's consolidated statements of
operations for the quarter and nine months ended September 30,
2000. As with 3Dlabs, the Company serves as the intermediary
between SGI and SCI for manufacturing performed by SCI for SGI.
Other significant components of the Company's "Gains on sales of
assets" for the nine months ended September 30, 2000 include an
aggregate gain of $5.2 million recognized on the sales of land and
an office building in the Netherlands, a $2 million gain
recognized on the sale of a noncore software division, a $1.5
million gain on the sale of an investment in an affiliate, and a
$1.5 million gain on the termination of a long-term capital lease.
The proceeds from the sales of the noncore software division and
the investment in the affiliate, $3.5 million in the aggregate,
were not received until fourth quarter 2000 and are reflected in
"Other current assets" in the Company's September 30, 2000
consolidated balance sheet.
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 filings for the quarters ended March 31, 2000 and June 30, 2000,
the Company is subject to certain risks and uncertainties and has
extensive ongoing litigation with Intel Corporation. Significant
litigation developments during third quarter 2000 are discussed
below.
Intel Litigation. 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 were by
permission of the Court filed on November 3, 2000. No decision
has been entered.
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 second half 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 nine months ended September 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. Systems and services orders for the third quarter and
first nine months of 2000 totaled $151.9 million and $467.9
million, respectively, reflecting declines of approximately 15%
and 14% from the comparable prior year periods. Orders for the
third quarter and first nine months of 1999 included $4.7 million
and $13.1 million, respectively, in orders of the Company's
discontinued VeriBest operation. Excluding the impact of
VeriBest, U.S. orders declined by 5% and 8%, respectively, and
international orders declined by 25% and 16%, respectively, from
the third quarter and year to date 1999 levels. Third quarter 2000
orders also declined by 12% from the second quarter 2000 level.
The orders decline for the quarter and year to date can be
attributed primarily to the weakening demand for the Company's
hardware products as the result of the Company's exit from this
market, though in first quarter 2000, some weakness was noted in
the Company's software segments as well. These negative factors
were partially offset by a significant improvement in orders of
the Company's Intergraph Public Safety ("IPS") business unit.
IPS's orders increased by 30% and 50%, respectively, from the
third quarter and year to date 1999 levels as the result of
several large orders received in third quarter 2000. The Company
believes the first quarter weakness in software orders was due in
part to transitioning to vertical units in the software
businesses, but may also have been related to the announced exit
from the hardware development business. 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 year to date
1999 level.
Revenues. Total revenues for the third quarter and first nine
months of 2000 were $158.9 million and $546.3 million,
respectively, down 28% and 21%, respectively, from the comparable
prior year periods due to the expected decline in hardware
revenues and the first quarter order softness in the vertical
software businesses. Sales outside the U.S. represented
approximately 52% of total revenues for the nine months ended
September 30, 2000, consistent with the comparable prior year
period and the full year 1999, despite the strengthening of the
U.S. dollar.
In third quarter 2000, the Company substantially completed the
segregation of its operations into six vertical business segments
which provide software, systems integration, and services to the
industries in which Intergraph is a market leader. Third quarter
and year to date revenues for each of these industry segments are
presented in Note 13 of Notes to Consolidated Financial Statements
contained in this Form 10-Q.
Systems. Systems revenue for the third quarter and first nine
months of 2000 was $92 million and $349.6 million, respectively,
down 39% and 26% 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 sales prices continue to
adversely affect the Company's systems revenues and margin.
Systems revenues in Europe, the U.S., the Americas (Canada and
Latin America), and Asia declined by 36%, 27%, 19% and 4%,
respectively, from year to date 1999 levels, while MidWorld
systems revenues increased by 12%. Excluding the impact of a
stronger dollar, the European revenue decline was 29%. 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 quarter totaled approximately $30
million, down 61% from the comparable prior year period and 41%
from the second quarter of 2000. Hardware revenues for the first
nine months of 2000 declined by approximately 43% from the prior
year to date level. The company anticipates continuing declines
in its hardware revenues as a result of its exit of the hardware
development business in third quarter 2000.
