-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K2+IANGATMqZIppnPH19X1CTdA9KwI7VgX5SrXI7ZIZX9pWgBcV/yW0bmRToL+ne ooBFla93E1LKYCxkUZUUTg== 0000351145-97-000001.txt : 19970327 0000351145-97-000001.hdr.sgml : 19970327 ACCESSION NUMBER: 0000351145-97-000001 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGRAPH CORP CENTRAL INDEX KEY: 0000351145 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 630573222 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09722 FILM NUMBER: 97563729 BUSINESS ADDRESS: STREET 1: THIGPEN HQ011 #9384 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2057302000 10-K405 1 ====================================================================== 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, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-9722 INTERGRAPH CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 63-0573222 ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Intergraph Corporation Huntsville, Alabama 35894-0001 --------------------------------------- ------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (205) 730-2000 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 --------------------------------------- (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. (X) As of January 31, 1997, there were 47,758,544 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 $362,316,000 based on the closing sale price of such stock as reported by NASDAQ on January 31, 1997, 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 - --------- ------------------- Portions of the Annual Report to Shareholders for the year ended December 31, 1996 Part I, Part II, Part IV Portions of the Proxy Statement for the May 15, 1997 Annual Shareholders' Meeting Part III ====================================================================== PART I ITEM 1. BUSINESS Overview Intergraph Corporation (the "Company" or "Intergraph"), founded in 1969, is a vendor of hardware, software, and services for technical, creative, and information technology (IT) professionals found in a range of industry and government sectors. Intergraph offers open, industry standard solutions, including Microsoft Corporation's Windows-based software, Intel Corporation's microprocessor-based hardware, and related services, to meet engineering, design, modeling, analysis, mapping, IT, and creative computing needs. The Company's products are sold through direct and indirect channels worldwide, with United States and European revenues representing approximately 78% of total revenues for 1996. Intel/Windows-Based Products for High Performance Computing 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) workstations for the UNIX operating system. These systems cost considerably more than the Intel microprocessor/Windows-based personal computers (PCs) currently used widely for word processing, spreadsheets, and other less demanding applications. In late 1992, 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 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. At the end of 1994, the Company completed a two year development effort to port its technical software applications to the Windows NT operating system, and to make Windows NT available on all Intergraph workstations. In addition, the transition from a proprietary hardware architecture (Clipper) to that of Intel Corporation was substantially completed during this same period. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 3 of Notes to Consolidated Financial Statements contained in the Company's 1996 Annual Report, portions of which are incorporated by reference in this Form 10-K Annual Report, for further discussion of the effects of these strategic decisions on the Company. Today, the Company offers a range of Intel/Windows-based solutions for technical, IT, and creative professionals, including low to high end workstations, servers, software applications, peripherals, and consulting, networking, system migration, training, and maintenance and support services. Depending on user requirements, the Company's products and services can be provided as point solutions or as integrated solutions that include all necessary hardware, software, and services. Intergraph Hardware During the last half of 1993, the Company began to offer a hardware platform (in addition to its own) based on Intel microprocessors. Previously, the Company's hardware platform offering had been based on its own microprocessor. The Company ceased design of its microprocessor at the end of 1993, and Intel- based systems grew to represent 74% of hardware unit sales in 1994, 95% in 1995, and 99% in 1996. Currently, Intergraph markets and sells a complete line of workstations and servers based on Intel's Pentium and Pentium Pro microprocessors and the Windows NT operating system. See "Manufacturing and Sources of Supply" below. The Company offers workstation products for a range of users. The TD line of computer systems offers Pentium and Pentium Pro microprocessors, Windows NT and Windows 95 operating systems, leading edge graphics, and other industry standard components. TD personal computers are intended for 2D design and drafting users, as well as office automation and business management tasks. TD personal workstations are for 3D design, engineering analysis, image processing, and rendering. TDZ 3D graphics workstations offer high end, industry standard graphics and computing power on price competitive Pentium Pro-based systems running Windows NT. All Intergraph systems offer numerous options that permit customers to order systems that meet their unique needs, including a selection of display monitors, upgradeable memory, and specialized peripherals. The Company offers Intel/Windows-based InterServe symmetric multiprocessing servers for workgroups, departments, or an entire enterprise. These systems come with fully integrated optical disk products, backup solutions, and networking capabilities, as well as with consultation, installation, and other services to assure customer success. Other systems are available for specialized needs. The Company's StudioZ workstations are Pentium Pro/Windows NT-based systems for creating computer generated images and digital betacam quality video for the entertainment and broadcast markets. Intel/Windows NT-based web servers are solutions for establishing and managing customers' sites on the World Wide Web. Industry standard 3D graphics accelerators are available, including RealiZm, providing 3D graphics for Windows NT; Intense 3D, an add-in graphics card available to third party PC and workstation vendors; and Intense 3D 100, a retail market 3D games card. The Company offers large format production scanners, imaging systems for scanning and plotting images, and laser imagesetters for electronic publishing. Additional special purpose peripherals such as disk and tape drives, printers, and other devices may be manufactured in house or sold as original equipment from third parties. Intergraph