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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________ to________
Commission file number 0-9722
INTERGRAPH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 63-0573222
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(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Intergraph Corporation
Huntsville, Alabama 35894-0001
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (256) 730-2000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of January 31, 2000, there were 49,252,406 shares of
Intergraph Corporation Common Stock $0.10 par value outstanding.
The aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately $252,402,000
based on the closing sale price of such stock as reported by The
Nasdaq Stock Market on January 31, 2000, assuming that all shares
beneficially held by executive officers and members of the
registrant's Board of Directors are shares owned by "affiliates,"
a status which each of the executive officers and directors
individually disclaims.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
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Portions of the Annual Report to Shareholders
for the year ended December 31, 1999 Part I, Part II, Part IV
Portions of the Proxy Statement for the
May 18, 2000 Annual Meeting of Shareholders Part III
PART I
ITEM 1. BUSINESS
Overview
Intergraph Corporation (the "Company"), founded in 1969, is a
technical solutions and systems integration company, providing
customizable core computer software, consulting, services, and
computer hardware to governments and industries worldwide. Known
for its leadership, technology, and global service
infrastructure, the Company supports technical and creative
professionals in a range of sectors, including local and federal
government, transportation, mapping/geographic information
systems ("GIS"), utilities, communications, public safety, and
process and building.
The Company offers software solutions based on Microsoft
Corporation's Windows operating systems and hardware systems
based on Intel Corporation's Pentium-class microprocessors, as
well as related professional services to satisfy engineering,
design, modeling, analysis, mapping, information technology, and
creative computing needs. The Company's products and services are
sold through industry-focused direct and indirect channels
worldwide, with United States and European revenues representing
approximately 79% of total revenues for 1999.
Background
Until the mid 1990s, the unique demands of high end technical
computing required tremendous processing and graphics
capabilities that could only be performed using reduced
instruction set computing ("RISC") based workstations for the
UNIX operating system. These systems cost considerably more than
the Intel microprocessor-powered/Microsoft Windows-based personal
computers ("PCs") widely used at the time for word processing,
spreadsheets, and other less demanding applications.
In 1992, the Company began evaluation of a transition from its
own Clipper RISC microprocessor to the Intel microprocessor and
from the UNIX operating system to Microsoft's Windows NT, a 32-
bit operating system powerful enough to run both technical and
business applications on a less expensive hardware platform. In
late 1992, based on commitments from Intel, the Company concluded
that systems with Intel microprocessors and Windows operating
systems would become capable of supporting high-end computing and
other enterprisewide computing environments, while at the same
time maintaining interoperability with existing UNIX-based
systems. The Company therefore chose to migrate products from
its own Clipper microprocessor to Intel microprocessors and from
the UNIX operating system to Microsoft Windows NT. This decision,
in effect, expanded the availability of the Company's
workstations and software applications to Windows-based computing
environments not previously addressed by the Company. It also
allowed the Company's software applications to operate on a
variety of other hardware architectures provided by vendors using
the Windows NT operating system. Prior to this decision, the
Company's software applications operated principally on its
proprietary hardware platforms.
The Company ceased development of the Clipper RISC
microprocessor at the end of 1993 and made a substantial
investment in the redesign of its hardware platform for
utilization of Intel's microprocessor. The Company chose to use
only Intel microprocessors and to focus its efforts and image
creation toward its core capabilities, specifically very high
performance computational and 3D graphics capabilities. This
high-end market place in the Windows NT operating system
environment is supported only by Intel products. The transition
from its proprietary hardware architecture to that of Intel was
substantially completed during 1994, and since 1995,
substantially all of the Company's hardware sales have been
comprised of Intel-based systems.
At the end of 1994, the Company also completed the development
effort to port its technical software applications to the Windows
NT operating system, and to make Windows NT available on all of
its workstations. Sales of Windows-based software have grown
sequentially each year and currently represent over 90% of the
Company's total software revenues.
In 1996, a dispute with Intel over the use of Intergraph
patents key to the development of Intel Pentium processors
disrupted relations between the Company and Intel, causing
significant delays in the Company's hardware development and
manufacturing cycles. Unable to acquire Intel microprocessors
and technical information crucial to its product development, the
Company could not introduce new hardware lines on a timetable
competitive with other hardware vendors. As a consequence, the
Company was unable to compete favorably in the high-performance
Intel processor-powered workstation markets it pioneered.
In November 1997, in response to Intel's actions, the Company
filed a lawsuit against Intel, alleging that Intel was using its
dominant market position in an attempt to coerce Intergraph into
giving up certain key patent rights. These coercive tactics
included the withholding of essential design and defect
information for released Intel products and the intentional
interference with Intergraph customers and suppliers. See
"Manufacturing and Sources of Supply" and Item 3, Legal
Proceedings, following, and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the
Company's 1999 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for further
discussion of the Company's dispute with Intel and its effects on
the Company's business and consolidated operating results.
In efforts to reduce losses and return to profitability, the
Company took significant measures, including the outsourcing of
its manufacturing function to SCI Technology Inc. ("SCI"), a
wholly owned subsidiary of SCI Systems Inc., in 1998 (for further
information about the SCI transaction, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1999 annual report,
portions of which are incorporated by reference in this Form 10-K
annual report), extensive reductions to its workforce in 1998 and
1999, and sales of several non-core product lines. In third quarter
1999, the Company exited the PC and generic server businesses,
which had been irreparably damaged as a result of the dispute
with Intel. Currently, the Company, through its Intergraph
Computer Systems business unit, markets and sells Intel/Windows-
based high-end workstations and specialty servers, and digital
video products. In order to maximize profitability in its
remaining hardware businesses, the Company is actively seeking
partnerships with companies that offer complementary technologies
and sales channels.
In terms of broad market segments, the Company's mapping/GIS
and process and building applications continue to dominate the
Company's product mix at approximately 50% and 19% of total
systems sales in 1999, respectively, compared to 47% and 19%,
respectively, in 1998. Due to the sale of the Company's Solid
Edge and Engineering Modeling System product lines in March 1998,
mechanical design, engineering, and manufacturing applications no
longer represent a significant portion of the Company's product
mix. These applications represented 14% of total systems sales
in 1997.
The Company believes that its operating system, hardware
architecture, and software applications strategies are the
correct choices. However, competing operating systems, hardware
products, and software applications are available in the market,
and the Company competes with companies with greater financial
resources in each of the markets it serves. 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.
In addition, the Company faces significant operational and
financial uncertainty of unknown duration due to its dispute with
Intel.
Discontinued Operation
On October 31, 1999, the Company sold its VeriBest Inc.
operating segment to Mentor Graphics Corporation, a global
provider of electronic hardware and software design solutions and
consulting services. As a result, electronic design automation
software and services no longer represent a portion of the
Company's revenues. For further discussion regarding the sale of
VeriBest, see Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's
1999 annual report, portions of which are incorporated by
reference in this Form 10-K annual report.
Business Entities
The Company's continuing operations are divided into three
separate business units for operational and management purposes:
the Software and Federal Systems ("Federal") business
(collectively, the Software and Federal businesses form what is
termed "Intergraph"), Intergraph Computer Systems ("ICS"), and
Intergraph Public Safety, Inc. ("IPS"). For further information
regarding the Company's operating segments, including financial
information for 1999 and 1998, see Management's Discussion and
Analysis of Financial Condition and Results of Operations and
Note 12 of Notes to Consolidated Financial Statements contained
in the Company's 1999 annual report, which are incorporated
herein by reference.
Intergraph
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Intergraph develops, markets, and supports technical solutions
for many industries as well as federal, state, and local
governments. Products include open, interdisciplinary software
applications, specialized industry specific hardware, consulting,
and support services. Intergraph provides business solutions to
three primary industries: process and building, federal
government, and mapping/GIS (including transportation and state
and local governments).
Intergraph's principal software applications are based on
Microsoft Windows, including operating systems, architecture
components, and development environments. This open technology
foundation enables Intergraph's software to interoperate with
thousands of third-party Windows-based technical and business
applications as well as with UNIX-based applications. An
additional graphics foundation used by the Company for certain
Intergraph software applications is MicroStation, software owned
by Bentley Systems Inc. ("BSI"), an approximately 33%-owned
affiliate of the Company. MicroStation provides fundamental
graphics element creation, maintenance, and display functions for
the Company's UNIX- and Intel-based workstations. In 1999,
MicroStation sales represented approximately 5% of the Company's
total software revenue. See Management's Discussion and Analysis
of Financial Condition and Results of Operations and Note 13 of
Notes to Consolidated Financial Statements contained in the
Company's 1999 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for discussion of
the Company's business relationship and past arbitration
proceedings with BSI.
Process and Building. Process & Building Solutions ("PBS") is
a global organization that supplies software and services to the
process, power, and marine industries. PBS focuses on integrated
life cycle engineering solutions for the design, construction,
and operation of plants and ships, with emphasis on engineering
information management and on linking the engineering systems
with business systems.
For more than 20 years, engineering/procurement/and
construction ("EPC") contractors, and process and power plant
owner/operators have used Intergraph solutions to design,
construct, operate and maintain facilities for petrochemical,
chemical, pharmaceutical, food and beverage, oil and gas, power
generation, and mining industries. Intergraph life cycle
engineering solutions increase the value of plant data by
facilitating capture and re-use of information throughout the
life cycle of a plant, resulting in significant productivity
gains, operational efficiencies, and higher profits.
According to industry analyst Daratech of Cambridge,
Massachusetts, in 1999 Intergraph held a 59% revenue share of the
3D plant design and visualization market. In the 2D plant design
market segment, Intergraph held a 24.5% revenue share.
The Company's Plant Design System ("PDS") is a comprehensive,
intelligent engineering application that creates and maintains an
accurate database of plant information. That information is a
valuable asset for regulatory compliance, streamlining
operations, maintenance, and downstream retrofit projects.
Integration features enable concurrent engineering, multiple
disciplines working on a project simultaneously, improving design
coordination, reducing errors, and increasing productivity. PDS
consists of integrated 2D and 3D modules which correspond to
basic tasks in the plant design workflow, including process flow
diagrams, piping and instrumentation diagrams, instrumentation
data management, piping, equipment, heating/ventilation/air
conditioning, electrical, structural, and other engineering
aspects of a plant.
In addition to PDS, Process & Building Solutions delivers its
SmartPlant family of products, including SmartPlant P&ID,
SmartSketch, SmartPlant Explorer, and SmartPlant Review, to
support life cycle engineering needs of the process and power
industries. Because plant data is populated in an open data
model, this data can be easily accessed and used by engineering,
procurement, construction, maintenance, management, and any other
relevant users who need it.
PBS's shipbuilding solutions provide software systems and
services for commercial and military ship design, construction,
and management. In cooperation with international industry
partners, PBS is developing the next generation solution that
will streamline shipbuilding processes, lower manpower and
material costs, and reduce the time to construct world-class
marine vessels. GSCAD is the next-generation naval and
shipbuilding solution for design, construction, and management.
GSCAD design, planning, and engineering analysis tools are built
on an enterprisewide, integrated infrastructure that accesses
real-time information. This software solution will provide the
capability to create a ship design that speeds product
development from conception to market delivery. It also provides
capabilities for performing risk analysis, design integrity and
functional engineering review of new and modified product
designs.
Federal Systems. The Federal Systems business unit markets and
sells specially developed hardware and software solutions,
commercial off-the-shelf products, and professional consulting
services to governments around the world. Products include
specialized hardware, mapping and information systems, logistics
and financial systems, environmental management solutions,
modeling and simulation systems and security systems. The
Federal business unit also supports U.S. state and local
governments with GIS solutions, and sells and supports civil
engineering and GIS-based transportation solutions. Effective
March 2000, the Federal Systems business was renamed Intergraph
Government Solutions.
For more than 20 years, Intergraph has been a top provider of
computer hardware, software, and professional services solutions
to federal, state, and local governments, enabling governments
worldwide to achieve maximum performance in military and civilian
computing environments. To better serve its government markets,
Intergraph's Federal business unit is divided into three primary
groups: the hardware solutions division, the government solutions
division, and the mapping and information systems division.
The hardware solutions division develops ruggedized
workstations for military and government engineering
applications. Its flagship product, the TD-R 2000 series
workstation, is an integral part of the U.S. Navy's Smart Ship
technology program, enabling the Navy to sustain high operational
workloads with reduced crews. Hardware solutions also develops
specialized turnkey systems for the military and surveillance
communities, including mission planning and video analysis
systems.
The government solutions division ("GSD") develops, implements,
and supports specialized software solutions and consulting
services to meet logistics systems, information management,
financial systems integration, and transportation engineering
needs of the Army, Navy, and Air Force branches of the U.S.
military. GSD also develops and implements civil engineering
solutions, and sells and supports U.S. state and local
governments with mapping/GIS solutions for land records and
mapping, asset management, public works, public safety,
transportation engineering, infrastructure modeling, planning,
and other functions.
Intergraph's suite of civil engineering solutions offers local
governments a full complement of solutions, from data collection
to site design to water resources. Intergraph civil design
products integrate with Intergraph GIS solutions to meet the
needs of state and city governments around the world. Both civil
and GIS product lines remove proprietary barriers by providing
automated mapping, spatial analysis, network modeling, and
integration with multimedia, satellite imagery, spreadsheets,
documents, and more. The software also provides seamless
integration with major vendor data formats.
To help government agencies strategically and efficiently
manage transportation networks, Intergraph transportation
software integrates maps, photos, property records, survey and
engineering data, inspection reports, traffic safety, and
congestion statistics. Intergraph photogrammetry, civil
engineering, and mapping products provide transportation
solutions that include imaging, design, modeling, reprographics,
plotting, training, integration, and professional services.
The mapping and information systems division ("IMIS") develops
and supports mapping systems, products, and services to the
world's major mapping and charting organizations. IMIS also
provides specialized systems, products, and services to military
agencies and national and local governments. Solutions include
map and chart production, security, identification, intelligence,
environmental, command and control, and geospatial data
exploitation systems.
Mapping/GIS. Mapping/GIS includes geospatial solutions and
imaging solutions. It develops, markets, and supports geospatial
solutions for business GIS, land records management, rail
transportation, environmental management, utilities and
communications companies, and commercial map production.
Solutions provide geographic visualization and analysis tools
useful in many businesses, including real estate, retailing,
service networks, transportation networks, site assessment,
agriculture, insurance, and health care.
Mapping/GIS also develops and sells geospatial solutions that
help governments improve public service, respond more efficiently
to legislated and political mandates, implement successful GIS
systems quickly, and reduce the total cost of GIS ownership.
Mapping/GIS sells its geospatial solutions for government through
Federal Systems.
Mapping/GIS solutions include Intergraph's GeoMedia family of
products. The dominant mapping/GIS solution for business and
government, including transportation agencies, GeoMedia is a
complete Windows-based desktop GIS solution for all decision
support query and reporting activities.
Intergraph's MGE is also used by transportation agencies as a
high-end software for basemap analysis. MGE is the foundation
for Intergraph's Modular GIS Environment ("MGE") family of
mapping and GIS software products. MGE offers project
management, coordinate system operations, data query and access,
multiple configuration options, and a range of common tools
valuable to MGE modules. MGE is interoperable with the GeoMedia
product suite.
Mapping/GIS also provides solutions for end-to-end digital map
and cartographic production. These solutions help cartographers
manage the map production environment. From map scanning to map
printing, Intergraph's end-to-end cartographic production tools
provide the means to collect, process, and output data.
Z/I Imaging Corporation, a 60%-owned joint venture with Carl
Zeiss formed in October 1999, develops, markets, and sells
Windows NT-based imaging solutions for photogrammetry
professionals. Solutions include aerial cameras, stereo
softcopy, workstations, analytic stereo plotters, photogrammetric
scanners, and image management, processing, and distribution
software. Z/I Imaging systems are nonproprietary, enabling
industry and government professionals to use them as a front-end
to mapping, GIS, and civil engineering software from a variety of
leading vendors.
Intergraph Computer Systems
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Intergraph Computer Systems, a wholly owned subsidiary of
Intergraph Corporation formed in 1998, develops high-performance
core hardware, including high-end workstations, add-in graphics
subsystems, specialty servers, and digital video products, for
use in numerous professional-level creative and technical
disciplines. Headquartered in Huntsville, Alabama, ICS employs a
staff of approximately 800 people worldwide.
ICS builds on the core hardware with the value add of extensive
market knowledge to create high-performance, leading-edge, and
highly reliable visual computing solutions for the digital media,
visual simulation, mechanical CAD and publishing/prepress
markets. ICS high-performance workstations and specialty servers
are embraced by an ever-growing number of customers in the
digital content creation markets.
The Information Technology ("IT") Services division of ICS
offers products and services including Intel/Windows-based PCs,
workstations, servers, fully integrated optical disk products,
backup solutions, firewalls, networking and system management
solutions, as well as consulting, installation packages, and
rapid application deployment solutions. Depending on user
requirements, IT Services' products and services can be provided
as point solutions or as integrated solutions that include all
necessary hardware, software, and support services for an
enterprise.
The Intense3D division of ICS develops and sells add-in
graphics subsystems for the Windows NT/Intel platform. Used in
high-performance workstations and PCs, the Intense3D family of
accelerators delivers performance at affordable prices in
graphics-intensive markets that include mechanical computer-aided
design ("CAD"), traditional CAD, animation, content creation,
visual simulation, scientific visualization, graphics arts, and
digital media. Intense3D's Wildcat graphics accelerators are
certified with the leading software vendors from across many
disciplines, and are used by researchers, engineers, designers,
and scientists who need to interact in real time with complex
visual data sets. Intense3D provides 3D graphics cards to
leading computer vendors such as Dell, IBM, Compaq, Fujitsu, and
Siemens.
Intergraph Public Safety, Inc.
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In January 1997, Intergraph Public Safety, Inc. was established
as a wholly-owned subsidiary of the Company. IPS includes the
Public Safety, Utilities and Communication groups. IPS solutions
include computer hardware and software systems, systems
implementation, training, maintenance, customer support, and
outsourcing services for the public safety and utilities markets.
The subsidiary is headquartered in Huntsville, Alabama and has a
staff of approximately 780 people worldwide.
Public Safety develops, markets, and implements and supports
computer-based solutions for emergency medical and rescue units,
fire departments, law enforcement organizations, and other public
safety agencies around the world. Other industries utilizing
Public Safety solutions include automobile clubs for roadside
assistance, and airports, campuses, and military bases for
security systems.
Public Safety products represent a complete solution for public
safety agencies. Public Safety products are designed to
interoperate in a comprehensive, integrated public safety
information system. These products include computer-aided
dispatch, police, fire, and emergency management systems, records
management systems, jail management systems, civil process and
mug shot systems, mobile computer systems, integrated radio and
telephony solutions, interfaces to alarm systems, management
information reporting systems, personnel rostering systems, and
training management systems.
The foundation product for Public Safety is its computer-aided
dispatch system. This product fully integrates interactive,
intelligent mapping with dispatching, records management, and
state of the art communications capabilities. Designed
specifically to support command and control operations, the
system is composed of high performance graphics workstations and
software. Records management is enhanced by a database that
includes geographic map information as well as address, incident
history, and traffic pattern data.
On January 1, 1999, Intergraph's Utilities and Communications
business was formally merged into IPS. Public Safety's popular
dispatch technology is a complementary application to their
mainstream geospatial products, such as ActiveFRAMME. By linking
the two, the Company is responding to utilities' increased demand
for a total solution that integrates AM/FM/GIS, outage management
and computer-aided dispatch. The Utilities and Communications
business continues to develop the Company's core geospatial
offerings, while collaboration with Public Safety augments those
offerings by adding computer-aided dispatch and outage management
components.
This business focuses its expertise and resources in two
strategic industry sectors: Utilities and Communications. Sales,
marketing and project services efforts are vertically focused
along these sectors. Utilities and Communications solutions are
also sold through the Intergraph Corporation international
distribution channels. A leading supplier of Windows NT-based
geospatial resource management solutions, this business provides
software and services that help energy and communications companies
manage their geospatial data and respond to customer needs.
The Utilities solutions assist electric, gas, pipeline, and
water companies in the management of customer-centric GIS data,
which contains all the information necessary for distributing
electricity or gas, tracking distribution, and managing service
disruptions. Its geospatial resource management solution
spatially enables this data, integrating operational support
systems such as outage analysis, and provides real time
information for customer service, thereby increasing operational
efficiency enterprisewide. Solutions include engineering design
and facilities management, technical document workflow and
archiving, mobile computing and field support, outage management,
spatial data analysis and data warehouse, and real time display
facility analysis.
For Communications, geospatial network resource management
solutions are provided to help the international communications
industry automate its network facility mapping, planning, design,
and maintenance for outside and inside plant.
IPS's solutions are Intel processor/Windows NT-based and rely
on Oracle Corporation's relational databases. By incorporating
industry standard hardware and software with its products, IPS is
able to provide customers with the best price and performance
features available. IPS distributes its products worldwide
through direct and indirect sales channels.
Product Development
The Company believes a strong commitment to ongoing product
development is critical to success in the interactive computer
graphics industry.
Product development expenditures include all costs related to
designing new or improving existing hardware and software. During
the year ended December 31, 1999, the Company spent $62.6 million
(6.8% of revenues) for the product development activities of its
continuing operations compared to $76.8 million (7.6% of
revenues) in 1998 and $90.3 million (8.2% of revenues) in 1997.
See Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's 1999 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for further discussion of product
development expenses, including portions capitalized and their
recoverability.
The industry in which the Company competes is characterized
by rapid technological change, which results in shorter product
cycles, higher performance and lower priced product offerings,
intense price and performance competition, and development and
support of software standards that result in less specific
hardware and software dependencies by customers. The Company
believes the life cycle for most of its products to be less than
two years, and it is therefore engaged in continuous product
development activity. The operating results of the Company and
others in the industry will continue to depend on the ability to
accurately anticipate customer requirements and technological
trends and to rapidly and continuously develop and deliver new
hardware and software products that are competitively priced,
offer enhanced performance, and meet customers' requirements for
standardization and interoperability.
Manufacturing and Sources of Supply
Reflecting the trend toward outsourcing in the hardware
industry, in fourth quarter 1998, the Company sold substantially
all of its U.S. manufacturing inventory and assets to SCI
Technology, Inc. ("SCI"), a wholly-owned subsidiary of SCI
Systems, Inc., and SCI assumed responsibility for manufacturing
of substantially all of the Company's hardware products. Prior
to the sale, this responsibility, which included the assembly and
testing of components and subassemblies manufactured by the
Company and others, was that of Intergraph Computer Systems
("ICS"), a wholly-owned subsidiary of the Company. ICS retains
certain risks, including its ability to accurately forecast its
manufacturing requirements of SCI and risks associated with
inventory excess and obsolescence as defined in the agreement.
For a complete description of the SCI transaction and its impact
on operating results and cash flows, see Management's Discussion
and Analysis of Financial Condition and Results of Operations
contained in the Company's 1999 annual report, portions of which
are incorporated by reference in this Form 10-K annual report.
Substantially all of the Company's microprocessor needs are
currently supplied by Intel Corporation. See Item 3, Legal
Proceedings, following and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the
Company's 1999 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for a discussion of
the Company's litigation proceedings with Intel and related
effects on the Company's microprocessor supply and results of
operations.
The Company is not required to carry extraordinary amounts of
inventory to meet customer demands or to ensure allotment of
parts from its suppliers.
Sales and Support
Sales. The Company's products are sold through a combination of
direct and indirect channels in approximately 65 countries
worldwide. Direct channel sales, which provide the majority of
the Company's product revenues, are generated by the Company's
direct sales force through sales offices in over 40 countries
worldwide. The efforts of the direct sales force are augmented
by sales through indirect channels, including dealers, value
added resellers, distributors, and system integrators. Sales
through indirect channels provided approximately 25% of total
Company systems revenues in 1999, compared to 22% in 1998 and
1997.
Each of the Company's major business entities maintains its own
sales force. Intergraph's selling efforts are organized along
key industry lines (process and building, federal, state and
local government, mapping/GIS, utilities and public safety) for
its major product applications. The Company believes an industry
focus better enables it to meet the specialized needs of
customers. In general, the direct sales forces are compensated
through a combination of base salary and commission. Sales
quotas are established along with certain incentives for
exceeding quota. Additional specific incentive programs may be
established periodically.
Customer Support. The Company believes that a high level of
customer support is important to the sale of interactive graphics
systems. Customer support includes preinstallation guidance,
customer training, onsite installation, hardware preventive
maintenance, repair service, software help desk and technical
support services in addition to consultative professional
services. The Company employs engineers and technical
specialists to provide customer assistance, maintenance, and
training. Maintenance and repair of systems are covered by
standard warranties and by maintenance agreements to which most
users subscribe. The trend in the industry toward lower priced
products and longer warranty periods has resulted in reduced
levels of maintenance revenue for the Company. The Company
believes this trend will continue in the future, though it may be
partially offset by growth in the Company's professional services
business. The Company is endeavoring to grow its services
business and has redirected the efforts of its hardware
maintenance organization to focus increasingly on systems
integration. Revenues from these services, however, typically
produce lower gross margins than maintenance revenues.
International Operations
International markets, particularly Europe and Asia, continue
in importance to the industry and to each of the Company's
operating segments. Sales outside the U.S. represented
approximately 52% of total revenues from continuing operations in
1999, compared to 51% in 1998. European and Asia Pacific
revenues represented 31% and 11%, respectively, of total revenues
from continuing operations in both 1999 and 1998. The Company's
operations are subject to and may be adversely affected by a
variety of risks inherent in doing business internationally, such
as government policies or restrictions, currency exchange
fluctuations, and other factors.
There are currently wholly-owned sales and support subsidiaries
of the Company located in every major European country. European
subsidiaries are supported by service and technical assistance
operations located in The Netherlands. Outside of Europe, the
Company's systems are sold and supported through a combination of
subsidiaries and distributorships. At December 31, 1999, the
Company had approximately 1,100 employees in Europe, 740
employees in the Asia Pacific region, and 640 employees in other
international locations.
Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results of
operations. The Company conducts business in all major markets
outside the U.S., but the most significant of these operations
with respect to currency risk are located in Europe and Asia.
Local currencies are the functional currencies for the Company's
European subsidiaries. The U.S. dollar is the functional
currency for all other international subsidiaries. With respect
to the currency exposures in these regions, the objective of the
Company is to protect against financial statement volatility
arising from changes in exchange rates with respect to amounts
denominated for balance sheet purposes in a currency other than
the functional currency of the local entity. The Company will
therefore enter into forward exchange contracts related to
certain balance sheet items, primarily intercompany receivables,
payables, and formalized intercompany debt, when a specific risk
has been identified. Periodic changes in the value of these
contracts offset exchange rate related changes in the financial
statement value of these balance sheet items. Forward exchange
contracts, generally less than three months in duration, are
purchased with maturities reflecting the expected settlement
dates of the balance sheet items being hedged, and only in
amounts sufficient to offset possibly significant currency rate
related changes in the recorded values of these balance sheet
items, which represent a calculable exposure for the Company from
period to period. Since this risk is calculable and these
contracts are purchased only in offsetting amounts, neither the
contracts themselves nor the exposed foreign currency denominated
balance sheet items are likely to have a significant effect on
the Company's financial position or results of operations. The
Company does not generally hedge exposures related to foreign
currency denominated assets and liabilities that are not of an
intercompany nature, unless a significant risk has been
identified. It is possible the Company could incur significant
exchange gains or losses in the case of significant, abnormal
fluctuations in a particular currency. By policy, the Company is
prohibited from market speculation via forward exchange contracts
and therefore does not take currency positions exceeding its
known financial statement exposures, and does not otherwise trade
in currencies. At December 31, 1999 and 1998, the Company's
outstanding forward contracts related to formalized intercompany
loans between the Company's European subsidiaries and were
immaterial to the Company's financial position.
The Company has historically experienced slower collection
periods for its international accounts receivable than for
similar sales to customers in the United States. The Company is
experiencing slow collections throughout the Middle East region,
particularly in Saudi Arabia. Total accounts receivable from
Middle Eastern customers was approximately $20 million at
December 31, 1999 and $23 million at December 31, 1998.
See Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1, 5, and 12 of Notes to
Consolidated Financial Statements contained in the Company's 1999
annual report, portions of which are incorporated by reference in
this Form 10-K annual report, for further discussion of the
Company's international operations.
U.S. Government Business
Total revenue from the United States government was
approximately $149 million in 1999, $166 million in 1998, and
$177 million in 1997, representing approximately 16% of total
revenues in all three years. The majority of these revenues are
attributed to the Federal unit of the Intergraph operating
segment.
The Company sells to the U.S. government under long-term
contractual arrangements, primarily indefinite delivery,
indefinite quantity and cost plus award fee contracts, and
through commercial sales of products not covered by long-term
contracts. Approximately 52% of the Company's 1999 federal
government revenues were earned under long-term contracts. The
Company believes its relationship with the federal government to
be good. While it is fully anticipated that these contracts will
remain in effect through their expiration, the contracts are
subject to termination at the election of the government. Any
loss of a significant government contract would have an adverse
impact on the results of operations of Federal Systems and the
Company as a whole.
The Company has historically experienced slower collection
periods for its U.S. government accounts receivable than for its
commercial customers. At December 31, 1999, accounts receivable
from the U.S. government was approximately $33 million versus
approximately $55 million at December 31, 1998.
Backlog
An order is entered into backlog only when the Company receives
a firm purchase commitment from a customer. The Company's
backlog of unfilled systems orders at December 31, 1999 and 1998
was $209 million and $237 million, respectively. Substantially
all of the December 1999 backlog of orders is expected to be
shipped during 2000.
The Company does not consider its business to be seasonal,
though typically fourth quarter orders and revenues exceed those
of other quarters.
The Company does not ordinarily provide return of merchandise
or extended payment terms to its customers.
Competition
The industry in which the Company competes continues to be
characterized by intense price and performance competition. To
compete successfully, the Company and others in the industry must
accurately anticipate customer requirements and technological
trends and rapidly and continuously develop products with
enhanced performance that can be offered at competitive prices.
The Company, along with other companies in the industry, engages
in the practice of price discounting to meet competitive industry
conditions. Other important competitive factors include quality,
reliability, customer service and support, and training.
Management of the Company believes that competition will remain
intense, particularly in product pricing.
The Company's competition varies among its different product
application areas. The Company considers its principal
competitors in the hardware market to be IBM, Hewlett Packard
Corporation, Compaq Computer Corporation, Dell Computer
Corporation, and Silicon Graphics, Inc. In the process and
building industry, Intergraph competes with the software products
of Bentley Systems, Inc. (an approximately 33%- owned affiliate
of the Company), Cadcentre, Rebis Industrial Workgroup Software,
and several smaller companies. The Company's primary competitors
in the utilities and mapping/GIS markets are ESRI, Autodesk Inc.,
Smallworld, and MapInfo. The primary competitors of Intergraph
Public Safety are TriTech Software Systems, Litton PRC, Tiburon,
Inc., and Printrak International Inc. Several companies with
greater financial resources than the Company, including IBM,
Hewlett Packard, Dell, and Compaq are active in the industries
served by the Company.
The Company believes it has an advantage over other vendors who
provide only hardware or software, leaving system integration to
the customer. In addition, the Company believes that its
experience and extensive worldwide customer service and support
infrastructure represent a competitive advantage.
Environmental Affairs
The Company's facilities are subject to numerous laws and
regulations designed to protect the environment. In the opinion
of the Company, compliance with these laws and regulations has
not had, and should not have, a material effect on the capital
expenditures, earnings, or competitive position of the Company.
Licenses, Copyrights, Trademarks, Patents, and Proprietary Information
The Company develops its own graphics, data management, and
applications software as part of its continuing product
development activities. The Company has standard license
agreements with Microsoft Corporation for use and distribution of
the Windows NT operating system and with UNIX Systems
Laboratories for use and distribution of the UNIX operating
system. The license agreements are perpetual and allow the
Company to sublicense the operating systems software upon payment
of required sublicensing fees. The Company also has an extensive
program for the licensing of third party application and general
utility software for use on systems and workstations.
The Company has a non-exclusive license agreement with Bentley
Systems, Inc. ("BSI"), an approximately 33%-owned affiliate of
the Company, under which the Company sells MicroStation, a
software product developed and maintained by BSI and utilized in
many of the Company's software applications, via its direct sales
force, and via its indirect sales channels if MicroStation is
sold with other Intergraph products. See Management's Discussion
and Analysis of Financial Condition and Results of Operations and
Note 13 of Notes to Consolidated Financial Statements contained
in the Company's 1999 annual report, portions of which are
incorporated by reference in this Form 10-K annual report, for
further discussion of the Company's affiliation and past
arbitration proceedings with BSI.
The Company owns and maintains a number of registered patents
and registered and unregistered copyrights, trademarks, and
service marks. The patents and copyrights held by the Company
are the principal means by which the Company preserves and
protects the intellectual property rights embodied in the
Company's hardware and software products. Similarly, trademark
rights held by the Company are used to preserve and protect the
goodwill represented by the Company's registered and unregistered
trademarks.
As industry standards proliferate, there is a possibility that
the patents of others may become a significant factor in the
Company's business. Personal computer technology, which is used
in the Company's workstation and server products, is widely
available, and many companies, including Intergraph, are
attempting to develop patent positions concerning technological
improvements related to personal computers, workstations and
servers. With the possible exception of its ongoing litigation
with Intel (in which the Company expects to prevail), it does not
appear that the Company will be prevented from using the
technology necessary to compete successfully, since patented
technology is typically available in the industry under royalty
bearing licenses or patent cross licenses, or the technology can
be purchased on the open market. Any increase in royalty
payments or purchase costs would increase the Company's costs of
manufacture, however, and it is possible that some key
improvement necessary to compete successfully in markets served
by the Company may not be available.
In addition, computer software technology is increasingly being
protected by patents, and many companies, including Intergraph,
are developing patent positions for software innovations. It is
unknown at the present time whether patented software technology
will be made generally available under license or whether
specific innovations will be held by their inventors and not made
available to others. In many cases, it may be possible to employ
software techniques that avoid the patents of others, but the
possibility exists that some features needed to compete
successfully in a particular segment of the software market may
be unavailable or may demand unacceptable costs due to royalty
requirements. Patented software techniques that become de facto
industry standards are among those that are likely to raise costs
or prevent the Company from competing successfully in particular
markets.
An inability to retain significant third party license rights,
in particular the Microsoft license, to protect the Company's
copyrights, trademarks, and patents, or to obtain current
technical information or any required patent rights of others
through licensing or purchase, all of which are important to
success in the industry in which the Company competes, could
significantly reduce the Company's revenues and adversely affect
its results of operations.
Technology significant to the Company is sometimes made
available in the form of proprietary information or trade secrets
of others. Prior to the dispute with Intel, Intel had made
freely available technical information used by the Company to
design, market and support its products that use Intel
components. Such information is claimed by Intel to be
proprietary and is made available by Intel only under
nondisclosure agreements. Prior to the April 1998 ruling of the
Alabama Court (See Item 3, Legal Proceedings, following), Intel
was withholding such information, attempting to cancel existing
agreements and refusing to enter into new nondisclosure
agreements with the Company. Intel's actions are the subject
matter of current litigation. These actions have damaged the
Company by slowing the introduction of new products using Intel
components and preventing proper maintenance and support of
Company products using Intel components.
Risks and Uncertainties
In addition to those described above and in Item 3, Legal
Proceedings, the Company has risks and uncertainties related to
its business and operating environment. See Management's
Discussion and Analysis of Financial Condition and Results of
Operations and Note 2 of Notes to Consolidated Financial
Statements contained in the Company's 1999 annual report,
portions of which are incorporated by reference in this Form 10-K
annual report, for further discussion of these risks and
uncertainties.
Employees
At December 31, 1999, the Company had approximately 5,700
employees. Of these, approximately 2,480 were employed outside
the United States. The Company's employees are not subject to
collective bargaining agreements, and there have been no work
stoppages due to labor difficulties. Management of the Company
believes its relations with employees to be good.
ITEM 2. PROPERTIES
The Company's corporate offices and primary distribution center
are located in Huntsville, Alabama. All of the Company's
operating segments have corporate headquarters located within the
Huntsville facilities. The Company's operating segments also
maintain sales and support facilities throughout the world.
The Company owns over 1,900,000 square feet of space in
Huntsville that is utilized for product development,
distribution, sales and administration. The Huntsville
facilities also include over 500 acres of unoccupied land. The
Company maintains sales and support locations in major U.S.
cities outside of Huntsville through operating leases.
Outside the U.S., the Company owns approximately 280,000 square
feet of space, primarily its Nijmegen distribution center. Sales
and support facilities are leased in most major international
locations.
The Company considers its facilities to be adequate for the
immediate future.
ITEM 3. LEGAL PROCEEDINGS
The Company filed a legal action on November 17, 1997, in U.S.
District Court, the Northern District of Alabama, Northeastern
Division (the "Alabama Court"), charging Intel Corporation, the
supplier of all of the Company's microprocessor supply, with
anticompetitive business practices. In the lawsuit, Intergraph
alleges that Intel attempted to coerce the Company into
relinquishing to Intel certain computer hardware patents through
a series of wrongful acts, including interference with business
and contractual relations, interference with technical assistance
from third party vendors, breach of contract, negligence,
misappropriation of trade secrets, and fraud based upon Intel's
failure to promptly notify the Company of defects in Intel's
products and timely correction of such defects, and further
alleging that Intel has infringed upon the Company's patents.
The Company's patents define the architecture of the cache memory
of an Intergraph developed microprocessor. The Company believes
this architecture is at the core of Intel's entire Pentium line
of microprocessors and systems. On December 3, 1997, the Company
amended its complaint to include a count charging Intel with
violations of federal antitrust laws. Intergraph asserts claims
for compensatory and treble damages resulting from Intel's
wrongful conduct and infringing acts, and punitive damages in an
amount sufficient to punish and deter Intel's wrongful conduct.
Additionally, the Company requested that Intel be enjoined from
continuing the alleged wrongful conduct which is anticompetitive
and/or violates federal antitrust laws, so as to permit
Intergraph uninterrupted development and sale of Intel-based
products.
On November 21, 1997, the Company filed a motion in the
Alabama Court to enjoin Intel from disrupting or delaying its
supply of products and product information, pending resolution of
Intergraph's legal action. On April 10, 1998, the Alabama Court
ruled in favor of Intergraph and ordered that Intel be
preliminarily enjoined from terminating Intergraph's rights as a
strategic customer in current and future Intel programs, and from
otherwise taking any action adversely affecting Intel's business
relationship with Intergraph or Intergraph's ability to design,
develop, produce, manufacture, market or sell products
incorporating, or based upon, Intel products or information. The
Court's ruling required that Intel carry out business with
Intergraph under the same terms and conditions, with the same
rights, privileges, and opportunities as Intel makes available to
Intergraph's competitors who are also strategic customers of
Intel. In response to the Alabama Court's decision, on April 16,
1998, Intel appealed to the United States Court of Appeals for
the Federal Circuit (the "Appeals Court"). On November 5, 1999,
the Appeals Court vacated the preliminary injunction that had
been entered by the Alabama Court. This ruling by the Appeals
Court is not expected to impact Company operations as Intel is
bound by an Agreement and Consent Order with the Federal Trade
Commission entered March 17, 1999 not to restrict microprocessor
sales to the Company and not to take coercive actions that were
identified by the Company in its legal action against Intel.
On June 17, 1998, Intel filed its answer in the Alabama case,
which included counterclaims against Intergraph, including claims
that Intergraph has infringed seven patents of Intel. On July 8,
1998, the Company filed its answer to the Intel counterclaims,
among other things denying any liability under the patent
infringement asserted by Intel. On June 17, 1998, Intel filed a
motion before the Alabama Court seeking a summary judgment
holding that Intel is licensed to use the patents that the
Company asserted against Intel in the Company's original
complaint. This "license defense" was based on Intel's
interpretation of the facts surrounding the acquisition by the
Company of the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. On September 15, 1998, the
Company filed a cross motion with the Alabama Court requesting
summary adjudication in favor of the Company. On November 13,
1998, the Company amended its complaint to include two additional
counts of patent infringement against Intel. The Company
requested the court to issue a permanent injunction enjoining
Intel from further infringement and to order that the financial
impact of the infringement be calculated and awarded in treble to
Intergraph. On June 4, 1999, the Alabama Court granted the
Company's September 15, 1998 motion and ruled that Intel has no
license to use the Company's Clipper patents as Intel had claimed
in its motion for summary judgment. On October 12, 1999, the
Alabama Court reversed its June 4, 1999 order and dismissed the
Company's patent claims against Intel. The Company is confident
that Intel has no license to use the Clipper patents and believes
that the court's original decision on this issue was correct. On
October 15, 1999, the Company appealed the Alabama Court's
October 12, 1999 order. No decision has been entered.
The Company believes that Intel's counterclaims, including the
alleged infringement of seven Intel patents, will not result in
material adverse consequences for the Company.
At an oral hearing held February 25, 2000, the Alabama Court
indicated that the trial date for this case, previously scheduled
for June, 2000, will be continued. A formal schedule has not
been entered, but the Company believes it likely that trial will
be re-scheduled for the Summer of 2001.
On March 10, 2000 the Alabama Court entered an order dismissing
the antitrust claims of the Company against Intel, based in part
upon a February 17, 2000 decision by the Appeals Court in another
case (CSU v. Xerox). The Company considers this dismissal to be
in error and intends to vigorously pursue its antitrust case
against Intel. At present, the Company is considering a number
of possible options which may include bringing an immediate
appeal of the order of the Alabama Court or an appeal following
the end of trial and judgment on the merits of the Company's case
in chief. At the present time, the Company is unable to
determine the effect, if any, of this dismissal on the Company's
overall case against Intel.
During the course of the Intel litigation, the Company has
employed a variety of experts to prepare estimates of the damages
suffered by the Company under various claims of injury brought by
the Company. The following damage estimates were provided to
Intel in the August/September 1999 time frame in due course of
the litigation process: estimated damages for injury covered
under non-patent claims through June 1999 - $100 million;
estimated additional damages for injury covered under non-patent
claims through December 2003 - $400 million, subject to present-
value reduction. These numbers are estimates only and any
recovery of damages in this litigation could be substantially
less than these estimates or substantially greater than these
estimates depending on a variety of factors that cannot be
determined at this time. Factors that could lead to recovery of
substantially less that these estimates include, but are not
limited to, the failure of the Alabama Court or the Appeals Court
to sustain the legal basis for one or more of the Company's
claims, the failure of the jury to award amounts consistent with
these estimates, the failure of the Alabama Court or the Appeals
Court to sustain any jury award in amounts consistent with these
estimates, the settlement by the Company of the Intel litigation
in an amount inconsistent with these estimates, and the failure
of the Company to successfully defend itself from Intel's patent
counterclaims in the Alabama Court and in the Appeals Court and a
consequential recovery by Intel for damages and/or a permanent
injunction against the Company. Factors that could lead to
recovery substantially greater than these estimates include, but
are not limited to, success by the Company in recovering punitive
damages on one or more of its non-patent claims.
The Company believes it was necessary to take legal action
against Intel in order to defend its workstation business, its
intellectual property, and the investments of its shareholders.
The Company is vigorously prosecuting its positions and defending
against Intel's claims and believes it will prevail in these
matters, but at present is unable to predict an outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information with respect to the executive officers of
the Company is set forth below. Officers serve at the discretion
of the Board of Directors.
Name Age Position Officer Since
- ---- --- -------- -------------
James F. Taylor Jr. 55 Chief Executive Officer and Director 1977
Robert E. Thurber 59 Executive Vice President and Director 1977
Graeme J. Farrell 57 Executive Vice President 1994
Penman R. Gilliam 62 Executive Vice President 1994
Lewis N. Graham Jr. 45 Executive Vice President 1997
Stephen J. Phillips 58 Executive Vice President 1987
Preetha R. Pulusani 39 Executive Vice President 1997
William E. Salter 58 Executive Vice President 1984
K. David Stinson Jr. 46 Executive Vice President 1996
John W. Wilhoite 48 Executive Vice President 1988
and Chief Financial Officer
Edward A. Wilkinson 66 Executive Vice President 1987
Manfred Wittler 59 Executive Vice President 1989
James F. Taylor Jr. joined the Company in July 1969, shortly
after its formation, and is considered a founder. He has served
as a Director since 1973. Mr. Taylor was responsible for the
design and development of the Company's first commercial computer-
aided-design products and for many application specific products.
He was elected Vice President in 1977 and Executive Vice
President in 1982. He assumed management responsibility for the
Company's public safety division in 1995. Effective March 2,
2000, he was elected Chief Executive Officer of Intergraph
Corporation. Mr. Taylor holds degrees in mathematics and
physics.
Robert E. Thurber, a founder of the Company, has been a
Director since 1972. Mr. Thurber was elected Vice President in
June 1997 and is currently serving as Executive Vice President
and Chief Engineer. Mr. Thurber holds a master's degree in
engineering.
Graeme J. Farrell joined the Company in February 1986 as the
Financial Controller for Intergraph's subsidiaries in Australia
and New Zealand. In 1987, the Company appointed him Finance
Director for its Asia-Pacific region. He was elected Vice
President of Business Operations for Asia-Pacific in 1994, and in
August 1999 he was elected Executive Vice President. Prior to
joining the Company, Mr. Farrell was involved in accounting
software development for five years, and prior to that he was
Finance director of Dennison Manufacturing's (USA) Australian
operations for five years. Mr. Farrell is a Chartered Secretary
and qualified accountant holding a public practice certificate.
Penman R. Gilliam joined the Company in April 1994 as Executive
Vice President responsible for federal programs. Mr. Gilliam is
currently responsible for the federal mapping and information
systems organization. Mr. Gilliam came to Intergraph from Hughes
Aircraft Company where he was Vice President of Hughes
Communications and Data Systems Division. From late 1987 through
early 1993, Mr. Gilliam served as Deputy Director of the Defense
Mapping Agency, the senior civilian responsible for overall
production, operations, and research. Mr. Gilliam holds a
bachelor's degree in mathematics and geology.
Lewis N. Graham Jr. joined the Company in 1985 and has been
involved in the design and delivery of imaging and mapping
systems during most of his career with the Company. He was
elected Vice President in 1997 and Executive Vice President in
1998, with responsibility for the mapping and geoengineering
divisions of Intergraph. He is currently the Chief Executive
Officer of Z/I Imaging, Inc., a 60%-owned photogrammetry company
formed in October 1999. Mr. Graham holds a bachelor's degree in
physics and a master's degree in electrical engineering.