Maintenance. Revenue from maintenance of Company systems totaled
$39.7 million for the third quarter and $123.5 million for the
first nine months of 2000, down 13% and 12%, respectively, from
the comparable prior year periods. 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, along with its exit of the hardware
development business, will act to reduce its level of maintenance
revenue.
Services. Services revenue, consisting primarily of revenues from
Company provided training and consulting, totaled $27.3 million
for the third quarter and $73.3 million for the first nine months
of 2000, up 13% and down 7% from the respective prior year levels.
Services are becoming increasingly significant to the Company's
business, representing approximately 17% of total revenue for the
third quarter and 13% of total revenue for the first nine months
of 2000. The Company is endeavoring to grow its services
business; however, revenues from these services 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 third quarter 2000 was 34.3%,
up 8.2 points from the third quarter 1999 level. Total gross
margin for the first nine months of 2000 was 35.8%, up 5.2 points
from the comparable prior year period and 4.1 points from the full
year 1999 level.
Systems margin for the third quarter was 33.2%, down 4.8 points
from the second quarter 2000 level and up 9.7 points from third
quarter 1999. Systems margin for the first nine months of 2000
was 35.9%, up 8.2 points from the comparable prior year period
and 5.9 points from the full year 1999. The third quarter 2000
margin was negatively impacted by a $4.5 million inventory write-
down incurred in connection with the shutdown of the Company's
hardware development business, and the third quarter 1999 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. (See "Nonrecurring Operating
Charges" preceding.) Excluding these charges, the third quarter
2000 systems margin was basically flat with the second quarter
2000 level and up 10.1 points from the comparable prior year
period. The increase in systems margin from the prior year
levels is due primarily to the 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 the high margins earned on sales of
reconnaissance cameras.
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, and a higher mix of international
systems sales to total systems sales. 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 a result of the Company's exit of the hardware development
business, derived primarily from an increased software content in
the product mix and a reduction in inventory carrying and
obsolescence costs. However, the Company continues to expect
pressure on its systems margin as the result of increasing
industry price competition.
Maintenance margin for the third quarter of 2000 was 48%, up 2.2
points from the second quarter 2000 level and 7.2 points from the
third quarter of 1999. Year to date maintenance margin is 46.8%,
up .4 points from the corresponding prior year period and up .8
points from the full year 1999 level. Though the Company's
maintenance revenues continue to decline, the cost of these
revenues has been reduced proportionately, due in part to reduced
inventory obsolescence costs. The Company monitors its
maintenance cost closely and has taken certain measures, including
reductions in headcount, to align these costs with the declining
levels of revenue. As part of these efforts, in the latter part
of 1999, the Company began outsourcing the hardware maintenance
function in some of its larger European subsidiaries. Third
quarter 1999 maintenance margins were negatively impacted by some
of the initial costs incurred in this transition to outsourcing,
primarily in the form of severance and incentives paid to
employees who transferred to the hardware maintenance
subcontractor. The Company believes that the trend in the
industry toward lower priced products and longer warranty periods,
along with its exit of the hardware development business, will
continue to reduce its maintenance revenue, which will pressure
maintenance margin in the absence of corresponding cost
reductions.
Services margin for the third quarter of 2000 was 17.8%, up 4
points from the second quarter 2000 level and 3 points from the
third quarter of 1999. Year to date services margin is 16.8%,
down 2.9 points from the corresponding prior year period and up .8
points from the full year 1999 level. The decline from the first
nine months of 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 federal services contract
which is nearing completion. Significant costs were incurred on
this project in the first half of the year, but the majority of
the remaining revenue on the contract will not be recognized until
contract completion, which is anticipated to occur in fourth
quarter 2000.
OPERATING EXPENSES
------------------
The Company's operating expenses continue to decline steadily each
quarter. Exclusive of nonrecurring charges, operating expenses
for the third quarter and first nine months of 2000 declined by
25% and 20%, 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 the prior year level.
Sales and marketing expense for the third quarter and first nine
months of 2000 declined by 30% and 28%, respectively, from the
corresponding 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 third quarter and first nine months
of 2000 decreased by 22% and 14%, respectively, from the
comparable 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 third
quarter and first nine months of 2000 declined by 19% and 9%,
respectively, from the corresponding prior year periods due
primarily to the reduction in headcount, partially offset by a
decline in software development costs qualifying for
capitalization, primarily related to the Company's federal
shipbuilding effort.