System Software In November 1992, the Company announced its decision to port its technical software applications to Microsoft Corporation's Windows NT operating system and to make Windows NT available on Intergraph workstations. The effect of this decision has been to expand the availability of the Company's workstations and software applications to Windows-based computing environments not previously addressed by the Company, including the availability of Intergraph software applications operating across a variety of both the Intergraph proprietary hardware architecture and the hardware architectures of other vendors that use the Windows NT operating system. Prior to this decision, the Company's software applications operated principally on Intergraph hardware platforms. The Company has continued to maintain products in the UNIX operating system environment, the foundation for its software applications prior to Windows NT. Limited shipments of Windows NT- based software began in the fourth quarter of 1993. As of the end of 1994, the Company had completed the port of its applications software to Windows NT, and sales of Windows-based software grew to represent 48% of software revenues in 1994, 70% in 1995, and 78% in 1996. While the Company believes the industry is accepting Windows NT and that it will become the dominant operating system in the markets served by the Company, acceptance of this system by customers has been slower than anticipated and the timing of such acceptance is unpredictable, since adoption of any new operating system requires considerable effort and expense. Competing operating systems are available in the market, and several competitors of the Company offer or are adopting Windows NT as the operating system for their products. There can be no assurance that the Windows NT operating system will become dominant in the markets served by the Company or that the Company's operating system and hardware strategies will result in the restoration of profitability. At the systems software level, Intergraph develops software to provide graphics and database management capabilities on Intergraph systems, advanced compilers for Intergraph systems, and utilities to enable interoperability with systems from other vendors. The Company also offers a line of UNIX to Windows interoperability products. The graphics software foundation for many Intergraph Windows 95- , Windows NT-, and UNIX-based software applications is MicroStation, a graphics software product owned by Bentley Systems, Inc., an Intergraph affiliate. MicroStation provides fundamental graphics element creation, maintenance, and display functions for Intergraph's UNIX- and Intel-based workstations. See Item 3, Legal Proceedings, below and 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 1996 Annual Report, portions of which are incorporated by reference in this Form 10-K Annual Report, for further discussion of the Company's affiliation with Bentley Systems, Inc. In late 1995, the Company introduced its Jupiter technology, a Windows-based component software architecture that is the foundation of many new computer-aided-design/computer-aided- manufacturing/computer-aided-engineering (CAD/CAM/CAE) and geographic information systems (GIS) applications software products under development by the Company. This technology creates a Windows native environment where information from competing CAD systems comes together without translation to form unified design models and drawings. The first two products built on Jupiter technology began shipping in mid-1996, including a 32 bit two dimensional technical drawing and concept tool and a three dimensional system for mechanical assembly and part modeling. Initial orders for these products have not met Company expectations and have not contributed substantially to 1996 revenues. Initial releases of these products were delayed until late in the year and contained certain performance problems. The Company believes these problems have been resolved in subsequent releases of the products, which began in the fourth quarter of 1996. Other Jupiter-based software applications will be introduced in 1997. Intergraph Applications Software Intergraph develops, markets, and supports Windows NT-, Windows 95-, and UNIX-based software products for professionals who work in CAD/CAM/CAE, mapping/GIS, asset and information management, utilities, facilities management, shipbuilding, mechanical and electronics design, public safety, and architecture, engineering, and construction (AEC). In terms of broad market segments, the Company's mapping/GIS, AEC, and mechanical design, engineering, and manufacturing product applications continue to dominate the Company's product mix at approximately 51%, 28%, and 13%, respectively, of total systems sales in 1996 (43%, 34%, and 14%, respectively, for 1995). Following is a brief description of these major product application areas. Mapping and GIS. Intergraph offers a range of mapping and GIS solutions to assist businesses, government, and academic institutions in solving geography-based problems. Intergraph's mapping/GIS software tools address the life cycle of mapping/GIS projects, from project and data management through data collection and integration, spatial query and analysis, output, and map production. Intergraph's mapping/GIS solutions help companies address workflows in government and several major industries. These products support solutions for all levels of government including infrastructure management, planning, growth management, economic development, land information management, public safety and security, public works, redistricting, tactical and strategic defense applications (such as land-based command and control operations), and hydrographic and aeronautical charting systems. Transportation industry applications range from decision support activities such as policy, planning, and programming to the creation of operations systems that support day-to-day tasks. Utility companies utilize Intergraph's mapping/GIS products to automate management and analysis applications such as market analyses, long range planning and forecasting, corridor evaluation and selection, right-of -way analysis, and environmental impact studies for siting, permitting, contaminant studies, and risk evaluation. Environmental and natural resource management applications include monitoring, evaluating and managing, conservation and remediation of the environment. Energy exploration and production products assist geoscientists in geological analysis related to energy exploration and production and mineral extraction. Intergraph also provides solutions for end-to-end digital map and chart publishing, digital image processing, orthophoto production, and digital photogrammetry. Architecture, Engineering, and Construction. Intergraph's architectural, facility management, and engineering product line automates the project design and management process. With this