Stephen J. Phillips joined the Company as Vice President and
General Counsel in November 1987 when Intergraph purchased the
Advanced Processor Division of Fairchild Semiconductor, where Mr.
Phillips was General Patent Counsel. He was elected Executive
Vice President in August 1992. Mr. Phillips holds a master's
degree in electrical engineering and a juris doctor in law.
Preetha R. Pulusani joined the Company in 1980 as a software
engineer, and since that time has held several positions in the
areas of marketing and development of mapping technology for the
Company. She was elected Vice President in 1997 and has served
as Executive Vice President, with responsibility for the mapping
and geographic information systems business of Intergraph, since
August 1998. Ms. Pulusani holds a master's degree in computer
science.
William E. Salter joined the Company in April 1973. Since that
time, he has served in several managerial positions in the
Company's federal systems business and as Director of Marketing
Communications. Dr. Salter was elected Vice President in August
1984 and is currently an Executive Vice President of the Company
and President of Intergraph Government Solutions. He holds a
doctorate in electrical engineering.
K. David Stinson Jr. joined the Company in 1996. Prior to
joining the Company, Mr. Stinson acted as Vice President of
Engineering and Nuclear Projects for the Tennessee Valley
Authority ("TVA"), the nation's largest government owned electric
power utility. Before joining TVA, he was founder and Chief
Executive Officer of Digital Engineering, with responsibility for
developing software to assist with the operations, maintenance,
and environmental qualification of nuclear facilities and other
process plants. Mr. Stinson was elected Executive Vice President
in 1996 and is currently responsible for the process and building
business of Intergraph. He is a graduate of the U.S. Air Force
Academy and holds a masters degree in management administration
science.
John W. Wilhoite joined the Company in July 1985 after eleven
years with Price Waterhouse & Co. He has been Controller of the
Company since 1986 and was elected Vice President in 1988. In
May 1998, he was elected Executive Vice President of Finance and
was named Chief Financial Officer in December 1998. Mr. Wilhoite
holds a bachelor's degree in business administration and is a
certified public accountant.
Edward A. Wilkinson joined the Company in 1985 as Director of
Government Relations. He was elected Vice President of Federal
Systems in 1987 and Executive Vice President in 1994. Prior to
joining the Company, Mr. Wilkinson served 34 years in the U.S.
Navy, retiring with the rank of Rear Admiral. He holds a
master's degree in mechanical engineering.
Manfred Wittler joined the Company in 1989 as Vice President.
In 1991, he was elected Executive Vice President, with
responsibility for sales and support in Europe, Canada, and Latin
America. He has served as Chairman of the Board of Intergraph
Computer Systems ("ICS") since November 1999 and was appointed
Chief Executive Officer of ICS in January 2000. From 1983
through 1989, Mr. Wittler held several positions with Data
General Corporation in Europe, including Division Vice President.
He holds a doctorate in engineering.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The information appearing under "Dividend Policy" and "Price
Range of Common Stock" on page 58 of the Intergraph Corporation
1999 annual report to shareholders is incorporated by reference
in this Form 10-K annual report.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31,
1999 appearing under "Five Year Financial Summary" on the inside
front page of the Intergraph Corporation 1999 annual report to
shareholders is incorporated by reference in this Form 10-K
annual report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing on pages 16 to 32 of the
Intergraph Corporation 1999 annual report to shareholders is
incorporated by reference in this Form 10-K annual report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information relating to the Company's market risks appearing
under "Impact of Currency Fluctuations and Currency Risk
Management" and "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of
Operations appearing on pages 27 to 32 of the Intergraph
Corporation 1999 annual report to shareholders is incorporated by
reference in this Form 10-K annual report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent
auditors appearing on pages 33 to 57 of the Intergraph
Corporation 1999 annual report to shareholders are incorporated
by reference in this Form 10-K annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing under "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of
1934" on pages 4 to 6 of the Intergraph Corporation proxy
statement relative to the annual meeting of shareholders to be
held May 18, 2000, is incorporated by reference in this Form 10-K
annual report. Directors are elected for terms of one year at
the annual meeting of the Company's shareholders.
Information relating to the executive officers of the Company
appearing under "Executive Officers of the Company" on pages 14
to 15 in this Form 10-K annual report is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under "Executive Compensation" on
pages 6 to 13 of the Intergraph Corporation proxy statement
relative to the annual meeting of shareholders to be held May 18,
2000, is incorporated by reference in this Form 10-K annual
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing under "Common Stock Outstanding and
Principal Shareholders" on pages 1 to 4 of the Intergraph
Corporation proxy statement relative to the annual meeting of
shareholders to be held May 18, 2000, is incorporated by
reference in this Form 10-K annual report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
Page in
Annual Report *
---------------
(a) 1) The following consolidated financial
statements of Intergraph Corporation
and subsidiaries and the report of
independent auditors thereon are
incorporated by reference from the
Intergraph Corporation 1999 annual
report to shareholders:
Consolidated Balance Sheets at December
31, 1999 and 1998 33
Consolidated Statements of Operations for
the three years ended December 31, 1999 34
Consolidated Statements of Cash Flows for
the three years ended December 31, 1999 35
Consolidated Statements of Shareholders'
Equity for the three years ended December 31, 1999 36
Notes to Consolidated Financial Statements 37-56
Report of Independent Auditors 57
* Incorporated by reference from the indicated pages of the
1999 annual report to shareholders.
Page in
Form 10-K
---------
2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
and Reserves for the three years ended
December 31, 1999 22
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
Financial statements of 50%-or-less-owned companies have been
omitted because the registrant's proportionate share of income
before income taxes of the companies is less than 20% of
consolidated loss before income taxes, and the investments in and
advances to the companies are less than 20% of consolidated total
assets.
3) Exhibits
Page in
Number Description Form 10-K
------ ----------- ---------
3(a) Certificate of Incorporation, Bylaws, and
Certificate of Merger (1).
3(b) Amendment to Certificate of Incorporation (2).
3(c) Restatement of Bylaws (3).
4 Shareholder Rights Plan, dated August 25,
1993 (4) and amendment dated March 16,
1999. (10)
10(a) * Employment Contract of Manfred Wittler
dated November 1, 1989 (5) and amendments
dated February 18, 1998 (8) and June 7, 1999.
10(b) Amended and Restated Loan and Security
Agreement, by and between Intergraph
Corporation and Foothill Capital Corporation,
dated November 30, 1999
10(c) * Intergraph Corporation 1997 Stock Option Plan
(6) and amendment dated January 11, 1999. (11)
10(d) Indemnification Agreement between Intergraph
Corporation and each member of the Board of
Directors of the Company dated June 3, 1997 (7).
10(e) * Employment Contract of Wade Patterson dated
May 30, 1997 (7) and amendment dated November
2, 1998. (10)
10(f) * Intergraph Corporation Nonemployee Director
Stock Option Plan (8).
10(g) * Employment Contract of Klaas Borgers dated
September 1, 1997. (10)
10(h) Asset Purchase Agreement by and among SCI
Technology, Inc. as Buyer and Intergraph
Corporation as Seller dated November 13,
1998, with Exhibits and Schedule 1 (9).
10(i) * Intergraph Computer Systems Holding, Inc.
1998 Stock Option Plan. (10)
13 Portions of the Intergraph Corporation
1999 Annual Report to Shareholders
incorporated by reference in this Form
10-K Annual Report
21 Subsidiaries of the Company 23
23 Consent of Independent Auditors 24
27 Financial Data Schedule
99(a) Consent of Lawrence R. Greenwood
99(b) Consent of Joseph C. Moquin
* Denotes management contract or compensatory plan, contract,
or arrangement required to be filed as an Exhibit to this
Form 10-K
- ------------------
(1) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1984, under the Securities Exchange Act
of 1934, File No. 0-9722.
(2) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1987, under the Securities Exchange Act
of 1934, File No. 0-9722.
(3) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, under the Securities Exchange Act
of 1934, File No. 0-9722.
(4) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated August 25,
1993, under the Securities Exchange Act of 1934, File
No. 0-9722.
(5) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year
ended December 31, 1992, under the Securities Exchange
Act of 1934, File No. 0-9722.
(6) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, under the Securities Exchange Act of
1934, File No. 0-9722.
(7) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, under the Securities Exchange Act
of 1934, File No. 0-9722.
(8) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, under the Securities Exchange Act of
1934, File No. 0-9722.
(9) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated November 13,
1998, under the Securities Exchange Act of 1934, File
No. 0-9722.
(10) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, under the Securities Exchange Act of
1934, File No. 0-9722.
(11) Incorporated by reference to exhibit filed with the
Company's Registration Statement on Form S-8 dated May
24, 1999, under the Securities Exchange Act of 1933,
File No. 333-79137.
- ------------------
(b) No reports on Form 8-K were filed during the fourth quarter
of the fiscal year ended December 31, 1999.
(c) Exhibits - the response to this portion of Item 14 is submitted
as a separate section of this report.
(d) Financial statement schedules - the response to this portion
of Item 14 is submitted as a separate section of this report.
- ------------------
Information contained in this Form 10-K annual report includes
statements that are forward looking as defined in Section 21E of
the Securities Exchange Act of 1934. Actual results could 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 contained in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations"
section of the Company's 1999 annual report, portions of which
are incorporated by reference in this Form 10-K annual report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ James F. Taylor Jr. Date: March 21, 2000
-----------------------
James F. Taylor Jr.
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Date
----
/s/ James W. Meadlock Chairman of the Board March 21, 2000
- ----------------------------
James W. Meadlock
/s/ James F. Taylor Jr. Chief Executive Officer
- ---------------------------- and Director March 21, 2000
James F. Taylor Jr.
/s/ Robert E. Thurber Executive Vice President
- ---------------------------- and Director March 21, 2000
Robert E. Thurber
/s/ Larry J. Laster
- ---------------------------- Director March 21, 2000
Larry J. Laster
- ---------------------------- Director March 21, 2000
Thomas J. Lee
- ---------------------------- Director March 21, 2000
Sidney L. McDonald
/s/ John W. Wilhoite Executive Vice President
- ---------------------------- and Chief Financial Officer
John W. Wilhoite (Principal Financial and
Accounting Officer) March 21, 2000
INTERGRAPH CORPORATION AND SUBSIDIARIES
SCHEDULE II ---- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- ----------------- ----------- ---------- ------------ -------------
Additions
Balance at charged to
beginning costs and Balance at
Description of period expenses Deductions end of period
- ----------------- ----------- ---------- ------------ -------------
Allowance for
doubtful
accounts deducted
from accounts
receivable in
the balance
sheet 1999 $13,814,000 6,900,000 4,648,000 (1) $16,066,000
1998 $14,488,000 3,168,000 3,842,000 (1) $13,814,000
1997 $16,703,000 2,844,000 5,059,000 (1) $14,488,000
Allowance for
obsolete inventory
deducted from
inventories in
the balance
sheet 1999 $31,249,000 23,187,000 (3) 20,540,000 (2) $33,896,000
1998 $36,508,000 19,346,000 24,605,000 (2) $31,249,000
1997 $43,223,000 15,582,000 22,297,000 (2) $36,508,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory reduced to net realizable value.
(3) Includes a $7 million inventory write-down resulting from the
Company's exit from the personal computer and generic server
businesses in third quarter 1999.
INTERGRAPH CORPORATION AND SUBSIDIARIES
EXHIBIT 21 ---- SUBSIDIARIES OF REGISTRANT
State or Other Percentage of
Jurisdiction Voting Securities
Name of Incorporation Owned by Parent
- ----------------------------------- ----------------- -----------------
Intergraph Asia Pacific, Inc. Delaware 100
Intergraph Computer Systems
Holding, Inc. Delaware 100
Intergraph European Manufacturing,
L.L.C. Delaware 100
Intergraph (Italia), L.L.C. Delaware 100
Intergraph (Middle East), L.L.C. Delaware 100
Intergraph Public Safety, Inc. Delaware 100
Z/I Imaging Corporation Delaware 60
Intergraph Benelux B.V. The Netherlands 100
Intergraph Danmark A/S Denmark 100
Intergraph CR spol. s r.o. Czech Republic 100
Intergraph (Deutschland) GmbH Germany 100
Intergraph Espana, S.A. Spain 100
Intergraph Europe (Polska) Sp. z o.o. Poland 100
Intergraph Finland Oy Finland 100
Intergraph (France) SA France 100
Intergraph GmbH (Osterreich) Austria 100
Intergraph (Hellas) S.A. Greece 100
Intergraph Norge A/S Norway 100
Intergraph (Portugal) Sistemas de
Computacao Grafica, S.A. Portugal 100
Intergraph (Sverige) AB Sweden 100
Intergraph (Switzerland) A.G. Switzerland 100
Intergraph (UK), Ltd. United Kingdom 100
Intergraph Public Safety Belgium S.A. Belgium 100
Intergraph Public Safety Deutschland,
GmbH Germany 100
Public Safety France, SA France 100
Intergraph Public Safety U.K., Ltd. United Kingdom 100
Z/I Imaging GmbH Germany 60
Z/I Imaging (Hellas) S.A. Greece 60
Z/I Imaging UK Ltd. United Kingdom 60
Intergraph China, Ltd. Hong Kong 100
Intergraph BEST (Vic) Pty. Ltd. Australia 100
Intergraph Computer (Shenzhen) Co. Ltd. China 100
Intergraph Corporation (N.Z.) Limited New Zealand 100
Intergraph Corporation Pty. Ltd. Australia 100
Intergraph Corporation Taiwan Taiwan, R.O.C. 100
Intergraph Hong Kong Limited Hong Kong 100
Intergraph Industry Solutions K.K. Japan 100
Intergraph Japan K.K. Japan 100
Intergraph Korea, Ltd. Korea 100
Intergraph Public Safety (New Zealand)
Limited New Zealand 100
Intergraph Public Safety Pty. Ltd. Australia 100
Intergraph Systems Singapore Pte Ltd. Singapore 100
Intergraph Computer Services
Industry & Trade, A.S. Turkey 100
Intergraph Canada, Ltd. Canada 100
Intergraph Computer Systems Canada, Inc. Canada 100
Intergraph Public Safety Canada Ltd. Canada 100
Intergraph de Mexico, S.A. de C.V. Mexico 100
Intergraph Electronics Ltd. Israel 100
Intergraph Servicios de Venezuela C.A. Venezuela 100
Intergraph Saudi Arabia Ltd. Saudi Arabia 75
EXHIBIT 23 ---- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report (Form 10-K) of Intergraph Corporation and subsidiaries
of our report dated January 27, 2000, included in the 1999
Annual Report to Shareholders of Intergraph Corporation.
Our audits also included the financial statement schedule of
Intergraph Corporation listed in Item 14(a)(2). This schedule
is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred
to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth herein.
We also consent to the incorporation by reference in the
Registration Statement (Form S-3 No. 33-25880) pertaining to
the Stock Bonus Plan dated December 22, 1988; in the
Registration Statement (Form S-8 No. 33-53849) pertaining
to the Intergraph Corporation 1992 Stock Option Plan dated
May 27, 1994; in the Registration Statement (Form S-8 No.
33-57211) pertaining to the Assumption of Options under the
InterCAP Graphics Systems, Inc. 1989 Stock Option Plan and
1994 Nonqualified Stock Option Program dated January 10, 1995;
in the Registration Statement (Form S-8 No. 33-59621) pertaining
to the 1995 Intergraph Corporation Employee Stock Purchase Plan
dated May 26, 1995; in the Registration Statement (Form S-8 No.
333-79129) pertaining to the Intergraph Corporation Nonemployee
Director Stock Option Plan dated May 24, 1999; in the Registration
Statement (Form S-8 No. 333-79137) pertaining to the Intergraph
Corporation 1997 Stock Option Plan dated May 24, 1999; and in the
related Prospectuses, of our report dated January 27, 2000,
with respect to the consolidated financial statements and schedule
of Intergraph Corporation and subsidiaries included or incorporated
by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1999.
Birmingham, Alabama
March 21, 2000
INTERGRAPH
- ----------
Memorandum
- ------------------------------------------------------------
Office of the CEO
Date: June 7, 1999
To: Manfred Wittler
From: Jim Meadlock
Subject: Employee Agreement/Addendum to U.S. Contract
- ------------------------------------------------------------
Manfred,
The following summarizes our agreement:
1. Your annual salary base will be increased by $10,000
per month effective May 31, 1999.
2. Intergraph will pay reasonable relocation costs for
essential household goods to be shipped from Germany.
3. Your housing allowance will be discontinued in the
Netherlands and will be replaced by the same amount
(after conversion to U.S. dollars).
4. At termination of employment with Intergraph,
Intergraph will ensure that you did not lose money on
the buying and reselling of the residence that you
currently have under contract.
5. You will be provided a company car.
6. Your overseas travel will be business class.
7. In the event that your employment is terminated by
Intergraph prior to your retirement, you will receive
one (1) year severance.
Additionally, I will recommend to the Intergraph Board that
you receive a seat on the Intergraph Board.
Apart from the above, all other employment conditions remain
in effect.
/s/ Jim Meadlock /s/ Manfred Wittler
- ----------------- --------------------
Jim Meadlock Manfred Wittler
- ------------------------------------------------------------
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
by and between
INTERGRAPH CORPORATION,
and
FOOTHILL CAPITAL CORPORATION
Dated as of November 30, 1999
TABLE OF CONTENTS
1. DEFINITIONS AND CONSTRUCTION 1
1.1 DEFINITIONS 1
1.2 ACCOUNTING TERMS 23
1.3 CODE 23
1.4 CONSTRUCTION 23
1.5 SCHEDULES AND EXHIBITS 23
2. LOAN AND TERMS OF PAYMENT 24
2.1 REVOLVING ADVANCES 24
2.2 LETTERS OF CREDIT 24
2.3 TERM LOAN 26
2.4 SUBFACILITY FOR BORROWER'S PERMITTED F/X
CONTRACTS (THE "F/X LINE") 27
2.5 OVERADVANCES 28
2.6 INTEREST AND LETTER OF CREDIT FEES: RATES,
PAYMENTS, AND CALCULATIONS 28
2.7 COLLECTION OF ACCOUNTS 30
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS 30
2.9 DESIGNATED ACCOUNT 31
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS 31
2.11 FEES 31
2.12 MAXIMUM AMOUNT 32
3. CONDITIONS; TERM OF AGREEMENT 32
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE, LETTER
OF CREDIT, AND F/X LINE INDEMNITY 32
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES, ALL LETTERS
OF CREDIT, AND ALL F/X LINE INDEMNITIES ON OR
AFTER THE CLOSING DATE 34
3.3 CONDITION SUBSEQUENT 35
3.4 TERM 37
3.5 EFFECT OF TERMINATION 37
3.6 EARLY TERMINATION BY BORROWER 37
3.7 TERMINATION UPON EVENT OF DEFAULT 37
4. CREATION OF SECURITY INTEREST 37
4.1 GRANT OF SECURITY INTEREST 37
4.2 NEGOTIABLE COLLATERAL 39
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES,
AND NEGOTIABLE COLLATERAL 39
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED 39
4.5 POWER OF ATTORNEY 40
4.6 RIGHT TO INSPECT 41
5. REPRESENTATIONS AND WARRANTIES 41
5.1 NO ENCUMBRANCES 41
5.2 ELIGIBLE ACCOUNTS 41
5.3 [INTENTIONALLY OMITTED] 41
5.4 EQUIPMENT 41
5.5 LOCATION OF INVENTORY AND EQUIPMENT 41
5.6 INVENTORY RECORDS 41
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN 41
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES 42
5.9 DUE AUTHORIZATION; NO CONFLICT 42
5.10 LITIGATION 43
5.11 NO MATERIAL ADVERSE CHANGE 43
5.12 SOLVENCY 43
5.13 EMPLOYEE BENEFITS 43
5.14 ENVIRONMENTAL CONDITION 44
5.15 SECURITIES ACCOUNTS 44
5.16 YEAR 2000 COMPLIANCE 44
6. AFFIRMATIVE COVENANTS 45
6.1 ACCOUNTING SYSTEM 45
6.2 COLLATERAL REPORTING 45
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES 46
6.4 TAX RETURNS 47
6.5 GUARANTOR REPORTS 48
6.6 RETURNS 48
6.7 TITLE TO EQUIPMENT 48
6.8 MAINTENANCE OF EQUIPMENT 48
6.9 TAXES 48
6.10 INSURANCE 49
6.11 NO SETOFFS OR COUNTERCLAIMS 50
6.12 LOCATION OF INVENTORY AND EQUIPMENT 50
6.13 COMPLIANCE WITH LAWS 50
6.14 EMPLOYEE BENEFITS 50
6.15 LEASES 51
6.16 YEAR 2000 COMPLIANCE 51
6.17 COPYRIGHT REGISTRATIONS 51
6.18 SALE OR OTHER DISPOSITION OF BORROWER'S
HARDWARE BUSINESS 52
7. NEGATIVE COVENANTS 52
7.1 INDEBTEDNESS 52
7.2 LIENS 53
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES 53
7.4 DISPOSAL OF ASSETS 54
7.5 CHANGE NAME 54
7.6 [INTENTIONALLY OMITTED] 54
7.7 NATURE OF BUSINESS 54
7.8 PREPAYMENTS AND AMENDMENTS 54
7.9 CHANGE OF CONTROL 54
7.10 CONSIGNMENTS 54
7.11 DISTRIBUTIONS 54
7.12 ACCOUNTING METHODS 55
7.13 INVESTMENTS 55
7.14 TRANSACTIONS WITH AFFILIATES 55
7.15 SUSPENSION 55
7.16 [INTENTIONALLY OMITTED] 55
7.17 USE OF PROCEEDS 55
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE;
INVENTORY AND EQUIPMENT WITH BAILEES 55
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA 55
7.20 FINANCIAL COVENANTS 56
7.21 CAPITAL EXPENDITURES 57
8. EVENTS OF DEFAULT 57
9. FOOTHILL'S RIGHTS AND REMEDIES 59
9.1 RIGHTS AND REMEDIES 59
9.2 REMEDIES CUMULATIVE 61
10. TAXES AND EXPENSES 61
11. WAIVERS; INDEMNIFICATION 62
11.1 DEMAND; PROTEST; ETC 62
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL 62
11.3 INDEMNIFICATION 62
12. NOTICES 62
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER 63
14. DESTRUCTION OF BORROWER'S DOCUMENTS 64
15. GENERAL PROVISIONS 64
15.1 EFFECTIVENESS 64
15.2 SUCCESSORS AND ASSIGNS 64
15.3 SECTION HEADINGS 65
15.4 INTERPRETATION 65
15.5 SEVERABILITY OF PROVISIONS 65
15.6 AMENDMENTS IN WRITING 65
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION 65
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS 65
15.9 INTEGRATION 66
15.10 CONFIDENTIALITY 66
SCHEDULES AND EXHIBITS
----------------------
Schedule P-1 Permitted Liens
Schedule P-2 Permitted Other Investments
Schedule R-1 Real Property Collateral
Schedule 5.8 Subsidiaries - Capitalization and
Assets
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 5.14 Environmental Condition
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness
Exhibit C-1 Form of Compliance Certificate
Exhibit F-1 Form of F/X Bank Parameters Letter
Exhibit F-2 Form of F/X Reserve Reduction
Certificate
Exhibit F-3 Form of F/X Reserve Increase
Certificate
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this
"Agreement"), is entered into as of November 30, 1999, between
FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa
Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333,
and INTERGRAPH CORPORATION, a Delaware corporation ("Borrower"),
with its chief executive office located at One Madison Industrial
Park, Huntsville, Alabama 35894.
R E C I T A L S:
- - - - - - - -
WHEREAS, Borrower and Foothill are parties to that certain
Loan and Security Agreement, dated as of December 20, 1996 (the
"Original Loan Agreement"), as amended by that certain Amendment
Number One to Loan and Security Agreement, dated as of January
14, 1997, that certain Amendment Number Two to Loan and Security
Agreement, dated as of November 25, 1997, that certain Amendment
Number Three to Loan and Security Agreement, dated as of October
30, 1998, that certain Amendment Number Four to Loan and Security
Agreement, dated as of April 29, 1999, and that certain Amendment
Number Five to Loan and Security Agreement, dated as of October
26, 1999 (the Original Loan Agreement, as so amended and as
otherwise modified or supplemented from time to time prior to the
Closing Date, is referred to herein as the "Existing Loan
Agreement");
WHEREAS, Borrower and Foothill desire to amend and restate
the Existing Loan Agreement in its entirety as provided in this
Agreement, it being understood that no repayment of the
obligations under the Existing Loan Agreement is being effected
hereby, but merely an amendment and restatement in accordance
with the terms hereof.
NOW THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, Borrower
and Foothill agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 Definitions. As used in this Agreement, the
following terms shall have the following definitions:
"Account Debtor" means any Person who is or who may
become obligated under, with respect to, or on account of, an
Account.
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of
obligations owing to Borrower arising out of the sale, license,
or lease of goods or software or the rendition of services by
Borrower, irrespective of whether earned by performance, and any
and all credit insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a).
"Additional Term Loan" has the meaning set forth in
Section 2.3.
"Affiliate" means, as applied to any Person, any other
Person who directly or indirectly controls, is controlled by, is
under common control with or is a director or officer of such
Person. For purposes of this definition, "control" means: (a)
solely when "Affiliate" is used in determining Eligible Accounts,
the possession, directly or indirectly, of the power to vote 5%
or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct
the management and policies of a Person; and (b) in all other
cases, the possession, directly or indirectly, of the power to
vote 10% or more of the securities having ordinary voting power
for the election of directors or the direct or indirect power to
direct the management and policies of a Person.
"Agreement" has the meaning set forth in the preamble
hereto.
"Appraised Assets" means items of Equipment that are
the subject of that certain appraisal, dated September 27, 1999,
performed by Acuval Associates, Inc. or any subsequent appraisal
performed by a qualified appraiser satisfactory to Foothill.
"Asset Disposition" means any sale, license, lease,
exchange, transfer, or other disposition (including any
disposition as part of a sale and lease-back transaction),
directly or indirectly, by Borrower of any of the properties or
assets of Borrower.
"Authorized Person" means any officer or other employee
of Borrower.
"Average Unused Portion of Maximum Revolving Amount"
means, as of any date of determination, (a) the Maximum Revolving
Amount, less (b) the sum of (i) the average Daily Balance of
Advances that were outstanding during the immediately preceding
month, plus (ii) the average Daily Balance of the Letter of
Credit Usage during the immediately preceding month.
"Availability" means the amount of money that Borrower
is entitled to borrow as Advances under Section 2.1, such amount
being the difference derived when (a) the sum of the principal
amount of Advances then outstanding (including any amounts that
Foothill may have paid for the account of Borrower pursuant to
any of the Loan Documents and that have not been reimbursed by
Borrower) is subtracted from (b) the lesser of (i) the Maximum
Revolving Amount less the sum of (y) the Letter of Credit Usage
and (z) the F/X Reserve, or (ii) the Borrowing Base less the sum
of (y) the Letter of Credit Usage and (z) the F/X Reserve.
"Bankruptcy Code" means the United States Bankruptcy
Code (11 U.S.C. section 101 et seq.), as amended, and any successor
statute.
"Benefit Plan" means a "defined benefit plan" (as
defined in Section 3(35) of ERISA) for which Borrower, any
Subsidiary of Borrower, or any ERISA Affiliate has been an
"employer" (as defined in Section 3(5) of ERISA) within the past
six years.
"Bentley Equity Interests" means the equity interests
in Bentley Systems, Inc. owned of record by Borrower as of the
Original Closing Date and the rights of Borrower related thereto
under that certain Stockholders' Agreement, dated June 11, 1987,
by and among Bentley Systems, Inc., Borrower, and the "Management
Stockholders" party thereto (as amended).
"Books" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or
evidencing Borrower's properties or assets (including the
Collateral) or liabilities; all information relating to
Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other
computer prepared information.
"Borrower" has the meaning set forth in the preamble to
this Agreement.
"Borrowing Base" has the meaning set forth in Section
2.1(a). For purposes of this definition, any amount that is
denominated in a currency other than Dollars shall be valued in
Dollars based on the applicable Exchange Rate for such currency
as of the date 1 Business Day prior to the date of determination.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which national banks are authorized or
required to close.
"Certifying Officer" means any one or more of the
following officers of Borrower: Treasurer, Assistant Treasurer,
Chief Financial Officer, and Chief Accounting Officer.
"Change of Control" shall be deemed to have occurred at
such time as a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934) becomes the "beneficial owner" (as defined in Rule 13d-3
under the Securities Exchange Act of 1934), directly or
indirectly, of more than 25% of the total voting power of all
classes of Stock then outstanding of Borrower entitled to vote in
the election of directors.
"Closing Date" means the date of the first to occur of
the making of the initial Advance, the issuance of the initial
Letter of Credit, or the issuance of the initial F/X Line
indemnity under this Agreement, in each case, pursuant to this
Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means all right, title, or interest of
Borrower with respect to the following:
(a) the Accounts,
(b) the Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(g) the Real Property Collateral,
(h) the Investment Property,
(i) any money, or other assets of Borrower that
now or hereafter come into the possession, custody, or control
of Foothill, and
(j) the proceeds and products, whether tangible
or intangible, of any of the foregoing, including proceeds of
insurance covering any or all of the Collateral, and any and
all Accounts, Books, Equipment, General Intangibles, Inventory,
Investment Property, Negotiable Collateral, Real Property, money,
deposit accounts, or other tangible or intangible property
resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof
or interest therein, and the proceeds thereof.
"Collateral Access Agreement" means a landlord waiver,
mortgagee waiver, bailee letter, or acknowledgement agreement of
any warehouseman, processor, lessor, consignee, or other Person
in possession of, having a Lien upon, or having rights or
interests in the Equipment or Inventory, in each case, in form
and substance reasonably satisfactory to Foothill.
"Collections" means all cash, checks, notes,
instruments, and other items of payment (including, insurance
proceeds, proceeds of cash sales, rental proceeds, and tax
refunds).
"Compliance Certificate" means a certificate
substantially in the form of Exhibit C-1 and delivered by a
Certifying Officer of Borrower to Foothill.
"Consolidated Current Assets" means, as of any date of
determination, the aggregate amount of all current assets of
Borrower and its Subsidiaries that would, in accordance with
GAAP, be classified on a balance sheet as current assets.
"Consolidated Current Liabilities" means, as of any
date of determination, the aggregate amount of all current
liabilities of Borrower and its Subsidiaries that would, in
accordance with GAAP, be classified on a balance sheet as current
liabilities. For purposes of this definition, all Obligations
outstanding under this Agreement shall be deemed to be current
liabilities without regard to whether they would be deemed to be
so under GAAP.
"copyright" shall have the meaning ascribed to such
term in the United States Copyright Act of 1976, as amended, and
includes unregistered copyrights.
"Copyright Security Agreement" means an Amended and
Restated Copyright Security Agreement, in form and substance
satisfactory to Foothill, dated as of even date herewith, between
Borrower and Foothill.
"Currency Protection Agreement" shall mean any currency
swap, cap, or collar agreement or other similar insurance-type
agreement in connection with hedging against foreign currency
rate fluctuations.
"Daily Balance" means the amount of an Obligation owed
at the end of a given day.
"deems itself insecure" means that the Person deems
itself insecure in accordance with the provisions of Section 1208
of the Code.
"Default" means an event, condition, or default that,
with the giving of notice, the passage of time, or both, would be
an Event of Default.
"Designated Account" means account number 635504-2506
of Borrower maintained with Borrower's Designated Account Bank,
or such other deposit account of Borrower (located within the
United States) which has been designated, in writing and from
time to time, by Borrower to Foothill.
"Designated Account Bank" means Norwest Bank Minnesota,
whose office is located at Sixth & Marquette, Minneapolis,
Minnesota, 55479, and whose ABA number is 091000019.
"Dilution" means, in each case based upon the
experience of the immediately prior 90 days, the result of
dividing the Dollar amount of (a) bad debt write-downs,
discounts, returns, credits, or other dilution with respect to
the Accounts, by (b) Collections with respect to Accounts (in
each case, excluding intercompany Accounts and extraordinary
items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of
determination pursuant to the report of Dilution delivered under
Section 6.2, an amount sufficient to reduce Foothill's advance
rate against Eligible Accounts by 1 percentage point for each
percentage point by which Dilution is in excess of 8%.
"Dollars or $" means United States dollars.
"Domestic Accounts" means Accounts with respect to
which the Account Debtor maintains its chief executive office in
the United States or is organized under the laws of the United
States or any State thereof.
"Early Termination Premium" has the meaning set forth
in Section 3.6.
"Eligible Accounts" means Eligible Domestic Accounts,
Eligible Foreign Accounts, and Eligible Unbilled Accounts.
"Eligible Domestic Accounts" means those Accounts
created by Borrower in the ordinary course of business, that
arise out of Borrower's sale, license, or lease of goods or
software or rendition of services, and that strictly comply with
each and all of the representations and warranties respecting
Accounts made by Borrower to Foothill in the Loan Documents;
provided, however, that standards of eligibility may be fixed and
revised from time to time by Foothill in Foothill's reasonable
credit judgment. Eligible Domestic Accounts shall not include
the following:
(a) Accounts that the Account Debtor has failed to
pay within 60 days of due date (or, in the case of Federal Accounts,
90 days of due date) or Accounts with selling terms of more than
60 days;
(b) Accounts owed by an Account Debtor or its
Affiliates where 50% or more of all Accounts owed by that Account
Debtor (or its Affiliates) are deemed ineligible under clause (a)
above;
(c) Accounts with respect to which the Account
Debtor is an employee, Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are placed
on consignment, guaranteed sale, sale or return, sale on approval,
bill and hold, or other terms by reason of which the payment by
the Account Debtor may be conditional;
(e) Accounts that are not payable in Dollars or
with respect to which the Account Debtor: (i) does not maintain
its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State
thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other
political subdivision thereof, or of any department, agency,
public corporation, or other instrumentality thereof, unless (y)
the Account is supported by an irrevocable letter of credit that
is satisfactory to Foothill (as to form, substance, and issuer or
domestic confirming bank) and that, upon the occurrence and
during the continuance of an Event of Default, has been delivered
to Foothill and is directly drawable by Foothill (provided,
however, that nothing herein shall limit Foothill's right to not
make an Advance or issue a Letter of Credit or F/X Line indemnity
upon the occurrence and during the continuance of an Event of
Default), or (z) the Account is covered by credit insurance in
form and amount, and by an insurer, satisfactory to Foothill;
(f) Accounts with respect to which the Account
Debtor is a creditor of Borrower, has or has asserted a right
of setoff, has disputed its liability (whether pursuant to a
contractual discrepancy or otherwise), or has made any claim
with respect to the Account; provided, however, that the foregoing
only shall apply to the extent of such right of setoff, disputed
liability, or other claim giving rise to such contra-account.
(g) Accounts with respect to an Account Debtor
whose total obligations owing to Borrower exceed 10% of all
Eligible Accounts, to the extent of the obligations owing by
such Account Debtor in excess of such percentage; provided,
however, that in the case of the United States and its
departments, agencies, and instrumentalities, taken as a whole,
the foregoing percentage shall be fifty percent (50%) before
the excess would be deemed ineligible;
(h) Accounts with respect to which the Account
Debtor is subject to any Insolvency Proceeding, or becomes
insolvent, or goes out of business;
(i) Accounts the collection of which Foothill,
in its reasonable credit judgment, believes to be doubtful by
reason of the Account Debtor's financial condition and with
respect to which Foothill has notified Borrower of such belief;
(j) Accounts (other than Eligible Unbilled
Accounts) with respect to which the goods giving rise to such
Account have not been shipped and billed to the Account Debtor,
the services giving rise to such Account have not been
performed and accepted by the Account Debtor, or the Account
otherwise does not represent a final sale;
(k) Accounts with respect to which the Account
Debtor is located in the states of New Jersey, Minnesota,
Indiana, or West Virginia (or any other state that requires a
creditor to file a Business Activity Report or similar document
in order to bring suit or otherwise enforce its remedies
against such Account Debtor in the courts or through any
judicial process of such state), unless Borrower has qualified
to do business in New Jersey, Minnesota, Indiana, West Virginia,
or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation,
the department of revenue, or with such other state offices,
as appropriate, for the then-current year, or is exempt from
such filing requirement;
(l) At such times as Foothill may determine
in its sole discretion, Federal Accounts (exclusive, however,
of Accounts with respect to which Borrower has complied, to
the satisfaction of Foothill and subject to Section 4.4(c)
hereof, with the Assignment of Claims Act, 31 U.S.C. section
3727);
(m) At such times as Foothill may determine
in its sole discretion, Accounts with respect to which the
Account Debtor is any State of the United States (exclusive,
however, of: (i) Accounts owed by any State that does not
have a statutory counterpart to the Assignment of Claims
Act; and (ii) Accounts owed by any State that has a statutory
counterpart to the Assignment of Claims Act and with respect
to which Borrower has complied, to the satisfaction of
Foothill and subject to Section 4.4(c) hereof, with such
statutory counterpart);
(n) Federal Accounts arising under any one
underlying contract or any series of related underlying
contracts, the total amount of which obligations owing
Borrower exceeds 10% of all Eligible Accounts, to the
extent of the obligations owing under such contract or
contracts in excess of such percentage;
(o) Federal Accounts in respect of which
the subject contract for goods and services is designated
by the Account Debtor as "classified" (i.e., the ability
of Foothill to receive information regarding such contract
or such Account is restricted by rules or regulations of
the United States or any department, agency, or instrumentality
of the United States in respect of classified information);
(p) [intentionally omitted];
(q) Accounts which represent progress payments
or other advance billings that are due prior to the completion
of performance by Borrower of the subject contract for goods
or services, except to the extent that such progress payments
or other advance billings are expressly permitted by the terms
of the subject contract (including so-called "maintenance
contracts"); or
(r) Accounts with respect to which a surety or
other bond has been issued in respect of the performance by
Borrower of the subject contract for goods or services.
"Eligible Foreign Accounts" means those Accounts
created by Borrower, with respect to which the Account Debtor is
IBM United Kingdom Ltd., a corporation organized under the laws
of the United Kingdom, Dell Asia Pacific Sdn., a company
organized under the laws of Malaysia, Dell Products, a company
organized under the laws of Ireland, Compaq Asia Pacific Pte
Ltd., a company organized under the laws of Singapore, or Hewlett
Packard, a company organized under the laws of France, that do
not qualify as Eligible Domestic Accounts solely because the
Account Debtor: (i) does not maintain its chief executive office
in the United States, or (ii) is not organized under the laws of
the United States or any State thereof.
"Eligible Unbilled Accounts" means those Domestic
Accounts created by Borrower that do not qualify as Eligible
Domestic Accounts solely because they constitute Unbilled
Accounts.
"Equipment" means all of Borrower's present and
hereafter acquired machinery, machine tools, motors, equipment,
furniture, furnishings, fixtures, vehicles (including motor
vehicles and trailers), tools, parts, goods (other than consumer
goods, farm products, or Inventory), wherever located, including,
(a) any interest of Borrower in any of the foregoing, and (b) all
attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security
Act of 1974, 29 U.S.C. section 1000 et seq., amendments thereto,
successor statutes, and regulations or guidance promulgated
thereunder.
"ERISA Affiliate" means (a) any corporation subject to
ERISA whose employees are treated as employed by the same
employer as the employees of Borrower under IRC Section 414(b),
(b) any trade or business subject to ERISA whose employees are
treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of
Section 302 of ERISA and Section 412 of the IRC, any organization
subject to ERISA that is a member of an affiliated service group
of which Borrower is a member under IRC Section 414(m), or (d)
solely for purposes of Section 302 of ERISA and Section 412 of
the IRC, any party subject to ERISA that is a party to an
arrangement with Borrower and whose employees are aggregated with
the employees of Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect
to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of
Borrower, any of its Subsidiaries or ERISA Affiliates from a
Benefit Plan during a plan year in which it was a "substantial
employer" (as defined in Section 4001(a)(2) of ERISA), (c) the
providing of notice of intent to terminate a Benefit Plan in a
distress termination (as described in Section 4041(c) of ERISA),
(d) the institution by the PBGC of proceedings to terminate a
Benefit Plan or Multiemployer Plan, (e) any event or condition
(i) that provides a basis under Section 4042(a)(1), (2), or (3)
of ERISA for the termination of, or the appointment of a trustee
to administer, any Benefit Plan or Multiemployer Plan, or
(ii) that may result in termination of a Multiemployer Plan
pursuant to Section 4041A of ERISA, (f) the partial or complete
withdrawal within the meaning of Sections 4203 and 4205 of ERISA,
of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan
under Section 401(a)(29) of the IRC by Borrower or its
Subsidiaries or any of their ERISA Affiliates.
"Event of Default" has the meaning set forth in Section
8.
"Exchange Rate" means the nominal rate of exchange
available to Foothill in a chosen foreign exchange market for the
purchase of the applicable non-Dollar currency at 12:00 noon,
local time, 1 Business Day prior to any date of determination,
expressed as the number of units of such currency per Dollar.
"Excluded Foreign Portion" means, with respect to any
Foreign Subsidiary, the portion (if any) of the equity securities
of such Subsidiary owned of record by Borrower with voting power
that is in excess of 65% of the total combined voting power of
issued and outstanding stock of such Subsidiary entitled to vote.
"Excluded Foreign Subsidiary Securities" means (a) the
Excluded Foreign Portion (if any) of the equity securities of any
Foreign Subsidiary of Borrower identified in Schedule II of the
Pledge Agreement (as the same may be amended or supplemented from
time to time), and (b) subject to the last paragraph of Section
6.3, 100% of the fully diluted issued and outstanding equity
securities of any other Foreign Subsidiary of Borrower.
"Exempt Copyright" means any Incipient Copyright or any
Obsolete Copyright.
"Existing Loan Agreement" has the meaning set forth in
the Recitals to this Agreement.
"Federal Accounts" means Accounts where the United
States or any department, agency, or instrumentality of the
United States is the Account Debtor.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to
this Agreement.
"Foothill Account" has the meaning set forth in Section
2.7.
"Foothill Expenses" means all: costs or expenses
(including taxes, and insurance premiums) required to be paid by
Borrower under any of the Loan Documents that are paid or
incurred by Foothill; fees or charges paid or incurred by
Foothill in connection with Foothill's transactions with
Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public
record searches (including tax lien, litigation, and UCC (or
equivalent) searches and including searches with the patent and
trademark office, the copyright office, or the department of
motor vehicles), filing, recording, publication, appraisal
(including periodic Personal Property Collateral or Real Property
Collateral appraisals), real estate surveys, real estate title
policies and endorsements, and environmental audits; costs and
expenses incurred by Foothill in the disbursement of funds to
Borrower (by wire transfer or otherwise); charges paid or
incurred by Foothill resulting from the dishonor of checks; costs
and expenses paid or incurred by Foothill to correct any default
or enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing,
shipping, selling, preparing for sale, or advertising to sell the
Personal Property Collateral or the Real Property Collateral, or
any portion thereof, irrespective of whether a sale is
consummated; costs and expenses paid or incurred by Foothill in
examining Borrower's Books; costs and expenses of third party
claims or any other suit paid or incurred by Foothill in
enforcing or defending the Loan Documents or in connection with
the transactions contemplated by the Loan Documents or Foothill's
relationship with Borrower (or any of its Subsidiaries party to
one or more Loan Documents); and Foothill's reasonable attorneys
fees and expenses incurred in advising, structuring, drafting,
reviewing, administering, amending, terminating, enforcing
(including attorneys fees and expenses incurred in connection
with a "workout," a "restructuring," or an Insolvency Proceeding
concerning Borrower), defending, or concerning the Loan
Documents, irrespective of whether suit is brought.
"Foreign Currency Letter of Credit" means (a) a Letter
of Credit payable in a denomination other than in Dollars, or (b)
a Letter of Credit with a face amount in Dollars-equivalent of a
denomination other than in Dollars.
"Foreign Currency Reserve" means an amount equal to 5%
of the aggregate outstanding face amount of Foreign Currency
Letters of Credit (if any); provided, however, that Foothill
shall have the right to adjust the then extant Foreign Currency
Reserve (if any) upwards or downwards in its reasonable business
credit judgment.
"Foreign Subsidiary" means any Subsidiary organized
under the laws of a jurisdiction other than the United States or
any State thereof.
"F/X Bank" means Norwest Bank Minnesota, National
Association, or any successor thereto.
"F/X Bank Parameters Letter" means that certain letter
agreement, dated as of January 14, 1997, between F/X Bank and
Borrower, a copy of which is attached hereto as Exhibit F-1,
regarding the parameters under which F/X Bank provides foreign
exchange currency services to Borrower.
"F/X Line" has the meaning set forth in Section 2.4.
"F/X Reserve" means, as of any date of determination, a
reserve equal to the maximum amount of obligations of Foothill to
indemnify F/X Bank against losses or expenses incurred by F/X
Bank in connection with Permitted F/X Contracts. As of the
Closing Date, the amount of the F/X Reserve is $0.
"GAAP" means generally accepted accounting principles
as in effect from time to time in the United States, consistently
applied.
"General Intangibles" means all of Borrower's present
and future general intangibles and other personal property
(including contract rights, rights arising under common law,
statutes, or regulations, choses or things in action, goodwill,
patents, trade names, trademarks, servicemarks, copyrights,
blueprints, drawings, purchase orders, customer lists, monies due
or recoverable from pension funds, route lists, rights to payment
and other rights under any royalty or licensing agreements,
infringement claims, computer programs, information contained on
computer disks or tapes, literature, reports, catalogs, deposit
accounts, insurance premium rebates, tax refunds, and tax refund
claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or articles
of incorporation, by-laws, or other organizational or governing
documents of any Person.
"Governmental Authority" means any nation or
government, any state, province, or other political subdivision
thereof, any central bank (or similar monetary or regulatory
authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or
controlled, through stock or capital ownership or otherwise, by
any of the foregoing.
"Hardware Business" means all or substantially all of
the assets of Borrower comprising the business of manufacturing,
or having manufactured, Intergraph hardware products (the
"Products") for Borrower's interactive computer graphics systems
and the related Inventory of Borrower as of the Closing Date.
The term "Products" does not include Image Stations, ruggedized
workstations, local products sold through EDC, TAMPS
workstations, photoscans, scan servers, and
printers/plotters/scanners sold through Borrower.