NONOPERATING INCOME AND EXPENSE
-------------------------------
Interest expense was $1 million for the third quarter and $3.2
million for the first nine months of 2000 versus $1.5 million and
$4.3 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 the proceeds from sales of
various noncore 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.
IMPACT OF CURRENCY FLUCTUATIONS AND CURRENCY RISK MANAGEMENT
------------------------------------------------------------
Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results of
operations. For the first nine months of 2000 and the full year
1999, approximately 52% 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. Over the first nine
months of 2000, the U.S. dollar strengthened on average from its
comparable prior year 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 nine months of
2000 by approximately $.07 per share in comparison to the
corresponding prior year period.
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. See the Company's
Annual Report on Form 10-K for the year ended December 31, 1999
for a description of the Company's policy for managing the
currency risks associated with its international operations.
At December 31, 1999, the Company's only outstanding forward
exchange contracts related to formalized intercompany loans
between the Company's European subsidiaries and were immaterial to
the Company's financial position. In first quarter 2000, the
Company ceased hedging its currency exposures in the European
region. At September 30, 2000, the Company had no forward
exchange contracts outstanding.
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".
In June 2000, Greece became the twelfth member of the EMU to adopt
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 the first nine months of 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 incurred a pretax loss of $3 million in the first nine
months of 2000 versus a pretax loss from continuing operations of
$67.2 million in the first nine months of 1999. Income tax
expense for both periods resulted primarily from taxes on
individually profitable majority owned subsidiaries, including the
Company's 60% ownership interest in Z/I Imaging in the first nine
months of 2000. There was no material income tax expense or
benefit related to the Company's discontinued operation. See the
Company's Annual Report on Form 10-K for the year ended December
31, 1999 for details of the Company's tax position, including net
operating loss and tax credit carryforwards.
RESULTS BY OPERATING SEGMENT
----------------------------
The year 2000 has been and continues to be a transitional year for
the Company during which it has focused its efforts on organizing
the Company into six vertical business segments. In third quarter
2000, the Company substantially completed the U.S. portion of this
process. The international portion of this process is expected to
be completed by the end of first quarter 2001. The following
discussion provides a comparative analysis of results of
operations based on the Company's prior business segmentation
structure. Prior year comparative data is not available for the
Company's new business structure, except for Intergraph Public
Safety, Inc. and Z/I Imaging Corporation, whose businesses did not
change as a result of the verticalization process. With the
exception of the Company's ICS business unit, all of the Company's
newly defined operating segments were profitable from operations
for the third quarter and year to date 2000. See Note 13 of Notes
to Consolidated Financial Statements contained in this Form 10-Q
for further explanation and details of the Company's segment
reporting, including a presentation of the Company's new vertical
operating structure for third quarter 2000 and forward.
In third quarter 2000, Intergraph Computer Systems ("ICS")
incurred an operating loss of $13.4 million on revenues of $31.2
million, compared to a third quarter 1999 operating loss of $20.2
million on revenues of $85.8 million. Year to date, ICS has
incurred an operating loss of $16.9 million on revenues of $142.5
million, compared to an operating loss of $39.7 million on
revenues of $265.2 million for first nine months of 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 $4.2
million and $4.5 million incurred in the first nine months of 2000
and 1999, respectively, primarily for employee termination costs
as well as fixed asset write-offs and accruals for lease
cancellations and idle building space recorded in third quarter
2000 as the result of the segment's final exit from the hardware
development business. ICS's operating loss improvement for the
first nine months of 2000 resulted primarily from an approximate
53% decline in operating expenses as the result of headcount
reductions achieved in 1999 and 2000. Although total revenues
declined by 46%, ICS's gross margin was flat with the prior year
to date level at 9.8%. ICS's third quarter 2000 margin was
negatively impacted by a $4.5 million inventory write-down
incurred in connection with the shutdown of its hardware
development business, and its third quarter 1999 margin was
negatively impacted by a $7 million inventory write-off incurred
in connection with the its decision to exit the PC and generic
server businesses. The ICS business was 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 third quarter 2000, the Company
exited the hardware development business. 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 and network
services operations were combined with the Intergraph Government
Solutions operating segment. Third quarter 2000 will be the last
quarter reflecting operations for the ICS operating segment.