software, users can develop and model building concepts, produce construction documents, and manage space and assets in a finished facility. The system serves the needs of architecture/engineering firms and corporate or governmental facility management offices. Included are capabilities for producing three dimensional models of design concepts, architectural drawings, reports, engineering plans, and construction drawings. Packages are also offered for space planning, facility layout, maintenance management, lease management and asset tracking. Intergraph's civil engineering software includes capabilities for coordinate geometry and for site, water resources, bridge, structural, geotechnical and transportation engineering. Structural engineering software is used to create two and three dimensional structural models that serve as the basis for frame- and finite element-based structural design and analysis of steel and concrete structures. For construction needs, the products support traditional drafting and report requirements. The Company's highway, rail, site, and hydraulic/hydrologic engineering products link traditional workflow activities from data collection to plan and profile production to the generation of construction drawings. The Company's plant design software addresses the needs of process and power plant design efforts. The plant design system product supports process flow diagrams, piping and instrumentation diagrams, instrumentation data management, piping, equipment, heating/ventilation/air conditioning, electrical, structural, and other design aspects of a plant. Three dimensional modeling capabilities are also provided. The system performs interference checking and provides reports, materials lists, and drawings. A supporting product provides "walk throughs" of three dimensional plant models. Mechanical Design, Engineering and Manufacturing. For the mechanical design and manufacturing market, Intergraph offers software to automate the product development cycle from design through analysis, manufacturing, and documentation. Customers use the system to design mechanical parts and assemblies, utilizing solid modeling software. Detailing, dimensioning, and drafting capabilities are included for the production of engineering drawings. Engineering software evaluates product designs for functional and structural integrity, predicting behavior under service or test conditions. Finite element modeling and analysis software evaluates designs by simulating stresses encountered in end use. Intergraph's manufacturing products assist in optimizing material usage and cutting cycles for metalworking and fabrication. In addition, a data management system organizes shared product databases for coordination and management of product cycle phases. 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 equipment and software. During the year ended December 31, 1996, the Company spent $103.4 million (9.4% of revenues) for product development activities compared to $111.6 million (10.2% of revenues) in 1995, and $137.2 million (13.2% of revenues) in 1994. See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1996 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 continues to be characterized by rapidly changing technologies, a move to higher performance, lower priced product offerings, intense price and performance competition, shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers. The Company believes the life cycle 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 The Company's primary manufacturing activities consist of the manufacture of printed circuit boards used in the Company's workstations and servers and the assembly and testing of components and subassemblies manufactured by the Company and others. Substantially all of the Company's microprocessor needs are currently supplied by Intel Corporation. The Company does not have a fixed quantity commitment for microprocessors in its agreements with Intel, but believes it has a good relationship with Intel and is unaware of any reason that Intel might encounter difficulties in meeting the Company's microprocessor needs for the long term. Other microprocessors are available in the market, but a change by the Company from Intel to another microprocessor would significantly disrupt the Company's development and manufacturing activities and result in delayed or lost sales, which would have a significant adverse effect on the Company's results of operations and financial position. 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 systems are sold through a combination of direct and indirect channels in approximately 60 countries worldwide. Direct channel sales, which represent the majority of the Company's systems 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 represented approximately 18% of total Company systems revenues in 1996 and 13% in 1995. The Company's selling efforts are organized along key industry lines (transportation and local government, utilities, process and building, manufacturing, federal government, etc.) for its major product applications. The Company believes an industry focus better enables it to meet the specialized needs of customers. In general, the Company's direct sales force is 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. International Operations International markets, particularly Europe, continue in importance to the industry and to the Company. Sales outside the U.S. represented approximately 55% of total revenues in 1996 and in 1995. European and Asia Pacific revenues represented 33% and 13%, respectively, of total revenues in 1996 (36% and 8%, respectively, in 1995). 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, Intergraph systems are sold and supported through a combination of subsidiaries and distributorships. At December 31, 1996, the Company had approximately 1,400 employees in Europe, 800 employees in the Asia Pacific area, and 700 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 (specifically Germany, U.K., The Netherlands, France and Italy) and Australia. Primarily, but not exclusively in these locations, the Company has certain currency related asset and liability exposures against which certain measures, primarily hedging, are taken to reduce currency risk. With respect to these exposures, 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 enters into forward exchange contracts primarily related to these balance sheet items (intercompany receivables, payables, and formalized intercompany debt). 