"Hazardous Materials" means (a) substances that are
defined or listed in, or otherwise classified pursuant to, any
applicable laws or regulations as "hazardous substances,"
"hazardous materials," "hazardous wastes," "toxic substances," or
any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as
ignitability, corrosivity, reactivity, carcinogenicity,
reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or
petroleum derived substances, natural gas, natural gas liquids,
synthetic gas, drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of
crude oil, natural gas, or geothermal resources, (c) any
flammable substances or explosives or any radioactive materials,
and (d) asbestos in any form or electrical equipment that
contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Huntsville Property" means the Real Property (and
related improvements thereto) of Borrower located in or about
Huntsville, Alabama.
"ICS" means Intergraph Computer Systems, Inc., a
Delaware corporation.
"IG Australia" means Intergraph Corporation Pty., Ltd..
a corporation organized under the laws of Australia.
"IG Australia Existing Lender" means National Bank of
Australia.
"IG Australia Existing Lender Pay-Off Letter" means a
letter, in form and substance reasonably satisfactory to
Foothill, from IG Australia Existing Lender respecting the amount
necessary to repay in full all of the obligations of Borrower or
IG Australia owing to IG Australia Existing Lender and obtain a
termination or release of all of the Liens existing in favor of
IG Australia Existing Lender in and to the properties or assets
of Borrower and its Subsidiaries.
"IG Benelux" means Intergraph Benelux B.V., a
corporation organized under the laws of The Netherlands.
"IG Benelux Existing Lender" means ING Bank, N.V..
"IG Delaware" means Intergraph Delaware, Inc., a
Delaware corporation.
"Incipient Copyright" means any copyright that: (a)
relates to software of Borrower under development (whether in the
form of a new product, a new version of a pre-existing product,
an upgrade, add-on, or modification to a pre-existing product, or
otherwise) that has not yet become a completed product, version,
upgrade, add-on, or modification or is not yet being marketed by
or on behalf of Borrower; or (b) is not the subject of licenses
thereof or other dispositions by Borrower giving rise to
Accounts.
"Indebtedness" means: (a) all obligations of Borrower
for borrowed money, (b) all obligations of Borrower evidenced by
bonds, debentures, notes, or other similar instruments and all
reimbursement or other obligations of Borrower in respect of
letters of credit, bankers acceptances, interest rate swaps, or
other financial products, (c) all obligations of Borrower under
capital leases, (d) all obligations or liabilities of others
secured by a Lien on any property or asset of Borrower,
irrespective of whether such obligation or liability is assumed,
and (e) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease,
dividend, letter of credit, or other obligation of any other
Person; provided, however, that the term "Indebtedness" shall not
include (i) liabilities or obligations arising out of or relating
to guarantees, warranties, or other commitments that products or
systems sold by Borrower or any of its Affiliates will meet
particular performance or operating specifications ("Commercial
Performance Guarantees"), or (ii) liabilities arising out of or
relating to agreements or commitments of Borrower to maintain the
financial condition or solvency of any Affiliate of Borrower that
are made, in the ordinary course of Borrower's business
consistent with past practices, in connection with or in
fulfillment of any Commercial Performance Guarantee.
"Initial Term Loan" has the meaning set forth in
Section 2.3.
"Insolvency Proceeding" means any proceeding commenced
by or against any Person under any provision of the Bankruptcy
Code or under any other bankruptcy or insolvency law, assignments
for the benefit of creditors, formal or informal moratoria,
compositions, extensions generally with creditors, or proceedings
seeking reorganization, arrangement, or other similar relief.
"Interest Rate Agreement" shall mean any interest rate
swap agreement or any other similar insurance-type agreement in
connection with any interest "cap" or "collar" transaction or any
other interest rate hedging transaction.
"Intercompany Notes" means promissory notes, if any,
evidencing loan obligations between Borrower and any of its
Subsidiaries that constitute loans qualifying under the
definition of "Permitted Subsidiary Loans and Capital
Contributions" or that are permitted under Section 7.1(d).
"Inventory" means all present and future inventory in
which Borrower has any interest, including goods held for sale,
license, or lease or to be furnished under a contract of service
and all of Borrower's present and future raw materials, work in
process, finished goods, and packing and shipping materials,
wherever located.
"Investment Property" means "investment property" as
that term is defined in section 9115 of the Code, whether now
owned or hereafter acquired.
"IPS" means Intergraph Public Safety, Inc., a Delaware
corporation.
"IPS Copyright Security Agreement" means a Copyright
Security Agreement, in form and substance satisfactory to
Foothill, between IPS and Foothill relative to the copyrights
transferred to IPS by Borrower that remain subject to Foothill's
Liens.
"IPS Trademark Security Agreement" means a Trademark
Security Agreement, in form and substance satisfactory to
Foothill, between IPS and Foothill relative to the trademark's
transferred to IPS by Borrower that remain subject to Foothill's
Liens.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section
2.2(a).
"Letter of Credit" means an L/C or an L/C Guaranty, as
the context requires.
"Letter of Credit Usage" means the sum of (a) the
undrawn amount of Letters of Credit, plus (b) the amount of
unreimbursed drawings under Letters of Credit, plus an amount
equal to the Foreign Currency Reserve.
"Lien" means any interest in property securing an
obligation owed to, or a claim by, any Person other than the
owner of the property, whether such interest shall be based on
the common law, statute, or contract, whether such interest shall
be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or
the existence of some future circumstance or circumstances,
including the lien or security interest arising from a mortgage,
deed of trust, encumbrance, pledge, hypothecation, assignment,
deposit arrangement, security agreement, adverse claim or charge,
conditional sale or trust receipt, or from a lease, consignment,
or bailment for security purposes and also including
reservations, exceptions, encroachments, easements, rights-of-
way, covenants, conditions, restrictions, leases, and other title
exceptions and encumbrances affecting Real Property.
"Liquidation Value" means, in respect of any item of
Equipment, the net orderly liquidation value of such item of
Equipment as determined by a qualified appraiser selected by
Foothill.
"Loan Account" has the meaning set forth in Section
2.10.
"Loan Documents" means this Agreement, the Letters of
Credit, the F/X Bank Parameters Letter, the Lockbox Agreements,
the Mortgages, the Copyright Security Agreement, the Patent
Security Agreement, the Pledge Agreement, the Trademark Security
Agreement, the Reaffirmation Agreement, the Restructuring
Consent, the IPS Copyright Security Agreement, the IPS Trademark
Security Agreement, any note or notes executed by Borrower and
payable to Foothill, and any other agreement entered into, now or
in the future, in connection with this Agreement.
"Lockbox Account" shall mean a depositary account
established pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox
Operating Procedural Agreements and those certain Depository
Account Agreements, in form and substance reasonably satisfactory
to Foothill, each of which is among Borrower, Foothill, and the
Lockbox Bank.
"Lockbox Bank" means Bank One, as successor to First
National Bank of Chicago.
"Lockboxes" has the meaning set forth in Section 2.7.
"M&S" means M&S Computing Investments, Inc., a Delaware
corporation.
"Material Adverse Change" means (a) a material adverse
change in the business, operations, results of operations,
assets, liabilities or condition of Borrower, (b) the material
impairment of Borrower's ability to perform its obligations under
the Loan Documents to which it is a party or of Foothill to
enforce the Obligations or to realize upon the Collateral, (c) a
material adverse effect on the value of the Collateral or the
amount that Foothill would be likely to receive (after giving
consideration to delays in payment and costs of enforcement) in
the liquidation of such Collateral, or (d) a material impairment
of the priority of Foothill's Liens with respect to the
Collateral; provided, however, that the determination of any
Material Adverse Change shall be made after giving effect to the
reserves, if any, created by Foothill against the Borrowing Base,
or the reduction, if any, made by Foothill of the applicable
advance rates based upon the Borrowing Base, in each case, in
respect of the event or circumstance giving rise to such material
adverse change, material impairment, or material adverse effect.
"Maturity Date" has the meaning set forth in Section
3.4.
"Maximum Amount" means $100,000,000, as such amount may
be reduced from time to time pursuant to Section 2.12.
"Maximum Revolving Amount" means, as of any date of
determination, the result of (a) the Maximum Amount, minus (b)
the then outstanding principal balance of the Term Loan.
"Mortgage Policies" means mortgagee title insurance
policies (or marked commitments to issue the same) for the Real
Property Collateral issued by a title insurance company
reasonably satisfactory to Foothill in amounts reasonably
satisfactory to Foothill.
"Mortgages" means one or more mortgages, deeds of
trust, or deeds to secure debt, executed by Borrower in favor of
Foothill, the form and substance of which shall be reasonably
satisfactory to Foothill, that encumber the Real Property
Collateral and the related improvements thereto.
"Multiemployer Plan" means a "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA) to which Borrower, any of
its Subsidiaries, or any ERISA Affiliate has contributed, or was
obligated to contribute, within the past six years.
"Negotiable Collateral" means all of Borrower's present
and future letters of credit, notes, drafts, instruments,
investment property, security entitlements, securities (including
the shares of stock of Subsidiaries of Borrower, but expressly
excluding the Excluded Foreign Subsidiary Securities and the
Bentley Equity Interests), documents, personal property leases
(wherein Borrower is the lessor), chattel paper, and Borrower's
Books relating to any of the foregoing.
"Net Worth" means, as of any date of determination,
Borrower's total stockholder's equity.
"Obligations" means all loans, Advances, debts,
principal, interest (including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued),
contingent reimbursement obligations under any outstanding
Letters of Credit, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to
Borrower's Loan Account pursuant hereto), obligations, fees,
charges, costs, or Foothill Expenses (including any fees or
expenses that, but for the provisions of the Bankruptcy Code,
would have accrued), lease payments, guaranties, covenants, and
duties owing by Borrower to Foothill of any kind and description
(whether pursuant to or evidenced by the Loan Documents or
pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether
direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to others that
Foothill may have obtained by assignment or otherwise, and
further including all interest not paid when due and all Foothill
Expenses that Borrower is required to pay or reimburse by the
Loan Documents, by law, or otherwise.
"Obligor" means any of Borrower or any of its
Subsidiaries party to one or more Loan Documents, including M&S,
IG Delaware, and IPS.
"Obsolete Copyright" means any copyright that relates
to software owned by Borrower that: (a) is no longer sold or
marketed by Borrower; (b) is not generating any material amount
of Accounts or revenues of Borrower; or (c) does not have a
material fair market value.
"Old Second Amendment" means that certain Amendment
Number Two to Loan and Security Agreement, dated as of November
25, 1997, between Foothill and Borrower.
"Old Second Amendment Closing Date" means the first
date on which all of the conditions to the effectiveness of the
Old Second Amendment have been satisfied (or waived or postponed
by Foothill in its sole discretion) pursuant to the terms
thereof.
"Ordinary Course Dispositions" means Asset Dispositions
of (a) Inventory in the ordinary course of business,
(b) Equipment that is substantially worn, damaged, or obsolete in
the ordinary course of business, (c) Equipment that is a so-
called "internal equipment item" that is replaced by Borrower in
the ordinary course of business and consistent with past
practices with another such item of equal or greater value, and
(d) Equipment that is a so-called "demonstration item" in the
ordinary course of business and consistent with past practices.
"Original Closing Date" means January 6, 1997.
"Original Loan Agreement" has the meaning set forth in
the Recitals to this Agreement.
"Overadvance" has the meaning set forth in Section 2.5.
"Participant" means any Person to which Foothill has
sold a participation interest in its rights under the Loan
Documents.
"Patent Security Agreement" means an Amended and
Restated Patent Security Agreement, in form and substance
satisfactory to Foothill, dated as of even date herewith, between
Borrower and Foothill.
"PBGC" means the Pension Benefit Guaranty Corporation
as defined in Title IV of ERISA, or any successor thereto.
"Permitted Appraised Assets Dispositions" means,
subject to the prior or concurrent satisfaction of the Release
Condition therefor, Asset Dispositions of Appraised Assets (in
the ordinary course of Borrower's business and consistent with
past practices), free and clear of Foothill's Lien thereon (other
than Foothill's Lien in the proceeds of such Asset Disposition),
so long as: (a) Borrower replaces the Appraised Asset that is the
subject of such Asset Disposition (the "Disposed Appraised
Asset") with a newly acquired item of Equipment of equal or
greater comparable value than the appraised value of the Disposed
Appraised Asset set forth in the most recent appraisal thereof
and reports such Asset Disposition and replacement pursuant to
Section 6.2; and (b) in the case of any single Asset Disposition
or series of integrated Asset Dispositions involving one or more
Disposed Appraised Assets with an aggregate appraised value of
$250,000 or more, a Certifying Officer of Borrower shall deliver
to Foothill a certificate, in form and substance satisfactory to
Foothill, demonstrating in reasonable detail that the value of
such newly acquired item or items of Equipment are of equal or
greater comparable value than the appraised value of the relevant
Disposed Appraised Asset set forth in the most recent appraisal
thereof.
"Permitted Bentley Dispositions" means, subject to the
prior or concurrent satisfaction of the Release Condition
therefor, Asset Dispositions of the Bentley Equity Interests.
"Permitted Disposition" means (a) Ordinary Course
Dispositions, (b) Permitted Bentley Dispositions, (c) subject to
the prior or concurrent satisfaction of the applicable Release
Condition therefor and the establishment and maintenance of a
reserve against the Borrowing Base relative thereto, Asset
Dispositions of (1) that portion of the Huntsville Property
commonly known as Building 25 or 25A, or (2) that portion of the
Huntsville Property denominated as "Excess Land" or "Raw Land" as
referenced on page 9 of that certain report of Appraisal
Associates Incorporated, dated September 22, 1999 relative to the
Huntsville Property, in each case, free and clear of Foothill's
Lien thereon (other than Foothill's Lien in the proceeds of such
Asset Disposition), (d) subject to the prior or concurrent
satisfaction of the applicable Release Condition therefor, Asset
Dispositions of the assets that are the subject of Permitted
Toehold Investments and Permitted Other Investments, (e)
Permitted Appraised Assets Dispositions, (f) Restructuring
Transactions constituting Asset Dispositions, (g) the sale or
other disposition of Borrower's Hardware Business, and (h)
subject to the prior or concurrent satisfaction of the applicable
Release Condition therefor and the establishment and maintenance
of a reserve against the Borrowing Base relative thereto, other
Asset Dispositions not in the ordinary course of Borrower's
business that do not exceed, on a book value basis, $5,000,000 in
the aggregate in any fiscal year and do not exceed, on a book
value basis, $250,000 in any one transaction or series of related
transactions.
"Permitted F/X Contracts" means foreign currency
exchange contracts between F/X Bank and Borrower that: (a) are in
respect of marked-to-market risk on foreign exchange future
trades or options; (b) are entered into by Borrower in the
ordinary course of its business; (c) are entered into in
connection with the operational needs of Borrower's business and
not for speculative purposes; (d) do not have a maturity date
that is after the date five (5) Business Days prior to the
Maturity Date; and (e) are provided by F/X Bank pursuant to the
F/X Bank Parameters Letter.
"Permitted Investments" means: (a) Permitted Ordinary
Course Investments; (b) Permitted Repayment Investments; (c)
Permitted Toehold Investments; (d) Permitted Subsidiary Loans and
Capital Contributions; (e) Permitted Other Investments; and (f)
Restructuring Transactions constituting equity investments.
"Permitted Liens" means (a) Liens held by Foothill,
(b) Liens for unpaid taxes that either (i) are not yet due and
payable or (ii) are the subject of Permitted Protests, (c) Liens
set forth on Schedule P-1, (d) purchase money Liens in respect of
Equipment and the interests of lessors under operating leases and
of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under
Section 7.21 and so long as the Lien only attaches to the asset
purchased or acquired and only secures the purchase price of the
asset, (e) Liens arising by operation of law in favor of
warehousemen, landlords, carriers, mechanics, materialmen,
laborers, or suppliers, incurred in the ordinary course of
business of Borrower and not in connection with the borrowing of
money, and which Liens either (i) are for sums not yet due and
payable, or (ii) are the subject of Permitted Protests, (f) Liens
arising from deposits made in connection with obtaining worker's
compensation or other unemployment insurance, (g) Liens or
deposits to secure performance of bids, tenders, or leases (to
the extent permitted under this Agreement), incurred in the
ordinary course of business of Borrower and not in connection
with the borrowing of money, (h) Liens arising by reason of
security for surety or appeal bonds in the ordinary course of
business of Borrower, (i) Liens of or resulting from any judgment
or award that would not have a Material Adverse Effect and as to
which the time for the appeal or petition for rehearing of which
has not yet expired, or in respect of which Borrower is in good
faith prosecuting an appeal or proceeding for a review, and in
respect of which a stay of execution pending such appeal or
proceeding for review has been secured, (j) Liens with respect to
the Real Property Collateral that are exceptions to the
commitments for title insurance issued in connection with the
Mortgages, as accepted by Foothill, (k) with respect to any Real
Property that is not part of the Real Property Collateral,
easements, rights of way, zoning and similar covenants and
restrictions, and similar encumbrances that customarily exist on
properties of Persons engaged in similar activities and similarly
situated and that in any event do not materially interfere with
or impair the use or operation of the Collateral by Borrower or
the value of Foothill's Lien thereon or therein, or materially
interfere with the ordinary conduct of the business of Borrower,
and (l) software escrow arrangements entered into in the ordinary
course of business consistent with past practice.
"Permitted Ordinary Course Investment" means (a) direct
obligations of, or obligations the principal of and interest on
which are unconditionally guaranteed by, the United States of
America with a maturity not exceeding one year, (b) certificates
of deposit, time deposits, banker's acceptances or other
instruments of a bank having a combined capital and surplus of
not less than $500,000,000 with a maturity not exceeding one
year, (c) investments in commercial paper rated at least A-1 or P-
1 maturing within one year after the date of acquisition thereof,
(d) money market accounts maintained at a bank having combined
capital and surplus of no less than $500,000,000 or at another
financial institution reasonably satisfactory to Foothill, (e)
loans and advances to officers and employees of Borrower in the
ordinary course of business in an aggregate amount at any one
time outstanding not to exceed $3,000,000, (f) [intentionally
omitted], (g) investments in negotiable instruments for
collection, (h) advances in connection with purchases of goods or
services in the ordinary course of business, and (i) deposits
required in connection with leases.
"Permitted Other Investments" means the equity
investments of Borrower as of the Closing Date identified on
Schedule P-2.
"Permitted Protest" means the right of Borrower to
protest any Lien other than any such Lien that secures the
Obligations, tax (other than payroll taxes or taxes that are the
subject of a United States federal tax lien), or rental payment,
provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in accordance with GAAP (or,
if higher, in an amount that Foothill in good faith and in its
reasonable credit judgment believes to be appropriate under the
circumstances), (b) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (c) Foothill is
satisfied that, while any such protest is pending, there will be
no impairment of the enforceability, validity, or priority of any
of the Liens of Foothill in and to the Collateral.
"Permitted Repayment Investment" means (a) the
contribution or loan by Borrower to IG Benelux of approximately
$15,000,000 to enable IG Benelux to repay, in full, all of its
indebtedness owing to the IG Benelux Existing Lender, or (b)
subject to the timely satisfaction of the condition set forth in
Section 3.3(f), the contribution or loan by Borrower to IG
Australia of approximately $24,000,000 to enable IG Australia to
repay, in full, all of its indebtedness owing to the IG Australia
Existing Lender.
"Permitted Spot Trades" means foreign currency exchange
transactions between F/X Bank and Borrower that: (a) are in
respect of foreign exchange spot value trades; (b) are entered
into by Borrower in the ordinary course of its business; and (c)
are entered into in connection with the operational needs of
Borrower's business and not for speculative purposes; and (d) are
conducted pursuant to the F/X Bank Parameters Letter.
"Permitted Subsidiary Loans and Capital Contributions"
means loans and capital contributions made after the Original
Closing Date by Borrower to any Subsidiary of Borrower; provided,
however, that all such loans and capital contributions made by
Borrower shall not exceed, in the aggregate: (a) $20,000,000
during the 1997 calendar year; (b) $25,000,000 during the 1998
calendar year (including the "ICS Capital Infusion", the
"Intergraph European Subsidiary Recapitalization Transactions",
the transactions described in item (iii) of the definition of
"IPS Recapitalization Transactions", and the transactions
described in item (ii) of the definition of "Veribest
Recapitalization Transaction", in each case as such terms are
used and defined in the Restructuring Consent); (c) $30,000,000
during the 1999 calendar year; and (d) $30,000,000 during the
each calendar year thereafter.
"Permitted Toehold Investment" means the acquisition of
an equity interest in a Person other than a Subsidiary of
Borrower (but not to exceed 10% of all of the issued and
outstanding equity interests of such Person on a fully diluted
basis) so long as (a) no Default or Event of Default shall have
occurred and be continuing or would result from the consummation
of the proposed acquisition, (b) the Person, in whom the equity
interest is being acquired, is engaged in the same business as
that of Borrower or any of its Subsidiaries or in a business
reasonably related thereto, (c) the relevant equity interest
being acquired in such Person is acquired directly by Borrower,
(d) to the extent required under Section 4.2, Borrower shall have
executed and delivered a supplement to the Pledge Agreement and
shall have perfected Foothill's security interest in the acquired
equity interest, and (e) the aggregate amount expended by
Borrower in respect of all such Permitted Toehold Investments
does not exceed $1,000,000 in any fiscal year.
"Person" means and includes natural persons,
corporations, limited liability companies, limited partnerships,
general partnerships, limited liability partnerships, joint
ventures, trusts, land trusts, business trusts, or other
organizations, irrespective of whether they are legal entities,
and governments and agencies and political subdivisions thereof.
"Personal Property Collateral" means all Collateral
other than the Real Property Collateral.
"Plan" means any employee benefit plan, program, or
arrangement maintained or contributed to by Borrower or with
respect to which it may incur liability.
"Pledge Agreement" means an Amended and Restated Pledge
Agreement, in form and substance satisfactory to Foothill, dated
as of even date herewith, among Borrower, IG Delaware, M&S, IPS,
and Foothill.
"Reaffirmation Agreement" means the Reaffirmation
Agreement, dated as of the Closing Date, by each of the Obligors
party to a Loan Document in favor of Foothill, in form and
substance satisfactory to Foothill, pursuant to which each of
each such Obligor reaffirms its obligations under the Loan
Documents to which it is party (including any grants of security
interests in favor of Foothill) notwithstanding the amendment and
restatement of the Existing Loan Agreement effected by this
Agreement.
"Real Property" means any estates or interests in real
property now owned or hereafter acquired by Borrower.
"Real Property Collateral" means the parcel or parcels
of Real Property and the related improvements thereto now owned
by Borrower and identified on Schedule R-1, and any Real Property
hereafter acquired by Borrower.
"Reference Rate" means, the rate of interest announced
within Wells Fargo Bank, N.A. at its principal office in San
Francisco as its "prime rate", with the understanding that the
"prime rate" is one of Wells Fargo's base rates (not necessarily
the lowest of such rates) and serves as the basis upon which
effective rates of interest are calculated for those loans making
reference thereto and is evidenced by the recording thereof after
its announcement in such internal publication or publications as
Wells Fargo may designate.
"Release Condition" means, in respect of any Asset
Disposition, that (a) no Default or Event of Default has occurred
and is continuing or would result therefrom, and (b) Borrower is
receiving at least fair value (as determined in accordance with
Section 3439 of the California Civil Code, as amended) for the
property or assets that are the subject of the Asset Disposition.
"Reportable Event" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than
a Reportable Event as to which the provision of 30 days notice to
the PBGC is waived under applicable regulations.
"Reserve" means, as of any date of determination, an
amount equal to the product of (i) $297,619 times (ii) the number
of months (or any portions thereof) separating such date from
November 30, 1999. Without limiting the generality of the
foregoing and solely by way of example, the amount of the Reserve
would equal: (x) zero (-0-) as of November 30, 1999; (y) $297,619
as of December 1, 1999; and (z) $595,238 as of January 1, 2000.
"Restructuring Consent" means that certain letter
agreement, dated as of August 31, 1998, between Borrower and
Foothill pursuant to which Foothill consented to the consummation
of the transactions described therein.
"Restructuring Transactions" means the transactions
contemplated under and described in the Restructuring Consent.
"Retiree Health Plan" means an "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA that
provides benefits to individuals after termination of their
employment, other than as required by Section 601 of ERISA.
"Securities Account" means a "securities account" as
that term is defined in the Code.
"Solvent" means, with respect to any Person on a
particular date, that on such date (a) at fair valuations, all of
the properties and assets of such Person are greater than the sum
of the debts, including contingent liabilities, of such Person,
(b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required
to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize
upon its properties and assets and pay its debts and other
liabilities, contingent obligations and other commitments as they
mature in the normal course of business, (d) such Person does not
intend to, and does not believe that it will, incur debts beyond
such Person's ability to pay as such debts mature, and (e) such
Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such
Person's properties and assets would constitute unreasonably
small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In
computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount
that, in light of all the facts and circumstances existing at
such time, represents the amount that reasonably can be expected
to become an actual or matured liability.
"Subsidiary" of a Person means a corporation,
partnership, limited liability company, or other entity in which
that Person directly or indirectly owns or controls the shares of
stock or other ownership interests having ordinary voting power
to elect a majority of the board of directors (or appoint other
comparable managers) of such corporation, partnership, limited
liability company, or other entity. Anything to the contrary
notwithstanding, Bentley Systems, Inc. shall not be deemed to be
a Subsidiary of Borrower.
"Supplemental Reserve" means, $2,500,000.
"Term Loan" has the meaning set forth in Section 2.3.
"Trademark Security Agreement" means an Amended and
Restated Trademark Security Agreement, in form and substance
satisfactory to Foothill, dated as of even date herewith, between
Borrower and Foothill.
"Triggering Event" means any of (a) the occurrence and
continuation of an Event of Default, or (b) Foothill deems itself
insecure.
"Unbilled Accounts" means Domestic Accounts that are
fully earned by performance, but have not yet been billed to the
Account Debtor and that, as of any date of determination, arise
from the sale of goods or rendition of services within the prior
60 days.
"United States" means the United States of America, or
any department, agency, or instrumentality of any of the
foregoing.
"Voidable Transfer" has the meaning set forth in
Section 15.8.
"Year 2000 Compliant" means, with regard to any Person
and any software, that such software in goods produced or sold
by, or utilized by and material to the business operations or
financial condition of, such Person are able to interpret and
manipulate data on and involving all calendar dates correctly and
without causing any abnormal ending scenario, including in
relation to dates in and after the Year 2000.
1.2 Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with
GAAP. When used herein, the term "financial statements" shall
include the notes and schedules thereto. Whenever the term
"Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower
on a consolidated basis unless thecontext clearly requires
otherwise.
1.3 Code. Any terms used in this Agreement that are
defined in the Code shall be construed and defined as set forth
in the Code unless otherwise defined herein.
1.4 Construction. Unless the context of this Agreement
clearly requires otherwise, references to the plural include
the singular, references to the singular include the plural,
the term "including" is not limiting, and the term "or" has,
except where otherwise indicated, the inclusive meaning represented
by the phrase "and/or." The words "hereof," "herein,"
"hereby," "hereunder," and similar terms in this Agreement refer
to this Agreement as a whole and not to any particular provision
of this Agreement. An Event of Default shall "continue" or
be "continuing" until such Event of Default has been waived in
writing by Foothill. Section, subsection, clause, schedule, and
exhibit references are to this Agreement unless otherwise
specified. Any reference in this Agreement or in the Loan
Documents to this Agreement or any of the Loan Documents shall
include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, and
supplements, thereto and thereof, as applicable.
1.5 Schedules and Exhibits. All of the schedules
and exhibits attached to this Agreement shall be deemed
incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 Revolving Advances.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an
amount outstanding not to exceed at any one time the lesser of
(i) the Maximum Revolving Amount less the sum of (A) the Letter
of Credit Usage, plus (B) the F/X Reserve, or (ii) the Borrowing
Base less the sum of (A) the Letter of Credit Usage, plus (B) the
F/X Reserve. For purposes of this Agreement, "Borrowing Base",
as of any date of determination, shall mean the result of:
(x) the lesser of (i) the result of (A) 80% of
Eligible Domestic Accounts, plus (B) the lowest of (1) 80% of
Eligible Unbilled Accounts, (2) 40% of the amount of credit
availability created by the foregoing clause (A), and (3)
$20,000,000, plus (C) the lesser of (1) 80% of Eligible Foreign
Accounts, and (2) $3,000,000, minus (D) the amount, if any,
of the Dilution Reserve, and (ii) an amount equal to the
Collections with respect to the Accounts of Borrower for the
immediately preceding 60 day period, minus
(y) the Reserve, minus
(z) the Supplemental Reserve.
(b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce
its advance rates based upon Eligible Domestic Accounts or
Eligible Unbilled Accounts without declaring an Event of Default
if it determines in good faith and in its reasonable credit
judgment that there has occurred a Material Adverse Change.
(c) [intentionally omitted]
(d) Foothill shall have no obligation to make
Advances hereunder to the extent they would cause the outstanding
Obligations (other than under the Term Loan) to exceed the Maximum
Revolving Amount.
(e) Amounts borrowed pursuant to this Section 2.1
may be repaid and, subject to the terms and conditions of this
Agreement, reborrowed at any time during the term of this Agreement.
2.2 Letters of Credit.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue letters of credit for the account of
Borrower (each, an "L/C") or to issue guarantees of payment (each
such guaranty, an "L/C Guaranty") with respect to letters of
credit issued by an issuing bank for the account of Borrower.
Foothill shall have no obligation to issue a Letter of Credit if
any of the following would result:
(i) the Letter of Credit Usage would exceed
the Borrowing Base less the sum of the amount of
outstanding Advances and the F/X Reserve, or
(ii) the Letter of Credit Usage would exceed
the lower of (y) the Maximum Revolving Amount less the
sum of the amount of outstanding Advances and the F/X
Reserve, or (z) $60,000,000, or
(iii) the outstanding Obligations (other than
under the Term Loan) would exceed the Maximum Revolving
Amount.
Borrower and Foothill acknowledge and agree that certain of the
letters of credit that are to be the subject of L/C Guarantees
may be outstanding on the Closing Date. Each Letter of Credit
shall have an expiry date no later than 60 days prior to the date
on which this Agreement is scheduled to terminate under Section
3.4 and all such Letters of Credit shall be in form and substance
acceptable to Foothill in its sole discretion. If Foothill is
obligated to advance funds under a Letter of Credit, Borrower
immediately shall reimburse such amount to Foothill and, in the
absence of such reimbursement, the amount so advanced immediately
and automatically shall be deemed to be an Advance hereunder and,
thereafter, shall bear interest at the rate then applicable to
Advances under Section 2.6.
(b) Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless from any loss, cost, expense,
or liability, including payments made by Foothill, expenses,
and reasonable attorneys fees incurred by Foothill arising
out of or in connection with any Letter of Credit. Borrower
agrees to be bound by the issuing bank's regulations and
interpretations of any Letters of Credit guarantied by Foothill
and opened to or for Borrower's account or by Foothill's
interpretations of any L/C issued by Foothill to or for
Borrower's account, even though this interpretation may be
different from Borrower's own, and Borrower understands and
agrees that Foothill shall not be liable for any error,
negligence, or mistake, whether of omission or commission,
in following Borrower's instructions or those contained in the
Letter of Credit or any modifications, amendments, or supplements
thereto. Borrower understands that the L/C Guarantees may
require Foothill to indemnify the issuing bank for certain costs
or liabilities arising out of claims by Borrower against such
issuing bank. Borrower hereby agrees to indemnify, save, defend,
and hold Foothill harmless with respect to any loss, cost,
expense (including reasonable attorneys fees), or liability
incurred by Foothill under any L/C Guaranty as a result of
Foothill's indemnification of any such issuing bank.
(c) Borrower hereby authorizes and directs any bank
that issues a letter of credit guaranteed by Foothill to deliver to
Foothill all instruments, documents, and other writings and property
received by the issuing bank pursuant to such letter of credit,
and to accept and rely upon Foothill's instructions and
agreements with respect to all matters arising in connection with
such letter of credit and the related application. Borrower may
or may not be the "applicant" or "account party" with respect to
such letter of credit.
(d) Any and all charges, commissions, fees, and
costs incurred by Foothill relating to the letters of credit
guaranteed by Foothill shall be considered Foothill Expenses
for purposes of this Agreement and immediately shall be
reimbursable by Borrower to Foothill.
(e) Immediately upon the termination of this
Agreement, Borrower agrees to either (i) provide cash collateral
to be held by Foothill in an amount equal to 102% of the maximum
amount of Foothill's obligations under Letters of Credit, plus
an amount equal to the Foreign Currency Reserve, or (ii) cause
to be delivered to Foothill releases of all of Foothill's obligations
under outstanding Letters of Credit. At Foothill's discretion,
any proceeds of Collateral received by Foothill after the
occurrence and during the continuation of an Event of Default may
be held as the cash collateral required by this Section 2.2(e).
(f) If by reason of (i) any change in any applicable
law, treaty, rule, or regulation or any change in the interpretation
or application by any Governmental Authority of any such
applicable law, treaty, rule, or regulation, or (ii) compliance
by the issuing bank or Foothill with any direction, request, or
requirement (irrespective of whether having the force of law) of
any Governmental Authority or monetary authority including,
without limitation, Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect (and any
successor thereto):
a. any reserve, deposit, or similar
requirement is or shall be imposed or modified in respect of
any Letters of Credit issued hereunder, or
b. there shall be imposed on the
issuing bank or Foothill any other condition regarding any
letter of credit, or Letter of Credit, as applicable, issued
pursuant hereto;
and the result of the foregoing is to increase, directly
or indirectly, the cost to the issuing bank or Foothill
of issuing, making, guaranteeing, or maintaining any letter of
credit, or Letter of Credit, as applicable, or to reduce the amount
receivable in respect thereof by such issuing bank or Foothill,
then, and in any such case, Foothill may, at any time within a
reasonable period after the additional cost is incurred or the
amount received is reduced, notify Borrower, and Borrower shall
pay on demand such amounts as the issuing bank or Foothill may
specify to be necessary to compensate the issuing bank or
Foothill for such additional cost or reduced receipt, together
with interest on such amount from the date of such demand until
payment in full thereof at the rate set forth in Section
2.6(a)(i) or (c)(i), as applicable. The determination by the
issuing bank or Foothill, as the case may be, of any amount due
pursuant to this Section 2.2(f), as set forth in a certificate
setting forth the calculation thereof in reasonable detail,
shall, in the absence of manifest or demonstrable error, be final
and conclusive and binding on all of the parties hereto.
2.3 Term Loan. Subject to the terms and conditions
of this Agreement, Foothill: (a) made a term loan to Borrower
on the Original Closing Date (in the original principal amount
of $20,000,000 (the "Initial Term Loan"); and (b) made an
additional term loan to Borrower on the Old Second Amendment
Closing Date in the original principal amount of $5,000,000
(the "Additional Term Loan"; the Initial Term Loan and the
Additional Term Loan are referred to, collectively, as the
"Term Loan"). The outstanding principal balance and all accrued
and unpaid interest under the Term Loan shall not be due and
payable until the earlier to occur of (a) the Maturity Date,
and (b) the date of termination of this Agreement, whether
by its terms, by acceleration, or otherwise. The unpaid
principal balance of the Term Loan may not be prepaid in whole
or in part. All amounts outstanding under the Term Loan
shall constitute Obligations.
2.4 Subfacility for Borrower's Permitted F/X Contracts
(the "F/X Line").
(a) If requested to do so by Borrower, Foothill
may, in its sole discretion, enter into agreements with F/X Bank
pursuant to which Foothill would indemnify F/X Bank against
losses or expenses incurred by F/X Bank in connection with
Permitted F/X Contracts, notwithstanding any objections by Borrower
as to the amount of such losses or expenses. If Foothill is
obligated to advance funds under an F/X Line indemnity,
Borrower immediately shall reimburse such amount to Foothill
and, in the absence of such reimbursement, the amount so
advanced immediately and automatically shall be deemed to
be an Advance hereunder and, thereafter, shall bear interest
at the rate then applicable to Advances under Section 2.6.
If, upon the maturity date of any Permitted F/X Contract,
Borrower does not have Availability in an amount sufficient
to pay the full amount of Borrower's obligations to
F/X Bank under such contract, Foothill may, in its sole
discretion, instruct F/X Bank to liquidate such Permitted F/X
Contract, at Borrower's sole expense, and to apply any
amounts thereunder that would have been payable to Borrower
against the amounts owed to F/X Bank by Borrower. Any amounts
paid by Foothill to F/X Bank and any other costs or expenses
incurred by Foothill in connection with any such Permitted F/X
Contracts shall constitute Advances, shall be secured by all of
the Collateral, and thereafter shall be payable by Borrower to
Foothill together with interest as provided for herein.
(b) Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless from any loss, cost, expense,
or liability, including payments made by Foothill, expenses,
and reasonable attorneys fees incurred by Foothill arising out
of or in connection with any F/X Line indemnity.
(c) Any and all charges, commissions, fees, and
costs incurred by Foothill relating to Permitted F/X Contracts
that are the subject of an F/X Line indemnity by Foothill shall
be considered Foothill Expenses for purposes of this Agreement
and immediately shall be reimbursable by Borrower to Foothill.
(d) Immediately upon the termination of this
Agreement, Borrower agrees to either (i) provide cash collateral
to be held by Foothill in an amount equal to 105% of the maximum
amount of Foothill's obligations under the F/X Line indemnities,
or (ii) cause to be delivered to Foothill releases of all of
Foothill's obligations under outstanding F/X Line indemnities. At
Foothill's discretion, any proceeds of Collateral received by
Foothill after the occurrence and during the continuation of an
Event of Default may be held as the cash collateral required by
this Section 2.4(d).
(e) The amount of the F/X Reserve may be reduced
from time to time by Foothill upon the receipt and written
acceptance by Foothill of an F/X Reserve Reduction Certificate,
in the form of that attached hereto as Exhibit F-2, duly executed
by both Borrower and F/X Bank, not less than 2 Business Days
prior to the requested effective date of such reduction.
(f) So long as no Triggering Event has occurred
and is continuing or would result therefrom, the amount of the F/X
Reserve may be increased from time to time by Foothill in its
sole discretion upon the receipt and written acceptance by
Foothill of an F/X Reserve Increase Certificate, in the form of
that attached hereto as Exhibit F-3, duly executed by both
Borrower and F/X Bank, not less than 2 Business Days prior to the
requested effective date of such increase.
(g) Anything in the Loan Documents to the contrary
notwithstanding, Permitted Spot Trades shall be deemed to qualify
as Permitted F/X Contracts eligible for coverage under an F/X
Line indemnity solely until such time, if ever, as Foothill is
obligated to advance funds under an F/X Line indemnity to cover
obligations owing but unpaid by Borrower to F/X Bank in respect
of Permitted Spot Trades and, thereafter, Permitted Spot Trades
shall no longer be deemed to qualify as Permitted F/X Contracts
eligible for coverage under an F/X Line indemnity and F/X Line
indemnities shall no longer be permitted to be issued in respect
of Permitted Spot Trades.
2.5 Overadvances. If, at any time or for any
reason, the amount of Obligations owed by Borrower to Foothill
pursuant to Sections 2.1 and 2.2 is greater than either
the Dollar or percentage limitations set forth in Sections
2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay
to Foothill, in cash, the amount of such excess to be used
by Foothill first, to repay Advances outstanding under Section
2.1 and, thereafter, to be held by Foothill as cash
collateral to secure Borrower's obligation to repay Foothill
for all amounts paid pursuant to Letters of Credit.
2.6 Interest and Letter of Credit Fees: Rates,
Payments, and Calculations.
(a) Interest Rate. Except as provided in clause
(b) below, all Obligations (except for undrawn Letters of Credit)
shall bear interest at a per annum rate of 0.625 percentage points
above the Reference Rate; provided, however, that (i) effective
on the date that Foothill receives Borrower's audited financial
statements for Borrower's fiscal year ending on December 31,
2000, and provided, that Borrower's net income for such
fiscal year determined in accordance with GAAP, as evidenced by
such audited financial statements, shall have been greater than
$0, the then applicable rate of interest shall be reduced by
0.125 percentage points, and (ii) effective on the date that
Foothill receives Borrower's audited financial statements for
Borrower's fiscal year ending on December 31, 2001, and provided,
that Borrower's net income for such fiscal year determined in
accordance with GAAP, as evidenced by such audited financial
statements, shall have been greater than or equal to $0, the
then applicable rate of interest shall be reduced by 0.125
percentage points.
(b) Letter of Credit Fee. Borrower shall pay
Foothill a fee (in addition to the charges, commissions, fees,
and costs set forth in Section 2.2(d)) equal to 1.5% per annum
times the aggregate undrawn amount of all outstanding Letters of Credit.
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except
for undrawn Letters of Credit) shall bear interest at a per annum
rate equal to 3.0 percentage points above the per annum rate
otherwise applicable thereto, and (ii) the Letter of Credit fee
provided in Section 2.6(b) shall be increased to 4.5% per annum
times the amount of the undrawn Letters of Credit that were
outstanding during the immediately preceding month.
(d) Minimum Interest. In no event shall the rate
of interest chargeable hereunder for any day be less than 7.0%
per annum. To the extent that interest accrued hereunder at the
rate set forth herein would be less than the foregoing minimum
daily rate, the interest rate chargeable hereunder for such day
automatically shall be deemed increased to the minimum rate.
(e) Payments. Interest and Letter of Credit fees
payable hereunder shall be due and payable, in arrears, on the
first day of each month during the term hereof. Borrower
hereby authorizes Foothill, at its option, without prior notice
to Borrower, to charge such interest and Letter of Credit fees,
all Foothill Expenses (as and when incurred), the charges,
commissions, fees, and costs provided for in Section 2.2(d)
(as and when accrued or incurred), the fees and charges provided
for in Section 2.11 (as and when accrued or incurred), and all
installments or other payments due under the Term Loan or any
Loan Document to Borrower's Loan Account, which amounts
thereafter shall accrue interest at the rate then applicable
to Advances hereunder. Any interest not paid when due shall
be compounded and shall thereafter accrue interest at the
rate then applicable to Advances hereunder.
(f) Computation. In the event the Reference Rate
is changed from time to time hereafter, the applicable rate of
interest hereunder automatically and immediately shall be increased
or decreased by an amount equal to such change in the Reference
Rate. All interest and fees chargeable under the Loan Documents
shall be computed on the basis of a 360 day year for the actual
number of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate.
In no event shall the interest rate or rates payable under this
Agreement, plus any other amounts paid in connection herewith,
exceed the highest rate permissible under any law that a court
of competent jurisdiction shall, in a final determination, deem
applicable. Borrower and Foothill, in executing and delivering
this Agreement, intend legally to agree upon the rate or rates
of interest and manner of payment stated within it; provided,
however, that, anything contained herein to the contrary
notwithstanding, if said rate or rates of interest or manner of
payment exceeds the maximum allowable under applicable law, then,
ipso facto as of the date of this Agreement, Borrower is and
shall be liable only for the payment of such maximum as allowed
by law, and payment received from Borrower in excess of such
legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such
excess.
2.7 Collection of Accounts. Borrower shall at all
times maintain lockboxes (the "Lockboxes") and, immediately
after the Closing Date, shall instruct all Account Debtors
(to the extent not so instructed prior to the Closing Date)
with respect to the Accounts, General Intangibles, and Negotiable
Collateral of Borrower to remit all Collections in respect
thereof to such Lockboxes. Borrower, Foothill, and the
Lockbox Bank shall enter into the Lockbox Agreements (to the
extent not so entered into prior to the Closing Date),
which among other things shall provide for the opening of a
Lockbox Account for the deposit of Collections at the Lockbox Bank.
Borrower agrees that all Collections and other amounts received
by Borrower from any Account Debtor or any other source immediately
upon receipt shall be deposited into a Lockbox Account. No
Lockbox Agreement or arrangement contemplated thereby shall
be modified by Borrower without the prior written consent of
Foothill. Upon the terms and subject to the conditions
set forth in the Lockbox Agreements, all amounts received
in each Lockbox Account shall be wired each Business Day into
an account (the "Foothill Account") maintained by Foothill
at a depositary selected by Foothill.
2.8 Crediting Payments; Application of Collections. The
receipt of any Collections by Foothill (whether from transfers
to Foothill by the Lockbox Bank pursuant to the Lockbox Agreements
or otherwise) immediately shall be applied provisionally
to reduce the Obligations outstanding under Section 2.1, but shall
not be considered a payment on account unless such Collection item
is a wire transfer of immediately available federal funds and
is made to the Foothill Account or unless and until such Collection
item is honored when presented for payment. From and after the
Closing Date, Foothill shall be entitled to charge Borrower for
1 Business Days of `clearance' or `float' at the rate set forth
in Section 2.6(a)(i) or Section 2.6(c)(i), as applicable, on
all Collections that are received by Foothill (regardless of
whether forwarded by the Lockbox Bank to Foothill, whether
provisionally applied to reduce the Obligations under Section
2.1, or otherwise). This across-the-board 1 Business Day clearance
or float charge on all Collections is acknowledged by the
parties to constitute an integral aspect of the pricing of
Foothill's financing of Borrower, and shall apply irrespective of
the characterization of whether receipts are owned by Borrower or
Foothill, and whether or not there are any outstanding Advances,
the effect of such clearance or float charge being the equivalent
of charging 1 Business Days of interest on such Collections.
Should any Collection item not be honored when presented for
payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly.
Anything to the contrary contained herein notwithstanding, any
Collection item shall be deemed received by Foothill only if it
is received into the Foothill Account on a Business Day on or
before 11:00 a.m. California time. If any Collection item is
received into the Foothill Account on a non-Business Day or after
11:00 a.m. California time on a Business Day, it shall be deemed
to have been received by Foothill as of the opening of business
on the immediately following Business Day.
2.9 Designated Account. Foothill is authorized to make
the Advances, the Letters of Credit, and the Term Loan under
this Agreement based upon telephonic or other instructions
received from anyone purporting to be an Authorized Person, or
without instructions if pursuant to Section 2.6(e). Borrower
agrees to establish and maintain the Designated Account with
the Designated Account Bank for the purpose of receiving
the proceeds of the Advances requested by Borrower and made by
Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by
Foothill hereunder shall be made to the Designated Account.
2.10 Maintenance of Loan Account; Statements of Obligations.
Foothill shall maintain an account on its books in the
name of Borrower (the "Loan Account") on which Borrower will be
charged with all Advances and the Term Loan made by Foothill to
Borrower or for Borrower's account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of Borrower.