In third quarter 2000, Intergraph Public Safety ("IPS") earned
operating income of $1.1 million on revenues of $22.4 million,
compared to operating income in third quarter 1999 of $2.4 million
on revenues of $24.1 million. Year to date, IPS has earned
operating income of $3.7 million on revenues of $66 million versus
operating income of $7.6 million on revenues of $70.2 million in
first nine months of 1999. Improvements in the segment's systems
and maintenance margins from the prior year to date level have
been offset by a 25% increase in operating expenses. In
anticipation of increasing orders, the Utilities division of IPS
has increased its headcount by approximately 14% from the prior
year to date level, primarily in the product development and sales
and marketing areas. Additionally, IPS's general and
administrative expenses have increased by 23% from the prior year
period due to legal expenses incurred in Australia for an inquiry
related to a large contract award. It is unknown at present
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. IPS's orders for the third quarter and year
to date 2000 increased by 30% and 50%, respectively, from the
comparable prior year levels as the result of several large orders
received in third quarter 2000, due in part to negotiation delays
on several projects in second quarter 2000. These orders should
accrue to revenue incrementally over the next several quarters as
the projects are completed.
In third quarter 2000, the Software business earned operating
income of $4.3 million on revenues of $81 million, compared to a
third quarter 1999 operating loss of $2.8 million on revenues of
$111.3 million. Year to date, the Software business has earned
operating income of $6.3 million on revenues of $262.5 million
versus an operating income of $4.8 million on revenues of $355.9
million for the same prior year period. These operating results
exclude the impact of certain nonrecurring income and operating
expense items associated with Software operations, including the
third quarter 2000 gain of $2 million on the sale of a noncore
software product line. Year to date 1999 operating income
excludes the first quarter 1999 arbitration settlement accrual of
$8.6 million, the second quarter 1999 gain on the sale of InterCAP
of $11.5 million, and third quarter 1999 nonrecurring operating
charges of approximately $5.8 million, primarily for employee
severance costs. Though total gross margin increased by 3.6
points from the prior year to date level to 40.7%, a 26% decline
in revenues resulted in a significant reduction in operating
income. The impact of the revenue decline was offset by a 21%
decline in operating expenses from the 1999 year to date level,
primarily related to the segment's sales and marketing expense.
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 $2.1
million on revenues of $34.4 million in third quarter 2000,
compared to third quarter 1999 operating income of $3.5 million on
revenues of $40.1 million. Year to date, Government Solutions has
earned operating income of $7 million on revenues of $111 million,
compared to operating income of $9.1 million on revenues of $122.7
million for the same prior year period. Though revenues for the
first nine months of 2000 declined by 10% from the comparable
prior year period, total gross margin improved by 3.7 points to
26.3%, due primarily to improvements in the segment's systems and
services margins. However, this improvement was offset by a 19%
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 third quarter 2000, Z/I Imaging earned operating income of $1.1
million on revenues of $9.7 million. Year to date, Z/I has earned
operating income of $6.3 million on revenues of $33.1 million.
This was the segment's fourth full quarter of operations since its
inception on October 1, 1999. Systems revenues were higher than
expected for the first nine months of 2000 as sales of
reconnaissance cameras were strong. Total gross margin for the
third quarter and first nine months of 2000 was 61% and 56%,
respectively, reflecting the high margins earned on software as
well as on sales of reconnaissance cameras. Z/I's operating
expenses for third quarter 2000 were approximately 25% above their
normal level due to the determination and payment of year end
bonuses.
General corporate expenses for the third quarter and year to date
2000 declined by 55% and 40%, respectively, from their comparable
prior year levels. These declines are due primarily to the
declines in the Company's legal expenses and the ongoing efforts
of the Company to reduce its corporate overhead.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At September 30, 2000, cash totaled $106.4 million, up from $88.5
million at December 31, 1999. Cash generated by operations in the
first nine months of 2000 totaled $37.6 million, compared to a
consumption of $24.6 million in the first nine months of 1999.