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 these balance sheet items (generally three months or less) and only in amounts sufficient to offset possible significant currency rate related changes in the recorded values of these balance sheet items, which represent a calculable exposure for the Company from period to period. The Company's positions in these derivatives are continuously monitored to ensure protection against the known balance sheet exposures described above. The Company is prohibited by policy from taking currency positions exceeding its known balance sheet currency exposures and from otherwise trading in currencies. The Company has historically experienced slower collection periods for its international accounts receivable than for similar sales to customers in the United States. In addition, in 1994 the Company wrote off a receivable from a Middle Eastern customer in the amount of $5.5 million, and is experiencing slow collection periods throughout that region, particularly in Saudi Arabia. Total accounts receivable from Middle Eastern customers as of the end of 1996 was $20.7 million ($13.6 million at December 31, 1995). See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 1, 4, and 11 of Notes to Consolidated Financial Statements contained in the Company's 1996 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 $161 million in 1996, $159 million in 1995, and $167 million in 1994, approximately 15% of total revenue in all three years. The Company sells to the U.S. government under long-term contractual arrangements, primarily indefinite delivery, indefinite quantity (IDIQ) and cost plus award fee contracts, and through commercial sales of products not covered by long-term contracts. Approximately 40% of total federal government revenues are 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 (with damages paid to the Company) 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. The Company has historically experienced slower collection periods for its U.S. government accounts receivable than for its commercial customers. At December 31, 1996, accounts receivable from the U.S. government was $48 million. 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, 1996, was $181 million. At December 31, 1995, backlog was $197 million. Substantially all of the December 1996 backlog of orders is expected to be shipped during 1997. 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 price and performance competition. To compete successfully, the Company and others in the industry must accurately anticipate customer requirements and technological trends 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, and customer service, support, and training. Management of the Company believes that competition will remain intense, particularly in product pricing. Competition in the interactive computer graphics industry varies among the different product application areas. The Company considers its principal competitors in the interactive computer graphics market to be IBM, Computervision Corporation, Hewlett Packard Corporation, Digital Equipment Corporation (DEC), Sun MicroSystems,Inc., Silicon Graphics, Inc., and Mentor Graphics, Inc. In the hardware market, Intergraph also competes with personal computer vendors, such as Compaq Computer Corporation, who sell high end systems. In the low end graphics market, Intergraph competes with the software products of Autodesk, Inc., Computervision, Softdesk, Inc., and several smaller companies. Several companies with greater financial resources than the Company, including IBM, Hewlett Packard, Sun, and Compaq, are active in the industry. The Company provides point solutions and solutions which are integrated -- workstations, servers, peripherals, and software configured by the Company to work together and satisfy customers' requirements. By delivering such integration, 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 manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, particularly from plant wastes and emissions. 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, and Patents 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. Through the end of 1994, the Company had an exclusive license agreement with Bentley Systems, Inc. (BSI), a 50%-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 Item 3, Legal Proceedings, below and 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 1996 Annual Report, portions of which are incorporated by reference in this Form 10-K Annual Report, for further discussion of the Company's affiliation 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, such as the federally registered trademark "Intergraph". 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 is widely available, and many companies are attempting to develop patent positions concerning technological improvements related to personal computers and workstations. At present, 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. 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 any required patent rights of others through licensing or purchase would significantly reduce the Company's revenues and adversely affect its results of operations. Risks and Uncertainties In addition to those described above, 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 1996 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, 1996, the Company had approximately 8,200 employees. Of these, approximately 2,900 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 manufacturing facility are located in Huntsville, Alabama. Sales and support facilities are maintained throughout the world. The Company owns over 1,900,000 square feet of space in Huntsville that is utilized for manufacturing, product development, sales and administration. The Huntsville facilities also include over 500 acres of unoccupied land. The Company maintains subsidiary company facilities and sales and support locations in major U.S. cities outside of Huntsville, primarily through operating leases. Outside the U.S., the Company owns approximately 430,000 square feet of space, primarily its Nijmegen distribution center and European headquarters facility. 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 is the 50% owner of 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. The Company's business relationship with BSI is the subject of two arbitration proceedings. In December 1995, the Company commenced an arbitration proceeding against BSI with the American Arbitration Association, Philadelphia, Pennsylvania, alleging that BSI inappropriately and without cause terminated a contractual arrangement between BSI and the Company. In response, BSI in January 1996, 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. In March 1996, BSI commenced arbitration against the Company alleging that the Company failed to properly account for and pay to BSI certain royalties on the sale of BSI software products by the Company, and seeking unspecified damages. This matter is currently pending with the American Arbitration Association, Atlanta, Georgia. The Company denies that it has breached any of its contractual obligations to BSI and is defending vigorously in both proceedings, but at present is unable to predict the outcome of the proceedings. See the discussion under Results of Operations set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1996 Annual Report, portions of which are incorporated by reference in this Form 10-K Annual Report, for further details relative to the Company's business relationship with BSI, its sales of MicroStation, and the financial effects on the Company of changes in the business relationship. The Company filed a legal action in August 1995, in the U.S. District Court of Alabama, Northeast Division, seeking to dissolve and wind up its business arrangement with Zydex, Inc. (Zydex), 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 response, Zydex filed a counterclaim against the Company in November 1995, alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. The Company denies and is defending these allegations vigorously, but at present is unable to predict the outcome of the proceedings. The Company's sales of PDS products during the year ended December 31, 1996 were approximately $36 million. 