In accordance with Section 2.8, the Loan Account will be credited
with all payments received by Foothill from Borrower or for
Borrower's account, including all amounts received in the
Foothill Account from the Lockbox Bank. Foothill shall render
statements regarding the Loan Account to Borrower, including
principal, interest, fees, and including an itemization of all
charges and expenses constituting Foothill Expenses owing, and
such statements shall be conclusively presumed to be correct and
accurate and constitute an account stated between Borrower and
Foothill unless, within 30 days after receipt thereof by
Borrower, Borrower shall deliver to Foothill written objection
thereto describing the error or errors contained in any such
statements.
2.11 Fees. Borrower shall pay to Foothill the following
fees:
(a) Modification/Extension Fee. On the Closing Date, a
modification/extension fee of $500,000, which fee shall be fully
earned and non-refundable when paid; provided, however, that
Foothill shall credit $500,000 of the "Commitment Fee" payable by
Borrower upon the execution of that certain letter agreement,
dated as of October 22, 1999 (the "Commitment Letter") against
such modification/extension fee to the extent the Commitment Fee
was paid by Borrower and not applied as a credit against the
agency fee payable pursuant to Section 2.11(b).
(b) Agency Fee. On the Closing Date, an agency
fee of $250,000, which fee shall be fully earned and non-refundable
when paid; provided, however, that Foothill shall credit $250,000
of the "Commitment Fee" payable by Borrower upon the execution of
the Commitment Letter against such agency fee to the extent the
Commitment Fee was paid by Borrower and not applied as a credit
against the modification/extension fee payable pursuant to
Section 2.11(a).
(c) Unused Line Fee. On the first day of each month
after the Closing Date during the term of this Agreement, an unused
line fee in an amount equal to 0.25% per annum times the Average
Unused Portion of the then extant Maximum Revolving Amount, which
fee shall be fully earned when due;
(d) Annual Facility Fee. On the Closing Date and
each anniversary of the Closing Date, an annual facility fee in an
amount equal to 0.15% of the then extant Maximum Amount, which
fee shall be fully earned when due;
(e) Financial Examination, Documentation, and
Appraisal Fees. Foothill's customary fee of $650 per day per
examiner, plus out-of-pocket expenses for each financial analysis
and examination (i.e., audits) of Borrower performed by personnel
employed by Foothill; Foothill's customary appraisal fee of $1,500
per day per appraiser, plus out-of-pocket expenses for each
appraisal of the Collateral performed by personnel employed by
Foothill; and, the actual charges paid or incurred by Foothill
if it elects to employ the services of one or more third Persons
to perform such financial analyses and examinations (i.e., audits)
of Borrower or to appraise the Collateral; and
(f) Monthly Agency Fee. On the first day of each
month after the Closing Date during the term of this Agreement, a
monthly agency fee in an amount equal to $12,500, which fee shall be
fully earned when due.
2.12 Maximum Amount. Borrower may elect, at any time and
from time to time, by irrevocable written notice to Foothill, to
permanently reduce the Maximum Amount by an amount equal to or
greater than the lesser of (a) $10,000,000, or (b) the amount
by which the Maximum Amount, prior to the effectiveness of any
such reduction, exceeds $75,000,000; provided, however, that
in no event shall the Maximum Amount be reduced below $75,000,000.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 Conditions Precedent to the Initial Advance, Letter of
Credit, and F/X Line Indemnity.
The obligation of Foothill to make the initial Advance, to
issue the initial Letter of Credit, or to issue the initial F/X
Line indemnity is subject to the fulfillment, to the satisfaction
of Foothill and its counsel, of each of the following conditions
on or before the Closing Date:
(a) the Closing Date shall occur on or before
December 10, 1999;
(b) Foothill shall have received confirmation of the
filing of its financing statements and fixture filings;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full
force and effect:
(i) the Reaffirmation Agreement;
(ii) [intentionally omitted];
(iii) the Copyright Security Agreement;
(iv) the Patent Security Agreement; and
(v) the Trademark Security Agreement;
(d) if and to the extent available on or before the Closing
Date, Foothill shall have received the original certificates
representing or evidencing all of the Pledged Shares (as defined
in the Pledge Agreement), together with stock powers or
equivalent assignments with respect thereto duly endorsed in
blank;
(e) Foothill shall have received originals of the
Intercompany Notes, together with endorsements with respect thereto
duly endorsed in blank;
(f) Foothill shall have received a certificate from
the Secretary or an Assistant Secretary of each Obligor attesting to
the resolutions of such Obligor's Board of Directors authorizing
its execution, delivery, and performance of the Loan Documents to
which it is a party and authorizing specific officers of such
Obligor to execute the same;
(g) Foothill shall have received copies of each
Obligor's Governing Documents, as amended, modified, or supplemented
to the Closing Date, certified by the Secretary or an Assistant
Secretary of such Obligor;
(h) Foothill shall have received a certificate of
status with respect to each Obligor, dated within 10 days of the
Closing Date, such certificate to be issued by the appropriate
officer of the jurisdiction of organization of such Obligor, which
certificate shall indicate that such Obligor is in good standing
in such jurisdiction;
(i) Foothill shall have received certificates of
status with respect to Borrower, such certificates to be issued by the
appropriate officer of the jurisdictions in which its failure to
be duly qualified or licensed would constitute a Material Adverse
Change, which certificates shall indicate that Borrower is in
good standing in such jurisdictions, and (A) with respect to the
State of Alabama, shall be dated within 15 days of the Closing
Date, and (B) with respect to all other jurisdictions, shall be
dated within 70 days of the Closing Date;
(j) Foothill shall have received a certificate of
insurance, together with the endorsements thereto, as are required by
Section 6.10, the form and substance of which shall be reasonably
satisfactory to Foothill and its counsel;
(k) Foothill shall have received an opinion of the
Obligors' counsel in form and substance reasonably satisfactory to
Foothill in its sole discretion;
(l) Foothill shall have received satisfactory
evidence (which evidence may be in the form of a Certificate of
a Certifying Officer of Borrower) that all tax returns required
to be filed by Borrower have been timely filed and all taxes upon
Borrower or its properties, assets, income, and franchises
(including real property taxes and payroll taxes) have been paid
prior to delinquency, except such taxes that are the subject of a
Permitted Protest;
(m) No Material Adverse Change shall have occurred;
(n) Foothill shall have received payment of all
accrued and unpaid Foothill Expenses;
(o) Foothill shall have received (i) commitments
from lenders and in amounts acceptable to Foothill in its sole
discretion to purchase participation interests in the Obligations
pursuant to documentation acceptable to Foothill in its sole
discretion, and (ii) participation agreements or amendments to
participation agreements, as applicable, in each case, in form
and substance satisfactory to Foothill;
(p) Borrower shall have retained a consulting
firm reasonably acceptable to Foothill (it being understood that
Altman & Company is acceptable to Foothill), which consulting
firm shall be continued to be retained by Borrower until such
time as Borrower shall have net income (determined in accordance
with GAAP) of at least $1.00 for a period of 2 consecutive fiscal
quarters, or such earlier date as Foothill and Borrower shall
mutually agree;
(q) Borrower shall have delivered to Foothill a
cost-cutting plan for Borrower's fiscal year ending December 31,
2000, which cost-cutting plan shall include such detail as
Foothill may reasonably request and shall otherwise be reasonably
satisfactory to Foothill; and
(r) all other documents and legal matters in
connection with the transactions contemplated by this Agreement
shall have been delivered, executed, or recorded and shall be
in form and substance reasonably satisfactory to Foothill and
its counsel.
3.2 Conditions Precedent to all Advances, all Letters of
Credit, and all F/X Line indemnities on or after the Closing Date.
The following shall be conditions precedent to all
Advances, all Letters of Credit, and all F/X Line indemnities
hereunder on or after the Closing Date:
(a) the representations and warranties contained in
this Agreement and the other Loan Documents shall be true and correct
in all respects on and as of the date of such extension of
credit, as though made on and as of such date (except to the
extent that such representations and warranties relate solely to
an earlier date);
(b) no Default or Event of Default shall have
occurred and be continuing on the date of such extension of credit,
nor shall either result from the making thereof; and
(c) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the
extending of such credit shall have been issued and remain in force
by any Governmental Authority against Borrower, Foothill, or any of
their Affiliates.
3.3 Condition Subsequent. As a condition subsequent
to initial closing hereunder, Borrower shall perform or cause to
be performed the following (the failure by Borrower to so perform
or cause to be performed constituting an Event of Default):
(a) (i) within 10 Business Days following the Closing
Date, Borrower shall have ordered certificates of status with respect
to Borrower from the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would
constitute a Material Adverse Change and paid all fees necessary
to obtain such certificates of status, and (ii) within 5 Business
Days of receipt by Borrower or its counsel of any such
certificate, deliver such certificate to Foothill, which
certificate shall indicate that Borrower is in good standing in
the applicable jurisdiction;
(b) within 30 days of the Closing Date, deliver
to Foothill the certified copies of the policies of insurance,
together with the endorsements thereto, as are required by Section
6.10, the form and substance of which shall be reasonably satisfactory to
Foothill and its counsel;
(c) on or before December 31, 1999, Foothill shall
have received each of the following documents, duly executed, and
each such document shall be in full force and effect:
(i) The IPS Copyright Security Agreement; and
(ii) The IPS Trademark Security Agreement;
(d) upon the request of Foothill (if ever) after the Closing
Date, within 30 days after the date of such request:
(i) a Mortgage on any Real Property acquired by
Borrower after the Closing Date shall have been duly
executed and delivered by Borrower, and the same shall be
in full force and effect, and such Mortgage shall have been
recorded in the office of the county recorder for the county
in which such Real Property is located;
(ii) Foothill shall have received supplemental
opinions of Borrower's counsel, in form and substance
satisfactory to Foothill in its sole discretion, in respect
of the Mortgage on such after acquired Real Property;
(iii) Foothill shall have received a preliminary
title report in respect of such after acquired Real Property
in form and substance reasonably satisfactory to Foothill; and
(iv) Foothill shall have received a phase-I
environmental report and a real estate survey shall have
been completed with respect to such after acquired Real
Property and copies thereof delivered to Foothill; the
environmental consultants and surveyors retained for such
reports or surveys, the scope of the reports or surveys,
and the results thereof shall be acceptable to Foothill in
its sole discretion;
(e) within 90 days following the Closing Date, Foothill
shall have received satisfactory evidence that all existing copyrights
of Borrower (other than Exempt Copyrights) required to be
registered under Section 6.17 have been registered with the
United States Copyright Office (or are the subject of a
diligently prosecuted application therefor), and that all such
copyrights (other than Exempt Copyrights) and any proceeds
thereof are specifically encumbered by the Copyright Security
Agreement;
(f) within 60 days of either (i) the date that
Borrower makes the Permitted Repayment Investment in respect of
the indebtedness of IG Australia owing to the IG Australia Existing
Lender or (ii) one or more Letters of Credit are issued to IG
Australia Existing Lender in support of the indebtedness of IG
Australia owing to IG Australia Existing Lender and IG Australia
Existing Lender releases its Lien on the capital stock of IG
Australia (in either case, the "IG Australia Payoff Date"), execute
and deliver an appropriate supplement to the Pledge Agreement and
deliver to Foothill possession of the original stock certificates,
respecting 65% of the issued and outstanding shares of stock of
IG Australia, together with stock powers with respect thereto
endorsed in blank; provided, however, that to the extent, if any,
that such shares are required to be pledged to the holder of any
project financing indebtedness of IG Australia incurred after the
IG Australia Payoff Date as security for such indebtedness, then,
upon Borrower's written request therefor and with Foothill's
prior written consent thereto (not to be unreasonably withheld),
Foothill agrees to release its Lien on such shares; provided
further, that if such holder will permit such subordination,
then, notwithstanding the foregoing proviso, Foothill's Lien on
such shares will not be released and will become a subordinate
Lien pursuant to documentation in form and substance reasonably
satisfactory to Foothill and such holder; and
(g) [intentionally omitted]
(h) to the extent not available on or before the
Closing Date under Section 3.1, Foothill shall have received, within
30 days of the Closing Date, the original certificates representing
or evidencing all of the Pledged Shares (as defined in the Pledge
Agreement), together with stock powers or equivalent assignments
with respect thereto duly endorsed in blank; provided, however,
that with respect to any "Pledged Foreign Issuer" (as defined in
the Pledge Agreement) as of the Closing Date, the Obligors need
not (i) deliver or cause to be delivered the original
certificates (to the extent any exist) representing or evidencing
the Pledged Shares issued by such Pledged Foreign Issuer, nor
(ii) comply or cause to be complied with all applicable foreign
law registration requirements for perfecting, under such foreign
law, the Lien of Foothill on such Pledged Shares, in each case,
until the date 60 days following the Closing Date before the
failure to do so would constitute an Event of Default.
3.4 Term. This Agreement shall become effective upon
the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on
January 7, 2003 (the "Maturity Date"). The foregoing
notwithstanding, Foothill shall have the right to terminate
its obligations under this Agreement immediately and without
notice upon the occurrence and during the continuation of an
Event of Default.
3.5 Effect of Termination. On the date of
termination of this Agreement, all Obligations (including
contingent reimbursement obligations of Borrower with respect
to any outstanding Letters of Credit or any outstanding F/X
Line indemnities) immediately shall become due and payable
without notice or demand. No termination of this Agreement,
however, shall relieve or discharge Borrower of Borrower's
duties, Obligations, or covenants hereunder, and Foothill's
continuing security interests in the Collateral shall remain
in effect until all Obligations have been fully and
finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated.
3.6 Early Termination by Borrower. Borrower has the
option, at any time prior to the Maturity Date and upon 60
days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations
(including an amount equal to 102% of the undrawn amount of
the Letters of Credit plus the Foreign Currency Reserve),
in full, together with a premium (the "Early Termination
Premium") equal to $1,000,000. The Early Termination Premium
provided for in this section shall be deemed included in
the Obligations.
3.7 Termination Upon Event of Default. If Foothill
terminates this Agreement upon the occurrence of an Event of
Default that intentionally is caused by Borrower for the
purpose, in Foothill's reasonable judgment, of avoiding payment
of the Early Termination Premium provided in Section 3.6, then,
in view of the impracticability and extreme difficulty of
ascertaining actual damages and by mutual agreement of the
parties as to a reasonable calculation of Foothill's lost profits
as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal
to the Early Termination Premium. The Early Termination Premium
shall be presumed to be the amount of damages sustained by
Foothill as the result of the early termination and Borrower
agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this
section shall be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 Grant of Security Interest. Borrower hereby
grants to Foothill a continuing security interest in all right,
title, and interest of Borrower in, to, and under all currently
existing and hereafter acquired or arising Personal Property
Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by
Borrower of each of its covenants and duties under the Loan
Documents. Foothill's security interests in the Personal Property
Collateral shall attach to all Personal Property Collateral without
further act on the part of Foothill or Borrower. Anything
contained in this Agreement or any other Loan Document to the
contrary notwithstanding, except for Permitted Dispositions,
Borrower has no authority, express or implied, to dispose of
any item or portion of the Personal Property Collateral or the
Real Property Collateral. Concurrent with the consummation of
any Permitted Disposition, Foothill agrees to release its Liens
on the subject property or asset (but not the proceeds from the
Asset Disposition).
(b) Anything in this Agreement and the other Loan
Documents to the contrary notwithstanding, the foregoing grant of
a security interest shall not extend to, and the term "Personal
Property Collateral" shall not include, any General Intangible,
Federal Account, or Permitted Other Investment that is now or
hereafter held by Borrower as licensee, lessee, or otherwise,
solely in the event and to the extent that: (i) as the proximate
result of the foregoing grant of a security interest, Borrower's
rights in or with respect to such General Intangible, Federal
Account, or Permitted Other Investment would be forfeited or would
become void, voidable, terminable, or revocable, or if Borrower
would be deemed to have breached, violated, or defaulted the
underlying license, lease, or other agreement that governs such
General Intangible, Federal Account, or Permitted Other Investment,
in each case, pursuant to the restrictions in the underlying lease,
license, or other agreement that governs such General Intangible,
Federal Account, or Permitted Other Investment; (ii) any such
restriction shall be effective and enforceable under applicable
law, including Section 9318(4) of the Code; and (iii) any such
forfeiture, voidness, voidability, terminability, revocability,
breach, violation, or default cannot be remedied by Borrower
using its best efforts (but without any obligation to make any
material expenditures of money or to commence legal proceedings);
provided, however, that the foregoing grant of security interest
shall extend to, and the term "Personal Property Collateral"
shall include, (y) any and all proceeds of such General
Intangible, Federal Account, or Permitted Other Investment to the
extent that the assignment or encumbering of such proceeds is not
so restricted, and (z) upon any such licensor, lessor, or other
applicable party's consent with respect to any such otherwise
excluded General Intangible, Federal Account, or Permitted Other
Investment being obtained, thereafter such General Intangible,
Federal Account, or Permitted Other Investment as well as any
proceeds thereof that might theretofore have been excluded from
such grant of a security interest and the term "Personal Property
Collateral."
(c) Anything in this Agreement or the other Loan
Documents to the contrary notwithstanding and subject to Section
4.1(b), (i) the security interest granted in the Permitted Other
Investments under Section 4.1(a) shall not attach unless and until a
Triggering Event has occurred, at which time such security
interest immediately and automatically shall attach without
notice or demand or further act on the part of Foothill or
Borrower, and (ii) Foothill agrees that Borrower need not deliver
any Negotiable Collateral in respect of the Permitted Other
Investments under Section 4.2 unless and until a Triggering Event
has occurred.
(d) Anything in this Agreement and the other Loan
Documents to the contrary notwithstanding, the foregoing grant of
a security interest shall not extend to, and the term "Personal
Property Collateral" shall not include, any Excluded Foreign Subsidiary
Securities or the assets or properties of any Foreign Subsidiary.
4.2 Negotiable Collateral. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable
Collateral, Borrower, immediately upon the request of Foothill,
shall endorse and deliver (or cause to be endorsed and
delivered) physical possession of such Negotiable Collateral
to Foothill. The foregoing notwithstanding, Borrower need not
deliver any Negotiable Collateral in respect of any Permitted
Toehold Investment with a value less than or equal to $500,000 unless
and until there is a Triggering Event.
4.3 Collection of Accounts, General Intangibles, and Negotiable
Collateral.
During a Triggering Event, Foothill or Foothill's designee
may (a) notify customers or Account Debtors of Borrower that the
Accounts, General Intangibles, or Negotiable Collateral have been
assigned to Foothill or that Foothill has a security interest
therein, and (b) collect the Accounts, General Intangibles, and
Negotiable Collateral directly and charge the collection costs
and expenses to the Loan Account. Borrower agrees that it will
hold in trust for Foothill, as Foothill's trustee, any
Collections that it receives and immediately will deliver said
Collections to Foothill in their original form as received by it.
4.4 Delivery of Additional Documentation Required. At
any time upon the request of Foothill, Borrower shall (and shall
cause its Subsidiaries to) execute and deliver to Foothill
all financing statements, continuation financing statements,
fixture filings, security agreements, pledges, assignments,
endorsements of certificates of title, applications for title,
affidavits, reports, notices, schedules of accounts, letters of
authority, and all other documents (including documents
required for compliance with the Assignment of Claims Act, 31
U.S.C. Section 3727 or any State's statutory counterpart
thereto) that Foothill reasonably may request, in form reasonably
satisfactory to Foothill, to perfect and continue perfected
Foothill's security interests in the Collateral and the other
properties and assets of Borrower and its Subsidiaries, and in
order to fully consummate all of the transactions contemplated
hereby and under the other Loan Documents.
(b) In respect of each of the Securities Accounts of
Borrower, if any, Foothill, Borrower, and each applicable financial
intermediary or depositary shall enter into a control agreement
that, among other things, provides that, from and after the
giving of notice by Foothill to such financial intermediary or
depositary, it shall take instructions solely from Foothill with
respect to the applicable Securities Account and related
securities entitlements or deposit account, as applicable.
Foothill agrees that it will not give such notice unless a
Triggering Event has occurred. Borrower agrees that it will not
transfer assets out of such Securities Accounts or deposit
accounts other than in the ordinary course of business and, if to
another financial intermediary or depositary, unless Borrower,
Foothill, and the substitute financial intermediary or depositary
have entered into a control agreement of the type described
above. No arrangement contemplated hereby shall be modified by
Borrower without the prior written consent of Foothill. Upon the
occurrence of a Triggering Event, Foothill may elect to notify
the financial intermediary to liquidate the securities
entitlements in such Securities Account and may elect to notify
the financial intermediary or depositary to remit the proceeds in
the Securities Account or deposit account to the Foothill
Account.
(c) Anything in this Agreement to the contrary
notwithstanding, Foothill agrees that: (i) so long as no Triggering
Event has occurred and is continuing, (y) Borrower need not execute
and deliver to Foothill documents required for compliance with the
Assignment of Claims Act, 31 U.S.C. Section 3727 or any State's
statutory counterpart thereto in respect of any one underlying
contract or series of related underlying contracts giving rise to
less than $1,000,000 of Accounts of Borrower, and (z) Foothill
agrees not to file notices or copies of assignments under the
Assignment of Claims Act or any State's statutory counterpart
thereto; and (ii) after the occurrence and during the continuance
of a Triggering Event, (y) Borrower shall execute and deliver to
Foothill all documents that Foothill may request, in form
satisfactory to Foothill, required for compliance with the
Assignment of Claims Act or any State's statutory counterpart
thereto, irrespective of the amount of Accounts arising out of
any underlying contract, and (z) Foothill may file any notices or
copies of assignments under the Assignment of Claims Act or any
State's statutory counterpart thereto.
4.5 Power of Attorney. Borrower hereby irrevocably
makes, constitutes, and appoints Foothill (and any of Foothill's
officers, employees, or agents designated by Foothill) as Borrower's
true and lawful attorney, with power to (a) if Borrower refuses
to, or fails timely to execute and deliver any of the documents
described in Section 4.4, sign the name of that Borrower on
any of the documents described in Section 4.4, (b) if there is
a Triggering Event, sign that Borrower's name on any invoice or bill
of lading relating to any Account, drafts against Account
Debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to Account Debtors, (c) send requests
for verification of Accounts, (d) endorse Borrower's name on any
Collection item that may come into Foothill's possession, (e) at
any time that an Event of Default has occurred and is continuing
or Foothill deems itself insecure, notify the post office
authorities to change the address for delivery of Borrower's mail
to an address designated by Foothill, to receive and open all
mail addressed to Borrower, and to retain all mail relating to
the Collateral and forward all other mail to Borrower, (f) if
there is a Triggering Event, make, settle, and adjust all claims
under Borrower's policies of insurance and make all
determinations and decisions with respect to such policies of
insurance, and (g) if there is a Triggering Event, settle and
adjust disputes and claims respecting the Accounts directly with
Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be
executed and delivered any documents and releases that Foothill
determines to be necessary. The appointment of Foothill as
Borrower's attorney, and each and every one of Foothill's rights
and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully and finally repaid and
performed and Foothill's obligation to extend credit hereunder is
terminated.
4.6 Right to Inspect. Foothill (through any of its
officers, employees, or agents) shall have the right, from time
to time hereafter to inspect Borrower's Books and to check, test,
and appraise the Collateral in order to verify Borrower's
financial condition or the amount, quality, value, condition of,
or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement,
Borrower makes the following representations and warranties which
shall be true, correct, and complete in all respects as of the
Closing Date, and at and as of the date of the making of each
Advance or Letter of Credit or F/X Line indemnity made
thereafter, as though made on and as of the date of such Advance
or Letter of Credit or F/X Line indemnity (except to the extent
that such representations and warranties relate solely to an
earlier date) and such representations and warranties shall
survive the execution and delivery of this Agreement:
5.1 No Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens except for
Permitted Liens.
5.2 Eligible Accounts. The Eligible Accounts are bona
fide existing obligations created by the sale and delivery of
Inventory or the rendition of services to Account Debtors in
the ordinary course of Borrower's business, unconditionally
owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. The
property giving rise to such Eligible Accounts has been delivered
to the Account Debtor, or to the Account Debtor's agent for
immediate shipment to and unconditional acceptance by the
Account Debtor (except for returns, in the ordinary course
of business, of products that fail to conform with standard
specifications). Borrower has not received notice of actual
or imminent bankruptcy, insolvency, or material impairment
of the financial condition of any Account Debtor
regarding any Eligible Account.
5.3 [Intentionally Omitted]
5.4 Equipment. All of the Equipment is used or held for
use in Borrower's business and is fit for such purposes.
5.5 Location of Inventory and Equipment. The Inventory
and Equipment are not stored with a bailee, warehouseman, or similar
party (without Foothill's prior written consent) and are located
only at the locations identified on Schedule 6.12 or otherwise
permitted by Section 6.12.
5.6 Inventory Records. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality, and
quantity of the Inventory, and Borrower's cost therefor.
5.7 Location of Chief Executive Office; FEIN The chief
executive office of Borrower is located at the address indicated
in the preamble to this Agreement. Borrower's FEIN is 63-0573222.
5.8 Due Organization and Qualification; Subsidiaries.
(a) Borrower is duly organized and existing and in
good standing under the laws of the jurisdiction of its
incorporation and qualified and licensed to do business in, and
in good standing in, any state where the failure to be so
licensed or qualified reasonably could be expected to have a
Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and
accurate list of Borrower's direct and indirect Subsidiaries,
showing: (i) the jurisdiction of their organization; (ii) the
number of shares or units of each class of common and preferred
stock or other equity securities authorized for each of such
Subsidiaries; and (iii) the number and the percentage of the
outstanding shares or units of each such class owned directly
or indirectly by Borrower. All of the outstanding capital stock
or other equity securities of each such Subsidiary has been
validly issued and is fully paid and non-assessable.
(c) Except as set forth on Schedule 5.8, no
capital stock or other equity securities (or any securities,
instruments, warrants, options, purchase rights, conversion
or exchange rights, calls, commitments or claims of any character
convertible into or exercisable for capital stock or other equity
securities) of any direct or indirect Subsidiary of Borrower is
subject to the issuance of any security, instrument, warrant,
option, purchase right, conversion or exchange right, call,
commitment or claim of any right, title, or interest therein or
thereto.
(d) Set forth on Schedule 5.8 are, with respect to
each Subsidiary of Borrower that is not a Foreign Subsidiary: (i) a
description of the direct and indirect stockholders (or holders
of equivalent equity interests) of each such Subsidiary; (ii) the
total assets of each such Subsidiary; (iii) the amount of the net
value of Borrower's direct or indirect investment in such
Subsidiary; and (iv) a true, correct, and complete statement
regarding whether each such Subsidiary's assets are comprised
principally of (x) foreign assets, (y) securities of other
Subsidiaries of Borrower, or (z) other operating assets.
5.9 Due Authorization; No Conflict.
(a) The execution, delivery, and performance by
each Obligor of the Loan Documents to which it is a party
have been duly authorized by all necessary corporate action.
(b) The execution, delivery, and performance by
each Obligor of the Loan Documents to which it is a party do not
and will not (i) violate any provision of federal, state, or local
law or regulation (including Regulations T, U, and X of the Federal
Reserve Board) applicable to such Obligor, the Governing
Documents of such Obligor, or any order, judgment, or decree of
any court or other Governmental Authority binding on such
Obligor, (ii) conflict with, result in a breach of, or constitute
(with due notice or lapse of time or both) a default under any
material contractual obligation or material lease of such
Obligor, (iii) result in or require the creation or imposition of
any Lien of any nature whatsoever upon any properties or assets
of such Obligor, other than Permitted Liens, or (iv) require any
approval of stockholders or any approval or consent of any Person
under any material contractual obligation of such Obligor.
(c) Other than the filing of appropriate financing
statements, fixture filings, and mortgages, the execution, delivery,
and performance by each Obligor of the Loan Documents to which such
Obligor is a party do not and will not require any registration
with, consent, or approval of, or (except for Borrower's filings
with the Securities Exchange Commission in the ordinary course of
Borrower's business) notice to, or other action with or by, any
federal, state, foreign, or other Governmental Authority or other
Person.
(d) The Loan Documents to which each Obligor is a
party, and all other documents contemplated hereby and thereby,
when executed and delivered by such Obligor will be the legally
valid and binding obligations of such Obligor, enforceable against
such Obligor in accordance with their respective terms, except as
enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar
laws relating to or limiting creditors' rights generally.
(e) The Liens granted by each Obligor to Foothill
in and to its properties and assets pursuant to the Loan Documents
are validly created, perfected, and first priority Liens, subject
only to Permitted Liens.
5.10 Litigation. There are no actions or proceedings
pending by or against Borrower before any court or administrative
agency and Borrower does not have knowledge or belief of any
pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except
for: (a) ongoing collection matters in which Borrower is the
plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters
arising after the date hereof that, if decided adversely to
Borrower, would not have a Material Adverse Change.
5.11 No Material Adverse Change. All financial statements
relating to Borrower, any other Obligor, or any guarantor of the
Obligations that have been delivered by Borrower to Foothill
have been prepared in accordance with GAAP (except, in the case
of unaudited financial statements, for the lack of footnotes and
being subject to year-end audit adjustments) and fairly present
Borrower's (or such other Obligor's or such guarantor's, as
applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended.
There has not been a Material Adverse Change with respect to
Borrower (or such other Obligor or such guarantor, as applicable)
since the date of the latest financial statements submitted to
Foothill.
5.12 Solvency. Borrower is Solvent. No transfer of
property is being made by Borrower and no obligation is being
incurred by Borrower in connection with the transactions
contemplated by this Agreement, or the other Loan Documents
with the intent to hinder, delay, or defraud either present or
future creditors of Borrower.
5.13 Employee Benefits. None of Borrower, any of its
Subsidiaries, or any of their ERISA Affiliates maintains or
contributes to any Benefit Plan, other than those listed on
Schedule 5.13. Borrower, each of its Subsidiaries and each
ERISA Affiliate have satisfied the minimum funding standards
of ERISA and the IRC with respect to each Benefit Plan to
which it is obligated to contribute. No ERISA Event has
occurred nor has any other event occurred that may result
in an ERISA Event that reasonably could be expected to
result in a Material Adverse Change. None of Borrower or its
Subsidiaries, or any ERISA Affiliate, is subject to any direct or
indirect liability with respect to any Plan under any applicable
law, treaty, rule, regulation, or agreement. None of Borrower or
its Subsidiaries or any ERISA Affiliate is required to provide
security to any Plan under Section 401(a)(29) of the IRC.
5.14 Environmental Condition. None of Borrower's properties
or assets has ever been used by Borrower or, to the best of
Borrower's knowledge, by previous owners or operators in the
disposal of, or to produce, store, handle, treat, release, or
transport, any Hazardous Materials, except in compliance with all
applicable laws and regulations in respect thereof. None of
Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a
candidate for closure pursuant to any environmental protection
statute. No Lien arising under any environmental protection
statute has attached to any revenues or to any real or personal
property owned or operated by Borrower. Except as set forth on
Schedule 5.14, Borrower has not received a summons, citation,
notice, or directive from the Environmental Protection Agency or
any other federal or state governmental agency concerning any
action or omission by Borrower resulting in the releasing or
disposing of Hazardous Materials into the environment.
5.15 Securities Accounts. Borrower does not have or
maintain any Securities Accounts.
5.16 Year 2000 Compliance. On the basis of a comprehensive
inventory, review and assessment currently being undertaken by
Borrower of Borrower's computer applications utilized by Borrower
or contained in products produced or sold by Borrower, and upon
inquiry made of Borrower's material suppliers and vendors,
Borrower's management is of the considered view that:
(a) Current and Future Generations of Hardware and
Software. All of Borrower's hardware and software products
listed in Borrower's `Year 2000 Price List' dated January 1, 1999
or any subsequent standard price list are certified as Year
2000 Compliant or will be so certified as new versions and utilities
are released.
(b) Prior Generation of Hardware and Software.
Borrower reasonably anticipates that Borrower will make its prior
generations of hardware and software Year 2000 Compliant except
where it would be commercially impracticable or impossible to do
so and where the failure to do so will not result in a Material
Adverse Change.
(c) Internal Business Systems. Borrower reasonably
anticipates that Borrower will successfully implement all internal
systems and programming changes necessary to make Borrower's internal
business systems Year 2000 Compliant in all material respects on
or before December 31, 1999.
(d) Suppliers and Other Third Parties. Borrower is
diligently conducting a program of investigation with Borrower's
critical suppliers to ensure that such suppliers are, or become on a
timely basis, Year 2000 Compliant in all material respects.
Borrower includes in its new supplier agreements a provision
relative to the relevant supplier's own status as, or program to
become on a timely basis, Year 2000 Compliant in all material
respects. Borrower also is diligently conducting discussions
with other entities with which Borrower interacts electronically
to ensure that such entities have appropriate plans to remediate
Year 2000 Compliance issues where such entities' systems
interface with Borrower's systems.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of
the Obligations, and unless Foothill shall otherwise consent in
writing, Borrower shall do all of the following:
6.1 Accounting System. Maintain one or more systems
of accounting that enable Borrower to produce financial statements
in accordance with GAAP, and maintain records pertaining to the
Collateral that contain information as from time to time may be
requested by Foothill. Borrower also shall keep a modern inventory
reporting system that shows all additions, sales, claims, returns,
and allowances with respect to the Inventory.
6.2 Collateral Reporting. Provide Foothill with the
following documents at the following times in form satisfactory
to Foothill: (a) on a monthly basis and, in any event, by no
later than the 25th day of each month during the term of this
Agreement (or, in the event that Borrower's then Availability is
less than $10,000,000, on such more frequent basis as Foothill
may require), a monthly accounts receivable roll-forward
report and a detailed calculation of the Borrowing Base as
of such date; (b) on a monthly basis and, in any event, by no
later than the 25th day of each month during the term of this
Agreement, a detailed aging, by total, of the Accounts, together
with a reconciliation to the detailed calculation of the Borrowing
Base previously provided to Foothill; (c) on such frequency (if any)
as Foothill reasonably may require, a listing of Borrower's accounts
payable, by vendor; (d) [intentionally omitted]; (e) upon
Foothill's reasonable request, copies of invoices in connection
with the Accounts, credit memos, and remittance advices and
reports in connection with the Accounts and for Inventory and
Equipment acquired by Borrower, purchase orders and invoices;
(f) in the event that Borrower's then Availability is less than
$10,000,000, on such frequent basis as Foothill may require,
a sales journal, collection journal, and credit register since
the last such schedule and copies of deposit slips, shipping
and delivery documents in connection with the Accounts and for
Inventory and Equipment acquired by Borrower; (g) on a quarterly
basis, a detailed list of Borrower's customers; (h) on a monthly
basis, a calculation of the Dilution for the prior month; (i)
on a quarterly basis, a detailed report specifying each Permitted
Toehold Investment, including the book value and market value
thereof; (j) (1) on a monthly basis, with respect to each
Permitted Appraised Asset Disposition with respect to which no
replacement Equipment was purchased in respect thereof, a
detailed report specifying each such Permitted Appraised Assets
Disposition consummated since the last such report, and (2) with
respect to each Permitted Appraised Asset Disposition with
respect to which replacement Equipment was purchased in respect
thereof, as requested by Foothill, a detailed report specifying
each Permitted Appraised Assets Disposition and Equipment
replacement in respect thereof consummated since the last such
report; (k) on a quarterly basis, a detailed report specifying
the aggregate amount of Permitted Subsidiary Loans and Capital
Contributions made by Borrower to date during the then current
calendar year and the aggregate amount of Indebtedness then
outstanding and permitted under Section 7.1(b), and (l) such
other reports as to the Collateral or the financial condition of
Borrower as Foothill may request from time to time. Original
sales invoices evidencing daily sales shall be mailed by Borrower
to each Account Debtor and, at Foothill's direction if there is a
Triggering Event, the invoices shall indicate on their face that
the Account has been assigned to Foothill and that all payments
are to be made directly to Foothill.
6.3 Financial Statements, Reports, Certificates. Deliver
to Foothill: (a) as soon as available, but in any event within
30 days after the end of each month during each of Borrower's
fiscal years, a company prepared balance sheet, income statement,
and statement of cash flow covering Borrower's operations
during such period, provided, however, that with respect
to any such month that is the last month of any of
Borrower's fiscal quarters, Borrower shall have until the date
that is the earlier of (i) the date that is 5 Business Days after
the date on which Borrower makes its quarterly earnings release
with respect to such fiscal quarter, or (ii) the date that is 45
days after the end of such month, to deliver such balance sheet,
income statement, and statement of cash flows to Foothill; and
(b) as soon as available, but in any event within 120 days after
the end of each of Borrower's fiscal years, financial statements
of Borrower for each such fiscal year, audited by independent
certified public accountants reasonably acceptable to Foothill
and certified, without any qualifications, by such accountants to
have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill stating
that such accountants do not have knowledge of the existence of
any Default or Event of Default. Such audited financial
statements shall include a balance sheet, profit and loss
statement, and statement of cash flow and, if prepared, such
accountants' letter to management. In addition to the financial
statements referred to above, Borrower agrees to deliver such
other information relative to Borrower and any Subsidiaries or
Affiliates thereof as Foothill reasonably may request and such
financial statements on a consolidating basis so as to present
Borrower and, solely to the extent available, each such related
entity, separately.
Together with the above, Borrower also shall deliver to
Foothill Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual
Reports, and Form 8-K Current Reports, and any other filings made
by Borrower with the Securities and Exchange Commission, if any,
within 5 Business Days of the date that the same are filed, or
any other information that is provided by Borrower to its
shareholders, and any other report reasonably requested by
Foothill relating to the financial condition of Borrower.
Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Foothill a
certificate signed by a Certifying Officer to the effect that:
(i) all financial statements delivered or caused to be delivered
to Foothill hereunder have been prepared in accordance with GAAP
(except, in the case of unaudited financial statements, for the
lack of footnotes and being subject to year-end audit
adjustments) and fairly present the financial condition of
Borrower, (ii) the representations and warranties of Borrower
contained in this Agreement and the other Loan Documents are true
and correct in all material respects on and as of the date of
such certificate, as though made on and as of such date (except
to the extent that such representations and warranties relate
solely to an earlier date), (iii) for each month that also is the
date on which a financial covenant in Section 7.20 is to be
tested, a Compliance Certificate demonstrating in reasonable
detail compliance at the end of such period with the applicable
financial covenants contained in Section 7.20, and (iv) on the
date of delivery of such certificate to Foothill there does not
exist any condition or event that constitutes a Default or Event
of Default (or, in the case of clauses (i), (ii), or (iii), to
the extent of any non-compliance, describing such non-compliance
as to which he or she may have knowledge and what action Borrower
has taken, is taking, or proposes to take with respect thereto).
Borrower shall have issued written instructions to its
independent certified public accountants authorizing them to
communicate with Foothill and to release to Foothill whatever
financial information concerning Borrower that Foothill may
request. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to
Foothill, at Borrower's expense, copies of Borrower's financial
statements, papers related thereto, and other accounting records
of any nature in their possession, and to disclose to Foothill
any information they may have regarding Borrower's business
affairs and financial conditions.
Each year, together with the financial statements provided
pursuant to Section 6.3(b), Borrower shall deliver to Foothill a
certificate signed by a Certifying Officer specifying, as to each
Foreign Subsidiary of Borrower, the amounts of assets and
liabilities and stockholder's equity of such Foreign Subsidiary
as of the end of the year then ended. Borrower hereby agrees
that, in respect of any Foreign Subsidiary whose capitalization
has materially improved (in Foothill's reasonable determination)
and upon Foothill's reasonable request therefor, Borrower shall
execute and deliver to Foothill a supplement to the Pledge
Agreement pursuant to which Borrower shall pledge to Foothill all
of Borrower's right, title, and interest in and to such Foreign
Subsidiary's equity securities (other than the Excluded Foreign
Portion) and deliver to Foothill all Negotiable Collateral, if
any, in respect of same, unless and to the extent that doing so
would, in any material respect, violate applicable law or cause a
breach or default under any material contract, agreement, or
arrangement binding on such Subsidiary.
6.4 Tax Returns. Deliver to Foothill copies of each
of Borrower's future federal income tax returns, and any amendments
thereto, within 30 days of the filing thereof with the Internal
Revenue Service.
6.5 Guarantor Reports. Cause any guarantor of any of
the Obligations to deliver its annual financial statements at
the time when Borrower provides its audited financial statements
to Foothill and copies of all federal income tax returns as
soon as the same are available and in any event no later than
30 days after the same are required to be filed by law.
6.6 Returns. Cause returns and allowances, if any, as
between Borrower and its Account Debtors to be on the same basis
and in accordance with the usual customary practices of Borrower,
as they exist at the time of the execution and delivery of this
Agreement. If, at a time when no Event of Default has occurred
and is continuing, any Account Debtor returns any Inventory to
Borrower, Borrower promptly shall determine the reason for such
return and, if Borrower accepts such return, issue a credit
memorandum (with, upon reasonable request, a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor. If,
at a time when an Event of Default has occurred and is continuing,
any Account Debtor returns any Inventory to Borrower, Borrower
promptly shall determine the reason for such return and, if
Foothill consents (which consent shall not be unreasonably
withheld), issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor.
6.7 Title to Equipment. Upon Foothill's request after the
occurrence of an Event of Default, Borrower immediately shall
deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title
to any items of Equipment; provided, however, that the foregoing
shall not be deemed to prevent Permitted Dispositions to the extent
otherwise permitted hereunder.
6.8 Maintenance of Equipment. Maintain the Equipment in
good operating condition and repair (ordinary wear and tear excepted),
and make all necessary replacements thereto so that the value and
operating efficiency thereof shall at all times be maintained and
preserved. Other than those items of Equipment that constitute
fixtures on the Original Closing Date, Borrower shall not permit
any item of Equipment to become a fixture to real estate or an
accession to other property, and such Equipment shall at all times
remain personal property.
6.9 Taxes. Cause all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or
assessed against Borrower or any of its property to be paid in
full, before delinquency or before the expiration of any extension
period, except to the extent that the validity of such assessment
or tax shall be the subject of a Permitted Protest. Borrower
shall make due and timely payment or deposit of all such federal,
state, and local taxes, assessments, or contributions required of
it by law, and will execute and deliver to Foothill, on demand,
appropriate certificates attesting to the payment thereof or
deposit with respect thereto. Borrower will make timely payment
or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income
taxes, and will, upon request, furnish Foothill with proof
satisfactory to Foothill indicating that Borrower has made such
payments or deposits.
6.10 Insurance.
(a) At its expense, keep the Personal Property
Collateral insured against loss or damage by fire, theft, explosion,
sprinklers, and all other hazards and risks, and in such amounts,
as are ordinarily insured against by other owners in similar
businesses. Borrower also shall maintain business interruption,
public liability, product liability, and property damage
insurance relating to Borrower's ownership and use of the
Personal Property Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation.
(b) At its expense, obtain and maintain (i) insurance
of the type necessary to insure the Improvements and Chattels (as
such terms are defined in the Mortgages), for the full replacement
cost thereof, against any loss by fire, lightning, windstorm,
hail, explosion, aircraft, smoke damage, vehicle damage,
earthquakes, elevator collision, and other risks from time to
time included under "extended coverage" policies, in such amounts
as Foothill may require, but in any event in amounts sufficient
to prevent Borrower from becoming a co-insurer under such
policies, (ii) combined single limit bodily injury and property
damages insurance against any loss, liability, or damages on,
about, or relating to each parcel of Real Property Collateral, in
an amount satisfactory to Foothill; (iii) business rental
insurance covering annual receipts for a 12 month period for each
parcel of Real Property Collateral; and (iv) insurance for such
other risks as Foothill may require. Replacement costs, at
Foothill's option, may be redetermined by an insurance appraiser,
satisfactory to Foothill, not more frequently than once every
12 months at Borrower's cost.
(c) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably
satisfactory to Foothill. All hazard insurance and such other
insurance as Foothill shall specify, shall contain a Form 438BFU
mortgagee endorsement, or an equivalent endorsement satisfactory
to Foothill, showing Foothill as sole loss payee thereof, and
shall contain a waiver of warranties. Every policy of insurance
referred to in this Section 6.10 shall contain an agreement by
the insurer that it will not cancel such policy except after 30
days prior written notice to Foothill and that any loss payable
thereunder shall be payable notwithstanding any act or negligence
of Borrower or Foothill which might, absent such agreement,
result in a forfeiture of all or a part of such insurance payment
and notwithstanding (i) occupancy or use of the Real Property
Collateral for purposes more hazardous than permitted by the
terms of such policy, (ii) any foreclosure or other action or
proceeding taken by Foothill pursuant to the Mortgages upon the
happening of an Event of Default, or (iii) any change in title or
ownership of the Real Property Collateral. Borrower shall
deliver to Foothill certified copies of such policies of
insurance and evidence of the payment of all premiums therefor.
(d) Original policies or certificates thereof
satisfactory to Foothill evidencing such insurance shall be delivered
to Foothill at least 10 days prior to the expiration of the existing
or preceding policies. Borrower shall give Foothill prompt notice
of any loss in excess of $250,000 covered by such insurance, and,
upon the occurrence and during the continuance of an Event of
Default, Foothill shall have the right to adjust any loss.
Foothill shall have the exclusive right to adjust all losses
payable under any such insurance policies without any liability
to Borrower whatsoever in respect of such adjustments. Any
monies received as payment for any loss under any insurance
policy including the insurance policies mentioned above, shall be
paid over to Foothill to be applied at the option of Foothill
either to the prepayment of the Obligations without premium, in
such order or manner as Foothill may elect, or shall be disbursed
to Borrower under stage payment terms satisfactory to Foothill
for application to the cost of repairs, replacements, or
restorations. All repairs, replacements, or restorations shall
be effected with reasonable promptness and shall be of a value at
least equal to the value of the items or property destroyed prior
to such damage or destruction. Upon the occurrence of an Event
of Default, Foothill shall have the right to apply all prepaid
premiums to the payment of the Obligations in such order or form
as Foothill shall determine.
(e) Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that
required to be maintained under this Section 6.10, unless Foothill
is included thereon as named insured with the loss payable to
Foothill under a standard California 438BFU (NS) Mortgagee
endorsement, or its local equivalent. Borrower immediately shall
notify Foothill whenever such separate insurance is taken out,
specifying the insurer thereunder and full particulars as to the
policies evidencing the same, and originals of such policies
immediately shall be provided to Foothill.