The cash generation in the first nine months of 2000 reflects the
Company's improved results of operations and continuing focus on
collection of accounts receivable. Cash consumption in the first
nine months of 1999 included the $12 million payment to BSI (See
"Arbitration Settlement" preceding). Severance payments in the
first nine months of 2000 and 1999 totaled $4.8 million and $4.4
million, respectively.
Net cash generated by investing activities totaled $5.3 million in
the first nine months of 2000, compared to a $1.9 million net
consumption of cash in the first nine months of 1999. Investing
activities in the first nine months of 2000 included $22.3 million
in net proceeds from sales of assets, primarily from sales of land
and office buildings in the Netherlands and on the Company's
Huntsville, Alabama campus. Investing activities in the first
nine months of 1999 included $28.9 million in net proceeds from
sales of assets, including $19.9 million from the fourth quarter
1998 sale of the Company's manufacturing assets (See Note 12 of
Notes to Consolidated Financial Statements contained in this Form
10-Q), $4.1 million from the sale of the InterCAP subsidiary, $2.5
million from the sale of land, and $2 million from the sale
of the corporate jet. Other significant investing activities
in the first nine months of 2000 included expenditures for
capitalizable software development costs of $9.8 million ($14.7
million in the first nine months of 1999) and capital
expenditures of $5.5 million ($7.9 million in the first nine
months 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 $19.7 million in
the first nine months of 2000, compared to $14.9 million in the
first nine months of 1999. Net debt repayments during the first
nine months of 2000 and 1999 totaled $21 million and $16.9
million, respectively. In the first nine months of 2000, the
Company used approximately $7 million to repay its Australian term
loan, $4 million to pay off the mortgage on a disposed European
office building, and $7.1 million to pay down the term loan with
its primary lender. Activity in the first nine months of 1999
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.
Currency fluctuations continue to have a negative impact on the
Company's consolidated cash balance due primarily to the
devaluation of the Euro. The Company has increased exposure to
this currency as a result of the October 1999 formation of Z/I
Imaging and its significant presence in Germany.
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. In
September 2000, the Company repaid $7.1 million of the $25 million
term loan portion of the agreement with proceeds received from the
sale of several office buildings on its Huntsville, Alabama
campus. The remaining $17.9 million term loan 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
September 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 September 30,
2000, the Company had outstanding borrowings of $17.9 million (the
term loan) which are classified as long-term debt in the
consolidated balance sheet, and an additional $17.2 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 $48.1 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 by the lender in second
quarter 2000.
At September 30, 2000, the Company had approximately $31 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 continues to improve its general financial condition
and has generated positive operating cash flow for the fourth
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 and 2000. 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,
including requirements for severance payments associated with the
various restructuring actions being taken by the Company. For the
near term, the Company also anticipates that its cash position
will continue to benefit from the sales of excess real estate and
other noncore assets of the Company. However, for the longer
term, 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 sales of assets and external financing. The Company
anticipates no significant nonoperating events that will require
the use of cash, other than its stock repurchase program described
under "Subsequent Event" below.
SUBSEQUENT EVENT
----------------
On October 30, 2000, the Company's Board of Directors approved a
stock repurchase plan which will allow the Company under certain
circumstances to repurchase up to $30 million of its outstanding
common stock. The Plan is not expected to commence until the
completion of certain transactions, including sale of the
Company's Microstation-based software products to BSI (See Note 17
of Notes to Consolidated Financial Statements contained in this
Form 10-Q.), sale of remaining idle building space on the
Company's Huntsville, Alabama campus, and completion of the
restructuring of the Company's international organization into the
vertical business units. However, the Board in its discretion may
approve purchases prior to completion of these transactions. The
Plan may be suspended at any time after its commencement and will
terminate on December 31, 2002. The Company has no obligation to
purchase any specific number of shares under the Plan.
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 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 were by permission of the Court filed on
November 3, 2000. No decision has been entered.
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 second half of 2001.
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 September 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: November 13, 2000 Date: November 13, 2000