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. Officer Name Age Position Since - ---- --- -------- ----- James W. Meadlock 63 Chairman of the Board and Chief Executive Officer 1969 Larry J. Laster 45 Executive Vice President, Chief Financial Officer and Director 1986 James F. Taylor Jr. 52 Executive Vice President and Director 1977 Robert E. Thurber 56 Executive Vice President and Director 1977 Lawrence F. Ayers Jr. 64 Executive Vice President 1987 Edward F. Boyle 48 Executive Vice President 1986 Penman R. Gilliam 59 Executive Vice President 1994 Neil E. Keith 51 Executive Vice President 1985 Richard H. Lussier 51 Executive Vice President 1996 Nancy B. Meadlock 58 Executive Vice President 1969 Wade C. Patterson 35 Executive Vice President 1994 Stephen J. Phillips 55 Executive Vice President 1987 William E. Salter 55 Executive Vice President 1984 Tommy D. Steele 56 Executive Vice President 1992 Edward A. Wilkinson 63 Executive Vice President 1987 Allan B. Wilson 48 Executive Vice President 1982 Manfred Wittler 56 Executive Vice President 1989 James W. Meadlock, a founder of the Company, has served as Chairman of the Board of Directors since the Company's inception in 1969 and is Chief Executive Officer. Mr. Meadlock received a degree in electrical engineering from North Carolina State University in 1956. Mr. Meadlock and Nancy B. Meadlock are husband and wife. Larry J. Laster joined the Company in June 1981 and has held several managerial positions in the Company's Finance Department and Federal Systems Division. He was elected Vice President in December 1986, named Chief Financial Officer in February 1987, elected to the Board of Directors in April 1987, and is currently Executive Vice President. Mr. Laster holds a bachelor's degree in accounting and is a certified public accountant. 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. Mr. Taylor was elected Vice President in 1977. He is currently an Executive Vice President of the Company and President of the International Public Safety business unit. Mr. Taylor holds a bachelor's degree in mathematics. Robert E. Thurber, a founder of the Company, has been a Director since 1972. In June 1977, Mr. Thurber was elected Vice President and is currently Executive Vice President and Chief Engineer. He is responsible for developing requirements and strategic directions for application solutions. Mr. Thurber holds a master's degree in engineering. Lawrence F. Ayers Jr. joined the Company in September 1987 after 32 years in federal government mapping where he became the Civilian Director of the Defense Mapping Agency. He served as Vice President for International Federal Marketing until February 1993. From 1993 to October 1995, he served as Executive Vice President for the Utility and Mapping Sciences application group. At present, he is serving on the Intergraph Software Solutions business unit staff as Executive Vice President. Mr. Ayers holds a bachelor's degree in civil engineering and a master's degree in public administration. Edward F. Boyle joined the Company in June 1981 and has been responsible for several of the Company's software products. Prior to joining Intergraph, he spent nine years in the steel industry where he developed graphic software applications. He was elected Vice President in 1986 and became Vice President of Intergraph's Utilities Division in May 1987. From 1993 through the fall of 1995, he was Vice President of the Solutions Engineering Division. He was then given charge of Enterprise Support Systems, comprised of utilities products and professional services. He was elected Executive Vice President in July 1996 and is currently responsible for the Infrastructure and Utilities Division. Dr. Boyle holds bachelor and doctoral degrees in civil engineering. Penman R. Gilliam joined the Company in April 1994 as Executive Vice President responsible for Federal Programs. Mr. Gilliam is the manager responsible for the Federal Mapping and Information Systems organization and the Intergraph Midworld Operations. 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 (DMA), the senior civilian responsible for overall production, operations, and research. Mr. Gilliam also held a number of other positions with DMA, including production management positions in St. Louis and Washington D.C. and a program director's position for DMA's digital production system. Mr. Gilliam holds a bachelor's degree in mathematics and geology. Neil E. Keith joined the Company in December 1981. He was elected Vice President in September 1985 and is currently Executive Vice President. He has extensive experience in manufacturing management and is responsible for the Company's manufacturing operations. Mr. Keith holds a bachelor's degree in management. Richard H. Lussier joined the Company in 1979. He was promoted to Vice President of Sales in 1981 and was later promoted to Executive Vice President of Worldwide Sales and Support. Mr. Lussier left Intergraph in 1990 to pursue personal business interests. He rejoined the Company in 1996 as Executive Vice President of U.S. Sales and is currently responsible for sales in the Company's five U.S. sales regions. Mr. Lussier holds a master's degree in business administration. Nancy B. Meadlock, a founder of the Company, served as a Director from 1969 until May 1996, excluding the period from February 1970 to February 1972. Mrs. Meadlock served as Secretary for 10 years, was elected Vice President in 1979, and is currently Executive Vice President. She holds a master's degree in business administration. Mrs. Meadlock and James W. Meadlock are wife and husband. Wade C. Patterson joined the Company in 1984 as a design engineer developing UNIX and central processing unit (CPU) subsystems for Intergraph workstation products. In 1992, Mr. Patterson managed Windows NT workstation projects as the Company made the transition from reduced instruction set computing CPUs to Intel microprocessor-based CPUs. Mr. Patterson has been responsible for hardware development and marketing for Intergraph Computer Systems, the Company's hardware business unit, since August 1994. He was elected Vice President in August 1994 and is currently an Executive Vice President of the Company and President of the Intergraph Computer Systems business unit. He holds a bachelor'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. 