6.11 No Setoffs or Counterclaims. Make payments hereunder
and under the other Loan Documents by or on behalf of Borrower
without setoff or counterclaim and free and clear of, and without
deduction or withholding for or on account of, any federal, state,
or local taxes.
6.12 Location of Inventory and Equipment. Keep the
Inventory and Equipment only at the locations identified on Schedule
6.12; provided, however, that Borrower may amend Schedule 6.12 so long
as such amendment occurs by written notice to Foothill not less
than 30 days prior to the date on which the Inventory or Equipment
is moved to such new location, so long as such new location is
within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements
or fixture filings necessary to perfect and continue perfected
Foothill's security interests in such assets and also provides
to Foothill a Collateral Access Agreement.
6.13 Compliance with Laws. Comply with the requirements
of all applicable laws, rules, regulations, and orders of any
Governmental Authority, including the Fair Labor Standards Act
and the Americans With Disabilities Act, other than laws, rules,
regulations, and orders the non-compliance with which, individually
or in the aggregate, would not have and could not reasonably be
expected to have a Material Adverse Change.
6.14 Employee Benefits.
(a) Promptly, and in any event within 10 Business Days
after Borrower or any of its Subsidiaries knows or has reason to
know that an ERISA Event has occurred that reasonably could be
expected to result in a Material Adverse Change, a written
statement of a Certifying Officer of Borrower describing such
ERISA Event and any action that is being taken with respect
thereto by Borrower, any such Subsidiary or ERISA Affiliate, and
any action taken or threatened by the IRS, Department of Labor,
or PBGC. Borrower or such Subsidiary, as applicable, shall be
deemed to know all facts known by the administrator of any
Benefit Plan of which it is the plan sponsor, (ii) promptly, and
in any event within 3 Business Days after the filing thereof with
the IRS, a copy of each funding waiver request filed with respect
to any Benefit Plan and all communications received by Borrower,
any of its Subsidiaries or, to the knowledge of Borrower, any
ERISA Affiliate with respect to such request, and (iii) promptly,
and in any event within 3 Business Days after receipt by
Borrower, any of its Subsidiaries or, to the knowledge of
Borrower, any ERISA Affiliate, of the PBGC's intention to
terminate a Benefit Plan or to have a trustee appointed to
administer a Benefit Plan, copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's
request, each of the following: (i) a copy of each Plan (or, where
any such plan is not in writing, complete description thereof) (and
if applicable, related trust agreements or other funding
instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that
have been distributed to employees or former employees of
Borrower or its Subsidiaries; (ii) the most recent determination
letter issued by the IRS with respect to each Benefit Plan;
(iii) for the three most recent plan years, annual reports on
Form 5500 Series required to be filed with any governmental
agency for each Benefit Plan; (iv) all actuarial reports prepared
for the last three plan years for each Benefit Plan; (v) a
listing of all Multiemployer Plans, with the aggregate amount of
the most recent annual contributions required to be made by
Borrower or any ERISA Affiliate to each such plan and copies of
the collective bargaining agreements requiring such
contributions; (vi) any information that has been provided to
Borrower or any ERISA Affiliate regarding withdrawal liability
under any Multiemployer Plan; and (vii) the aggregate amount of
the most recent annual payments made to former employees of
Borrower or its Subsidiaries under any Retiree Health Plan.
6.15 Leases. Pay when due all rents and other amounts
payable under any leases to which Borrower is a party or by
which Borrower's properties and assets are bound, unless such
payments are the subject of a Permitted Protest. To the extent
that Borrower fails timely to make payment of such rents and
other amounts payable when due under its leases, Foothill shall be
entitled, in its discretion, to reserve an amount equal to such
unpaid amounts against the Borrowing Base.
6.16 Year 2000 Compliance. Borrower will be Year 2000
Compliant in all material respects by December 31, 1999.
6.17 Copyright Registrations. As soon as practicable but
in any event no less frequently than once every 6 months (or such
more frequent basis as Foothill reasonably may require), unless
Foothill otherwise agrees in writing, Borrower shall: (a) cause
all copyrights in commercially significant software owned by
Borrower (other than Exempt Copyrights) that are not already
the subject of a registration with the United States Copyright
Office (or an application therefor diligently prosecuted) to be
registered with the United States Copyright Office in a manner
sufficient to impart constructive notice of Borrower's ownership
thereof; and (b) cause to be prepared, executed, and delivered to
Foothill, with sufficient time to permit Foothill to record no later
than the last Business Day within 10 days following the date that
such copyrights have been registered or an application for
registration has been filed, a Copyright Security Agreement or
amendment thereto with supplemental schedules in respect thereof
reflecting the security interest of Foothill in all such new
copyrights in commercially significant software (other than
Exempt Copyrights, which, although subject to the security
interest of Foothill, shall not be required to be registered
until such time, if any, as they cease to be Exempt Copyrights),
which supplemental schedules shall be in form and content
suitable for registration with the United States Copyright Office
so as to give constructive notice, when so registered, of the
transfer by Borrower to Foothill of a security interest in such
copyrights.
6.18 Sale or Other Disposition of Borrower's Hardware
Business. Within 60 days after the Closing Date Borrower shall
retain the services of an investment banking firm to advise
Borrower on the sale or other disposition of Borrower's Hardware
Business. Within 120 days after the Closing Date, Borrower and
such investment banking firm shall develop and deliver to
Foothill a plan for the sale or other disposition of Borrower's
Hardware Business, which plan (including, without limitation, the
period of time within which to complete such sale or other
disposition) shall be acceptable to Foothill in its sole
discretion. Borrower shall complete the sale or other
disposition of Borrower's Hardware Business in accordance with
and within the period of time contained in such plan.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of
the Obligations, Borrower will not do any of the following
without Foothill's prior written consent:
7.1 Indebtedness. Create, incur, assume, permit, guarantee,
or otherwise become or remain, directly or indirectly, liable with
respect to any Indebtedness, except:
(a) Indebtedness evidenced by this Agreement, together
with Indebtedness to issuers of letters of credit that are the subject
of L/C Guarantees and Indebtedness to F/X Bank under Permitted
F/X Contracts (which Indebtedness outstanding as of the Closing
Date is set forth in section (a) of Schedule 7.1);
(b) (i) unsecured guarantees of indebtedness of
Borrower's Subsidiaries, (ii) unsecured back-to-back letters of credit
or letter of credit guarantees to issuers of underlying letters of
credit, the account parties of which are Borrower's Foreign
Subsidiaries, that are not the subject of L/C Guarantees, and
(iii) guarantees of indebtedness of Z/I Imaging Corporation, a
Delaware corporation, in an aggregate amount at any one time
outstanding not to exceed $1,800,000, which guarantee may be
secured solely by a letter of credit (which Indebtedness
outstanding as of the Closing Date is set forth in section (b) of
Schedule 7.1); provided, however, that the aggregate amount of
such Indebtedness at any one time outstanding permitted under
this Section 7.1(b) shall not exceed $50,000,000;
(c) Indebtedness set forth in section (c) of
Schedule 7.1;
(d) unsecured Indebtedness of Borrower owing to
one or more of its Subsidiaries; provided, however, that upon the
request of Foothill, Borrower shall cause each of its Subsidiaries
that is a holder of such Indebtedness to execute and deliver to
Foothill a subordination agreement, in form and substance satisfactory
to Foothill, in respect of such Indebtedness;
(e) unsecured Indebtedness evidenced by Interest Rate
Agreements and Currency Protection Agreements entered into by Borrower
in the ordinary course of its business consistent with past
practices and entered into in connection with the operational
needs of Borrower's business and not for speculative purposes;
(f) Indebtedness secured by Permitted Liens; and
(g) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (c), (e), and (f) of this
Section 7.1 (and continuance or renewal of any Permitted Liens
associated therewith) so long as: (i) the terms and conditions of
such refinancings, renewals, or extensions do not materially impair
the prospects of repayment of the Obligations by Borrower, (ii)
the net cash proceeds of such refinancings, renewals, or
extensions do not result in an increase in the aggregate
principal amount of the Indebtedness so refinanced, renewed, or
extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted
maturity of the Indebtedness so refinanced, renewed, or extended,
and (iv) to the extent that Indebtedness that is refinanced was
subordinated in right of payment to the Obligations, then the
subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those
applicable to the refinanced Indebtedness.
7.2 Liens. Create, incur, assume, or permit to exist,
directly or indirectly, any Lien on or with respect to any of its
property or assets, of any kind, whether now owned or hereafter
acquired, or any income or profits therefrom, except for
Permitted Liens (including Liens that are replacements of Permitted
Liens to the extent that the original Indebtedness is refinanced
under Section 7.1(g) and so long as the replacement Liens only
encumber those assets or property that secured the original
Indebtedness). Without limiting the generality of the foregoing,
Borrower agrees not to create, incur, assume, or permit to exist,
directly or indirectly, any Lien on or with respect to the equity
securities of any Subsidiary of Borrower and the equity
securities evidencing any Permitted Toehold Investment (except
for Liens thereon in favor of Foothill and Liens expressly
permitted hereunder on the equity securities of IG Australia).
7.3 Restrictions on Fundamental Changes. (a) Other than
the Restructuring Transactions, enter into any merger,
consolidation, reorganization, or recapitalization, or reclassify
its capital stock; (b) liquidate, wind up, or dissolve itself
(or suffer any liquidation or dissolution); or (c) except for
Permitted Dispositions, convey, sell, assign, lease, transfer,
or otherwise dispose of, in one transaction or a series of
transactions, all or any substantial part of its property or
assets.
7.4 Disposal of Assets. Except for Permitted
Dispositions and Restructuring Transactions, make any Asset
Disposition.
7.5 Change Name. Change Borrower's name, FEIN,
corporate structure (within the meaning of Section 9402(7) of the
Code), or identity, or add any new fictitious name.
7.6 [intentionally omitted].
7.7 Nature of Business. Make any change in the principal
nature of Borrower's business.
7.8 Prepayments and Amendments.
(a) Except in connection with a refinancing permitted by
Section 7.1(g), prepay, redeem, defease, purchase, or otherwise acquire
any Indebtedness owing to any third Person, other than the
Obligations in accordance with this Agreement, and
(b) Directly or indirectly, amend, modify, alter,
increase, or change any of the terms or conditions of any agreement,
instrument, document, indenture, or other writing evidencing or
concerning Indebtedness permitted under Sections 7.1(b), (c),
(d), (e), or (f), except for any amendment, modification, waiver,
or consent the effect of which would be to: (i) extend the
maturity of all or part of the remaining scheduled payments of
principal outstanding thereunder; (ii) make any covenant or
default contained therein less stringent; (iii) decrease the
interest rate or interest rate margin or the default interest
rate or interest rate margin, or both; (iv) amends or modify any
other terms thereof so long as the amendments or modifications
referenced in this clause (iv) are not in the aggregate
materially more expensive, burdensome, or otherwise adverse to
Borrower or Foothill.
7.9 Change of Control. Cause, permit, or suffer,
directly or indirectly, any Change of Control.
7.10 Consignments. Consign any Inventory or sell any
Inventory to any Person that is not an Affiliate of Borrower on
bill and hold, sale or return, sale on approval, or other
conditional terms of sale; provided, however, that the foregoing
shall not prevent Borrower from consigning Inventory with a value
not to exceed $4,000,000 at any one time outstanding, in the
ordinary course of Borrower's business, consistent with past practices,
so long as at the time of any such consignment, Borrower shall take
such steps as may be necessary to ensure that such consigned Inventory
is not subject to the claims of the consignees' creditors or that
Borrower has priority over any perfected security interests in the
inventory of such consignee.
7.11 Distributions. Make any distribution or declare or
pay any dividends (in cash or other property, other than
capital stock) on, or purchase, acquire, redeem, or retire any
of Borrower's capital stock, of any class, whether now or hereafter
outstanding.
7.12 Accounting Methods. Modify or change significantly
its method of accounting or enter into, modify, or terminate
any agreement currently existing, or at any time hereafter
entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting
records without said accounting firm or service bureau agreeing
to provide Foothill information regarding the Collateral or
Borrower's financial condition. Borrower waives the right to
assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information
requested by Foothill pursuant to or in accordance with this
Agreement, and agrees that Foothill may contact directly any such
accounting firm or service bureau in order to obtain such information.
7.13 Investments. Except for Permitted Investments, Permitted
Dispositions, and the Restructuring Transactions directly or
indirectly make, acquire, or incur any liabilities (including
contingent obligations) for or in connection with (a) the acquisition
of the securities (whether debt or equity) of, or other interests in, a
Person, (b) loans, advances, capital contributions, or transfers
of property to a Person, or (c) the acquisition of all or
substantially all of the properties or assets of a Person.
7.14 Transactions with Affiliates. Except for Permitted
Investments and the Restructuring Transactions, directly or
indirectly enter into or permit to exist any material transaction
with any Affiliate of Borrower except for transactions that
are in the ordinary course of Borrower's business, upon fair and
reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in a
comparable arm's length transaction with a non-Affiliate.
7.15 Suspension. Suspend or go out of a substantial
portion of its business.
7.16 [intentionally omitted].
7.17 Use of Proceeds. Use the proceeds of the Advances
and the Term Loan made hereunder for any purpose other than, consistent
with the terms and conditions hereof, for its lawful and permitted
corporate purposes.
7.18 Change in Location of Chief Executive Office; Inventory and
Equipment with Bailees.
Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to
Foothill and so long as, at the time of such written
notification, Borrower provides any financing statements or
fixture filings necessary to perfect and continue perfected
Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location.
The Inventory and Equipment shall not at any time now or
hereafter be stored with a bailee, warehouseman, or similar party
without Foothill's prior written consent.
7.19 No Prohibited Transactions Under ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary of Borrower to
engage, in any prohibited transaction which is reasonably likely to
result in a civil penalty or excise tax described in Sections 406 of
ERISA or 4975 of the IRC for which a statutory or class exemption
is not available or a private exemption has not been previously
obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan
any accumulated funding deficiency (as defined in Sections 302 of
ERISA and 412 of the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to fail,
to pay timely required contributions or annual installments due with
respect to any waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower
to terminate, any Benefit Plan where such event would result in any
liability of Borrower, any of its Subsidiaries or any ERISA
Affiliate under Title IV of ERISA;
(e) fail, or permit any Subsidiary of Borrower to fail,
to make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to fail,
to pay any required installment or any other payment required under
Section 412 of the IRC on or before the due date for such
installment or other payment;
(g) amend, or permit any Subsidiary of Borrower to amend,
a Plan resulting in an increase in current liability for the plan year
such that either of Borrower, any Subsidiary of Borrower or any
ERISA Affiliate is required to provide security to such Plan
under Section 401(a)(29) of the IRC; or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is
reasonably likely to result in any liability of any such entity under
Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably
would be expected to result in a claim against or liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate in
excess of $1,500,000.
7.20 Financial Covenants. Fail to maintain:
(a) Current Ratio. A ratio of Consolidated Current
Assets divided by Consolidated Current Liabilities of at least
1.0:1.0, measured on a fiscal quarter-end basis; and
(b) Net Worth. Net Worth, as of the end of each fiscal
quarter set forth below of at least the minimum amount corresponding
thereto:
Fiscal Quarter Ending Minimum Net Worth
December 31, 1999 $235,000,000
March 31, 2000 $216,000,000
June 30, 2000 and as $200,000,000
of the last day of
each fiscal quarter
thereafter
7.21 Capital Expenditures. Make capital expenditures in any
fiscal year in excess of $50,000,000.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
event of default (each, an "Event of Default") under this
Agreement:
8.1 If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether
of principal, interest (including any interest which, but for the
provisions of the Bankruptcy Code, would have accrued on such
amounts), fees and charges due Foothill, reimbursement of
Foothill Expenses, or other amounts constituting Obligations);
8.2 (a) If Borrower fails or neglects to perform, keep, or
observe, in any material respect, any term, provision, condition,
covenant, or agreement contained in Sections 6.2 (Collateral
Reports) or 6.3 (Financial Statements) of this Agreement and such
failure continues for a period of five (5) days from the date
Foothill sends Borrower telephonic or written notice of such
failure or neglect; (b) If Borrower fails or neglects to perform,
keep, or observe, in any material respect, any term, provision,
condition, covenant, or agreement contained in Sections 6.4 (Tax
Returns), 6.5 (Guarantor Reports), 6.7 (Title to Equipment), 6.12
(Location of Inventory and Equipment), 6.13 (Compliance with
Laws), 6.14 (Employee Benefits), or 6.15 (Leases) of this
Agreement and such failure continues for a period of fifteen (15)
days from the date of such failure or neglect; (c) If Borrower
fails or neglects to perform, keep, or observe, in any material
respect, any term, provision, condition, covenant, or agreement
contained in Sections 6.1 (Accounting System), 6.6 (Returns), or
6.8 (Maintenance of Equipment) of this Agreement and such failure
continues for a period of fifteen (15) days from the date
Foothill sends Borrower telephonic or written notice of such
failure or neglect; or (d) If Borrower fails or neglects to
perform, keep, or observe, in any material respect, any other
term, provision, condition, covenant, or agreement contained in
this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Foothill (other
than any such term, provision, condition, covenant, or agreement
that is the subject of another provision of this Section 8);
8.3 If there is a Material Adverse Change;
8.4 If any material portion of Borrower's properties or assets
is attached, seized, subjected to a writ or distress warrant, or
is levied upon, or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower
and any of the following events occur: (a) Borrower consents to
the institution of the Insolvency Proceeding against it; (b) the
petition commencing the Insolvency Proceeding is not timely
controverted; (c) the petition commencing the Insolvency
Proceeding is not dismissed within 45 calendar days of the date
of the filing thereof; provided, however, that, during the
pendency of such period, Foothill shall be relieved of its
obligation to extend credit hereunder; (d) an interim trustee is
appointed to take possession of all or a substantial portion of
the properties or assets of, or to operate all or any substantial
portion of the business of, Borrower; or (e) an order for relief
shall have been issued or entered therein;
8.7 If Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any
material part of its business affairs;
8.8 (a) If a notice of Lien, levy, or assessment for more
than $1,500,000 is filed of record with respect to any of Borrower's
properties or assets by the United States, or if any taxes or
debts owing for an amount in excess of $1,500,000 at any time
hereafter to the United States becomes a lien, whether choate or
otherwise, upon any of Borrower's properties or assets; provided,
however, that Foothill shall be entitled to create a reserve
against the Borrowing Base in an amount sufficient to discharge
such lien, levy, or assessment and any and all penalties or
interest payable in connection therewith; or
(b) If a judgment or other claim for an amount in excess
of $1,500,000 becomes a Lien or encumbrance upon any material
portion of Borrower's properties or assets;
8.9 If there is a default in any material agreement to which
Borrower is a party with one or more third Persons and such
default (a) occurs at the final maturity of the obligations
thereunder, or (b) results in a right by such third Person(s),
irrespective of whether exercised, to accelerate the maturity of
Borrower's obligations thereunder or to terminate the subject
agreement;
8.10 If Borrower makes any payment on account of Indebtedness
that has been contractually subordinated in right of payment to
the payment of the Obligations, except to the extent such payment
is permitted by the terms of the subordination provisions
applicable to such Indebtedness;
8.11 If any material misstatement or misrepresentation exists
now or hereafter in any warranty, representation, statement, or
report made to Foothill by Borrower or any officer, employee,
agent, or director of Borrower, or if any such warranty or
representation is withdrawn; or
8.12 If the obligation of M&S, IG Delaware, or IPS under
any Loan Document to which it is a party is limited or terminated by
operation of law or by such Person thereunder, or any such Person
becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 Rights and Remedies. Upon the occurrence, and during
the continuation, of an Event of Default Foothill may, at its election,
without notice of its election and without demand, do any one or more of
the following, all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable;
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement, under any of the Loan
Documents, or under any other agreement between Borrower and
Foothill;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Foothill, but
without affecting Foothill's rights and security interests in the
Personal Property Collateral or the Real Property Collateral and
without affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Foothill considers
advisable, and in such cases, Foothill will credit Borrower's
Loan Account with only the net amounts received by Foothill in
payment of such disputed Accounts after deducting all Foothill
Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in
trust for Foothill, segregate all returned Inventory from all other
property of Borrower or in Borrower's possession and
conspicuously label said returned Inventory as the property of
Foothill;
(f) Without notice to or demand upon Borrower, make
such payments and do such acts as Foothill considers necessary or
reasonable to protect its security interests in the Collateral.
Borrower agrees to assemble the Personal Property Collateral if
Foothill so requires, and to make the Personal Property
Collateral available to Foothill as Foothill may designate.
Borrower authorizes Foothill to enter the premises where the
Personal Property Collateral is located, to take and maintain
possession of the Personal Property Collateral, or any part of
it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or Lien that in Foothill's determination appears to
conflict with its security interests and to pay all expenses
incurred in connection therewith. With respect to any of
Borrower's owned or leased premises, Borrower hereby grants
Foothill a license to enter into possession of such premises and
to occupy the same, without charge, for up to 120 days in order
to exercise any of Foothill's rights or remedies provided herein,
at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being
expressly waived by Borrower), and without constituting a retention of
any collateral in satisfaction of an obligation (within the meaning
of Section 9505 of the Code), set off and apply to the
Obligations any and all (i) balances and deposits of Borrower
held by Foothill (including any amounts received in the Lockbox
Accounts), or (ii) indebtedness at any time owing to or for the
credit or the account of Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances
and deposits of Borrower held by Foothill, and any amounts
received in the Lockbox Accounts, to secure the full and final
repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner
provided for herein) the Personal Property Collateral. Borrower
hereby grants to Foothill a license or other right to use,
without charge, Borrower's labels, patents, copyrights, rights of
use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar
nature, as it pertains to the Personal Property Collateral, in
completing production of, advertising for sale, and selling any
Personal Property Collateral and Borrower's rights under all
licenses and all franchise agreements shall inure to Foothill's
benefit;
(j) Sell the Personal Property Collateral at either
a public or private sale, or both, by way of one or more contracts
or transactions, for cash or on terms, in such manner and at such
places (including any of Borrower's premises) as Foothill
determines is commercially reasonable. It is not necessary that
the Personal Property Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition
of the Personal Property Collateral as follows:
(i) Foothill shall give the applicable Borrower
and each holder of a security interest in the Personal
Property Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and
place of public sale, or, if the sale is a private sale or
some other disposition other than a public sale is to be
made of the Personal Property Collateral, then the time
on or after which the private sale or other disposition is
to be made;
(ii) The notice shall be personally delivered
or mailed, postage prepaid, to Borrower as provided in
Section 12, at least 5 days before the date fixed for
the sale, or at least 5 days before the date on or after
which the private sale or other disposition is to be made;
no notice needs to be given prior to the disposition of
any portion of the Personal Property Collateral that is
perishable or threatens to decline speedily in value or
that is of a type customarily sold on a recognized market.
Notice to Persons other than Borrower claiming an interest
in the Personal Property Collateral shall be sent to such
addresses as they have furnished to Foothill;
(iii) If the sale is to be a public sale, Foothill
also shall give notice of the time and place by publishing
a notice one time at least 5 days before the date of the
sale in a newspaper of general circulation in the county in
which the sale is to be held;
(l) Foothill may credit bid and purchase at any public
sale;
(m) Any deficiency that exists after disposition of
the Personal Property Collateral as provided above will be paid
immediately by Borrower. Any excess will be returned, without
interest and subject to the rights of third Persons, by Foothill
to Borrower; and
(n) Foothill may, at its option, require Borrower to
deposit with Foothill funds in an amount equal to the F/X Line Reserve
(if any), and, if Borrower fails to make such deposit promptly,
Foothill may advance such amount as an Advance (whether or not an
Overadvance is created thereby). Any such deposit or the
proceeds of such Advance shall be held by Lender as a reserve to
fund indemnity obligations owing to F/X Bank under the F/X Line.
At such time (if ever) as all such indemnity obligations have
been paid or terminated, any amounts remaining in such reserve
shall be applied against any outstanding Obligations or, if all
Obligations have been indefeasibly paid in full, returned to
Borrower.
9.2 Remedies Cumulative. Foothill's rights and remedies
under this Agreement, the Loan Documents, and all other agreements
shall be cumulative. Foothill shall have all other rights and remedies
not inconsistent herewith as provided under the Code, by law, or in
equity. No exercise by Foothill of one right or remedy shall be
deemed an election, and no waiver by Foothill of any Event of
Default shall be deemed a continuing waiver. No delay by
Foothill shall constitute a waiver, election, or acquiescence by
it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased
properties or assets, rents or other amounts payable under such
leases) due to third Persons, or fails to make any deposits or
furnish any required proof of payment or deposit, all as required
under the terms of this Agreement, then, to the extent that
Foothill determines that such failure by Borrower could result in
a Material Adverse Change, in its discretion and without prior
notice to Borrower, Foothill may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such
reserves in Borrower's Loan Account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type described
in Section 6.10, and take any action with respect to such
policies as Foothill deems prudent. Any such amounts paid by
Foothill shall constitute Foothill Expenses. Any such payments
made by Foothill shall not constitute an agreement by Foothill to
make similar payments in the future or a waiver by Foothill of
any Event of Default under this Agreement. Foothill need not
inquire as to, or contest the validity of, any such expense, tax,
or Lien and the receipt of the usual official notice for the
payment thereof shall be conclusive evidence that the same was
validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 Demand; Protest; etc. Borrower waives demand,
protest, notice of protest, notice of default or dishonor, notice
of payment and nonpayment, nonpayment at maturity, release, compromise,
settlement, extension, or renewal of accounts, documents, instruments,
chattel paper, and guarantees at any time held by Foothill on
which Borrower may in any way be liable.
11.2 Foothill's Liability for Collateral. So long as
Foothill complies with its obligations, if any, under Section 9207
of the Code, Foothill shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral;
(b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the
value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other Person. All
risk of loss, damage, or destruction of the Collateral shall be
borne by Borrower.
11.3 Indemnification. Borrower shall pay, indemnify,
defend, and hold Foothill, each Participant, and each of their
respective officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to
the fullest extent permitted by law) from and against any and all
claims, demands, suits, actions, investigations, proceedings, and
damages, and all reasonable attorneys fees and disbursements and
other costs and expenses actually incurred in connection therewith
(as and when they are incurred and irrespective of whether suit is
brought), at any time asserted against, imposed upon, or incurred
by any of them in connection with or as a result of or related to
the execution, delivery, enforcement, performance, and administration
of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any
investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of
the credit provided hereunder (irrespective of whether any
Indemnified Person is a party thereto), or any act, omission,
event or circumstance in any manner related thereto (all the
foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person under
this Section 11.3 with respect to any Indemnified Liability that
a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such
Indemnified Person. This provision shall survive the termination
of this Agreement and the repayment of the Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan
Document shall be in writing and (except for financial statements
and other informational documents which may be sent by first-
class mail, postage prepaid) shall be personally delivered or
sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to
Borrower or to Foothill, as the case may be, at its address set
forth below:
If to Borrower: INTERGRAPH CORPORATION
One Madison Industrial Park
Huntsville, Alabama 35894-0001
Mail Stop HQ 1200
Attn: Mr. Eugene H. Wrobel
Fax No. 256.730.2742
with copies to: BALCH & BINGHAM
1710 Sixth Avenue North
Birmingham, Alabama 35201
Attn: John F. Mandt, Esq.
Fax No. 205.226.8799
If to Foothill: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
with copies to: BROBECK, PHLEGER & HARRISON LLP
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Fax No. 213.745.3345
The parties hereto may change the address at which they are
to receive notices hereunder, by notice in writing in the
foregoing manner given to the other. All notices or demands sent
in accordance with this Section 12, other than notices by
Foothill in connection with Sections 9504 or 9505 of the Code,
shall be deemed received on the earlier of the date of actual
receipt or 3 days after the deposit thereof in the mail.
Borrower acknowledges and agrees that notices sent by Foothill in
connection with Sections 9504 or 9505 of the Code shall be deemed
sent when deposited in the mail or personally delivered, or,
where permitted by law, transmitted telefacsimile or other
similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN
DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF,
AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO
ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR
THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES
AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE
COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION
OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER
AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE
LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS
BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND
FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF
THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF
BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER
AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF
LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of
by Foothill 4 months after they are delivered to or received by
Foothill, unless the applicable Borrower requests, in writing,
the return of said documents, schedules, or other papers and
makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 Effectiveness. This Agreement shall be binding and
deemed effective when executed by Borrower and Foothill.
15.2 Successors and Assigns. This Agreement shall bind
and inure to the benefit of the respective successors and assigns
of each of the parties; provided, however, that Borrower may not
assign this Agreement or any rights or duties hereunder without
Foothill's prior written consent and any prohibited assignment
shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign
this Agreement and its rights and duties hereunder and no consent
or approval by Borrower is required in connection with any
such assignment. Foothill reserves the right to sell, assign,
transfer, negotiate, or grant participations in all or any part
of, or any interest in Foothill's rights and benefits hereunder.
In connection with any such assignment or participation, Foothill
may disclose all documents and information which Foothill now
or hereafter may have relating to Borrower or Borrower's
business, but such documents and information shall be subject
to the confidentiality provisions of Section 15.10. To the extent
that Foothill assigns its rights and obligations hereunder to a
third Person, Foothill thereafter shall be released from such
assigned obligations to the relevant Borrower and such assignment
shall effect a novation between the relevant Borrower and such
third Person.
15.3 Section Headings. Headings and numbers have been
set forth herein for convenience only. Unless the contrary
is compelled by the context, everything contained in each
section applies equally to this entire Agreement.
15.4 Interpretation. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or
resolved against Foothill or Borrower, whether under any rule
of construction or otherwise. On the contrary, this Agreement
has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of all
parties hereto.
15.5 Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this
Agreement for the purpose of determining the legal enforceability
of any specific provision.
15.6 Amendments in Writing. This Agreement can only be
amended by a writing signed by both Foothill and Borrower.
15.7 Counterparts; Telefacsimile Execution. This Agreement
may be executed in any number of counterparts and by different
parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which,
when taken together, shall constitute but one and the same
Agreement. Delivery of an executed counterpart of this Agreement
by telefacsimile shall be equally as effective as delivery
of an original executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile
also shall deliver an original executed counterpart of this
Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
15.8 Revival and Reinstatement of Obligations. If the
incurrence or payment of the Obligations by Borrower or any
guarantor of the Obligations or the transfer by either or both
of such parties to Foothill of any property of either or both
of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy
Code relating to fraudulent conveyances, preferences, and
other voidable or recoverable payments of money or transfers of
property (collectively, a "Voidable Transfer"), and if
Foothill is required to repay or restore, in whole or in part,
any such Voidable Transfer, or elects to do so upon the
reasonable advice of its counsel, then, as to any such Voidable
Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs,
expenses, and attorneys fees of Foothill related thereto, the
liability of Borrower or such guarantor automatically shall be
revived, reinstated, and restored and shall exist as though such
Voidable Transfer had never been made.
15.9 Integration. This Agreement, together with the
other Loan Documents, reflects the entire understanding of the
parties with respect to the transactions contemplated
hereby and shall not be contradicted or qualified by any other
agreement, oral or written, before the date hereof.
15.10 Confidentiality. Foothill agrees to treat
all material, non-public information regarding Borrower and
its Subsidiaries and their operations, assets, and existing and
contemplated business plans in a confidential manner; it
being understood and agreed by Borrower that in any event
Foothill may make disclosures (a) to counsel for and other
advisors, accountants, and auditors to Foothill, (b) reasonably
required by any bona fide potential or actual assignee,
transferee, or participant in connection with any contemplated
or actual assignment or transfer by Foothill of an interest
herein or any participation interest in Foothill's rights
hereunder, (c) of information that has become public by
disclosures made by Persons other than Foothill, or (d) as
required or requested by any court, governmental or
administrative agency, pursuant to any subpoena or other legal
process, or by any law, statute, regulation, or court order;
provided, however, that, unless prohibited by applicable law,
statute, regulation, or court order, Foothill shall notify
Borrower of any request by any court, governmental or
administrative agency, or pursuant to any subpoena or other legal
process for disclosure of any such non-public material
information concurrent with, or where practicable, prior to the
disclosure thereof.
[Remainder of page left intentionally blank.]
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in Los Angeles, California.
INTERGRAPH CORPORATION,
a Delaware corporation
By /s/ John Wilhoite
------------------------------
Title: Executive Vice President
--------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Victor Barwig
------------------------------
Title: Vice President
--------------------------
EXHIBIT C-1
(form of Compliance Certificate)
[on Borrower's letterhead]
To: Foothill Capital Corporation, as Agent
11111 Santa Monica Boulevard, Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Re: Compliance Certificate dated ___________, 199_
Ladies and Gentlemen:
Reference is made to that certain Amended and Restated
Loan and Security Agreement, dated as of November 30, 1999
(as the same may from time to time be amended, modified,
supplemented or restated, the "Loan Agreement") by and
between Intergraph Corporation, a Delaware corporation
("Borrower"), and Foothill Capital Corporation, a California
Corporation ("Foothill"). The initially capitalized terms
used in this Compliance Certificate have the meanings set
forth in the Loan Agreement unless specifically defined
herein.
Pursuant to Section 6.3 of the Loan Agreement, the
undersigned officer of Borrower hereby certifies that:
1. The financial information of Borrower furnished in
Schedule 1 attached hereto, has been prepared in accordance
with GAAP (except for year-end adjustments and the lack
of footnotes, in the case of financial statements delivered
under Section 6.3(a) of the Loan Agreement) and fairly presents
the financial condition of Borrower.
2. Such officer has reviewed the terms of the Loan
Agreement and has made, or caused to be made under his/her
supervision, a review in reasonable detail of the
transactions and condition of Borrower during the accounting
period covered by financial statements delivered pursuant to
Section 6.3 of the Loan Agreement.
3. Such review has not disclosed the existence on and
as of the date hereof, and the undersigned does not have
knowledge of the existence as of the date hereof of any
event or condition that constitutes a Default or Event of
Default, except for such conditions or events listed on
Schedule 2 attached hereto, specifying the nature and period
of existence thereof and what action Borrower has taken, is
taking or proposes to take with respect thereto.
4. Borrower is in timely compliance with all
representations, warranties, and covenants set forth in the
Loan Agreement and the other Loan Documents, except as set
forth on Schedule 2 attached hereto. Without limiting the
generality of the foregoing, Borrower is in compliance with
the covenants contained in Sections 7.20 and 7.21 of the
Loan Agreement as demonstrated on Schedule 3 hereof.
IN WITNESS WHEREOF, this Compliance Certificate is executed
by the undersigned this _____ day of _______________,
_________.
Intergraph Corporation
A Delaware corporation
By:_________________________
Name:
Title:
Exhibit F-1
(TO BE ATTACHED)
Exhibit F-2
F/X RESERVE REDUCTION CERTIFICATE
Today's date:__________________
(1) FROM INTERGRAPH TO: [NORWEST BANK MINNESOTA]
ATTENTION:
FACSIMILE:
(2) FROM [NORWEST] TO: FOOTHILL CAPITAL CORPORATION
ATTENTION:
FACSIMILE:
(3) FROM FOOTHILL TO INTERGRAPH AND NORWEST:
Reference hereby is made to that certain Amended and
Restated Loan and Security Agreement, dated as of November
__, 1999 (as amended, supplemented, and modified, the "Loan
Agreement"), between Foothill Capital Corporation
("Foothill") and Intergraph Corporation ("Borrower").
Capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed to them in the loan
Agreement.
Pursuant to Section 2.4 of the Loan Agreement, Borrower
hereby requests a reduction in the F/X Reserve from the
current amount of $___________ to the new amount of
$___________, such reduction to become effective on
______________________, ______.
INTERGRAPH CORPORATION
By
Title:
Facimile:
Attn:
FOOTHILL CAPITAL CORPORATION
By
Title:
[NORWEST BANK, Minnesota, N.A.]
By
Title:
Exhibit F-3
F/X RESERVE INCREASE CERTIFICATE
--------------------------------
Today's date:__________________
(1) FROM INTERGRAPH TO: FOOTHILL CAPITAL CORPORATON
ATTENTION:
FACSIMILE:
(2) FROM FOOTHILL TO: [NORWEST BANK MINNESOTA]
ATTENTION:
FACSIMILE:
(3) FROM [NORWEST] TO INTERGRAPH AND FOOTHILL:
Reference hereby is made to that certain Amended and
Restated Loan and Security Agreement, dated as of November
__, 1999 (as amended, restated, supplemented, and modified
from time to time, the "Loan Agreement"), between Foothill
Capital Corporation ("Foothill") and Intergraph Corporation
("Borrower"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings ascribed to
them in the loan Agreement.
Pursuant to Section 2.4 of the Loan Agreement, Borrower
hereby requests an increase in the F/X Reserve from the
current amount of $___________ to the new amount of
$___________, such increase to become effective on
______________________, ______.
INTERGRAPH CORPORATION
By
Title:
Facimile:
Attn:
FOOTHILL CAPITAL CORPORATION
By
Title:
[NORWEST BANK, Minnesota, N.A.]
By
Title:
<TABLE>
Five Year Financial Summary
<CAPTION>
- ----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $914,880 $1,005,007 $1,095,625 $1,065,806 $1,097,978
Nonrecurring operating charges 15,596 15,343 1,095 10,545 6,040
Loss from operations (67,440) (100,998) (38,242) (52,556) (54,145)
Gains on sales of assets 11,505 112,533 4,858 11,173 6,493
Loss from continuing operations (78,561) (6,728) (53,490) (54,246) (45,348)
Discontinued operations (1) 6,984 (12,906) (16,747) (14,866) ---
Net loss (71,577) (19,634) (70,237) (69,112) (45,348)
Net loss from continuing
operations per share, basic
and diluted ( 1.60) ( .14) ( 1.11) ( 1.15) ( .98)
Net loss per share, basic
and diluted ( 1.46) ( .41) ( 1.46) ( 1.46) ( .98)
Working capital 168,307 216,520 204,534 230,804 261,140
Total assets 584,944 695,974 720,989 756,347 826,045
Total debt 62,926 83,213 104,665 65,644 69,541
Shareholders' equity $276,700 $ 355,332 $ 368,783 $ 447,263 $ 504,064
</TABLE>
(1) On October 31, 1999, the Company sold its VeriBest, Inc. operating
segment. Accordingly, the gain on sale as well as the results of
operations for this operating segment have been classified as
discontinued operations in the consolidated statements of operations
from the date of the segment's inception in January 1996 through the
date of sale. VeriBest provided software design tools and services to
the electronics design automation market. See Note 4 of Notes to
Consolidated Financial Statements contained in this annual report for a
complete discussion of this transaction and its impact on the Company's
results of operations and financial position.
Information contained in this report may include statements that are
forward-looking as defined in Section 21E of the Securities Exchange Act of
1934. Actual results could differ materially from those projected in the
forward-looking statements. Additional information concerning factors that
could cause actual results to differ materially from those in the forward-
looking statements is contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in this Annual Report.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary. In fourth quarter 1999, the Company sold its VeriBest
operating segment. Accordingly, the Company's consolidated
statements of operations for the three years ended December 31, 1999
reflect VeriBest's business as a discontinued operation. As such,
except where noted otherwise, the following discussion of the
Company's results of operations addresses only results of continuing
operations. VeriBest's results of operations for the three years
ended December 31, 1999 are discussed separately in "Discontinued
Operation" below.
The following summarized financial data sets forth the results of
operations of the Company for each year in the three year period
ended December 31, 1999. The complete consolidated financial
statements of the Company, including footnote disclosures, are
presented on pages 33 to 56 of this annual report.
- ----------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------
(In millions except per share amounts)
Revenues $ 915 $1,005 $1,096
Cost of revenues 625 694 709
- ----------------------------------------------------------------------------
Gross profit 290 311 387
Operating expenses 342 397 424
Nonrecurring operating charges 15 15 1
- ----------------------------------------------------------------------------
Loss from operations ( 67) ( 101) ( 38)
Interest expense ( 6) ( 8) ( 7)
Arbitration settlements ( 9) --- ( 6)
Gains on sales of assets 12 113 5
Other income (expense) - net ( 3) ( 5) ( 3)
- ----------------------------------------------------------------------------
Loss from continuing operations
before income taxes ( 73) ( 1) ( 49)
Income tax expense ( 6) ( 6) ( 4)
- ----------------------------------------------------------------------------
Loss from continuing operations ( 79) ( 7) ( 53)
Discontinued operation (VeriBest) 7 ( 13) ( 17)
- ----------------------------------------------------------------------------
Net loss $( 72) $( 20) $( 70)
============================================================================
Net loss from continuing operations
per share, basic and diluted $(1.60) $( .14) $(1.11)
Net loss per share, basic and diluted $(1.46) $( .41) $(1.46)
============================================================================
In 1993, the Company began the process of transformation of its
proprietary, closed-system product offerings to the open computing
environment of products based on Intel Corporation hardware and
Microsoft Corporation software. The dedication of significant
Company resources to hardware, software, and system implementation
for this new environment contributed substantially to the Company's
operating losses for the years 1993 through 1996.
For hardware implementation, the Company chose to use only Intel
processors and to focus its efforts and image creation on its core
capabilities, specifically very high performance computational and
graphics capabilities. This high-end market in the Windows NT
operating system environment is supported only by Intel-based
hardware products. The Company expected that its four year hardware
development effort and investment in the high-end graphics market
would result in substantially increased revenues and profits in 1997,
but these benefits were not realized due primarily to actions of
Intel described separately in the "Intel Litigation" section of this
report. In addition, demand for the Company's software products did
not meet expectations and gross margin on product sales continued to
decline due primarily to price competition in the industry.
In 1998, the Company's revenues and operating results continued to be
impacted by its dispute with Intel, as resulting delays in new
product releases eliminated the potential for revenue growth and
increased the Company's inventory obsolescence charges.
Additionally, price competition continued to adversely affect the
Company's margins. Operating expenses were reduced in reaction to
lower sales volumes and through various restructuring actions, but
were offset to a degree by increased legal expenses related to Intel
and other matters.
Revenues and operating results in 1999 were negatively impacted by
increasingly weak demand for the Company's hardware product
offerings, as the Company was unable to recover completely from the
loss of momentum caused by Intel's actions. As a result, in third
quarter 1999 the Company was forced to exit the personal computer
("PC") and generic server businesses and narrow the focus of its
Intergraph Computer Systems ("ICS") business unit to workstations,
specialty servers, digital video products and 3D graphics cards. The
Company also implemented several cost-cutting measures, primarily in
the form of direct reductions in workforce, during 1999 in an effort
to align its expenses with the lower revenue levels being generated.
(See "Nonrecurring Operating Charges" following.) The Company is
actively engaged in discussions with potential business partners for
ICS and is considering all other available alternatives to help stem
the losses in this business unit.
The Company expects that the industry will continue to be
characterized by higher performance and lower priced products,
intense competition, rapidly changing technologies, shorter product
cycles, and development and support of software standards that result
in less specific hardware and software dependencies by customers.
Improvement in the Company's operating results will depend on its
ability to accurately anticipate customer requirements and
technological trends and to rapidly and continuously develop and
deliver new hardware and software products that are competitively
priced, offer enhanced performance, and meet customers' requirements
for standardization and interoperability, and will further depend on
its ability to successfully implement its strategic direction. In
addition, the Company faces significant operational and financial
uncertainty of unknown duration due to its dispute with Intel. To
achieve and maintain profitability, the Company must substantially
increase sales volume and/or continue to align its operating expenses
with the level of revenue and gross margin being generated.
Discontinued Operation. On October 31, 1999, the Company sold its
VeriBest, Inc. operating segment to Mentor Graphics Corporation, a
global provider of electronic hardware and software design solutions
and consulting services, for approximately $11 million, primarily in
the form of cash received at closing. The resulting gain on this
transaction of $14.4 million is reflected in "Gain on sale of
discontinued operation, net of income taxes" in the 1999 consolidated
statement of operations.
The VeriBest business unit served the electronic design automation
market, providing software design tools, design processes, and consulting
services for developers of electronic systems.
For the period in 1999 prior to sale, VeriBest incurred an operating
loss of $7.3 million on revenues of $23.7 million. Similarly,
VeriBest incurred operating losses of $13.2 million and $16.7 million
in 1998 and 1997, on revenues of $27.8 million and $28.7 million,
respectively. VeriBest's operating losses for 1999 and 1998 include
nonrecurring operating charges of $.9 million and $.5 million,
respectively, incurred for employee terminations as part of various
company-wide restructurings (see "Nonrecurring Operating Charges"
following.) Systems revenues declined by 11% and 17%, respectively,
in 1997 and 1998, reflecting weakening demand for the subsidiary's
software products. In 1998, the decline in systems revenues was
partially offset by a 21% increase in maintenance revenues as the
result of sales force focus on increasing the subsidiary's
maintenance revenue base. Results for 1997 were negatively impacted
by a 6 point decline in gross margin, primarily the result of
declining systems revenues, partially offset by a 5% decline in
operating expenses. Losses for 1998 were reduced by a 5 point
improvement in gross margin as the result of declining royalty costs,
and by an additional 10% reduction in operating expenses. In 1999,
VeriBest realized improvements in its revenues, margins, and
operating expenses as it directed its selling efforts toward a newly
developed line of proprietary products and realized the benefits of
its reduced headcount and revised selling strategy toward indirect
methods. VeriBest's headcount declined by approximately 40% from
the subsidiary's inception in January 1996 through its sale in
October 1999.
For further information regarding VeriBest, including summarized
financial information for all periods presented, see Note 4 of Notes
to Consolidated Financial Statements.
Nonrecurring Operating Charges. In first quarter 1998, the Company
reorganized its European operations to reflect the organization of
the Company into distinct business units and to align operating
expenses more closely with revenue levels in that region. The cost
of this reorganization was originally estimated and recorded at $5.4
million, primarily for employee severance pay and related costs.
During the remainder of 1998, approximately $2.2 million of the costs
recorded in first quarter were reversed as the result of incurrence
of lower severance costs than originally anticipated. In fourth
quarter, additional European reorganization costs of $2 million
were recorded for further headcount reductions. The net year to
date charge of $5.2 million is included in "Nonrecurring operating
charges" in the 1998 consolidated statement of operations.
Approximately 80 European positions were eliminated in the sales and
marketing, general and administrative, and pre- and post- sales
support areas. Cash outlays related to this charge approximated $3.1
million in 1998, with the remainder paid in 1999. The Company
estimates this European reorganization has resulted in annual savings
of approximately $7 million.
In fourth quarter 1998, the Company took further actions, principally
in the form of direct workforce reductions, to align the operating
expenses of its unprofitable businesses with their respective revenue
levels. Approximately 100 positions were eliminated, primarily in
the Company's ICS and VeriBest business units. The costs of this
reduction in force totaled approximately $1.3 million, $.8 million of
which is included in "Nonrecurring operating charges" in the 1998
consolidated statement of operations. The remainder of the costs
relate to reductions in force in the Company's VeriBest business unit
and, accordingly, they are reflected in "Loss from discontinued
operation, net of income taxes" in the 1998 consolidated statement of
operations. Related cash outlays approximated $.8 million in 1998,
with the remainder paid in 1999. The Company estimates that these
headcount reductions have resulted in an annual savings of
approximately $7 million.
The remainder of 1998 nonrecurring operating charges consists
primarily of write-offs of a) certain intangible assets, primarily
capitalized business system software no longer in use, b) goodwill
recorded on a prior acquisition of a domestic subsidiary and
determined to be of no value, and c) a noncompete agreement with a
former third party consultant. Prior to the write-off, amortization
of these intangibles accounted for approximately $3.4 million of the
Company's annual operating expenses.
In second quarter 1999, in response to continued operating losses in
its 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 1999 consolidated statement
of operations. Approximately 46 European positions were eliminated,
all in the sales and marketing area. Related cash outlays
approximated $1.4 million in 1999, with the remainder expected to be
paid in 2000. The Company estimates that this resizing will result
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 fully support the vertical markets in which the Company
operates. These actions included eliminating approximately 400
positions worldwide, consolidating offices, completing the worldwide
vertical market alignment of the sales force, and narrowing the focus
of the Company's ICS business unit to workstations, specialty
servers, digital video products and 3D graphics cards. As a result
of these actions, the Company recorded a nonrecurring charge to
operations of approximately $20.1 million, $7 million of which is
recorded as a component of "Cost of revenues - Systems" in the
consolidated statement of operations. This $7 million charge
represents the costs of inventory write-offs incurred as a result of
ICS's exit from the PC and generic server business. The Company
estimates that this change in ICS's product offerings will reduce its
annual systems revenues by approximately $70 to $80 million. The
associated margins for these products range from 15.5% to 17.5%. The
Company has announced a new line of workstations and specialty
servers and is endeavoring to replace revenue associated with its
discontinued products with increased sales volume of its new
offerings.
Severance costs associated with third quarter 1999 restructuring
totaled approximately $8.7 million, $7.8 million of which is included
in "Nonrecurring operating charges" in the 1999 consolidated
statement of operations. The remaining severance costs relate 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 1999 consolidated statement of
operations. 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. Related cash expenditures totaled approximately $5.7 million
in 1999, with the remainder expected to be paid in 2000. The Company
estimates the annual savings resulting from this reduction in force
will approximate $22 million.
The remainder of third quarter 1999 nonrecurring operating charges
consists of write-offs of capitalized business system software no
longer required as a result of the verticalization of the Company's
business units and resulting decentralization of portions of the
corporate financial and administrative functions.
At December 31, 1999, the total remaining accrued liability for
severance related to 1999 reductions in force was approximately
$5 million and is included in "Other accrued expenses" in the
December 31, 1999 consolidated balance sheet. These costs are
expected to be paid in 2000 and relate primarily to severance
liabilities in European countries, which typically take several
months to settle. Severance payments to date have been funded from
existing cash balances and from proceeds from the sale of VeriBest.
For further discussion regarding the Company's liquidity, see
"Liquidity and Capital Resources" following.
Gains on Sales of Assets. As part of the effort to focus on its
core competencies, in 1998 the Company sold its Solid Edge and
Engineering Modeling system product lines at a gain of $102.8
million and its printed circuit board manufacturing facility at
a gain of $8.3 million. Similarly, in 1999 the Company sold its
InterCAP subsidiary at a gain of $11.5 million. The Company's gains
on these transactions are included in "Gains on sales of assets" in
the consolidated statements of operations. See "Nonoperating Income
and Expense" following for further details.
SCI. Reflecting the trend toward outsourcing in the industry, in
fourth quarter 1998 the Company sold substantially all of its U.S.
manufacturing inventory and assets to SCI Technology Inc. ("SCI"), a
wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. In addition, the Company licensed
certain related intellectual property to SCI, and SCI employed
approximately 300 of the Company's manufacturing employees. The
total purchase price for the assets was approximately $62.4 million,
$42.5 million of which was received during the fourth quarter of
1998. The final purchase price installment of $19.9 million was
received in January 1999. Proceeds from the sale have been utilized
primarily to retire debt. The Company's $1.5 million gain on this
transaction is included in "Gains on sales of assets" in the 1998
consolidated statement of operations.
As part of this transaction, SCI retained the option to sell to the
Company any inventory included in the initial purchase 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 $10.2 million in exchange
for a cash payment of $2 million and a short-term installment note
payable in the principal amount of $8.2 million. This note was paid
in three monthly installments concluding October 1, 1999 and bore
interest at a rate of 9%. The Company's payments to SCI were funded
primarily with existing cash balances.
Significant contingencies related to this arrangement include the
ability of the Company to obtain most favorable pricing for products
purchased from SCI through higher volumes and the ability of the
Company to accurately forecast its requirements of SCI. The Company
benefits from lower employee headcount and lower per unit costs for
materials and overhead expenses if higher volumes are achieved. The
Company is subject to forecasting risk, and retains the risk associated
with inventory excess and obsolescence, defined in the agreement as
any component or material in SCI's inventory for more than 60 days
and which is in excess of demand as reflected in the Company's six
month forecast.
Litigation and Other Risks and Uncertainties. The Company has
extensive ongoing litigation with Intel Corporation, and its business
is subject to certain other risks and uncertainties, including those
described below.
Intel Litigation. The Company filed a legal action on November 17,
1997, in U.S. District Court, the Northern District of Alabama,
Northeastern Division (the "Alabama Court"), charging Intel
Corporation, the supplier of all of the Company's microprocessor
supply, with anticompetitive business practices. In the lawsuit,
Intergraph alleges that Intel attempted to coerce the Company into
relinquishing to Intel certain computer hardware patents through a
series of wrongful acts, including interference with business and
contractual relations, interference with technical assistance from
third party vendors, breach of contract, negligence, misappropriation
of trade secrets, and fraud based upon Intel's failure to promptly
notify the Company of defects in Intel's products and timely
correction of such defects, and further alleging that Intel has
infringed upon the Company's patents. The Company's patents define
the architecture of the cache memory of an Intergraph developed
microprocessor. The Company believes this architecture is at the
core of Intel's entire Pentium line of microprocessors and systems.
On December 3, 1997, the Company amended its complaint to include a
count charging Intel with violations of federal antitrust laws.
Intergraph asserts claims for compensatory and treble damages
resulting from Intel's wrongful conduct and infringing acts, and
punitive damages in an amount sufficient to punish and deter Intel's
wrongful conduct. Additionally, the Company requested that Intel be
enjoined from continuing the alleged wrongful conduct which is
anticompetitive and/or violates federal antitrust laws, so as to
permit Intergraph uninterrupted development and sale of Intel-based
products.
On November 21, 1997, the Company filed a motion in the Alabama Court
to enjoin Intel from disrupting or delaying its supply of products
and product information pending resolution of Intergraph's legal
action. On April 10, 1998, the Alabama Court ruled in favor of
Intergraph and ordered that Intel be preliminarily enjoined from
terminating Intergraph's rights as a strategic customer in current
and future Intel programs, and from otherwise taking any action
adversely affecting Intel's business relationship with Intergraph or
Intergraph's ability to design, develop, produce, manufacture, market
or sell products incorporating, or based upon, Intel products or
information. The Court's ruling required that Intel carry out
business with Intergraph under the same terms and conditions, with
the same rights, privileges, and opportunities as Intel makes
available to Intergraph's competitors who are also strategic
customers of Intel. In response to the Alabama Court's decision, on
April 16, 1998, Intel appealed to the United States Court of Appeals
for the Federal Circuit (the "Appeals Court"). On November 5, 1999,
the Appeals Court vacated the preliminary injunction that had been
entered by the Alabama Court. This ruling by the Appeals Court is
not expected to impact Company operations as Intel is bound by an
Agreement and Consent Order with the Federal Trade Commission entered
March 17, 1999 not to restrict microprocessor sales to the Company
and not to take coercive actions that were identified by the Company
in its legal action against Intel.
On June 17, 1998, Intel filed its answer in the Alabama case, which
included counterclaims against Intergraph, including claims that
Intergraph has infringed seven patents of Intel. On July 8, 1998,
the Company filed its answer to the Intel counterclaims, among other
things denying any liability under the patent infringement asserted
by Intel. On June 17, 1998, Intel filed a motion before the Alabama
Court seeking a summary judgment holding that Intel is licensed to
use the patents that the Company asserted against Intel in the
Company's original complaint. This "license defense" was based on
Intel's interpretation of the facts surrounding the acquisition by
the Company of the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. On September 15, 1998, the
Company filed a cross motion with the Alabama Court requesting
summary adjudication in favor of the Company. On November 13, 1998,
the Company amended its complaint to include two additional counts of
patent infringement against Intel. The Company requested the court
to issue a permanent injunction enjoining Intel from further
infringement and to order that the financial impact of the
infringement be calculated and awarded in treble to Intergraph. On
June 4, 1999, the Alabama Court granted the Company's September 15,
1998 motion and ruled that Intel has no license to use the Company's
Clipper patents as Intel had claimed in its motion for summary
judgment. On October 12, 1999, the Alabama Court reversed its June
4, 1999 order and dismissed the Company's patent claims against
Intel. The Company is confident that Intel has no license to use the
Clipper patents and believes that the court's original decision on
this issue was correct. On October 15, 1999, the Company appealed
the Alabama Court's October 12, 1999 order. No decision has been
entered.
The Company believes that Intel's counterclaims, including the alleged
infringement of seven Intel patents, will not result in material
adverse consequences for the Company.
At an oral hearing held February 25, 2000, the Alabama Court
indicated that the trial date for this case, previously scheduled for
June, 2000, will be continued. A formal schedule has not been
entered, but the Company believes it likely that trial will be
rescheduled for the Summer of 2001.
On March 10, 2000 the Alabama Court entered an order dismissing the
antitrust claims of the Company against Intel, based in part upon a
February 17, 2000 decision by the Appeals Court in another case (CSU
v. Xerox). The Company considers this dismissal to be in error and
intends to vigorously pursue its antitrust case against Intel. At
present, the Company is considering a number of possible options
which may include bringing an immediate appeal of the order of the
Alabama Court or an appeal following the end of trial and judgment on
the merits of the Company's case in chief. At the present time, the
Company is unable to determine the effect, if any, of this dismissal
on the Company's overall case against Intel.
Effects. The Company ceased further design of its Clipper
microprocessor at the end of 1993, and made a substantial investment
in redesign of its hardware platform for utilization of Intel
microprocessors. The Company relied on the assurances,
representations, and commitments of Intel that they would supply
Intergraph's microprocessor needs on fair and reasonable terms, and
would provide Intergraph with the essential technical information,
assistance, and advice necessary to utilize the microprocessors to be
developed and supplied by Intel. As a result of the assurances of
Intel and its transition to Intel-based workstations, Intergraph is
technologically and economically bound to the use of Intel's
microprocessors. Successful participation in the high-end
workstation market requires involvement in Intel product development
programs that provide advance information for the development of new
products to be sold by Intergraph and others and permit formulation
of standards and specifications for those new products. During 1997,
Intergraph's product design and release cycle was severely impacted
by Intel's refusal to provide Intergraph with advance technology and
product information and immediate information on Intel defects and
corrections. Yet, Intel continued to provide this information to the
Company's competitors. Intel's refusal to provide this vital
information delayed the Company's new product releases by one to six
months, resulting in lost sales for the Company as well as increased
discounting on available products, severely impacting the Company's
revenues and margins. While the April 1998 ruling of the Alabama
Court required Intel to provide Intergraph with advance product
samples and technical information, the Company lost considerable
sales momentum and continued to feel residual effects from the
dispute through the end of 1998, including shipment problems
resulting from a non-Intel chipset used in certain of the Company's
workstations. In late 1997, when the dispute looked as if it might
jeopardize the Company's supply of Intel components, an alternate
chipset supplier was selected for some designs. In the third quarter
of 1998, that vendor had difficulty delivering enough parts to the
Company, resulting in a significant backlog that could not be shipped
until the fourth quarter. It was not until October 1998 that all of
the Company's hardware product offerings contained the latest Intel
technology and were technologically back in line with industry
competition. Additionally, while Intel is supplying the Company with
advance product samples and technical information, the Company
believes that their responsiveness is not at the same level as prior
to the dispute. In 1999, demand for the Company's hardware products
continued to decline as the Company was unable to recover completely
from the loss of momentum caused by Intel's actions. As a result,
in the third quarter, the Company exited the personal computer and
generic server businesses and narrowed the focus of its ICS business
unit to workstations, specialty servers, digital video products and
3D graphics cards. The Company is also actively engaged in
discussions with potential business partners for ICS and is considering
all other available alternatives to help stem the losses in this
business unit.
Damages. During the course of the Intel litigation, the Company has
employed a variety of experts to prepare estimates of the damages
suffered by the Company under various claims of injury brought by
the Company. The following damage estimates were provided to Intel
in the August/September 1999 time frame in due course of the litigation
process: estimated damages for injury covered under non-patent claims
through June 1999 - $100 million; estimated additional damages for
injury covered under non-patent claims through December 2003 - $400
million, subject to present-value reduction. These numbers are
estimates only and any recovery of damages in this litigation could
be substantially less than these estimates or substantially greater
than these estimates depending on a variety of factors that cannot be
determined at this time. Factors that could lead to recovery of
substantially less that these estimates include, but are not limited
to, the failure of the Alabama Court or the Appeals Court to sustain
the legal basis for one or more of the Company's claims, the failure
of the jury to award amounts consistent with these estimates, the
failure of the Alabama Court or the Appeals Court to sustain any jury
award in amounts consistent with these estimates, the settlement by
the Company of the Intel litigation in an amount inconsistent with
these estimates, and the failure of the Company to successfully
defend itself from Intel's patent counterclaims in the Alabama Court
and in the Appeals Court and a consequential recovery by Intel for
damages and/or a permanent injunction against the Company. Factors
that could lead to recovery substantially greater than these
estimates include, but are not limited to, success by the Company in
recovering punitive damages on one or more of its non-patent claims.
The Company believes it was necessary to take legal action against
Intel in order to defend its workstation business, its intellectual
property, and the investments of its shareholders. The Company is
vigorously prosecuting its positions and defending against Intel's
claims and believes it will prevail in these matters, but at present
is unable to predict an outcome. The Company does expect, however,
that adverse effects on its operations will continue in the near
term, including increased legal and administrative expenses
associated with the lawsuit.
See "Other Risks and Uncertainties" below for additional information
regarding Intel's actions.
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.
Other Risks and Uncertainties. The Company develops its own
graphics, data management, and applications software as part of its
continuing product development activities. The Company has standard
license agreements with Microsoft Corporation for use and
distribution of the Windows NT operating system and with UNIX Systems
Laboratories for use and distribution of the UNIX operating system.
The license agreements are perpetual and allow the Company to
sublicense the operating systems software upon payment of required
sublicensing fees. The Company also has an extensive program for the
licensing of third party application and general utility software for
use on systems and workstations.
The Company owns and maintains a number of registered patents and
registered and unregistered copyrights, trademarks, and service
marks. The patents and copyrights held by the Company are the
principal means by which the Company preserves and protects the
intellectual property rights embodied in the Company's hardware and
software products. Similarly, trademark rights held by the Company
are used to preserve and protect the goodwill represented by the
Company's registered and unregistered trademarks.
As industry standards proliferate, there is a possibility that the
patents of others may become a significant factor in the Company's
business. Personal computer technology, which is used in the
Company's workstation and server products, is widely available, and
many companies, including Intergraph, are attempting to develop
patent positions concerning technological improvements related to
personal computers, workstations and servers. With the possible
exception of its ongoing litigation with Intel (in which the Company
expects to prevail), it does not appear that the Company will be
prevented from using the technology necessary to compete
successfully, since patented technology is typically available in the
industry under royalty bearing licenses or patent cross licenses, or
the technology can be purchased on the open market. Any increase in
royalty payments or purchase costs would increase the Company's costs
of manufacture, however, and it is possible that some key improvement
necessary to compete successfully in markets served by the Company
may not be available.
In addition, computer software technology is increasingly being
protected by patents, and many companies, including Intergraph, are
developing patent positions for software innovations. It is unknown
at the present time whether patented software technology will be made
generally available under license or whether specific innovations
will be held by their inventors and not made available to others. In
many cases, it may be possible to employ software techniques that
avoid the patents of others, but the possibility exists that some
features needed to compete successfully in a particular segment of
the software market may be unavailable or may demand unacceptable
costs due to royalty requirements. Patented software techniques that
become de facto industry standards are among those that are likely to
raise costs or prevent the Company from competing successfully in
particular markets.
An inability to retain significant third party license rights, in
particular the Microsoft license, to protect the Company's
copyrights, trademarks, and patents, or to obtain current technical
information or any required patent rights of others through licensing
or purchase, all of which are important to success in the industry in
which the Company competes, could significantly reduce the Company's
revenues and adversely affect its results of operations.
Technology significant to the Company is sometimes made available in
the form of proprietary information or trade secrets of others.
Prior to the dispute with Intel, Intel had made freely available
technical information used by the Company to design, market and
support its products that use Intel components. Such information is
claimed by Intel to be proprietary and is made available by Intel
only under nondisclosure agreements. Prior to the April 1998 ruling
of the Alabama Court, Intel was withholding such information,
attempting to cancel existing agreements and refusing to enter into
new nondisclosure agreements with the Company. Intel's actions are
the subject matter of current litigation. These actions have damaged
the Company by slowing the introduction of new products using Intel
components and preventing proper maintenance and support of Company
products using Intel components.
Year 2000 Issue. Until recently, most computer programs were written
to store only two digits of date-related information. Such programs
may be unable to distinguish between the year 1900 and the year 2000,
potentially causing data processing malfunctions and computer system
failures. The Company has 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, there can be
no assurance that the Company has detected all of the problems that
could lead to a potential system failure or disruption of operations.
Additionally, 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.
See Notes 1, 5, 7, 8, and 12 to Consolidated Financial Statements for
further discussion of risks and uncertainties related to the Company.
Arbitration Settlements. 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 May 1997, the Company received notice
of the adverse determination of an arbitration proceeding with BSI in
which the Company had alleged that BSI inappropriately and without
cause terminated a contractual arrangement with the Company, and in
which BSI had filed a counterclaim against the Company seeking
significant damages as the result of the Company's alleged failure to
use best efforts to sell software support services pursuant to terms
of the contractual arrangement terminated by BSI. The arbitrator's
award against the Company was in the amount of $6.1 million and is
included in "Arbitration settlements" in the 1997 consolidated
statement of operations. Approximately $5.8 million in fees
otherwise owed the Company by BSI were offset against the amount
awarded to BSI. In addition, the contractual arrangement that was
the subject of this arbitration was terminated effective with the
award and, as a result, the Company no longer sells the related
software support services under this agreement. The Company and BSI
have entered into a new agreement which establishes single support
services between the two companies.
In a second proceeding brought in March 1996, BSI commenced
arbitration against the Company with the American Arbitration
Association, Atlanta, Georgia, relating to the respective rights of
the companies under their April 1987 Software License Agreement and
other matters, including the Company's alleged failure to properly
account for and pay to BSI certain royalties on its sales of BSI
software products, and seeking significant damages. On March 26,
1999, the Company and BSI executed a Settlement Agreement and Mutual
General Release ("the Agreement") to settle this arbitration and
mutually release all claims related to the arbitration or otherwise,
except for a) certain litigation between the companies that is the
subject of a separate settlement agreement and b) payment for
products and services obtained or provided in the normal course of
business since January 1, 1999. Both the Company and BSI expressly
deny any fault, liability, or wrongdoing concerning the claims that
were the subject matter of the arbitration and have settled solely to
avoid continuing litigation with each other.
Under the terms of the Agreement, the Company on April 1, 1999 made
payment to BSI of $12 million and transferred to BSI ownership of
three million of the shares of BSI's Class A common stock owned by
the Company. The transferred shares were valued at approximately
$3.5 million on the Company's books, and the Company's investment in
BSI (reflected in "Investments in affiliates" in the Company's
consolidated balance sheets) was reduced accordingly. As a result of
the settlement, Intergraph's equity ownership in BSI was reduced from
approximately 50% to 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 in connection with the
settlement, representing the portion of settlement costs not
previously accrued. This charge is included in "Arbitration
settlements" in the 1999 consolidated statement of operations.
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.
Orders. Systems orders for 1999 were $605 million, down 24% from the
prior year after increases of 3% and 7% in 1998 and 1997,
respectively, including $10.3 million in orders of the Company's
discontinued VeriBest operation. Order levels in 1997 were
characterized by less than anticipated demand for the Company's
hardware product offerings, due in part to the slow customer and
market acceptance of the Windows NT/Intel strategy, and by weakened
demand for its software products. The previously described actions
of Intel also adversely impacted hardware orders in both 1997 and
1998. In the last half of 1997, the Company experienced a two month
delay in shipment of the Company's TDZ 2000 line of workstations as
the result of Intel's wrongful conduct and delays. Order levels in
1998 were further reduced by the first quarter sale of the Company's
Solid Edge and Engineering Modeling System product lines. In 1999,
order volumes declined worldwide, primarily in the Company's hardware
business as demand continued to weaken, though some weakness has been
noted in the Company's software segments as well, particularly in the
Company's international markets.
Geographic Regions. U.S. systems orders, including federal
government orders, totaled $313 million for the year, down 30% from
the prior year after increases of 11% and 24% in 1998 and 1997,
respectively. The increases in both 1997 and 1998 were attributable
to growth in the Company's hardware business and in orders received
from the federal government. Federal orders were up 25% and 5%,
respectively, in 1997 and 1998. Orders growth in 1998, both federal
and commercial, was concentrated primarily in the fourth quarter as
the U.S. hardware business began to recover slightly from the effects
of the Intel dispute. However, in 1999, demand for the Company's
hardware product offerings weakened significantly, accounting for the
majority of the decline in U.S. orders. International orders for
1999 totaled $292 million for the year, down 15% from the prior year
after declines of 6% and 7% in 1998 and 1997, respectively. Order
levels have declined significantly in all of the Company's
international markets. Asia Pacific orders totaled $61 million in
1999, down 6% from the 1998 level after declines of 11% in 1998 and
35% in 1997. Orders in 1996 included several individually
significant orders for the Company's public safety products and
related consulting services which did not recur in 1997.
Additionally, devaluation of Asian currencies, most notably the
Korean won, had a negative impact on orders for the region during the
fourth quarter of 1997 and throughout 1998. This strengthening of
the dollar in Asian markets reduced 1998 orders by approximately 9%.
In 1999, weakening of the dollar against Asian currencies improved
order levels in that region by approximately 5%; however, this
positive impact was more than offset by weakened demand for the
Company's hardware products. European orders totaled $190 million,
down 10% from the prior year level, after declining 5% in 1998 and
remaining flat in 1997. European order levels in terms of U.S.
dollars were reduced by approximately 3% and 2% in 1999 and 1998,
respectively, due to strengthening of the U.S. dollar against the
currencies of the region.
Revenues. Total revenues from continuing operations for 1999 were
$915 million, down 9% from the prior year level after an 8% decline
in 1998 and a 3% increase in 1997.
Systems. Systems revenue from continuing operations was $623 million
in 1999, down 13% from the previous year after a decrease of 7% in
1998 and an increase of 9% in 1997. Factors previously cited as
affecting systems orders in total and on a geographic basis,
including the actions of Intel in 1997 and 1998, also affected
systems revenues over the three year period. Competitive conditions
manifested in declining per unit sales prices continue to adversely
affect the Company's systems revenues and margin. In addition, the
Company's hardware revenues remain low as the Company has lost
momentum in this market due to the actions of Intel.
Geographic Regions. Systems revenues have declined in all geographic
markets served by the Company. U.S. systems sales from continuing
operations, including sales to the federal government, declined by
12% in 1999, after decreasing by 1% in 1998 and increasing by 16% in
1997. Growth in U.S. systems sales was depressed in 1997 due to the
sale of one of the Company's unprofitable business units early in the
year. Excluding this business unit, U.S. sales growth was 21% in
1997. The revenue decline in 1998 was due primarily to a 7% decrease
in sales to the federal government, partially offset by growth in the
Company's public safety business. During the second half of 1997 and
the first quarter of 1998, Intergraph Public Safety secured several
large U.S. installations, significantly increasing the subsidiary's
revenue base. The 1999 revenue decline is primarily attributable to
weakened demand for the Company's hardware products and a 6% decline
in sales to the federal government. International sales totaled $288
million for the year, down 14% from the prior year level after a 14%
decline in 1998 and a 3% increase in 1997. European sales were down
11%, after a decline of 13% in 1998 and an increase of 6% in 1997.
Asia Pacific systems sales were down 9%, after declines of 25% and
11% in 1998 and 1997, respectively.
Software. Sales of the Company's software applications declined by
10% in 1999 after a 16% decline in 1998 and a 1% decline in 1997.
Sales of MicroStation declined by 43%, 46%, and 34% in 1999, 1998 and
1997, respectively (see "MicroStation" below for further discussion).
In 1997 and 1998, sales of the Company's plant design software
applications increased by 21% and 19%, respectively (such sales
declined by 8% in 1999), partially offsetting the effect of the loss
in MicroStation sales. However, 1998 revenues were further reduced
as a result of the sale of the Company's Solid Edge and Engineering
Modeling System product lines in early 1998 (these revenues for 1997
were $18.7 million). See "Nonoperating Income and Expense"
below for further discussion. In 1999, sales declined for all
applications, with the exception of substantial increase in sales of
Geomedia and in sales of federal software applications. Plant design
remains the Company's highest volume software offering, representing
28% of total software sales for 1999.
In terms of broad market segments, the Company's mapping/geographic
information systems and process and building applications continue to
dominate the Company's product mix at approximately 50% and 19% of
total systems sales in 1999, respectively (47% and 19%, respectively,
in 1998 and 57% and 27%, respectively, in 1997). Due to the sale of
the Company's Solid Edge and Engineering Modeling System product
lines in March 1998, mechanical design, engineering and manufacturing
applications no longer represent a significant portion of the
Company's product mix. These applications represented 14% of total
systems sales in 1997.
Hardware. Total hardware revenue decreased by 27% in 1999, after
decreasing by 10% in 1998 and increasing by 22% in 1997. Workstation
and server unit volume decreased 17% in 1999, after increases of 6%
and 67% in 1998 and 1997, respectively, while workstation and server
revenue declined by 28% and 9% in 1999 and 1998, respectively, and
increased by 6% in 1997. Price competition continues to erode per
unit selling prices, and volumes in 1998 and 1999 were suppressed by
the aforementioned factors associated with the Intel lawsuit. Sales
of peripheral hardware products decreased by 25% and 11% in 1999 and
1998, respectively, after increasing by 64% in 1997. Both the 1997
increase and the 1998 decline relate to sales of graphics cards and
storage devices. Sales of the Company's first add-in 3D graphics
cards, which began shipping during the third quarter of 1996, were
initially strong and grew throughout 1997. However, 1998 sales were
below the Company's expectations as the products approached the end
of their life cycle. Graphics sales increased by 9% in 1999 with the
availability of new products based upon the Company's Wildcat 3D
graphics technology; however, this increase was more than offset by
significant declines in the Company's sales of storage devices and
memory and of Intel options and upgrades. The Company's systems are
Windows NT/Intel-based and have been since 1994.
Federal Government Sales. Total revenue from the United States
government was approximately $149 million in 1999, $166 million in
1998, and $177 million in 1997, representing approximately 16% of
total revenues in all three years. In 1998 and 1999, U.S. government
orders and revenues were characterized by weakened demand for the
Company's hardware product offerings, due partially to increasing
price competition within the industry. The Company sells to the U.S.
government under long-term contractual arrangements, primarily
indefinite delivery, indefinite quantity and cost-plus award fee
contracts, and through commercial sales of products not covered by
long-term contracts. Approximately 52% of the Company's 1999 federal
government revenues were earned under long-term contracts. The
Company believes its relationship with the federal government to be
good. While it is fully anticipated that these contracts will remain
in effect through their expiration, the contracts are subject to
termination at the election of the government. Any loss of a
significant government contract would have an adverse impact on the
results of operations of the Company.
MicroStation. Through the end of 1994, the Company had an exclusive
license agreement with BSI, an approximately 33%-owned affiliate of
the Company, under which the Company distributed MicroStation, a
software product developed and maintained by BSI and utilized in many
of the Company's software applications. As a result of settlement of
a dispute between the companies relative to the exclusivity of the
Company's distribution license, effective January 1, 1995, the
Company has a nonexclusive license to sell MicroStation via its
direct sales force and to sell MicroStation via its indirect sales
channels if MicroStation is sold with other Intergraph products. See
"Arbitration Settlements" preceding for a description of past
arbitration proceedings between the Company and BSI.
The Company's sales of MicroStation have declined each year since the
1994 change in the license agreement, by approximately 34% in 1997,
46% in 1998, and 43% in 1999. In 1998 and 1999, MicroStation sales
represented 8% and 5% of total software revenue, respectively. The
Company is unable to predict the level of MicroStation sales that
will occur in the future, but it is likely that such sales will be
further reduced.
Maintenance and Services. Maintenance and services revenue consists
of revenues from maintenance of Company systems and from Company
provided services, primarily training and consulting. These forms of
revenue from continuing operations totaled $291 million in 1999, flat
with the 1998 level after declines of 10% and 9% in 1998 and 1997,
respectively. Maintenance revenues totaled $187 million in 1999,
down 8% after declines of 15% and 13% in 1998 and 1997, respectively.
The trend in the industry toward lower priced products and longer
warranty periods has resulted in reduced levels of maintenance
revenue, and the Company believes this trend will continue in the
future. Services revenue represented 11% of total revenues in 1999,
an increase of two percentage points from the previous year. Growth
in services revenue has partially offset the decline in maintenance
revenue. The Company is endeavoring to grow its services business
and has redirected the efforts of its hardware maintenance
organization to focus increasingly on systems integration. Revenues
from these services, however, typically produce lower gross margins
than maintenance revenues.
Gross Margin. The Company's total gross margin on revenues from
continuing operations was 31.7% in 1999, up .7 points after declines
of 4.3 points and 1.1 points in 1998 and 1997, respectively.
Margin on systems revenues from continuing operations improved 1.4
points in 1999 after declining 5.6 points and 1.1 points in 1998 and
1997, respectively. Competitive pricing conditions in the industry
have acted to reduce systems margins generally. In 1997 and 1998,
margins were also negatively impacted by an increasing hardware
content in the product mix. Margin was further reduced in 1997 by a
decrease in the mix of international systems revenues to total
Company systems revenues, due in part to strengthening of the U.S.
dollar in international markets, primarily Europe and Asia. In 1998,
margin was negatively impacted by unfavorable volume related
manufacturing variances and inventory revaluations incurred prior to
the outsourcing of the Company's manufacturing to SCI in fourth
quarter 1998. In 1999, the impact of a $7 million inventory write-
off incurred in connection with the Company's decision to exit the PC
and generic server business (see "Nonrecurring Operating Charges"
preceding) was offset by an increased software content in the product
and a decline in unfavorable manufacturing variances as the result of
the outsourcing to SCI. Systems margins continue to be negatively
impacted by strengthening of the U.S. dollar in international
markets, primarily Europe, and by the loss of volume resulting from
its dispute with Intel.
In general, the Company's systems margin may be improved by a higher
software content in the product, a weaker dollar in international
markets, a higher mix of international systems sales to total systems
sales, and reductions in prices of component parts, which generally
tend to decline over time in the industry. Systems margins may be
lowered by price competition, a higher hardware content in the
product mix, a stronger U.S. dollar in international markets, the
effects of technological changes on the value of existing
inventories, and a higher mix of federal government sales, which
generally produce lower margins than commercial sales. While the
Company is unable to predict the effects that many of these factors
may have on its systems margin, it expects continuing pressure on its
systems margin as the result of increasing industry price
competition.
Margin on maintenance and services revenues from continuing
operations declined by 1.4 points in 1999 after declines of 1.3
points in 1998 and .6 points in 1997. The margin declines over the
past three years have resulted primarily from declining maintenance
revenues. In 1999, declining maintenance revenues and margins were
partially offset by improved professional services margins.
Professional services revenues have increased by 17% from the 1998
level without a proportional increase in costs. The Company
continues to monitor its maintenance and services costs closely and
has taken certain measures, including reductions in headcount, to
align these costs with current revenue levels. The Company believes
that the trend in the industry toward lower priced products and
longer warranty periods will continue to curtail its maintenance
revenue, which will pressure maintenance margin in the absence of
corresponding cost reductions.
The industry in which the Company competes is characterized by rapid
technological change. This technological change is an important
consideration in the Company's overall inventory management program,
in which the Company endeavors to purchase only inventory supported
by firm customer orders and parts as spares for the customer
contracted maintenance of systems in its installed customer base. In
fourth quarter 1998, the Company sold substantially all of its U.S.
manufacturing assets to SCI, and SCI assumed responsibility for the
manufacturing of substantially all of the Company's hardware
products. (See "SCI" preceding for a complete description of this
transaction). Effective inventory and purchasing management remains
necessary in order for the Company to provide SCI with accurate and
timely information regarding its needs. Any unanticipated change in
technology or an inability of the Company to accurately forecast its
manufacturing needs could significantly and adversely affect gross
margins and reported results of operations.
Operating Expenses (exclusive of nonrecurring operating charges).
Operating expenses for continuing operations declined by 14% in 1999,
6% in 1998, and 1% in 1997. In response to the level of its
operating losses, the Company has reduced the total number of its
employees by 32% during the three year period ended December 31,
1999.
Product development expense declined by 18% in 1999 after declines of
15% and 4% in the two preceding years. Employee headcount in the
development area has been significantly reduced over the last three
years through reductions in force, attrition, and sales of
unprofitable business operations. Additionally, 1998 and 1999
expenses were reduced due to additional software development projects
whose cost qualifies for capitalization.
The Company capitalizes certain costs incurred after the
technological feasibility of new software products has been
established and amortizes those costs against revenues later
generated by those products. Though the Company regularly reviews
its capitalized development costs to ensure recognition of any
decline in value, it is possible that for any given product revenues
will not materialize in amounts anticipated due to industry
conditions that include intense price and performance competition, or
that product lives will be reduced due to shorter product cycles.
Should these events occur, the carrying amount of capitalized
development costs would be reduced, producing adverse effects on the
Company's systems margin and results of operations.
Sales and marketing expense declined by 22% in 1999, after declining
by 6% in 1998 and 2% in 1997. Expenses in all three years were
reduced by the strengthening of the U.S. dollar against international
currencies, primarily in Europe. In 1997, expenses were
significantly reduced due to the sale of two unprofitable business
units, but the resulting benefits were partially offset by increased
trade show activity and advertising expenses for the Company's new
products. The 1998 decline was primarily due to across the board
expense reductions in Europe resulting from restructuring actions
taken in the first quarter (see "Nonrecurring Operating Charges"
preceding.) Additional headcount reductions in late 1998 and
throughout 1999 have resulted in significant across the board expense
declines worldwide.
General and administrative expense increased by 8% in 1999 after
remaining basically flat for the previous two years. In 1997 and
1998, increases in the Company's legal expenses (see "Litigation and
Other Risks and Uncertainties" preceding) were offset by
strengthening of the U.S. dollar in the Company's international
markets and, in 1998, by benefits resulting from European headcount
reductions. The expense increase in 1999 resulted from increased bad
debt expenses in the U.S. and continuing growth in the Company's
legal fees, partially offset by across the board declines in all
other expense categories. The Company expects its general and
administrative expense to remain high in 2000 as additional legal
expenses are incurred in preparation for the Intel trial.
Additionally, the Company is anticipating a temporary duplication of
administrative expenses in connection with its efforts to verticalize
its operating segments and decentralize portions of the corporate
finance and administrative function. The Company expects that these
expenses will decline by the end of 2000.
Nonoperating Income and Expense. Interest expense for continuing
operations was $5.7 million in 1999, $7.4 million in 1998, and $6.6
million in 1997. In 1999, the Company's average outstanding debt
declined due primarily to repayment of borrowings under the Company's
revolving credit facility utilizing proceeds from sales of various
businesses and assets. See "Liquidity and Capital Resources"
following for a discussion of the Company's current financing
arrangements.
In 1997, the Company sold a stock investment in a publicly traded
affiliate, resulting in a gain of $4.9 million. This gain is
included in "Gains on sales of assets" in the 1997 consolidated
statement of operations.
In first quarter 1998, the Company sold its Solid Edge and
Engineering Modeling System product lines to Electronic Data Systems
Corporation and its Unigraphics Solutions, Inc. subsidiary for $105
million in cash. The Company recorded a gain on this transaction of
$102.8 million. This gain is included in "Gains on sales of assets"
in the 1998 consolidated statement of operations. Full year 1997
revenues and operating loss for these product lines were $35.2
million and $4.1 million, respectively. The Company estimates the
sale of this business has resulted in an annual improvement in its
operating results of approximately $5 million.
In second quarter 1998, the Company sold the assets of its printed
circuit board manufacturing facility for $16 million in cash. The
Company recorded a gain on this transaction of $8.3 million. This
gain is included in "Gains on sales of assets" in the 1998
consolidated statement of operations. The Company is now outsourcing
its printed circuit board needs. This operational change did not
materially impact the Company's results of operations in 1998.
In second quarter 1999, the Company sold InterCAP Graphics Systems,
Inc., a wholly-owned subsidiary, to Micrografx Inc., 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 in
March, 2002. The resulting gain on this transaction of $11.5 million
is included in "Gains on sales of assets" in the 1999 consolidated
statement of operations. 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. InterCAP did not have a material effect
on the Company's results of operations for the period in 1999 prior
to the sale.
"Other income (expense) - net" in the consolidated statements of
operations consists primarily of interest income, foreign exchange
gains (losses), equity in the earnings of investee companies, and
other miscellaneous items of nonoperating income and expense.
Impact of Currency Fluctuations and Currency Risk Management.
International markets, particularly Europe and Asia, continue in
importance to the industry and to each of the Company's operating
segments. The Company's operations are subject to and may be
adversely affected by a variety of risks inherent in doing business
internationally, such as government policy restrictions, currency
exchange fluctuations, and other factors.
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 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 into U.S. dollars for reporting
purposes. A stronger U.S. dollar will decrease the level of reported
U.S. dollar orders and revenues, decrease the dollar gross margin,
and decrease reported dollar operating expenses of the international
subsidiaries. Currency fluctuations did not have a significant
impact on the Company's 1999 results of operations as strengthening
of the U.S. dollar in Europe and other international regions was
offset by weakening of the dollar in the Company's Asian markets.
The Company estimates that the net strengthening of the U.S. dollar
in its international markets adversely impacted its results of
operations by approximately $.02, $.10, and $.30 per share in 1999,
1998, and 1997, respectively. To illustrate the sensitivity of the
Company's results of operations to changes in international currency
exchange rates, the Company estimates that the result of a uniform
10% strengthening in the value of the dollar relative to the
currencies in which the Company's sales are denominated would result
in a decrease in earnings of approximately $10 million for the year
ended December 31, 2000. Likewise, a uniform 10% weakening in the
value of the dollar would result in increased earnings of
approximately $9 million. This calculation assumes that each
exchange rate would change in the same direction relative to the U.S.
dollar. In addition to the direct effects of changes in exchange
rates, exchange rate fluctuations may also affect the volume of sales
and foreign currency sales prices. The Company's estimation of the
effects of changes in foreign currency exchange rates does not
consider potential changes in sales levels or local currency prices.
The Company's income statement exposure to currency fluctuations has
declined by approximately 18% from the prior year level as the result
of declining activity levels in its international regions, related to
the sales volume decline in 1999. See note 12 of Notes to
Consolidated Financial Statements for a summary of the Company's
revenues by geographic area.
The Company conducts business in all major markets outside the U.S.,
but the most significant of these operations with respect to currency
risk are located in Europe and Asia. Local currencies are the
functional currencies for the Company's European subsidiaries. The
U.S. dollar is the functional currency for all other international
subsidiaries. With respect to the currency exposures in these
regions, the objective of the Company is to protect against financial
statement volatility arising from changes in exchange rates with
respect to amounts denominated for balance sheet purposes in a
currency other than the functional currency of the local entity. The
Company will therefore enter into forward exchange contracts related
to certain balance sheet items, primarily intercompany receivables,
payables, and formalized intercompany debt, when a specific risk has
been identified. Periodic changes in the value of these contracts
offset exchange rate related changes in the financial statement value
of these balance sheet items. Forward exchange contracts, generally
less than three months in duration, are purchased with maturities
reflecting the expected settlement dates of the balance sheet items
being hedged, and only in amounts sufficient to offset possibly
significant currency rate related changes in the recorded values of
these balance sheet items, which represent a calculable exposure for
the Company from period to period. Since this risk is calculable,
and these contracts are purchased only in offsetting amounts, neither
the contracts themselves nor the exposed foreign currency denominated
balance sheet items are likely to have a significant effect on the
Company's financial position or results of operations. The Company
does not generally hedge exposures related to foreign currency
denominated assets and liabilities that are not of an intercompany
nature, unless a significant risk has been identified. It is
possible the Company could incur significant exchange gains or losses
in the case of significant, abnormal fluctuations in a particular
currency. By policy, the Company is prohibited from market
speculation via forward exchange contracts and therefore does not
take currency positions exceeding its known financial statement
exposures, and does not otherwise trade in currencies.
In 1999 and 1997, the Company incurred net foreign exchange losses
from its continuing operations of $1.3 million and $2.2 million,
respectively. (In 1998, the Company realized a net exchange gain of
$.4 million from its continuing operations.) At December 31, 1999
and 1998, the Company had outstanding forward exchange contracts with
values of approximately $.8 million and $7.6 million, respectively.
The fair values of those contracts approximated the original contract
amounts based on the insignificant amounts the Company would have
paid or received upon transferring the contracts to a third party at
those dates. Net cash flow from forward contract activity,
consisting of realized gains and losses from settlement of exposed
assets and liabilities at exchange rates in effect at the settlement
date rather than at the time of recording, settlement of the forward
contracts purchased to mitigate these exposures, and payment of bank
fees on the forward contracts was not significant for any year in the
three year period ended December 31, 1999. Deferred gains and losses
as of December 31, 1999 and 1998 were not significant.
At December 31, 1999 and 1998, the Company's only outstanding forward
exchange contracts related to formalized intercompany loans between
the Company's European subsidiaries and are immaterial to the
Company's present financial position. The Company is not currently
hedging any of its foreign currency risks in the Asia Pacific region
or its U.S. exposures related to foreign currency denominated
intercompany loans. To illustrate the sensitivity of the Company's
result of operations to changes in exchange rates for international
currencies underlying its intercompany loans, the Company estimates
that a uniform 10% strengthening or weakening in the value of the
dollar relative to the currencies in which such intercompany loans
are denominated at December 31, 1999 would not result in a
significant loss or improvement in earnings. This calculation
assumes that each exchange rate would change in the same direction
relative to the U.S. dollar.
The Company is exposed to foreign currency risks related to certain
of its financial instruments, primarily debt securities held by its
European subsidiaries, long-term mortgages on certain of its European
facilities, and an Australian term loan. The net effect of a uniform
10% change in exchange rates relative to the currencies in which
these financial instruments are denominated would not have a material
impact on the Company's results of operations.
Euro Conversion. On January 1, 1999, eleven member countries of the
European Monetary Union (EMU) fixed the conversion rates of their
national currencies to a single common currency, the "Euro". The
national currencies of the participating countries will continue to
exist through July 1, 2002, and Euro currency will begin to circulate
on January 1, 2002. All of the Company's financial systems currently
accommodate the Euro, and during 1999 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.
See Notes 1 and 5 of Notes to Consolidated Financial Statements for
further information related to management of currency risk.
Income Taxes. The Company incurred pretax losses from continuing
operations of $73.1 million in 1999, $.7 million in 1998 and $49.5
million in 1997. Income tax expense for these years resulted
primarily from taxes on individually profitable subsidiaries.
Note 9 of Notes to Consolidated Financial Statements contains a
reconciliation of statutory income tax benefit to actual income tax
expense for each year in the three year period ended December 31,
1999 and includes further details of the Company's tax position,
including net operating loss and tax credit carryforwards.
Results by Operating Segment: Effective January 1, 1998, the Company
divided its business into four reporting segments for operational and
management purposes: Intergraph Computer Systems ("ICS"), Intergraph
Public Safety, Inc. ("IPS"), the Software and Federal Systems
("Federal") business (collectively, the Software and Federal
businesses form what is termed "Intergraph"), and VeriBest, Inc.
("VeriBest"). In fourth quarter 1999, the Company sold VeriBest to
Mentor Graphics Corporation. Accordingly, VeriBest's results of
operations through the date of sale have been classified as
discontinued operations in the Company's consolidated statements of
operations for each year in the three year period ended December 31,
1999 and have been excluded from the Company's segment disclosures.
For further information regarding this sale and VeriBest's operating
results for the periods presented, see "Discontinued Operation"
preceding and Note 4 of Notes to Consolidated Financial Statements.
See Note 12 of Notes to Consolidated Financial Statements for details
of the Company's segment reporting.
ICS supplies high performance Windows NT-based graphics workstations,
3D graphic subsystems, and specialty servers. IPS develops, markets,
and implements systems for the public safety and utilities
industries. Intergraph supplies software and solutions, including
hardware purchased from ICS, consulting, and services to the process
and building and infrastructure industries and provides services and
specialized engineering and information technology to support Federal
government programs.