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 Division 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 the Intergraph Federal Systems business unit. He holds a doctorate in electrical engineering. Tommy D. Steele joined the Company in June 1992 and is responsible for managing the Intergraph Software Solutions business unit. This includes all Intergraph software, except that from VeriBest and International Public Safety, and all associated professional services. He is currently an Executive Vice President of the Company and President of the Intergraph Software Solutions business unit. Mr. Steele came to Intergraph from IBM Corporation, where he was employed for more than 28 years. During his tenure at IBM, he worked on the Saturn, Apollo, Skylab, and space shuttle programs as well as a number of Department of Defense programs. Mr. Steele's last ten years at IBM were spent in the personal computer software business managing products for communications, databases, office automation, and operating systems. The last four of those years were spent managing personal computer operating systems (OS/2, DOS, and AIX). He holds a bachelor's degree in electrical engineering. 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 Intergraph, Mr. Wilkinson served for 34 years in the U.S. Navy, retiring with the rank of Rear Admiral. He holds a master's degree in mechanical engineering. Allan B. Wilson joined the Company in 1980 and was responsible for the development of international operations outside of Europe and North America. He was elected Vice President in May 1982 and Executive Vice President in November 1982. Mr. Wilson is currently responsible for sales and support for the Company's Asia Pacific region. He holds bachelor's and master's degrees in electrical engineering. Manfred Wittler joined the Company in 1989 as Vice President. In 1991, he was elected Executive Vice President and is currently responsible for sales and support for Europe, Canada, and Latin America. 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 46 of the Intergraph Corporation 1996 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, 1996, appearing under "Five Year Financial Summary" on page 1 of the Intergraph Corporation 1996 Annual Report to Shareholders are 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 12 to 22 of the Intergraph Corporation 1996 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 23 to 45 of the Intergraph Corporation 1996 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" on page 4 of the Intergraph Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held May 15, 1997, 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 10 to 12 in this Form 10-K Annual Report is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information appearing under "Executive Compensation" on pages 5 to 11 of the Intergraph Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held May 15, 1997, 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 2 to 3 of the Intergraph Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held May 15, 1997, is incorporated by reference in this Form 10-K Annual Report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information appearing under "Certain Relationships and Related Transactions" on page 5 of the Intergraph Corporation Proxy Statement relative to the Annual Meeting of Shareholders to be held May 15, 1997, is incorporated by reference in this Form 10- K Annual Report. 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 1996 Annual Report to Shareholders: Consolidated Balance Sheets at December 31, 1996 and 1995 23 Consolidated Statements of Operations for the three years ended December 31, 1996 24 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 25 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1996 26 Notes to Consolidated Financial Statements 27 - 44 Report of Independent Auditors 45 * Incorporated by reference from the indicated pages of the 1996 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, 1996 17 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 20%- to 50%-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 income 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) Page in Number Description Form 10-K ------ ----------- --------- 4 Shareholder Rights Plan, dated August 25, 1993.(4) 10(a)* Employment contracts of Allan B. Wilson dated May 3, 1995. (5) 10(b)* Loan program for executive officers of the Company as amended, dated May 1, 1996. 10(c) Loan and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated December 20, 1996 and amendment. 10(d)* Intergraph Corporation 1997 Stock Option Plan. 11 Computations of Loss Per Share 18 13 Portions of the Intergraph Corporation 1996 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report 21 Subsidiaries of the Company 19 23 Consent of Independent Auditors 20 27 Financial Data Schedule 99 Consent of Director Nominee 21 *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, 1995, under the Securities Exchange Act of 1934, File No. 0-9722. - --------------- (b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1996. (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. 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 W. Meadlock Date: March 24, 1997 ---------------------------- -------------- James W. Meadlock Chief Executive Officer and Chairman of the Board (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 Chief Executive Officer and March 24, 1997 - -------------------------- Chairman of the Board James W. Meadlock (Principal Executive Officer) /s/ Larry J. Laster Executive Vice President,Chief March 24, 1997 - -------------------------- Financial Officer, and Director Larry J. Laster (Principal Financial Officer) Executive Vice President and March 24, 1997 - -------------------------- Director James F. Taylor Jr. /s/ Robert E. Thurber Executive Vice President and March 24, 1997 - -------------------------- Director Robert E. Thurber /s/ Roland E. Brown Director March 24, 1997 - -------------------------- Roland E. Brown Director March 24, 1997 - -------------------------- Keith H. Schonrock Jr. /s/ John W. Wilhoite Vice President and Controller March 24, 1997 - -------------------------- (Principal Accounting Officer) John W. Wilhoite 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 1996 $20,399,000 (2,049,000)(3) 1,647,000(1) $16,703,000 1995 $20,309,000 4,945,000 4,855,000(1) $20,399,000 1994 $20,791,000 10,536,000 11,018,000(1) $20,309,000 Allowance for obsolete inventory deducted from inventories in the balance sheet 1996 $34,441,000 24,189,000 15,407,000(2) $43,223,000 1995 $31,033,000 17,455,000 14,047,000(2) $34,441,000 1994 $24,560,000 20,137,000 13,664,000(2) $31,033,000 (1)Uncollectible accounts written off, net of recoveries. (2)Obsolete inventory reduced to net realizable value. (3)The Company provides its allowance for doubtful accounts on a specific identification basis. In 1996, significant improvement in collection prospects on several large accounts occurred, resulting in reversal of amounts previously provided in the allowance for doubtful accounts. EX-11 2 INTERGRAPH CORPORATION AND SUBSIDIARIES EXHIBIT 11 ---- COMPUTATIONS OF LOSS PER SHARE Year ended December 31, 1996 1995 1994 - ------------------------------------ ------------- ------------- ------------- Primary: Weighted average common shares outstanding 47,195,000 46,077,000 44,860,000 Net common shares issuable on exercise of certain stock options (1) --- --- --- ------------- ------------- ------------- Average common and equivalent common shares outstanding 47,195,000 46,077,000 44,860,000 ============= ============= ============= Net loss $(69,112,000) $(45,348,000) $(70,220,000) ============= ============= ============= Net loss per share $(1.46) $( .98) $(1.56) ============= ============= ============= Fully diluted: Weighted average common shares outstanding 47,195,000 46,077,000 44,860,000 Net common shares issuable on exercise of certain stock options (1) --- --- --- ------------- ------------- ------------- Average common and equivalent common shares outstanding 47,195,000 46,077,000 44,860,000 ============= ============= ============= Net loss $(69,112,000) $(45,348,000) $(70,220,000) ============= ============= ============= Net loss per share $(1.46) $( .98) $(1.56) ============= ============= ============= (1) Net common shares issuable on exercise of certain stock options is calculated based on the treasury stock method using the average market price for the primary calculation and the ending market price, if higher than the average, for the fully diluted calculation. EX-21 3 INTERGRAPH CORPORATION AND SUBSIDIARIES EXHIBIT 21 ---- SUBSIDIARIES OF REGISTRANT State or Other Percentage of Jurisdiction of Voting Securities Name Incorporation Owned by Parent - ------------------------------------------ --------------- ----------------- InterCAP Graphics Systems, 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 International Public Safety Delaware 100 VeriBest, Inc. Delaware 100 Intergraph Benelux B.V. The Netherlands 100 Intergraph CAD/CAM (Danmark) A/S Denmark 100 Intergraph CR s.r.o. Czech Republic 100 Intergraph (Deutschland) GmbH Germany 100 Intergraph Espana, S.A. Spain 100 Intergraph Europe (POLSKA) s.p.z.o.o. Poland 100 Intergraph Finland Oy Finland 100 Intergraph (France) SA France 100 Intergraph GmbH (Osterreich) Austria 100 Intergraph Hungary, Ltd. Hungary 100 Intergraph Ireland, Ltd. Ireland 100 Intergraph Norge A/S Norway 100 Intergraph (Portugal) Sistemas de Computacao Grafica, S.A. Portugal 100 Intergraph SR s.r.o. Slovac Republic 100 Intergraph (Sverige) AB Sweden 100 Intergraph (Switzerland) A.G. Switzerland 100 Intergraph (UK), Ltd. United Kingdom 100 VeriBest GmbH Germany 100 VeriBest International, Ltd. United Kingdom 100 VeriBest S.A. France 100 Intergraph Asia Pacific Limited 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 Japan K.K. Japan 100 Intergraph Korea, Ltd. Korea 100 Intergraph Systems Singapore Pte Ltd. Singapore 100 VeriBest K.K. Japan 100 Computer Services Industry & Trade, A.S. Turkey 97 Intergraph 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 EX-23 4 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 30, 1997, included in the 1996 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; and in the related Prospectuses of our report dated January 30, 1997 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, 1996. /s/ Ernst & Young LLP Birmingham, Alabama March 24, 1997 EX-99 5 EXHIBIT 99 --CONSENT OF DIRECTOR NOMINEE I hereby consent to being named as a nominee for director of Intergraph Corporation in the proxy statement prepared for the May 15, 1997 annual shareholders' meeting, and to serve as a director of Intergraph Corporation if elected. Date: March 18, 1997 /s/ Thomas J. Lee ----------------- Thomas J. Lee EX-10.B 6 EXECUTIVE OFFICER LOAN AGREEMENT -------------------------------- This Agreement is between _________________________ ("the Borrower") and Intergraph Corporation ("Intergraph"). The Borrower hereby agrees to all of the terms and conditions contained in this Agreement. Establishment of the Program. On January 7, 1993, the Board of Directors established a loan program for corporate officers who are required to report Intergraph stock transactions to the SEC. The purpose of the loan program is to assist such officers at such times that stock transactions would be prohibited, restricted, or otherwise impractical. Program Amendments. In March 1994, the Board amended the program by extending the original termination date from May 1, 1994 to May 1, 1995. In April 1995, the Board again amended the program by extending it to May 1, 1996. On December 19, 1995, the Board amended the program by modifying the stock price used in the definition of the Program End Date from $20 per share to $25 per share, and by changing the repayment requirement from the date that "the Borrower sells any Intergraph stock " to the date that "the Borrower sells a cumulative amount of more than 100,000 shares of Intergraph stock". Effective May 1, 1996, the Board extended the loan until April 30, 1997. These amendments are reflected in the provisions of this Agreement contained below. Program Beginning/End. The program will commence on January 7, 1993. The program will cease on the Program End Date, which is the earlier of April 30, 1997, or the date that the Intergraph common stock price reaches or exceeds $25 per share; provided, however, that such determination shall not be made during a restricted trading period (as announced from time-to-time by the corporate legal department). The Intergraph common stock price shall be based on the reported closing price as listed in the Wall Street Journal (or similar publication). Repayment. All principal and interest outstanding under the program must be repaid in full within fifteen (15) business days following the earlier of (i) the date of employment termination with Intergraph and (ii) the date the Borrower sells a cumulative amount of more than 100,000 shares of Intergraph stock, or (iii) the Program End Date. Full or partial pre-payments of principal are permitted at any time. All interest shall be paid with the final principal payment. Interest Rate. Interest on the amounts outstanding hereunder shall accrue for each calendar month or portion thereof at a rate equal to the Prime Rate as published in the "Money Rates" section of the Wall Street Journal (or similar publication) on the last business day of each calendar month (calculated on the basis of a year of 365 (or 366 as the case may be) days and actual days elapsed; provided, however, that if any amount shall