The Company evaluates performance of its operating segments based on
revenue and income from operations. Sales among the operating
segments, the most significant of which are sales of hardware
products and maintenance from ICS to the other segments, are
accounted for under a transfer pricing policy. Transfer prices
approximate prices that would be charged for the same or similar
property to similarly situated unrelated buyers. In the U.S.,
intersegment sales of products and services to be used for internal
purposes are charged at cost. For international subsidiaries,
transfer price is charged on intersegment sales of products and
services to be used for either internal purposes or sale to
customers. Certain expenses, primarily general and administrative
expenses, not directly attributable to an operating segment are
considered corporate in nature and are not charged to any operating
segment. In addition, gains on sales of assets and nonrecurring
charges to operations (see "Summary" section above), which were
significant in 1999 and 1998, are not credited or charged to the
operating segments.
Effective January 1, 1999, the Utilities business of Intergraph
Software was merged into IPS. Additionally, in 1999, hardware
maintenance revenues, previously attributed exclusively to ICS, were
attributed to the selling segment entities with ICS receiving transfer
price revenue for services provided to other operating segments. The
Company's 1998 segment information has been restated to reflect both
of these operational changes.
Prior to 1998, the Company utilized several variations of the current
model for evaluation of the performance of its operating segments,
depending on the Company's structure and its business environment
at the time. Segment financial information for years prior to 1998 has
not been restated to conform to the current model because it is
impractical to do so.
In 1999, ICS incurred an operating loss of $44.8 million on revenues
of $332.1 million, compared to a 1998 operating loss of $71.2 million
on revenues of $447.1 million. These operating losses exclude the
impact of certain nonrecurring income and operating expense items
associated with ICS's operations, including 1998 gains totaling $9.8
million on the sales of its printed circuit board facility and
manufacturing inventory and assets, and nonrecurring operating
charges of $.8 million and $4.5 million in 1998 and 1999,
respectively, primarily for employee termination costs. ICS's
operating loss for 1999 included a $7 million inventory write-off
resulting from the segment's exit from the PC and generic server
business. Excluding this charge, the 1999 operating loss was $37.8
million, reflecting a $33.4 million improvement from the prior year.
This improvement resulted primarily from a 32% decline in operating
expenses as the result of headcount reductions achieved in 1998 and
1999. ICS's headcount was reduced by approximately 52% during the
two year period ended December 31, 1999. ICS's 1998 and 1999 results
of operations were significantly adversely impacted by factors
associated with the Company's dispute with Intel, the effects of
which included lost momentum, lost revenue and margin, and
increased operating expenses, primarily for marketing and public
relations expenses. (See "Litigation and Other Risks and
Uncertainties" preceding for a complete discussion of the Company's
dispute with Intel and its effects on the operations of ICS and the
Company). ICS's 1998 margins were also severely impacted by volume
and inventory value related manufacturing variances incurred prior to
the outsourcing of its manufacturing to SCI in fourth quarter 1998.
In 1999, improvements in ICS's expense levels were more than offset
by declining sales volume as demand weakened for the segment's
hardware products. In response to its continuing operating losses,
in third quarter 1999, ICS exited the PC and generic server businesses
and narrowed its focus to workstations, specialty servers, digital
video products and 3D graphics cards. The Company estimates that this
change in ICS's product offerings will reduce its annual systems
revenues by approximately $70 to $80 million. The associated margins
for these products range from 15.5% to 17.5%. The segment has
announced a new line of workstations and specialty servers and
is endeavoring to replace revenue associated with its discontinued
products with increased sales volume of its new offerings. The
Company is also actively engaged in discussions with potential
business partners for ICS and is considering all other available
alternatives to help stem the losses in this business unit.
In 1999, IPS earned operating income of $10.8 million on revenues of
$96.3 million, compared to 1998 operating income of $6.2 million on
revenues of $93.4 million. The improvement in 1999 resulted
primarily from a 6 point increase in gross margin, largely due to
improved margins on professional services projects. This margin
improvement was partially offset by a 10% increase in operating
expenses, due in part to increased headcount. Growth in IPS's
revenues and operating income was limited somewhat in 1999 due to a
slowdown in large installations resulting from customer and market
concerns about potential year 2000 computing problems generally.
Additional growth is expected in 2000 as more of these systems are
brought online.
In 1999, the Software business earned operating income of $9.2
million on revenues of $476.4 million, compared to 1998 operating
income of $13.8 million on revenues of $531.5 million. The declines
in revenues and operating income from the 1998 level resulted
primarily from a 17% decline in systems revenue, due in part to
weakened demand for ICS hardware products, while margins earned on
systems sales remained relatively flat with the 1998 level at 39%.
The negative impact of the revenue decline was partially offset by a
16% decline in sales and marketing expenses as the operating segment
reduced and reorganized it sales force to align expenses with the
volume of revenue generated. Current year operating income excludes
the impact of certain nonrecurring income and operating expense items
associated with Software operations, including the arbitration
settlement charge of $8.6 million, the gain on sale of InterCAP
of $11.5 million, and nonrecurring operating charges of approximately
$5.8 million, primarily for employee severance costs. Operating
income for 1998 excludes the $102.8 million gain on sale of the
business unit's Solid Edge and Engineering Modeling System product
lines and nonrecurring operating charges of $14.6 million, primarily
for asset write-offs and employee terminations.
In 1999, Federal earned operating income of $12.4 million on revenues
of $159.8 million, compared to a 1998 operating loss of $3.0 million
on revenues of $171.5 million. The improvement in 1999 resulted
primarily from a 30% decline in operating expenses, due in part to
headcount reductions and to an increase in shipbuilding software
development costs qualifying for capitalization. Despite the revenue
decline, margins improved by 4 points from the 1998 level due
primarily to a 4 point increase in margins earned on systems sales.
Revenues and margins in both 1998 and 1999 were adversely impacted by
weakened demand for the Company's hardware product offerings.
Effective March 2000, the Federal business was renamed Intergraph
Government Solutions.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, cash totaled $88.5 million, down $7 million
from year-end 1998. Cash consumed by operations totaled $9.7
million in 1999, $31.1 million in 1998, and $20.9 million in 1997,
primarily reflecting the negative cash flow effects of operating
losses. Operating cash consumption in 1999 included the payment of
$12 million to Bentley Systems, Inc. (see "Arbitration Settlements"
preceding), payments to SCI of $10.2 million to purchase unused
inventory (see "SCI" preceding), and severance payments to employees
of approximately $9 million. In 1997, an inventory build-up consumed
approximately $16 million as a result of an anticipated increase in
hardware unit sales volume and customer demand for faster delivery of
products.
Net cash provided by investing activities totaled $25.5 million and
$99.6 million in 1999 and 1998, respectively, compared to a net
investing consumption of cash of $30.7 million in 1997. Investing
activities in 1999 included $54.1 million in proceeds from sales of
various businesses and assets. Investing activities in 1998 included
$160.5 million in proceeds from sales of various businesses and assets,
including the Company's Solid Edge and Engineering Modeling System
product lines, its manufacturing inventory and assets, and its printed
circuit board manufacturing facility, and an investment of $26.3 million
for the purchase of Zydex software rights. Other significant investing
activities in 1999 included capital expenditures of $10.2 million
($17.3 million in 1998 and $24.8 million in 1997), primarily for
Intergraph products used in hardware and software development and
sales and marketing activities, expenditures for capitalizable
software development of $20.7 million ($15.7 million in 1998 and
$10.6 million in 1997), and $11.7 million contributed by the minority
interest partner to the start-up of the Z/I Imaging business. (See
Note 15 of Notes to Consolidated Financial Statements.)
Net cash used for financing activities totaled $21 million and $19.3
million in 1999 and 1998, respectively, compared to a net financing
generation of cash of $48.4 million in 1997. Net debt repayments were
$23.6 million and $22.3 million in 1999 and 1998, respectively, while
1997 sources of cash included net borrowings of $44.9 million.
The Company's average collection period for accounts receivable in
1999 was approximately 84 days, representing a slight increase from
the prior year. Approximately 68% of the Company's 1999 revenues
were derived from international customers and the U.S. government,
both of which traditionally carry longer collection periods. The
Company continues to experience slow collections throughout the
Middle East region, particularly in Saudi Arabia. Total accounts
receivable from Middle Eastern customers was approximately $20
million at December 31, 1999 and $23 million at December 31, 1998.
Total U.S. government accounts receivable was $33 million at December
31, 1999 ($55 million at December 31, 1998). The Company endeavors
to enforce its payment terms with these and other customers, and
grants extended payment terms only in very limited circumstances.
The Company expects that capital expenditures will require $10
million to $15 million in 2000, primarily for Intergraph products
used in product development and sales and marketing activities. The
Company's revolving credit agreement, among other restrictions,
limits the level of the Company's capital expenditures.
Under the Company's January 1997 six year fixed term loan and
revolving credit agreement, as amended, available borrowings are
determined by the amounts of eligible assets of the Company (the
"borrowing base"), as defined in the agreement, primarily accounts
receivable, with maximum availability of $100 million. The $25
million term loan portion of the agreement is due at expiration of
the agreement. Borrowings are secured by a pledge of substantially
all of the Company's assets in the U.S. and certain international
receivables. The rate of interest on all borrowings under the
agreement is the greater of 7% or the Norwest Bank Minnesota National
Association base rate of interest (8.5% at December 31, 1999) plus
.625%. The amended agreement contains provisions which will lower the
interest rate upon achievement of sustained profitability by the
Company. The agreement requires the Company to pay a facility fee at
an annual rate of .15% of the amount available under the credit line,
an unused credit line fee at an annual rate of .25% of the average
unused portion of the revolving credit line, a letter of credit fee
at an annual rate of 1.5% of the undrawn amount of all outstanding
letters of credit, and a monthly agency fee. At December 31, 1999,
the Company had outstanding borrowings of $27.5 million, the $25
million term loan portion of which was classified as long-term debt
in the consolidated balance sheet, and an additional $32.4 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 $69.3 million ($68.5 at
February 29, 2000).
The term loan and revolving credit agreement contains certain
financial covenants of the Company, including minimum net worth,
minimum current ratio, and maximum levels of capital expenditures,
and restrictive covenants that limit or prevent various business
transactions (including repurchases of the Company's stock, dividend
payments, mergers, acquisitions of or investments in other
businesses, and disposal of assets including individual businesses,
subsidiaries, and divisions) and limit or prevent certain other
business changes without approval. The amended agreement has reduced
the Company's net worth covenant to $235 million at December 31,
1999, with subsequent reductions to $216 million at March 31, 2000
and $200 million at June 30, 2000. Additionally, the amended
agreement requires the Company to retain the services of an
investment banking firm to advise the Company regarding potential
partnering arrangements and other alternatives for its computer
hardware business.
In fourth quarter 1999, the Company entered into an agreement for the
sale and leaseback of its European headquarters office building in
the Netherlands. The lease has an initial term of ten years with an
early termination option after five years. The lease is accounted
for as an operating lease in accordance with Statement of Financial
Accounting Standards No. 13, Accounting for Leases. The gain realized
on the sale of approximately $4.2 million has been deferred and will
be credited to income over the ten year lease term. Payments under
the lease, which are denominated in Dutch Guilders, approximate
$1.2 million per year. Proceeds from the sale approximated $13.7
million, $4.2 million of which was used to pay off the mortgage on
the building.
At December 31, 1999, the Company had approximately $53 million in
debt on which interest is charged under various floating rate
arrangements, primarily its six year term loan and revolving credit
agreement, mortgages, and an Australian term loan (see Note 8 of
Notes to Consolidated Financial Statements). The Company is exposed
to market risk of future increases in interest rates on these loans,
with the exception of the Australian term loan, on which the Company
has entered into an interest rate swap agreement. To illustrate the
sensitivity of the Company's results of operations to changes in
interest rates on its debt, the Company estimates that its results of
operations would not be materially affected by a two point increase
or decrease in the average interest rates related to its floating
rate debt. This hypothetical change in rates was determined based on
the trend of the Company's actual rates over the past four years.
The Company's estimate assumes a level of debt consistent with the
December 31, 1999 level and does not consider the effects that
further operating losses, if any, will have on the balance of debt
outstanding. The Company's interest rate exposure has not changed
significantly from the December 31, 1998 level as the decline in its
floating rate debt resulted primarily from payments on its revolving
credit facility which, due to its short term nature, does not
represent a material interest rate exposure for the Company.
Although the Company did not generate adequate cash to fund its
operations for 1999, it did begin to generate positive cash flow from
operations in fourth quarter 1999 as the result of improved accounts
receivable collections and operating expense declines. The Company
expects continued improvement in its operating cash flows in 2000 as
a result of headcount reductions and other expense savings actions
taken during 1999. The Company believes that the combination of
improved cash flow from operations, its existing cash balances, and
cash available under its amended revolving credit agreement will be
adequate to meet cash requirements for 2000. However, the Company
must increase sales volume and continue to align its operating
expenses with the level of revenue being generated if it is to fund
its operations and build cash reserves without reliance on funds from
external financing. For the longer term, the Company anticipates no
significant nonoperating issues that will require the use of cash, and
correspondingly the adequacy of its cash reserves will be dependent on
improvement in its operating results.
FOURTH QUARTER 1999
Revenues from continuing operations in the fourth quarter were $222.6
million, down 20% from fourth quarter 1998. The Company earned net
income of $3.6 million ($.07 per share) for the quarter, compared to
a fourth quarter 1998 net loss of $20.9 million ($.43 per share).
Loss from continuing operations per share improved from $.40 in
fourth quarter 1998 to $.20 in fourth quarter 1999 due to a 3.4 point
increase in gross margin and a 17% decline in operating expenses.
Fourth quarter 1998 systems margin was negatively impacted by
expenses of approximately $7 million ($.14 per share) related to the
Company's transition to outsourcing its manufacturing operations.
The operating expense decline was concentrated primarily in the sales
and marketing area and correlates directly to the 15% decline in
headcount from the prior year level. The fourth quarter 1999 loss
from continuing operations was offset by the $14.4 million ($.29 per
share) gain on the sale of VeriBest. Exchange rate fluctuations did
not have a significant impact on fourth quarter 1999 results of
operations.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------------------
(In thousands except share and per share amounts)
Assets
Cash and cash equivalents $ 88,513 $ 95,473
Accounts receivable, net 258,768 312,123
Inventories 35,918 38,001
Other current assets 28,744 48,928
- ----------------------------------------------------------------------
Total current assets 411,943 494,525
Investments in affiliates 9,940 12,841
Other assets 68,154 61,240
Property, plant, and equipment, net 94,907 127,368
- ----------------------------------------------------------------------
Total Assets $584,944 $695,974
======================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $ 50,963 $ 64,545
Accrued compensation 35,848 42,445
Other accrued expenses 71,052 75,038
Billings in excess of sales 66,051 68,137
Income taxes payable 8,175 4,122
Short-term debt and current maturities
of long-term debt 11,547 23,718
- ----------------------------------------------------------------------
Total current liabilities 243,636 278,005
Deferred income taxes 2,620 3,142
Long-term debt 51,379 59,495
Other noncurrent liabilities 10,609 ---
- ----------------------------------------------------------------------
Total liabilities 308,244 340,642
- ----------------------------------------------------------------------
Shareholders' equity:
Common stock, par value $.10 per share --
100,000,000 shares authorized;
57,361,362 shares issued 5,736 5,736
Additional paid-in capital 216,943 222,705
Retained earnings 178,231 249,808
Accumulated other comprehensive income
(loss) - cumulative translation adjustment (5,506) 4,161
- ----------------------------------------------------------------------
395,404 482,410
Less -- cost of 8,145,149 treasury shares
at December 31, 1999, and 8,719,612
treasury shares at December 31, 1998 (118,704) (127,078)
- ----------------------------------------------------------------------
Total shareholders' equity 276,700 355,332
- ----------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $584,944 $695,974
======================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
(In thousands except per share amounts)
Revenues
Systems $623,451 $ 712,916 $ 770,384
Maintenance and services 291,429 292,091 325,241
- -----------------------------------------------------------------------------
Total revenues 914,880 1,005,007 1,095,625
- -----------------------------------------------------------------------------
Cost of revenues
Systems 436,254 508,836 506,752
Maintenance and services 188,691 185,028 201,655
- -----------------------------------------------------------------------------
Total cost of revenues 624,945 693,864 708,407
- -----------------------------------------------------------------------------
Gross profit 289,935 311,143 387,218
Product development 62,638 76,818 90,298
Sales and marketing 169,805 219,044 233,041
General and administrative 109,336 100,936 101,026
Nonrecurring operating charges 15,596 15,343 1,095
- -----------------------------------------------------------------------------
Loss from operations (67,440) (100,998) (38,242)
Gains on sales of assets 11,505 112,533 4,858
Arbitration settlements ( 8,562) --- ( 6,126)
Interest expense ( 5,663) ( 7,441) ( 6,579)
Other income (expense) -- net ( 2,901) ( 4,822) ( 3,401)
- -----------------------------------------------------------------------------
Loss from continuing operations
before income taxes (73,061) ( 728) (49,490)
Income tax expense ( 5,500) ( 6,000) ( 4,000)
- -----------------------------------------------------------------------------
Loss from continuing operations (78,561) ( 6,728) (53,490)
Gain on sale of discontinued operation, net
of income taxes 14,384 --- ---
Loss from discontinued operation, net of
income taxes ( 7,400) ( 12,906) (16,747)
- -----------------------------------------------------------------------------
Net loss $(71,577) $ ( 19,634) $ (70,237)
=============================================================================
Income (loss) per share-basic and diluted:
Continuing operations $( 1.60) $ ( .14) $ ( 1.11)
Discontinued operations .14 ( .27) ( .35)
- -----------------------------------------------------------------------------
Net loss $( 1.46) $ ( .41) $ ( 1.46)
=============================================================================
Weighted average shares outstanding-basic
and diluted 48,906 48,376 47,945
=============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net loss $(71,577) $( 19,634) $(70,237)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation 21,228 29,446 37,283
Amortization 26,878 25,274 23,049
Noncash portion of arbitration
settlements 3,530 --- 5,835
Noncash portion of nonrecurring
operating charges 9,614 11,506 ---
Deferred income tax expense 45 95 1,555
Gains on sales of assets (25,889) (112,533) ( 4,858)
Net changes in current assets and
liabilities 26,490 34,738 (13,573)
- -----------------------------------------------------------------------------
Net cash used for operating activities ( 9,681) ( 31,108) (20,946)
- -----------------------------------------------------------------------------
Investing Activities:
Net proceeds from sales of assets 54,056 160,487 5,749
Contributions from minority interest
partner 11,732 --- ---
Purchases of property, plant, and
equipment (10,221) ( 17,264) (24,785)
Capitalized software development costs (20,656) ( 15,738) (10,592)
Capitalized internal use software costs ( 5,875) ( 802) ( 644)
Purchase of software rights --- ( 26,292) ---
Other ( 3,579) ( 757) ( 394)
- -----------------------------------------------------------------------------
Net cash provided by (used for)
investing activities 25,457 99,634 (30,666)
- -----------------------------------------------------------------------------
Financing Activities:
Gross borrowings --- 10,689 75,896
Debt repayment (23,605) ( 32,949) (30,950)
Proceeds of employee stock purchases and
exercises of stock options 2,612 2,940 3,483
- -----------------------------------------------------------------------------
Net cash provided by (used for)
financing activities (20,993) ( 19,320) 48,429
- -----------------------------------------------------------------------------
Effect of exchange rate changes on cash ( 1,743) ( 378) ( 846)
- -----------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents ( 6,960) 48,828 ( 4,029)
Cash and cash equivalents at beginning
of year 95,473 46,645 50,674
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 88,513 $ 95,473 $ 46,645
=============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
<TABLE>
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated Total
Additional Other Share-
Common Paid-in Retained Comprehensive Treasury holders'
Stock Capital Earnings Income (Loss) Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $5,736 $229,675 $339,679 $12,907 $(140,734) $447,263
Comprehensive loss:
Net loss --- --- (70,237) --- --- (70,237)
Other comprehensive loss:
Net unrealized holding loss on securities of affiliate --- --- --- (6,858) --- ( 6,858)
Foreign currency translation adjustments --- --- --- (4,959) --- ( 4,959)
--------
Comprehensive loss --- --- --- --- --- (82,054)
========
Issuance of 432,263 shares under employee stock purchase plan --- (3,149) --- --- 6,301 3,152
Issuance of 40,187 shares upon exercise of stock options --- ( 255) --- --- 586 331
Other --- 91 --- --- --- 91
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 5,736 226,362 269,442 1,090 (133,847) 368,783
Comprehensive income (loss):
Net loss --- --- (19,634) --- --- (19,634)
Other comprehensive income - foreign currency translation adjustments --- --- --- 3,071 --- 3,071
--------
Comprehensive loss --- --- --- --- --- (16,563)
========
Issuance of 464,230 shares under employee stock purchase plan --- (3,829) --- --- 6,769 2,940
Other --- 172 --- --- --- 172
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 5,736 222,705 249,808 4,161 (127,078) 355,332
Comprehensive loss:
Net loss --- --- (71,577) --- --- (71,577)
Other comprehensive loss:
Foreign currency translation adjustments --- --- --- (9,340) --- ---
Less: Net translation gain realized upon sales of subsidiaries --- --- --- ( 327) --- ---
-------
Net foreign currency translation adjustments --- --- --- (9,667) --- ( 9,667)
------- --------
Comprehensive loss --- --- --- --- --- (81,244)
========
Issuance of 557,713 shares under employee stock purchase plan --- (5,539) --- --- 8,130 2,591
Issuance of 16,750 shares upon exercise of stock options --- ( 223) --- --- 244 21
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $5,736 $216,943 $178,231 $(5,506) $(118,704) $276,700
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES.
Basis of Presentation: The consolidated financial statements
include the accounts of Intergraph Corporation and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. As discussed
in Note 4, the Company sold its VeriBest, Inc. operating segment on
October 31, 1999 and, accordingly, its operating results have been
removed from continuing operations and are reported as discontinued
operations for all years presented.
The preparation of financial statements in conformity with
generally accepted accounting principles requires that management
make estimates and assumptions that affect the amounts reported in
the financial statements and determine whether contingent assets
and liabilities, if any, are disclosed in the financial statements.
The ultimate resolution of issues requiring these estimates and
assumptions could differ significantly from the resolution
currently anticipated by management and on which the financial
statements are based.
The Company's continuing operations are divided into three separate
business units for operational and management purposes: Intergraph
Computer Systems ("ICS"), Intergraph Public Safety, Inc. ("IPS"),
and the Software and Federal Systems ("Federal") business
(collectively, the Software and Federal businesses form what is
termed "Intergraph"). Effective March 2000, the Federal business
was renamed Intergraph Government Solutions. ICS supplies high
performance Windows NT-based graphics workstations, 3D graphics
subsystems, and specialty servers. IPS develops, markets, and
implements systems for the public safety and utilities industries.
Intergraph supplies software and solutions, including hardware,
consulting, and services, to the federal government and to the
process and building and infrastructure industries. The Company's
products are sold worldwide, with United States and European revenues
representing approximately 79% of total revenues for 1999. See Note
12 for further information regarding the Company's operating segments
and the geographic markets it serves.
The Company's hardware products and software applications are used
for computer-aided design and engineering, mapping and geographic
information services, and technical information management in
industries such as process plant design, shipbuilding, utilities,
communications, transportation, public safety, and local and
federal government.
Cash Equivalents: The Company's excess funds are generally
invested in short-term, highly liquid, interest-bearing securities,
which may include short-term municipal bonds, time deposits, money
market preferred stocks, commercial paper, and U.S. government
securities. The Company's investment policy limits the amount of
credit exposure to any single issuer of securities. Cash
equivalents are stated at fair market value based on quoted market
prices. Investments with original maturities of three months or
less are considered to be cash equivalents for purposes of
financial statement presentation.
The Company's investments in debt securities are valued at fair
market value with any unrealized gains and losses reported as a
component of shareholders' equity, net of tax. At December 31,
1999 and 1998, the Company held various debt securities within
three months of maturity at those dates, with fair market values of
approximately $33,000,000 and $54,000,000, respectively. Gross
realized gains and losses on debt securities sold during the years
ended December 31, 1999 and 1998 were not significant, and there
were no unrealized holding gains or losses on debt securities at
December 31, 1999 or 1998.
The Company's December 31, 1999 consolidated cash balance includes
approximately $13,000,000 held by a 60%-owned consolidated
subsidiary.
Inventories: Inventories are stated at the lower of average cost
or market and are summarized as follows:
- ----------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------
(In thousands)
Raw materials $ 4,982 $ 2,739
Work-in-process 13,645 3,594
Finished goods 5,895 15,597
Service spares 11,396 16,071
- ----------------------------------------------------------
Totals $35,918 $38,001
==========================================================
On November 13, 1998, the Company sold substantially all of its
U.S. manufacturing assets (including inventories with a book value
of approximately $60,000,000) to SCI Technology Inc. ("SCI"), a
wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. On June 30, 1999, the Company
repurchased inventory from SCI having a value of approximately
$10,200,000, the majority of which is classified as raw materials
and work-in-process. For a complete description of these
transactions, see "SCI" included in Management's Discussion and
Analysis of Financial Condition and Results of Operations on page
19 of this annual report.
In third quarter 1999, as a result of the Company's exit from the
personal computer ("PC") and generic server business, the Company
recorded an inventory write-down of approximately $7,000,000,
primarily related to its finished goods inventory. See
"Nonrecurring Operating Charges" included in Management's
Discussion and Analysis of Financial Condition and Results of
Operations on pages 17 to 19 of this annual report for further
discussion.
The industry in which the Company competes is characterized by
rapid technological change. This technological change is an
important consideration in the Company's overall inventory
management program, in which the Company endeavors to carry only
parts and systems utilizable with the technology of its current
product offerings and as spares for the contracted maintenance of
systems in its installed customer base. The Company regularly
estimates the degree of technological obsolescence in its
inventories and provides inventory reserves on that basis. Though
the Company believes it has adequately provided for any such
declines in inventory value to date, any unanticipated change in
technology could significantly affect the value of the Company's
inventories and thereby adversely affect gross margins and results
of operations. In addition, an inability by the Company to
accurately forecast its manufacturing requirements of SCI could
adversely affect gross margin and results of operations.
Investments in Affiliates: Investments in companies in which the
Company believes it has the ability to influence operations or
finances are accounted for by the equity method. Investments in
companies in which the Company does not exert such influence are
accounted for at fair value if such values are readily
determinable, and at cost if such values are not readily
determinable. Effective January 1, 1998, the Company ceased
accounting for its investment in Bentley Systems, Inc. ("BSI")
under the equity method due to a lack of significant influence. On
April 1, 1999, as the result of an arbitration settlement with BSI,
the Company's equity ownership in BSI was reduced from
approximately 50% to 33%, and the book value of the Company's
investment in BSI was reduced accordingly. See Note 13 and
"Arbitration Settlements" included in Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages
22 to 23 of this annual report for further discussion of the
Company's arbitration proceedings and business relationship with
BSI. The book value of the Company's investment in BSI was
approximately $9,190,000 at December 31, 1999. The Company is
unable to determine the fair value of this investment.
During 1997, the Company sold its stock investment in a publicly
traded affiliate at a gain of $4,858,000. At January 1, 1997, the
unrealized gain on this investment resulting from periodic mark-to-
market adjustments totaled $6,858,000. This unrealized gain is
included in "Accumulated Other Comprehensive Income (Loss)" in the
consolidated statements of shareholder's equity as of that date.
Property, Plant, and Equipment: Property, plant, and equipment,
summarized below, is stated at cost. Depreciation is provided
using the straight line method over the estimated useful lives
described below.
- -------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------
(In thousands)
Land and improvements (15-30 years) $ 11,278 $ 13,948
Buildings and improvements (30 years) 113,455 132,759
Equipment, furniture, and fixtures (3-8 years) 184,393 239,735
- -------------------------------------------------------------------
309,126 386,442
Allowances for depreciation (214,219) (259,074)
- -------------------------------------------------------------------
Totals $ 94,907 $127,368
===================================================================
Significant dispositions of property, plant, and equipment in 1999
include the sale-leaseback of a European office building having a
net book value of approximately $9,000,000 at the date of sale
(see Note 8). The remaining decline in net property, plant, and
equipment is due primarily to depreciation expense and write-offs
of internal systems no longer in use as the result of reductions
in force and other actions taken to downsize the Company.
Other Noncurrent Liabilities: Other noncurrent liabilities of
$10,609,000 reflected in the Company's December 31, 1999
consolidated balance sheet consist of liabilities incurred in
connection with a business acquisition in January 1999 (see Note
15), deferred gain on the sale-leaseback of a European office
building (see Note 8), and minority interest in the equity of a
60%-owned subsidiary of the Company (see Note 15).
Treasury Stock: Treasury stock is accounted for by the cost
method. The Board of Directors of the Company has authorized the
purchase of up to 20,000,000 shares of the Company's common stock
in the open market. As of December 31, 1999, the Company had
purchased approximately 18,800,000 shares for the treasury with
the last purchase occurring in 1994. Further purchases of stock
for the treasury are restricted by terms of the Company's term
loan and revolving credit agreement. See Note 8. Treasury stock
activity is presented in the consolidated statements of
shareholders' equity.
Revenue Recognition: Revenues from systems sales with no
significant post-shipment obligations are recognized as equipment
and/or software are shipped, with any post-shipment costs accrued
at that time. Revenues on systems sales with significant post-
shipment obligations, including the production, modification, or
customization of software, are recognized by the percentage-of-
completion method, with progress to completion measured on the
basis of completion of milestones, labor costs incurred currently
versus the total estimated cost of performing the contract over its
term, or other factors appropriate to the individual contract of
sale. The total amount of revenues to be earned under contracts
accounted for by the percentage-of-completion method are generally
fixed by contractual terms. The Company regularly reviews its
progress on these contracts and revises the estimated costs of
fulfilling its obligations. Due to uncertainties inherent in the
estimation process, it is possible that completion costs will be
further revised on some of these contracts, which could delay
revenue recognition and decrease the gross margin to be earned. Any
losses identified in the review process are recognized in full in
the period in which determined.
Revenues from certain contracts with the U.S. government, primarily
cost-plus award fee contracts, are recognized monthly as costs are
incurred and fees are earned under the contracts.
Maintenance and services revenues are recognized ratably over the
lives of the maintenance contracts or as services are performed.
Effective January 1, 1998, the Company adopted American Institute
of Certified Public Accountants Statement of Position 97-2,
Software Revenue Recognition. The Statement requires each element
of a software sale arrangement to be separately identified and
accounted for based on the relative fair value of each element.
Revenue cannot be recognized on any element of the sale arrangement
if undelivered elements are essential to the functionality of
delivered elements. Adoption of this new accounting standard did
not significantly affect the Company's results of operations for
1998 and 1999 as the Company's revenue recognition policies have
historically been in substantial compliance with the practices
required by the new pronouncement.
Billings may not coincide with the recognition of revenue.
Unbilled accounts receivable occur when revenue recognition
precedes billing to the customer, and arise primarily from
commercial sales with predetermined billing schedules, U.S.
government sales with billing at the end of a performance period,
and U.S. government cost-plus award fee contracts. Billings in
excess of sales occur when billing to the customer precedes revenue
recognition, and arise primarily from maintenance revenue billed in
advance of performance of the maintenance activity and systems
revenue recognized on the percentage-of-completion method.
Product Development Costs: The Company capitalizes certain costs
of computer software development incurred after the technological
feasibility of the product has been established. Such capitalized
costs are amortized on a straight line basis over a period of two
to five years. Amortization of these capitalized costs, included
in "Cost of revenues - Systems" in the consolidated statements of
operations, amounted to $14,600,000 in 1999, $12,700,000 in 1998,
and $10,500,000 in 1997. Amortization included in discontinued
operations amounted to $2,400,000 in 1999, $2,900,000 in 1998, and
$3,100,000 in 1997. The unamortized balance of these capitalized
costs, included in "Other assets" in the consolidated balance
sheets, totaled $23,500,000 and $23,000,000 at December 31, 1999
and 1998, respectively.
Although the Company regularly reviews its capitalized development
costs to ensure recognition of any decline in value, it is possible
that for any given product revenues will not materialize in amounts
anticipated due to industry conditions that include intense price
and performance competition, or that product lives will be reduced
due to shorter product cycles. Should either of these events
occur, the carrying amount of capitalized development costs would
be reduced, producing adverse effects on systems cost of revenues
and results of operations.
Foreign Currency Exchange and Translation: Local currencies are
the functional currencies for the Company's European subsidiaries.
The U.S. dollar is the functional currency for all other
international subsidiaries. Foreign currency gains and losses
resulting from remeasurement or settlement of receivables and
payables denominated in a currency other than the functional
currency, together with gains and losses and fees paid in
connection with the Company's forward exchange contracts, are
included in "Other income (expense) - net" in the consolidated
statements of operations. Net exchange gains (losses) from
continuing operations totaled ($1,300,000) in 1999, $400,000 in
1998, and ($2,200,000) in 1997. Translation gains and losses
resulting from translation of subsidiaries' financial statements
from the functional currency into dollars for U.S. reporting
purposes and foreign currency gains and losses resulting from
remeasurement of intercompany advances of a long-term investment
nature are included in the "Accumulated other comprehensive income
(loss) - cumulative translation adjustment" component of shareholders'
equity.
Derivative Financial Instruments: Derivatives utilized by the
Company consist of forward exchange contracts and interest rate
swap agreements. The Company is prohibited by policy from taking
derivative positions exceeding its known balance sheet exposures
and from otherwise trading in derivative financial instruments.
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. With respect to the
currency exposures in these regions, the objective of the Company
is to protect against financial statement volatility arising from
changes in exchange rates with respect to amounts denominated for
balance sheet purposes in a currency other than the functional
currency of the local entity. The Company will therefore enter
into forward exchange contracts related to certain balance sheet
items, primarily intercompany receivables, payables, and formalized
intercompany debt, when a significant risk has been identified.
Periodic changes in the value of these contracts offset exchange
rate related changes in the financial statement value of these
balance sheet items. Forward exchange contracts are purchased with
maturities reflecting the expected settlement dates of the balance
sheet items being hedged, which are generally less than three
months, and only in amounts sufficient to offset possibly
significant currency rate related changes in the recorded values of
these balance sheet items. The Company does not generally hedge
the exposures related to other foreign currency denominated assets
and liabilities unless a significant risk has been identified.
Forward exchange contracts are accounted for under the fair value
method. Under this method, realized and unrealized gains and
losses on forward exchange contracts are recognized as offsets to
gains and losses resulting from the underlying hedged transactions
in the period in which exchange rates change and are included in
"Other income (expense) - net" in the consolidated statements of
operations. Bank fees charged on the contracts are amortized over
the period of the contract. Gain or loss on termination of a
forward exchange contract is recognized in the period in which the
contract is terminated. In the event of early settlement of a
hedged intercompany asset or liability, the related forward
exchange contract gains or losses are recognized in the period in
which exchange rates change.
The Company enters into interest rate swap agreements to reduce the
risk of increases in interest rates on certain of its outstanding
floating rate debt. The Company enters into agreements in which
the principal and term of the interest rate swap match those of the
specific debt obligation being hedged. The Company pays a fixed
rate of interest and receives payment based on a variable rate of
interest, and is thus exposed to market risk of potential decreases
in interest rates. Interest rate swap agreements are accounted for
under the accrual method. Under this method, the differences in
amounts paid and received under interest rate swap agreements are
recognized in the period in which the payments and receipts occur
and are included in "Interest expense" in the consolidated
statements of operations. Gain or loss on termination of an
interest rate swap agreement is deferred and amortized as an
adjustment to interest expense over the remaining term of the
original contract life of the terminated swap agreement. In the
event of early extinguishment of a debt obligation, any realized or
unrealized gain or loss on the related swap agreement is recognized
in income coincident with the extinguishment gain or loss.
Amounts payable to or receivable from counterparties related to
derivative financial instruments are included in "Other accrued
expenses" or "Other current assets" in the consolidated balance
sheets. These amounts were not significant at December 31, 1999 or
1998.
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 all derivatives as either
assets or liabilities on the balance sheet and to measure the
instruments at fair value. In July 1999, the FASB delayed the
implementation of this new accounting standard to fiscal years
beginning after June 15, 2000 (calendar year 2001 for the Company).
The Company is evaluating the effects of adopting SFAS 133 but does
not anticipate a significant impact on its consolidated operating
results or financial position.
See Note 5 for further details of the Company's derivative
financial instruments.
Stock-Based Compensation Plans: The Company maintains a stock
purchase plan and two fixed stock option plans for the benefit of
its employees.
Under the stock purchase plan, employees purchase stock of the
Company at 85% of the closing market price of the Company's stock
as of the last pay date of each calendar month. No compensation
expense is recognized for the difference in price paid by employees
and the fair market value of the Company's stock at the date of
purchase.
Under the fixed stock option plans, stock options may be granted to
directors and other employees at fair market value or at a price
less than fair market value at the date of grant. No compensation
expense is recognized for options granted at fair market value.
Expense associated with grants at less than fair market value,
equal to the difference in exercise price and fair market value at
the date of grant, is recognized over the vesting period of the
options.
In accordance with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company has provided pro forma basis information
to reflect results of operations and earnings per share had
compensation expense been recognized for employee stock purchases
and for stock options granted at market value at date of grant.
See Note 10.
Income Taxes: The provision for income taxes includes federal,
international, and state income taxes currently payable or
refundable and income taxes deferred because of temporary
differences between the financial statement and tax bases of assets
and liabilities. See Note 9.
Net Loss Per Share: 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 (see Note 10).
Comprehensive Income: Effective January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Under this Statement, all nonowner
changes in equity during a period are reported as a component of
comprehensive income (loss). With respect to the Company, such
nonowner equity items include foreign currency translation
adjustments and unrealized gains and losses on certain investments
in debt and equity securities. The Company's comprehensive losses
for each year in the three year period ended December 31, 1999 are
displayed in the Consolidated Statements of Shareholders' Equity.
Accumulated other comprehensive income (loss) at the end of each of
these three years consisted of foreign currency translation
adjustments. There was no income tax effect related to any of the
items included in other comprehensive income (loss) for any year in
the three year period ended December 31, 1999. See Note 9 for
details of the Company's tax position, including net operating loss
carryforwards, and its policy for reinvestment of subsidiary
earnings.
Reclassifications: Certain reclassifications have been made to the
previously reported consolidated statements of operations and cash
flows for the years ended December 31, 1998 and 1997 to provide
comparability with the current year presentation.
NOTE 2 -- LITIGATION AND OTHER RISKS AND UNCERTAINTIES.
In addition to those described in Notes 1, 5, 7, 8, and 12, the
Company has certain risks related to its business and economic
environment and has extensive ongoing litigation with Intel
Corporation, as further described in "Litigation and Other Risks
and Uncertainties" included in Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 19 to 22
of this annual report.
NOTE 3 -- NONRECURRING OPERATING CHARGES.
The Company recorded nonrecurring operating charges from continuing
operations totaling $22,596,000 (including a $7,000,000 inventory
write-down recorded as a component of "Cost of revenues - Systems")
in 1999, $15,343,000 in 1998, and $1,095,000 in 1997. For a
complete description of these charges, see "Nonrecurring Operating
Charges" included in Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 17 to 19 of
this annual report.
NOTE 4: -- DISCONTINUED OPERATIONS.
On October 31, 1999, the Company sold its VeriBest, Inc. operating
segment to Mentor Graphics Corporation, a global provider of
electronic hardware and software design solutions and consulting
services, for approximately $11,000,000, primarily in the form of
cash received at closing. The resulting gain on this transaction
of $14,384,000 is reflected in "Gain on sale of discontinued
operation, net of income taxes" in the consolidated statement of
operations for the year ended December 31, 1999.
The Company's consolidated statements of operations for each year
in the three year period ended December 31, 1999 have been restated
to reflect VeriBest's business as a discontinued operation.
Discontinued operations have not been presented separately in the
consolidated balance sheet for December 31, 1998 or in the
consolidated statements of cash flows. Other than their operating
losses for the periods presented, the discontinued operations did
not have a significant impact on the Company's consolidated cash
flow or financial position.
Summarized financial information for VeriBest is presented below.
For this presentation, VeriBest's operating and net losses for each
year in the three year period ended December 31, 1999 have been
adjusted to exclude the impact of intercompany revenue and expense
items.
- ------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
(In thousands)
Revenues from unaffiliated customers $23,704 $27,783 $28,680
Operating loss before nonrecurring charges (6,460) (12,708) (16,674)
Nonrecurring operating charges 871 500 ---
Net loss $(7,400) $(12,906) $(16,747)
========================================================================
VeriBest's assets and liabilities at December 31, 1998 totaled
$15,274,000 and $11,064,000, respectively.
NOTE 5 -- FINANCIAL INSTRUMENTS.
Information related to the Company's financial instruments, other
than cash equivalents and stock investments in less than 50%-owned
companies, is summarized below.
Short- and Long-Term Debt: The balance sheet carrying amounts of
the Company's floating rate debt (approximately $53,000,000 at
December 31, 1999), consisting primarily of loans under a revolving
credit agreement, mortgages, and a term loan (see Note 8),
approximate fair market values since interest rates on the debt
adjust periodically to reflect changes in market rates of interest.
With the exception of the Australian term loan (see Note 8), the
Company is exposed to market risk of future increases in interest
rates on these loans. The carrying amounts of fixed rate debt
approximate fair market values based on current interest rates for
debt of the same remaining maturities and character.
Convertible debenture: As part of the proceeds of the April 1999
sale of its InterCAP subsidiary (see Note 15), the Company received
a $5,797,000 convertible subordinated debenture from Micrografx,
Inc. due on March 31, 2002. The conversion feature allows the
Company to convert the debenture into shares of Micrografx common
stock in multiples of $500,000 at a conversion price of $10. This
conversion price may be adjusted, at Micrografx's option, based on
the twenty day average closing price of Micrografx stock on three
reset dates specified in the agreement. Micrografx also has an
option to convert the debenture into shares of their common stock
if the twenty day average closing price is at least 120% of the
applicable conversion price. The Company is unable to estimate the
fair value of the conversion option, but does not anticipate
conversion of the debenture by either party in the near term.
Accordingly, at December 31, 1999, the debenture is recorded at its
face value of $5,797,000 and included in "Other assets" in the
Company's consolidated balance sheet as of that date.
Stock warrant: As part of the proceeds of the October 1999 sale of
its VeriBest operating segment (see Note 4), the Company received a
warrant to purchase 500,000 shares of the common stock of Mentor
Graphics, Inc. at a price of $15 per share. The warrant becomes
exercisable on October 31, 2001 and expires on October 31, 2002.
The Company's estimated value of the warrant is included in
"Investments in affiliates" in the Company's December 31, 1999
consolidated balance sheet. This value was determined using the
Black-Scholes option pricing model as of the date of the sale and
as such, does not represent the actual value, if any, that will be
realized upon exercise of the warrant.
Forward exchange contracts: Outstanding notional amounts of the
Company's forward exchange contracts were $808,000 and $7,586,000
at December 31, 1999 and 1998, respectively, both reflecting a
net commitment to purchase currencies. These notional amounts
were determined by translating the foreign currency amounts to
dollars at the rates in effect at each balance sheet date. They
do not necessarily represent amounts to be exchanged between the
Company and the counterparties to the forward exchange contracts,
and as such they do not represent the amount of the Company's
currency related exposures at those dates. The amounts
potentially subject to risk, arising from the possible inability
of the counterparties to meet the terms of the contracts, are
generally limited to the amounts, if any, by which the
counterparties' obligations exceed those of the Company. Net
receivables from/payables to counterparties related to forward
exchange contracts were not significant at December 31, 1999 or
1998. The carrying amounts approximated fair value at those
dates due to the short duration (generally three months or less)
of the contracts.
Forward exchange contracts outstanding at December 31, 1999 and
1998 relate solely to formalized intercompany loans between the
Company's European subsidiaries. As of first quarter 1998, the
Company is no longer hedging its U.S. exposures related to foreign
currency denominated intercompany loans.
Based on the terms of outstanding forward exchange contracts and
the amount of the related balance sheet exposures at December 31,
1999, the Company's results of operations would not be materially
affected by a 10% increase or decrease in exchange rates underlying
the contracts and the exposures hedged. Cash requirements of
forward exchange contracts are limited to receipt of an amount
equal to the exchange gain or payment of an amount equal to the
exchange loss at the contract settlement date, and payment of bank
fees related to the contracts. Net cash flow from forward contract
activity, consisting of realized gains and losses from settlement
of exposed assets and liabilities at exchange rates in effect at
the settlement date rather than at the time of recording,
settlement of the forward contracts purchased to mitigate the
exposures, and payment of bank fees on the forward contracts, was
not significant for any year in the three year period ended
December 31, 1999.
Interest rate swap agreements: In 1996, the Company entered into
an interest rate swap agreement in the principal amount of its
Australian term loan agreement (approximately $8,100,000 at
December 31, 1999). The agreement is for a period of approximately
six years, and its expiration date coincides with that of the term
loan. Under the agreement, the Company pays a 9.18% fixed rate of
interest and receives payment based on a variable rate of interest.
The weighted average receive rate of the agreement at December 31,
1999 and 1998 was 5.84% and 6.54%, respectively. The fair market
value of this interest rate swap agreement at December 31, 1999 was
approximately $300,000 ($600,000 at December 31, 1998). Fair
market value was determined by obtaining a bank quote and
represents the amount the Company would pay should the Company's
obligation under the instrument be transferred to a third party at
the reporting date. Cash requirements of the Company's interest
rate swap agreement are limited to the differential between the
fixed rate paid and the variable rate received.
NOTE 6 -- SUPPLEMENTARY CASH FLOW INFORMATION.
Changes in current assets and liabilities, net of the effects of
business acquisitions and divestitures and nonrecurring operating
charges, in reconciling net loss to net cash used for operations
are as follows:
- ------------------------------------------------------------------------------
Cash Provided By (Used For) Operations
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable $47,418 $16,939 $(25,624)
Inventories 3,994 7,580 (21,296)
Other current assets 5,426 8,706 9,905
Increase (decrease) in:
Trade accounts payable (17,194) 2,600 11,449
Accrued compensation and other
accrued expenses (11,433) (2,527) 5,258
Income taxes payable 1,876 878 ( 1,135)
Billings in excess of sales ( 3,597) 562 7,870
- ------------------------------------------------------------------------------
Net changes in current assets and liabilities $26,490 $34,738 $(13,573)
==============================================================================
Cash payments for income taxes totaled $9,300,000, $5,200,000, and
$6,100,000 in 1999, 1998, and 1997, respectively. Cash payments
for interest in those years totaled $5,700,000, $7,700,000, and
$6,400,000, respectively.
Significant noncash investing and financing transactions in 1999
included the acquisition of a business in part for future
obligations totaling approximately $3,300,000 and the sale of a
subsidiary of the Company in part for a convertible subordinated
debenture with a value of $5,797,000. See Note 15. Investing and
financing transactions in 1998 that did not require cash included
the sale of assets in part for a deferred installment payment of
approximately $20,000,000 (see Note 15). Investing and financing
transactions in 1997 that did not require cash included the sale of
two noncore business units of the Company in part for notes
receivable and future royalties totaling $3,950,000.
NOTE 7 -- ACCOUNTS RECEIVABLE.
Concentrations of credit risk with respect to accounts receivable
are limited due to the diversity of the Company's customer base.
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral.
Historically, the Company has not experienced significant losses
related to trade receivables from individual customers or from
groups of customers in any geographic area, with the exception of
the 1994 write-off of a $5,500,000 receivable from a Middle Eastern
customer. The Company's total accounts receivable from Middle
Eastern customers approximated $20,100,000 at December 31, 1999,
and $22,900,000 at December 31, 1998.
Revenues from the U.S. government were $149,300,000 in 1999,
$166,100,000 in 1998, and $177,100,000 in 1997, representing
approximately 16% of total revenue in all three years. Accounts
receivable from the U.S. government was approximately $33,300,000
and $55,200,000 at December 31, 1999 and 1998, respectively. The
Company sells to the U.S. government under long-term contractual
arrangements, primarily indefinite delivery, indefinite quantity
and cost-plus award fee contracts, and through commercial sales of
products not covered by long-term contracts. Approximately 52% of
the Company's 1999 federal government revenues were earned under
long-term contracts. The Company believes its relationship with
the federal government to be good. While it is fully anticipated
that these contracts will remain in effect through their
expiration, the contracts are subject to termination at the
election of the government. Any loss of a significant government
contract would have an adverse impact on the results of operations
of the Company.
Accounts receivable includes unbilled amounts of $64,400,000 and
$77,400,000 at December 31, 1999 and 1998, respectively. These
amounts include amounts due under long-term contracts of
approximately $16,400,000 and $25,000,000 at December 31, 1999 and
1998, respectively.
The Company maintained reserves for uncollectible accounts,
included in "Accounts receivable" in the consolidated balance
sheets at December 31, 1999 and 1998, of $16,100,000 and
$13,800,000, respectively.
NOTE 8 -- DEBT AND LEASES.
Short- and long-term debt is summarized as follows:
- --------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------
(In thousands)
Revolving credit agreement and term loan $27,470 $39,461
Australian term loan 8,141 9,963
Long-term mortgages 13,402 20,712
Other secured debt 9,800 9,210
Short-term credit facilities 3,690 3,312
Other 423 555
- --------------------------------------------------------------------
Total debt 62,926 83,213
Less amounts payable within one year 11,547 23,718
- --------------------------------------------------------------------
Total long-term debt $51,379 $59,495
====================================================================
Under the Company's January 1997 six year fixed term loan and
revolving credit agreement, as amended, available borrowings are
determined by the amounts of eligible assets of the Company (the
"borrowing base"), as defined in the agreement, primarily accounts
receivable, with maximum availability of $100,000,000. The
$25,000,000 term loan portion of the agreement is due at expiration
of the agreement. Borrowings are secured by a pledge of
substantially all of the Company's assets in the U.S. and certain
international receivables. The rate of interest on all borrowings
under the agreement is the greater of 7% or the Norwest Bank
Minnesota National Association base rate of interest (8.5% at
December 31, 1999) plus .625%. The amended agreement contains provisions
which will lower the interest rate upon achievement of sustained
profitability by the Company. The average effective rate of
interest for the period of time in 1999 during which the Company
had outstanding borrowings under this agreement was 8.7% (9.1% in
1998). 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, a letter of
credit fee at an annual rate of 1.5% of the undrawn amount of all
outstanding letters of credit, and a monthly agency fee. At
December 31, 1999, the Company had outstanding borrowings of
$27,470,000, the $25,000,000 term loan portion of which was
classified as long-term debt in the consolidated balance sheet, and
an additional $32,400,000 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 $69,300,000 ($68,500,000 at February 29, 2000).
The term loan and revolving credit agreement contains certain
financial covenants of the Company, including minimum net worth,
minimum current ratio, and maximum levels of capital expenditures,
and restrictive covenants that limit or prevent various business
transactions (including repurchases of the Company's stock,
dividend payments, mergers, acquisitions of or investments in other
businesses, and disposal of assets including individual businesses,
subsidiaries, and divisions) and limit or prevent certain other
business changes without approval. The amended agreement has
reduced the Company's net worth covenant to $235,000,000 at
December 31, 1999, with subsequent reductions to $216,000,000 at
March 31, 2000 and $200,000,000 at June 30, 2000. Additionally,
the amended agreement requires the Company to retain the services
of an investment banking firm to advise the Company regarding
potential partnering arrangements and other alternatives for its
computer hardware business.
In August 1995, the Company entered into a term loan agreement with
an Australian bank totaling 35,000,000 Australian dollars
(approximately $23,000,000). The loan is payable in varying
installments through August 2002 and bears interest at the bank's
variable short-term lending rate, which ranged from 5% to 5.15% in
1999 (4.9% to 5.36% in 1998). Letters of credit totaling
approximately $8,100,000 are pledged as security under the loan
agreement. During 1996, the Company entered into a six year
interest rate swap agreement in the amount of the term loan to
reduce the risk of increases in interest rates, effectively
converting the interest rate on this loan to a fixed rate of 9.58%.
In 1998, the fixed pay rate was lowered to 9.18%.
The Company has two long-term mortgages on certain of its European
facilities, payable in varying installments through the year 2010.
One of the mortgages bears interest at the floating Euro Interbank
Offered Rate ("Euribor") plus 1%. Prior to January 1, 1999,
interest on this mortgage was based on the Amsterdam Interbank
Offering Rate ("AIBOR"). Rates paid on this mortgage ranged from
3.9% to 4.6% in 1999 (4.3% to 4.6% in 1998). The second mortgage,
which was entered into in December 1998, bears interest at the
United Kingdom base rate plus 1%. Rates paid on this mortgage
ranged from 6% to 7.25% in 1999.
In November 1999, the Company entered into an agreement for the
sale and leaseback of its European headquarters office building in
the Netherlands. The lease has an initial term of ten years with
an early termination option after five years. The lease is
accounted for as an operating lease in accordance with Statement of
Financial Accounting Standards No. 13, Accounting for Leases. The
net book value of the building of approximately $9,000,000 has been
removed from the Company's books, and the gain realized on the sale
of approximately $4,200,000 has been deferred and will be credited
to income over the ten year lease term. Payments under the lease,
which are denominated in Dutch Guilders, approximate $1,200,000 per
year and are included in the future minimum lease payments
presented below for the first five years of the lease. A portion
of the proceeds from the sale was used to pay off the mortgage on
the building. At the date of payment, the outstanding principal on
the mortgage was approximately $4,200,000. Interest rates paid on
this mortgage, which were based on Euribor in 1999 and AIBOR in
1998, ranged from 3.7% to 4.3% for the period in 1999 during which
the mortgage was outstanding and from 4.3% to 4.8% in 1998.
Other secured debt consists of debt to various financial
institutions payable in varying installments through 2017 and
secured by certain assets of the Company, including facilities and
internally used computer software and equipment. In March of 1997,
the Company entered into an agreement for the sale and leaseback of
one of its facilities. The amount borrowed totals approximately
$8,300,000 and is payable over a period of 20 years at an implicit
rate of interest of 10.7%. The weighted average interest rate on
this and all other secured debt was approximately 10.5% for 1999
and 11% for 1998. In February 2000, the Company entered into a
lease termination agreement with the owner of this facility and
vacated the premises.
See Note 5 for discussion of fair values of the Company's debt and
interest rate swap agreements.
The Company leases various property, plant, and equipment under
operating leases as lessee. Rental expense for operating leases
was $25,100,000 in 1999, $26,600,000 in 1998, and $30,400,000 in
1997. Subleases and contingent rentals are not significant.
Future minimum lease payments, by year and in the aggregate, under
noncancelable operating leases with initial or remaining terms of
one year or more are as follows:
- --------------------------------------------------------
Operating
Lease Commitments
- --------------------------------------------------------
(In thousands)
2000 $18,800
2001 12,800
2002 9,100
2003 6,100
2004 4,100
Thereafter 21,700
- --------------------------------------------------------
Total future minimum lease payments $72,600
========================================================
NOTE 9 -- INCOME TAXES.
The components of loss from continuing operations before income
taxes are as follows:
- -----------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------
(In thousands)
U.S. $(68,150) $ 6,301 $(43,035)
International ( 4,911) ( 7,029) ( 6,455)
- -----------------------------------------------------------------------
Loss from continuing operations
before income taxes $(73,061) $( 728) $(49,490)
=======================================================================
Income tax expense consists of the following:
- -----------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------
(In thousands)
Current benefit (expense):
Federal $(1,327) $(3,353) $ 1,400
International (4,128) (2,552) (3,845)
- -----------------------------------------------------------------------
Total current (5,455) (5,905) (2,445)
- -----------------------------------------------------------------------
Deferred benefit (expense):
Federal --- --- (1,726)
International ( 45) ( 95) 171
- -----------------------------------------------------------------------
Total deferred ( 45) ( 95) (1,555)
- -----------------------------------------------------------------------
Total income tax expense $(5,500) $(6,000) $(4,000)
=======================================================================
Deferred income taxes included in the Company's balance sheet
reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax return purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows:
- --------------------------------------------------------------------------
December 31, 1999 1998
- --------------------------------------------------------------------------
(In thousands)
Current Deferred Tax Assets (Liabilities):
Inventory reserves $ 13,066 $ 13,348
Vacation pay and other employee benefit accruals 5,841 5,705
Other financial statement reserves, primarily
allowances for doubtful accounts and warranty 9,142 10,333
Profit on uncompleted sales contracts ( 806) 3,074
Other current tax assets and liabilities, net 3,435 ( 1,298)
- --------------------------------------------------------------------------
30,678 31,162
Less asset valuation allowance ( 28,445) (28,344)
- --------------------------------------------------------------------------
Total net current asset (1) 2,233 2,818
- --------------------------------------------------------------------------
Noncurrent Deferred Tax Assets (Liabilities):
Net operating loss and tax credit carryforwards:
U.S. federal and state 69,895 56,636
International operations 39,446 43,555
Depreciation ( 1,495) ( 8,116)
Capitalized software development costs ( 7,704) ( 7,281)
Other noncurrent tax assets and liabilities, net 3,639 3,194
- --------------------------------------------------------------------------
103,781 87,988
Less asset valuation allowance (106,401) (91,130)
- --------------------------------------------------------------------------
Total net noncurrent liability ( 2,620) ( 3,142)
- --------------------------------------------------------------------------
Net deferred tax liability $( 387) $( 324)
==========================================================================
(1) Included in "Other current assets" in the consolidated balance
sheets.
The valuation allowance for deferred tax assets, which consists
primarily of reserves against the tax benefit of net operating loss
carryforwards, increased by $15,372,000 in 1999 due to increases in
deferred tax assets of $6,159,000 arising from changes in
deductible temporary differences and an increase of $9,150,000 in
the benefit from net operating loss carryforwards. If realized,
these reserved tax benefits will be applied to reduce income tax
expense in the year of realization.
Net operating loss carryforwards are available to offset future
earnings within the time periods specified by law. At December 31,
1999, the Company had a U.S. federal net operating loss
carryforward of approximately $159,000,000 expiring from 2009
through 2020. International net operating loss carryforwards total
approximately $107,000,000 and expire as follows:
- -------------------------------------------------------
International
Net Operating Loss
December 31, 1999 Carryforwards
- -------------------------------------------------------
(In thousands)
Expiration:
3 years or less $ 21,000
4 to 5 years 16,000
6 to 10 years 3,000
Unlimited carryforward 67,000
- -------------------------------------------------------
Total $107,000
=======================================================
Additionally, the Company has $3,500,000 of U.S. alternative
minimum tax credit carryforward which has no expiration date. U.S.
research and development tax credit carryforwards of $7,800,000 are
available to offset regular tax liability through 2012.
A reconciliation from income tax benefit at the U.S. federal
statutory tax rate of 35% to the Company's income tax expense for
continuing operations is presented below. There was no material
income tax benefit or expense related to the Company's discontinued
operation.
- ------------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------------
(In thousands)
Income tax benefit at federal statutory rate $ 25,571 $ 255 $ 17,322
Alternative minimum tax 453 ( 453) ---
Tax effects of international operations, net (10,417) (6,760) ( 4,828)
Tax effect of U.S. tax loss carried forward (20,607) 5,107 (18,019)
Prior year taxes ( 762) (2,482) 1,165
Other - net 262 (1,667) 360
- ------------------------------------------------------------------------------
Income tax expense $( 5,500) $(6,000) $( 4,000)
==============================================================================
The Company does not provide for federal income taxes or tax
benefits on the undistributed earnings or losses of its
international subsidiaries because earnings are reinvested and, in
the opinion of management, will continue to be reinvested
indefinitely. At December 31, 1999, the Company had not provided
federal income taxes on earnings of individual international
subsidiaries of approximately $22,000,000. Should these earnings
be distributed in the form of dividends or otherwise, the Company
would be subject to both U.S. income taxes and withholding taxes in
the various international jurisdictions. Determination of the
related amount of unrecognized deferred U.S. income tax liability
is not practicable because of the complexities associated with its
hypothetical calculation. Withholding taxes of approximately
$600,000 would be payable if all previously unremitted earnings as
of December 31, 1999 were remitted to the U.S. company.
NOTE 10 -- STOCK-BASED COMPENSATION PLANS.
The Intergraph Corporation 1997 Stock Option Plan was approved by
shareholders in May 1997. Under this plan, the Company reserved a
total of 3,000,000 shares of common stock to grant as options to
key employees. In May 1999, the plan was amended to increase the
number of shares of common stock that may be issued pursuant to the
plan by 2,000,000 shares. Options may be granted at fair market
value or at a price less than fair market value on the date of
grant. Options are not exercisable prior to twenty four months
from the date of grant or later than ten years after the date of
grant. At December 31, 1999, 2,654,937 shares were available for
future grants.
The Intergraph Corporation Nonemployee Director Stock Option Plan
was approved by shareholders in May 1998. The Company has reserved
a total of 250,000 shares of common stock to grant as options under
this plan. The exercise price of each option granted is the fair
market value on the date of grant. Options are not exercisable
prior to one year from the date of grant or later than ten years
after the date of grant. Upon approval of this plan, members of
the Company's Board of Directors who were not otherwise employed by
the Company were granted options to purchase 3,000 shares of the
Company's common stock. Any new nonemployee director will
similarly be granted an option to purchase 3,000 shares of common
stock upon his or her first election to the Board. At each annual
meeting of shareholders, each nonemployee director re-elected to
the Board is granted an option to purchase 1,500 shares of the
Company's common stock. Options to purchase 4,500 and 12,000
shares of the Company's common stock were granted in 1999 and 1998,
respectively, under this plan. At December 31, 1999, 233,500
shares were available for future grants.
Under the 1995 Employee Stock Purchase Plan, 3,200,000 shares of
common stock were made available for purchase through a series of
five consecutive annual offerings each June beginning June 1, 1995.
In order to purchase stock, each participant may have up to 10% of
his or her pay, not to exceed $25,000 in any offering period,
withheld through payroll deductions. All full time employees,
except members of the Administrative Committee of the Plan, are
eligible to participate. The purchase price of each share is 85%
of the closing market price of the Company's common stock on the
last pay date of each calendar month. Employees purchased 557,713,
464,230, and 432,263 shares of stock in 1999, 1998, and 1997,
respectively, under the 1995 plan. At December 31, 1999, 1,201,521
shares were available for future purchases. The Company's Board of
Directors has approved a successor plan with substantially the same
terms as the 1995 plan which will be voted upon at the Annual
Meeting of Shareholders in May 2000.
As allowed under the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), the Company has elected to apply
Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations in
accounting for its stock-based plans. Accordingly, the Company has
recognized no compensation expense for these plans. Had the
Company accounted for its stock-based compensation plans based on
the fair value of awards at grant date consistent with the
methodology of SFAS 123, the Company's net loss and loss per share
would have been increased as indicated below. The effects of
applying SFAS 123 on a pro forma basis for the three year period
ended December 31, 1999 are not likely to be representative of the
effects on reported pro forma net income (loss) for future years as
options vest over several years and as it is anticipated that
additional grants will be made in future years.
- ------------------------------------------------------------------------
Year Ended December 31, 1999 1998 1997
- ------------------------------------------------------------------------
(In thousands except per share amounts)
Net loss As reported $(71,577) $(19,634) $(70,237)
Pro forma $(74,018) $(21,496) $(72,497)
Basic and diluted
loss per share As reported $( 1.46) $( .41) $( 1.46)
Pro forma $( 1.51) $( .44) $( 1.51)
========================================================================
Under the methodology of SFAS 123, the fair value of the Company's
fixed stock options was estimated at the date of grant using the
Black-Scholes option pricing model. The multiple option approach
was used, with assumptions for expected option life of 1.38 years
after vest date in all three years and 48% expected volatility for
the market price of the Company's stock in 1999 (45% in 1998 and
43% in 1997). Dividend yield is excluded from the calculation
since it is the present policy of the Company to retain all
earnings to finance operations. Risk free interest rates were
determined separately for the grants in each year and are as
follows:
- ----------------------------------------------
Risk Free Interest Rates
Expected Life ------------------------
(in years) 1999 1998 1997
- ----------------------------------------------
2.38 5.64% 4.13% ---
3.38 5.73% 4.19% 6.28%
4.38 5.87% 4.28% 6.38%
5.38 6.00% 4.40% 6.34%
6.38 6.07% 4.53% 6.46%
==============================================
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective
assumptions, including expected stock price volatility. Because
the Company's employee stock options have characteristics
significantly different from those of traded options, and because
the subjectivity of assumptions can materially affect estimates of
fair value, the Company believes the Black-Scholes model does not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
Shares issued under the Company's stock purchase plan were valued
at the difference between the market value of the stock and the
discounted purchase price of the shares on the date of purchase.
The date of grant and the date of purchase coincide for this plan.
The weighted average grant date fair values of options granted to
employees during 1999, 1998, and 1997 were $2.49, $2.37, and $3.66,
respectively, under the 1997 and Nonemployee Director stock option
plans and $.82, $1.12, and $1.29, respectively, under the 1995
stock purchase plan.
Activity in the Company's fixed stock option plans for each year in
the three year period ended December 31, 1999 is summarized as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 3,587,173 $ 7.63 2,259,923 $ 9.61 1,831,417 $10.38
Granted at fair value 220,500 5.17 1,733,000 5.41 672,250 7.99
Exercised ( 16,750) 1.27 --- --- ( 40,187) 8.23
Expired --- --- --- --- ( 30,000) 16.00
Forfeited (240,627) 8.34 (405,750) 9.21 (173,557) 10.65
- ----------------------------------------------------------------------------------------------------------
Outstanding at end of year 3,550,296 $ 7.46 3,587,173 $ 7.63 2,259,923 $ 9.61
==========================================================================================================
Exercisable at end of year 1,044,111 $10.22 728,171 $10.22 540,922 $ 9.62
==========================================================================================================
</TABLE>
Further information relating to stock options outstanding at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.063 to $ 6.969 1,878,500 8.87 years $ 5.36 --- ---
$ 7.00 to $ 9.50 841,786 6.37 years 8.52 422,976 $ 8.87
$10.125 to $12.25 830,010 5.60 years 11.12 621,135 11.15
- ----------------------------------------------------------------------------------------------
3,550,296 7.51 years $ 7.46 1,044,111 $10.22
==============================================================================================
</TABLE>
Options exercised during 1999 with a weighted average exercise
price of $1.27 per share were granted in 1995 as the result of a
business acquisition in which the Company assumed the total shares
and price obligations under the acquired company's stock option
plans. As of December 31, 1999, all of the options assumed as a
result of this business acquisition have either been exercised or
cancelled. All option grants during the three year period ended
December 31, 1999 were at the fair market value of the Company's
stock on the date of grant.
NOTE 11 -- EMPLOYEE BENEFIT PLANS.
The Intergraph Corporation Stock Bonus Plan was established in 1975
to provide retirement benefits to substantially all U.S. employees.
Effective January 1, 1987, the Company amended the Plan to qualify
it as an employee stock ownership plan (ESOP). The Company made
contributions to the Plan in amounts determined at the discretion
of the Board of Directors, and the contributions were funded with
Company stock. Amounts were allocated to the accounts of
participants based on compensation. Benefits are payable to
participants subject to the vesting provisions of the Plan. The
Company has not made a contribution to the Plan since 1991.
In 1990, the Company established the Intergraph Corporation
SavingsPlus Plan, an employee savings plan qualified under Section
401(k) of the Internal Revenue Code, covering substantially all
U.S. employees. Employees can elect to contribute up to 15% of
their compensation to the Plan. The Company matches 50% of
employee contributions up to 6% of each employee's compensation.
Cash contributions by the Company to the Plan were $4,143,000,
$5,082,000, and $5,148,000, in 1999, 1998, and 1997, respectively.
The Company maintains various retirement benefit plans for employees
of its international subsidiaries, primarily defined contribution
plans that cover substantially all employees. Contributions to the
plans are made in cash and are allocated to the accounts of
participants based on compensation. Benefits are payable based on
vesting provisions contained in each plan. Contributions to the
plans were $2,873,000, $3,110,000, and $3,244,000 in 1999, 1998,
and 1997, respectively.
NOTE 12 -- SEGMENT INFORMATION.
The Company's operating segments are Intergraph Computer Systems
("ICS"), Intergraph Public Safety, Inc. ("IPS"), and the Software
and Federal Systems ("Federal") business (collectively, the
Software and Federal businesses form what is termed "Intergraph").
On 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 each year in the three
year period ended December 31, 1999. A complete description
of this transaction and its impact on the Company's results of operations
and financial position, including summarized financial information
for each year in the three year period ended December 31, 1999, is
included in Note 4.
The Company's reportable segments are strategic business units
which are organized by the types of products sold and the specific
markets served. They are managed separately due to unique
technology and marketing strategy resident in each of the Company's
markets.
ICS supplies high performance Windows NT-based graphics
workstations, 3D graphics subsystems, and specialty servers. IPS
develops, markets, and implements systems for the public safety and
utilities industries. Intergraph supplies software and solutions,
including hardware purchased from ICS, consulting, and services to
the process and building and infrastructure industries and provides
services and specialized engineering and information technology to
support Federal government programs.
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 described in Note 1.
Sales among the operating segments, the most significant of which
are sales of hardware products and maintenance from ICS to the
other segments, are accounted for under a transfer pricing policy.
Transfer prices approximate prices that would be charged for the
same or similar property to similarly situated unrelated buyers.
In the U.S., intersegment sales of products and services to be used
for internal purposes are charged at cost. For international
subsidiaries, transfer price is charged on intersegment sales of
products and services to be used for either internal purposes or
sale to customers.
The following table sets forth revenues and operating income (loss)
by operating segment for the years ended December 31, 1999 and
1998, together with supplementary information related to
depreciation and amortization expense attributable to the operating
segments.
- --------------------------------------------------------------
Year Ended December 31, 1999 1998
- --------------------------------------------------------------
(In thousands)
Revenues:
ICS:
Unaffiliated customers $ 214,476 $ 229,005
Intersegment revenues 117,631 218,103
- --------------------------------------------------------------
332,107 447,108
- --------------------------------------------------------------
IPS:
Unaffiliated customers 84,932 87,881
Intersegment revenues 11,333 5,537
- --------------------------------------------------------------
96,265 93,418
- --------------------------------------------------------------
Intergraph Software:
Unaffiliated customers 462,492 520,714
Intersegment revenues 13,860 10,819
- --------------------------------------------------------------
476,352 531,533
- --------------------------------------------------------------
Intergraph Federal:
Unaffiliated customers 152,980 167,407
Intersegment revenues 6,817 4,081
- --------------------------------------------------------------
159,797 171,488
- --------------------------------------------------------------
1,064,521 1,243,547
- --------------------------------------------------------------
Eliminations (149,641) (238,540)
- --------------------------------------------------------------
Total revenues $ 914,880 $1,005,007
==============================================================
- --------------------------------------------------------------
Year Ended December 31, 1999 1998
- --------------------------------------------------------------
(In thousands)
Operating income (loss) before nonrecurring charges:
ICS (1) $(44,808) $(71,166)
IPS 10,759 6,236
Intergraph Software 9,157 13,792
Intergraph Federal 12,371 ( 2,953)
Corporate (39,323) (31,564)
- --------------------------------------------------------------
Total $(51,844) $(85,655)
==============================================================
(1) ICS's 1999 operating loss includes a $7,000,000 nonrecurring
charge for an inventory write-down which is included as a
component of "Cost of revenues - systems" in the consolidated
statement of operations.
- --------------------------------------------------------------
Depreciation and amortization expense:
ICS $ 5,239 $10,314
IPS 5,915 5,099
Intergraph Software 28,873 30,171
Intergraph Federal 2,886 3,003
Corporate 2,180 2,294
- --------------------------------------------------------------
Total depreciation and amortization
expense from continuing
operations $45,093 $50,881
==============================================================
Amounts included in the "Corporate" category consist of general
corporate expenses, primarily general and administrative expenses
remaining after charges to the operating segments based on segment
usage of those services. Included in these amounts are legal fees
of $18,470,000 and $10,650,000, respectively, for 1999 and 1998.
Significant profit and loss items for 1999 that were not allocated
to the segments and not included in the analysis above include an
$8,562,000 charge for an arbitration settlement with Bentley
Systems, Inc. (see Note 13), an $11,505,000 gain on the sale of a
subsidiary (see Note 15), and nonrecurring operating charges of
$15,596,000 (see Note 3). Such items for 1998 include gains on
sales of assets of $112,533,000 (see Note 15) and nonrecurring
operating charges of $15,343,000 (see Note 3).
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.
Effective January 1, 1999, the Utilities business of Intergraph
Software was merged into IPS. Additionally, in 1999, hardware
maintenance revenues, previously attributed exclusively to ICS,
were attributed to the selling segment entities with ICS receiving
transfer price revenue for services provided to other operating
segments. The Company's 1998 segment information has been restated
to reflect both of these operational changes.
The operating segment information model used for 1998 and 1999
differs significantly from those utilized in prior years,
specifically in the institution of a transfer pricing system in
1998 and in the attribution of revenues to its ICS and Software
operating segments in sales transactions where both hardware and
software, and perhaps attendant services, are sold to a single
customer. The Company has found it impractical to restate segment
information for years prior to 1998 to reflect the current
reporting model, since such a restatement would involve a
transaction-by-transaction analysis.
Revenues from the U.S. government were $149,300,000 in 1999,
$166,100,000 in 1998, and $177,100,000 in 1997, representing
approximately 16% of total revenue in all three years. The
majority of these revenues are attributed to the Federal unit of
the Intergraph operating segment. The U.S. government was the only
customer accounting for more than 10% of consolidated revenue in
each year in the three year period ended December 31, 1999.
International markets, particularly Europe and Asia, continue in
importance to the industry and to each of the Company's operating
segments. The Company's operations are subject to and may be
adversely affected by a variety of risks inherent in doing business
internationally, such as government policies or restrictions,
currency exchange fluctuations, and other factors. Following is a
summary of external revenues and long-lived assets by principal
geographic area. For purposes of this presentation, revenues are
attributed to geographic areas based on customer location. Long-
lived assets include property, plant, and equipment, investments in
affiliates, and other noncurrent assets. Assets have been allocated
to geographic areas based on their physical location.
- ------------------------------------------------------------------------------
Revenues Long-lived Assets
- ------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------
(In thousands)
United States $438,649 $ 488,908 $ 512,429 $130,762 $139,128 $152,184
Europe 285,548 308,118 345,167 24,194 40,878 41,467
Asia Pacific 98,773 105,860 131,178 14,167 17,975 21,304
Other International 91,910 102,121 106,851 3,878 3,468 4,010
- ------------------------------------------------------------------------------
Total $914,880 $1,005,007 $1,095,625 $173,001 $201,449 $218,965
==============================================================================
NOTE 13 -- RELATED PARTY TRANSACTIONS.
Bentley Systems, Inc.: The Company maintains an equity ownership
position in Bentley Systems, Inc. ("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. Under the Company's distributor
agreement with BSI, the Company purchases MicroStation products for
resale to third parties. The Company's purchases from BSI totaled
$2,978,000 in 1999, $1,339,000 in 1998, and $5,656,000 in 1997.
Net receivables from or payables to BSI at December 31, 1999 and
1998 were insignificant.
In second quarter 1997, the Company received notice of the adverse
determination of an arbitration proceeding with BSI. The
arbitrator's award against the Company was in the amount of
$6,126,000 and is included in "Arbitration settlements" in the
consolidated statement of operations for the year ended December
31, 1997. Approximately $5,835,000 in fees otherwise owed the
Company by BSI were offset against the amount awarded to BSI.
In first quarter 1999, the Company entered into an arbitration
settlement agreement with BSI under which the Company made payment
of $12,000,000 and transferred to BSI ownership of three million of
the shares of BSI's Class A common stock owned by the Company. The
transferred shares were valued at approximately $3,500,000 on the
Company's books, and the Company's investment in BSI (reflected in
"Investments in affiliates" in the Company's consolidated balance
sheets) was reduced accordingly. As a result of the settlement,
Intergraph's equity ownership in BSI was reduced from approximately
50% to 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.
The Company recorded a nonoperating charge to earnings of
$8,562,000 in connection with this settlement, representing the
portion of settlement costs not previously accrued. This charge is
included in "Arbitration settlements" in the consolidated statement
of operations for the year ended December 31, 1999.
See "Arbitration Settlements" included in Management's Discussion
and Analysis of Financial Condition and Results of Operations on
pages 22 to 23 of this annual report for further discussion of the
Company's arbitration proceedings and business relationship with
BSI.
Carl Zeiss B.V: Carl Zeiss B.V. ("Carl Zeiss"), a manufacturer of
aerial cameras and photogrammetric scanning systems, has a 40%
ownership interest in Z/I Imaging Corporation ("Z/I Imaging"), a
60%-owned and consolidated subsidiary of the Company which was
formed on October 1, 1999. See Note 15 for a discussion of the
formation of Z/I Imaging. Z/I Imaging and Carl Zeiss are party to
various license, supply, and reseller agreements, under which the
two companies sell products and services to each other. During the
three month period ended December 31, 1999, Z/I Imaging's inventory
purchases from Carl Zeiss totaled $1,770,000. Sales to Carl Zeiss
during this period were not material. Z/I Imaging's net payable to
Carl Zeiss at December 31, 1999 was $2,946,000.
Loan Program for Executive Officers: In order to encourage
retention of Company stock by executive officers, the Company
adopted a loan program effective January 1993, under which
executive officers could borrow from the Company, on an unsecured
basis, an amount not exceeding (1) the market value of the common
stock of the Company owned by any such executive officer, and/or
(2) the net value (market price less exercise price) of exercisable
stock options owned by any such executive officer. Interest was
charged on these loans at the prevailing prime rate. Prior to the
April 30, 1998 expiration of the loan program, James W. Meadlock,
Chairman of the Board and former Chief Executive Officer of the
Company, was indebted to the Company in the maximum amount of
$6,129,000 under the program. Mr. Meadlock repaid his loan in full
on November 21, 1997.
NOTE 14 -- SHAREHOLDER RIGHTS PLAN.
On August 25, 1993, the Company's Board of Directors adopted a
Shareholder Rights Plan. As part of this plan, the Board of
Directors declared a distribution of one common stock purchase
right (a "Right") for each share of the Company's common stock
outstanding on September 7, 1993. Each Right entitles the holder
to purchase from the Company one common share at a price of $50,
subject to adjustment. The Rights are not exercisable until the
occurrence of certain events related to a person or a group of
affiliated or associated persons acquiring, obtaining the right to
acquire, or commencing a tender offer or exchange offer, the
consummation of which would result in beneficial ownership by such
a person or group of 15% or more of the outstanding common shares
of the Company. Rights will also become exercisable in the event
of certain mergers or an asset sale involving more than 50% of the
Company's assets or earnings power. Upon becoming exercisable,
each Right will allow the holder, except the person or group whose
action has triggered the exercisability of the Rights, to either
buy securities of Intergraph or securities of the acquiring
company, depending on the form of the transaction, having a value
of twice the exercise price of the Rights. The Rights trade with
the Company's common stock. The Rights are subject to redemption
at the option of the Board of Directors at a price of $.01 per
Right until the occurrence of certain events, and are exchangeable
for the Company's common stock at the discretion of the Board of
Directors under certain circumstances. The Rights expire on
September 7, 2003.
NOTE 15 -- ACQUISITIONS AND DIVESTITURES.
In January 1999, the Company acquired the assets of PID, an Israeli
software development company, for $5,655,000. At closing, the
Company paid $2,180,000 in cash, with the remainder due in varying
installments through February 2002. The accounts and results of
operations of PID have been combined with those of the Company
since the date of acquisition using the purchase method of
accounting. This acquisition did not materially affect the
Company's results of operations for 1999.
In April 1999, the Company sold InterCAP Graphics Systems, Inc., a
wholly-owned subsidiary, to Micrografx Inc., 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 December 31, 1999 consolidated balance
sheet). The resulting gain on this transaction of $11,505,000 is
included in "Gains on sales of assets" in the consolidated
statement of operations for the year ended December 31, 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.
Effective October 1, 1999, the Company contributed operating and
financial assets with a total net book value of approximately
$5,000,000 (including cash of $1,800,000) to Z/I Imaging
Corporation, a newly formed corporation which supplies end-to-end
photogrammetry solutions for front-end data collection to mapping
related and engineering markets, in exchange for a 60% ownership
interest in the new company. Additionally, Carl Zeiss B.V.
contributed assets and liabilities with a net book value of
approximately $4,000,000 (including cash of $11,732,000) to the new
company in exchange for a 40% ownership interest. Z/I Imaging's
assets, liabilities and results of operations are included in the
Company's consolidated financial statements. Carl Zeiss's minority
interest in earnings and equity of this subsidiary are immaterial
to the Company's consolidated operating results and financial
position. See Note 13 for a discussion of transactions between Z/I
Imaging and Carl Zeiss during the fourth quarter of 1999.
See Note 4 for a discussion of the Company's October 1999 sale of
VeriBest, Inc.
The Company filed a legal action in August 1995 seeking to
dissolve and wind up its business arrangement with Zydex, Inc., a
company with which it jointly developed its plant design software
application ("PDS"), and seeking an order allowing the Company to
continue the business of that arrangement without further
responsibility or obligation to Zydex. In November 1995, Zydex
filed a counterclaim against the Company alleging wrongful
dissolution of the business relationship and seeking both sole
ownership of PDS and significant compensatory and punitive
damages. In September 1997, the Court issued an order resolving
all disputed issues and requiring the parties to settle, and
dismissed the case. A closing of the final settlement agreement
occurred on January 15, 1998. The final settlement included the
purchase by Intergraph of 100% of the common stock of Zydex for
$26,300,000, with $16,000,000 paid at closing of the agreement and
the remaining amount payable in 15 equal monthly installments,
including interest. In March 1998, the Company prepaid in full
the remaining amount payable to Zydex. The former owner of Zydex
retains certain rights to use, but not sell or sublicense, PDS
products for a period of 15 years following the date of closing.
In addition to the purchase price of the common stock, the Company
was required to pay additional royalties to Zydex in the amount of
$1,000,000 at closing of the agreement. These royalties were
included in the Company's 1997 results of operations. The first
quarter 1998 cash payments to Zydex were funded by the Company's
primary lender and by proceeds from the sale of the Company's
Solid Edge and Engineering Modeling System product lines. The
Company accounted for the acquisition as the purchase of PDS
software rights and is amortizing those rights over an estimated
useful life of seven years. The unamortized balance,
approximately $18,800,000 at December 31, 1999, is included in
"Other assets" in the consolidated balance sheet. PDS is
currently the Company's highest volume software offering,
representing approximately 28% of total software sales for 1999.
In March 1998, the Company sold its Solid Edge and Engineering
Modeling System product lines to Electronic Data Systems
Corporation and its Unigraphics Solutions, Inc. subsidiary for
$105,000,000 in cash. The Company's gain on this transaction of
$102,767,000 is included in "Gains on sales of assets" in the 1998
consolidated statement of operations. Full year 1997 revenues and
operating losses for these product lines were $35,200,000 and
$4,100,000, respectively. Based on 1997 performance, the Company
estimates that the sale of this business resulted in an improvement
in its 1998 operating results of approximately $5,000,000,
excluding the impact of the gain on the sale.
In April 1998, the Company sold its printed circuit board
manufacturing facility for $16,002,000 in cash. The Company's gain
on this transaction of $8,275,000 is included in "Gains on sales of
assets" in the 1998 consolidated statement of operations. The
Company is now outsourcing its printed circuit board needs. This
operational change did not materially impact the Company's results
of operations in 1998.
In November 1998, the Company sold substantially all of its U.S.
manufacturing inventory and assets to SCI Technology Inc. ("SCI"),
a wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. The total purchase price was
$62,404,000, $42,485,000 of which was received during the fourth
quarter of 1998. The final purchase price installment of
$19,919,000 (included in "Other current assets" in the December 31,
1998 consolidated balance sheet) was received on January 12, 1999.
The Company's gain on this transaction of $1,491,000 is included in
"Gains on sales of assets" in the 1998 consolidated statement of
operations. As part of this transaction, SCI retained the option
to sell to the Company any inventory included in the initial
purchase which had not been utilized in the manufacture and sale of
finished goods within six months of the date of the sale (the
"unused inventory"). On June 30, 1999, SCI exercised this option
and sold to the Company unused inventory having a value of
approximately $10,200,000 in exchange for a cash payment of
$2,000,000 and a short-term installment note payable in the
principal amount of $8,200,000. This note was paid in three
monthly installments concluding October 1, 1999 and bore interest
at a rate of 9%. The Company's payments to SCI were funded
primarily with existing cash balances. For a complete description
of the SCI transaction and its impact on operating results and cash
flows, see "SCI" included in Management's Discussion and Analysis
of Financial Condition and Results of Operations on page 19 of this
annual report.
NOTE 16 - SUMMARY OF QUARTERLY INFORMATION - UNAUDITED.
- -----------------------------------------------------------------------------
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------
(In thousands except per share amounts)
Year ended December 31, 1999:
Revenues $244,610 $227,076 $220,548 $222,646
Gross profit 78,926 75,420 57,585 78,004
Loss from continuing operations (15,475) ( 9,648) (43,534) ( 9,904)
Net income (loss) (17,558) (12,092) (45,501) 3,574
Loss from continuing operations
per share - basic and diluted ( .32) ( .20) ( .89) ( .20)
Net income (loss) per share -
basic and diluted ( .36) ( .25) ( .93) .07
Weighted average shares
outstanding - basic and
diluted 48,697 48,831 48,971 49,121
Year ended December 31, 1998:
Revenues $238,913 $240,567 $247,089 $278,438
Gross profit 75,108 73,351 74,700 87,984
Income (loss) from continuing
operations 54,324 (17,305) (24,379) (19,368)
Net income (loss) 49,442 (20,988) (27,173) (20,915)
Income (loss) from continuing
operations per share -
basic and diluted 1.13 ( .36) ( .50) ( .40)
Net income (loss) per share -
basic and diluted 1.03 ( .43) ( .56) ( .43)
Weighted average shares
outstanding - basic and
diluted 48,219 48,311 48,416 48,547
==========================================================================
On October 31, 1999, the Company sold its VeriBest, Inc. operating
segment. Accordingly, the gain on the sale as well as the results
of operations for this operating segment have been excluded from
continuing operations for all periods presented.
First quarter 1999 losses included an $.18 per share charge for
settlement of the Company's arbitration proceedings with Bentley
Systems, Inc. Second quarter 1999 results included a $.24 per
share gain on the sale of a subsidiary company and a $.05 per share
nonrecurring operating charge for the resizing of the Company's
European computer hardware sales organization. Third quarter 1999
losses included nonrecurring operating charges of $.43 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 fully support the vertical markets in which the Company
operates. These actions included eliminating approximately 400
positions worldwide, consolidating offices, completing the
worldwide vertical market alignment of the sales force, and
narrowing the focus of the Company's ICS business unit to high-end
workstations, specialty servers, digital video products and 3D
graphics cards. The fourth quarter 1999 loss from continuing
operations was offset by the $.29 per share gain on the sale of
VeriBest.
First quarter 1998 earnings included a $2.13 per share gain on the
sale of the Company's Solid Edge and Engineering Modeling System
product lines and a $.31 per share charge for nonrecurring
operating expenses, primarily for employee termination costs and
write-off of certain intangible assets. Second quarter 1998 losses
were reduced by a $.17 per share gain on the sale of the Company's
printed circuit board manufacturing facility. Fourth quarter 1998
losses included expenses of approximately $.14 per share relating
to the Company's transition to outsourcing of its manufacturing
operation and a $.04 per share charge for nonrecurring operating
expenses, primarily for employee terminations.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Intergraph Corporation
We have audited the accompanying consolidated balance sheets
of Intergraph Corporation and subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements
of operations, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made
by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Intergraph Corporation and subsidiaries
at December 31, 1999 and 1998, and the consolidated results
of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Birmingham, Alabama
January 27, 2000
DIVIDEND POLICY
The Company has never declared or paid a cash dividend on its
common stock. It is the present policy of the Company's Board of
Directors to retain all earnings to finance the Company's
operations. In addition, payment of dividends is restricted by the
Company's term loan and revolving credit agreement.
PRICE RANGE OF COMMON STOCK
Since April 1981, Intergraph common stock has traded on The Nasdaq
Stock Market under the symbol INGR. As of January 31, 2000, there
were 49,252,406 shares of common stock outstanding, held by 4,427
shareholders of record. The following table sets forth, for the
periods indicated, the high and low sale prices of the Company's
common stock as reported on The Nasdaq Stock Market.
- ----------------------------------------------------------------
1999 1998
Period High Low High Low
- ----------------------------------------------------------------
First Quarter $ 7 1/4 $4 29/32 $10 3/16 $8 1/4
Second Quarter 10 1/4 6 10 9/16 7 3/16
Third Quarter 7 15/16 4 3/8 8 5/8 5 1/2
Fourth Quarter 5 13/16 3 3/16 7 4 11/16
================================================================
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank
Shareholder Services Division
311 W. Monroe Street, 11th Floor
P. O. Box A3504
Chicago, IL 60690-3504
(312) 360-5116
CORPORATE COUNSEL
Lanier Ford Shaver & Payne P.C.
200 West Side Square, Suite 5000
Huntsville, AL 35801
INDEPENDENT AUDITORS
Ernst & Young LLP
1900 AmSouth/Harbert Plaza
Birmingham, AL 35203
FORM 10-K
A copy of the Company's Form 10-K filed with the Securities and
Exchange Commission is available without charge upon written
request to Shareholder Relations, Intergraph Corporation,
Huntsville, AL 35894-0001.
ANNUAL MEETING
The annual meeting of Intergraph Corporation will be held May 18,
2000, at the Corporate offices in Huntsville, Alabama.
BOARD MEMBERS AND OFFICERS
- ---------------------------------------------------------------------------
Board of Directors Executive Vice Presidents Vice Presidents
James W. Meadlock Graeme J. Farrell Theron E. Anders
Chairman of the Board
Penman R. Gilliam Henry J. Dipietro
James F. Taylor Jr.
Chief Executive Officer Lewis N. Graham Jr. Thomas J. Doran
Robert E. Thurber Stephen J. Phillips Aggie L. Frizzell
Executive Vice President
Preetha R. Pulusani Rune Kahlbom
Larry J. Laster
William E. Salter Robert L. Kuehlthau
Thomas J. Lee
K. David Stinson Jr. Robert Patience
Sidney L. McDonald
John W. Wilhoite Gerhard Sallinger
Chief Financial Officer
James H. Slate
Edward A. Wilkinson
Richard L. Watson
Manfred Wittler
Eugene H. Wrobel
Treasurer
SECRETARY
John R. Wynn
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Annual Report on Form 10-K for the year ended December 31, 1999,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 88,513
<SECURITIES> 0
<RECEIVABLES> 274,834<F1>
<ALLOWANCES> 16,066
<INVENTORY> 35,918
<CURRENT-ASSETS> 411,943
<PP&E> 309,126
<DEPRECIATION> 214,219
<TOTAL-ASSETS> 584,944
<CURRENT-LIABILITIES> 243,636
<BONDS> 51,379
0
0
<COMMON> 5,736
<OTHER-SE> 270,964
<TOTAL-LIABILITY-AND-EQUITY> 584,944
<SALES> 623,451
<TOTAL-REVENUES> 914,880
<CGS> 436,254
<TOTAL-COSTS> 624,945
<OTHER-EXPENSES> 357,375<F2>
<LOSS-PROVISION> 6,900<F3>
<INTEREST-EXPENSE> 5,663
<INCOME-PRETAX> (73,061)
<INCOME-TAX> (5,500)
<INCOME-CONTINUING> (78,561)
<DISCONTINUED> 6,984
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (71,577)
<EPS-BASIC> (1.46)
<EPS-DILUTED> (1.46)
<FN>
<F1>Accounts receivable in the Consolidated Balance Sheet is shown net of
allowances for doubtful accounts.
<F2>Other expenses include Product development expenses, Sales and marketing
expenses, General and administrative expenses, and Nonrecurring operating
charges.
<F3>The provision for doubtful accounts is included in Other expenses above.
</FN>
</TABLE>
CONSENT
I, the undersigned, hereby consent to being named as nominee to
the Intergraph Corporation Board of Directors in the Proxy
Statement relative to the Annual Meeting of Shareholders to be
held May 18, 2000, and hereby consent to serve as a director of
Intergraph Corporation, if elected.
Dated this 20th day of March 2000.
Signature: /s/ Lawrence R. Greenwood
-------------------------
Lawrence R. Greenwood
CONSENT
I, the undersigned, hereby consent to being named as nominee to
the Intergraph Corporation Board of Directors in the Proxy
Statement relative to the Annual Meeting of Shareholders to be
held May 18, 2000, and hereby consent to serve as a director of
Intergraph Corporation, if elected.
Dated this 20th day of March 2000.
Signature: /s/ Joseph C. Moquin
----------------------
Joseph C. Moquin