not be paid when due (at maturity, by acceleration or otherwise), such amount shall bear interest at the rate stated above plus two percent (2%) from the date such amount was due and payable until the date such amount is paid in full. Promissory Note. Loans made under this Agreement shall be evidenced by a promissory note (below). The Borrower's signature on the promissory note shall indicate agreement with all terms and conditions of this Agreement. I hereby certify that I am an officer of Intergraph Corporation and that I am required to report Intergraph stock transactions to the SEC. I further certify that (i) I am the owner or beneficial owner of Intergraph common stock with a current market value of at least the amount of any loans made under this Agreement, and/or (ii) I have currently exercisable options to purchase Intergraph common stock with a net value (current market price less exercise price) of at least the amount of any loans made under this Agreement. I agree to provide suitable evidence of the foregoing upon request. I request a loan in the amount set forth in the promissory note shown below. PROMISSORY NOTE --------------- $___________________ Date:__________ FOR VALUE RECEIVED, the Borrower promises to pay to the order of Intergraph Corporation at any such place as Intergraph may designate, the sum of $____________ together with interest thereon, in accordance with the Agreement set forth above. In the event that any payment due hereunder is not received when due, this Note shall be deemed in default and the entire principal and interest due hereunder shall be immediately due and payable. In the event of default hereunder, the Borrower shall pay all costs of collection, including, without limitation, reasonable attorney's fees and legal expenses incurred by Intergraph in endeavoring to collect any amounts payable hereunder. The Borrower hereby expressly waives presentment, demand for payment, dishonor, notice of dishonor, protest and notice of protest. IN WITNESS WHEREOF, the Borrower has caused this Note to be made, executed and delivered as of the date and year written above. _________________________ Signature of the Borrower Witness: ____________________________________________ EX-10.C 7 =============================================================================== LOAN AND SECURITY AGREEMENT by and between INTERGRAPH CORPORATION and FOOTHILL CAPITAL CORPORATION Dated as of December 20, 1996 =============================================================================== TABLE OF CONTENTS ----------------- Page(s) ------- 1. DEFINITIONS AND CONSTRUCTION. 1 1.1 Definitions 1 1.2 Accounting Terms 24 1.3 Code 25 1.4 Construction 25 1.5 Schedules and Exhibits. 25 2. LOAN AND TERMS OF PAYMENT. 25 2.1 Revolving Advances. 25 2.2 Letters of Credit. 26 2.3 Term Loan 29 2.4 [Intentionally omitted]. 29 2.5 Overadvances 29 2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations. 29 2.7 Collection of Accounts 30 2.8 Crediting Payments; Application of Collections 31 2.9 Designated Account. 31 2.10 Maintenance of Loan Account; Statements of Obligations. 32 2.11 Fees. 32 3. CONDITIONS; TERM OF AGREEMENT. 33 3.1 Conditions Precedent to the Initial Advance, and Letter of Credit, and the Term Loan. 33 3.2 Conditions Precedent to all Advances, all Letters of Credit, and the Term Loan. 36 3.3 Condition Subsequent. 36 3.4 Term. 39 3.5 Effect of Termination. 39 3.6 Early Termination by Borrower. 39 3.7 Termination Upon Event of Default. 40 4. CREATION OF SECURITY INTEREST. 40 4.1 Grant of Security Interest. 40 4.2 Negotiable Collateral. 41 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. 42 4.4 Delivery of Additional Documentation Required. 42 4.5 Power of Attorney. 43 4.6 Right to Inspect. 43 5. REPRESENTATIONS AND WARRANTIES. 44 5.1 No Encumbrances. 44 5.2 Eligible Accounts. 44 5.3 Eligible Domestic Inventory. 44 5.4 Equipment. 44 5.5 Location of Inventory and Equipment. 44 5.6 Inventory Records. 44 5.7 Location of Chief Executive Office; FEIN. 45 5.8 Due Organization and Qualification; Subsidiaries. 45 5.9 Due Authorization; No Conflict. 45 5.10 Litigation. 46 5.11 No Material Adverse Change. 47 5.12 Solvency. 47 5.13 Employee Benefits. 47 5.14 Environmental Condition. 47 5.15 Securities Accounts. 48 6. AFFIRMATIVE COVENANTS. 48 6.1 Accounting System. 48 6.2 Collateral Reporting. 48 6.3 Financial Statements, Reports, Certificates. 49 6.4 Tax Returns. 50 6.5 Guarantor Reports. 51 6.6 Returns. 51 6.7 Title to Equipment. 51 6.8 Maintenance of Equipment. 51 6.9 Taxes. 51 6.10 Insurance. 52 6.11 No Setoffs or Counterclaims. 53 6.12 Location of Inventory and Equipment. 53 6.13 Compliance with Laws. 54 6.14 Employee Benefits. 54 6.15 Leases. 55 7. NEGATIVE COVENANTS. 55 7.1 Indebtedness. 55 7.2 Liens. 56 7.3 Restrictions on Fundamental Changes. 56 7.4 Disposal of Assets. 57 7.5 Change Name. 57 7.6 [intentionally omitted]. 57 7.7 Nature of Business. 57 7.8 Prepayments and Amendments. 57 7.9 Change of Control. 57 7.10 Consignments. 57 7.11 Distributions. 58 7.12 Accounting Methods. 58 7.13 Investments. 58 7.14 Transactions with Affiliates. 58 7.15 Suspension. 58 7.16 [intentionally omitted]. 58 7.17 Use of Proceeds. 58 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. 59 7.19 No Prohibited Transactions Under ERISA 59 7.20 Financial Covenants. 60 7.21 Capital Expenditures. 60 8. EVENTS OF DEFAULT. 60 9. FOOTHILL'S RIGHTS AND REMEDIES. 62 9.1 Rights and Remedies. 62 9.2 Remedies Cumulative. 65 10. TAXES AND EXPENSES. 65 11. WAIVERS; INDEMNIFICATION 66 11.1 Demand; Protest; etc. 66 11.2 Foothill's Liability for Collateral. 66 11.3 Indemnification. 66 12. NOTICES. 66 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. 68 14. DESTRUCTION OF BORROWER'S DOCUMENTS. 68 15. GENERAL PROVISIONS. 69 15.1 Effectiveness. 69 15.2 Successors and Assigns. 69 15.3 Section Headings. 69 15.4 Interpretation. 69 15.5 Severability of Provisions. 69 15.6 Amendments in Writing. 69 15.7 Counterparts; Telefacsimile Execution. 69 15.8 Revival and Reinstatement of Obligations. 70 15.9 Integration. 70 15.10 Confidentiality. 71 SCHEDULES AND EXHIBITS ---------------------- Schedule E-1 Eligible Domestic Inventory Locations 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 A-1 Form of Aircraft Security Agreement Exhibit C-1 Form of Compliance Certificate Exhibit C-2 Form of Copyright Security Agreement Exhibit P-1 Form of Patent Security Agreement Exhibit P-2 Form of Pledge Agreement Exhibit T-1 Form of Trademark Security Agreement Exhibit V-1 Form of VCOC Letter LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of December 20, 1996, 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. The parties 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). "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. "Aircraft Security Agreement" means an Aircraft Security Agreement, in the form of Exhibit A-1 attached hereto, dated as of even date herewith, between Borrower and Foothill. "AnaTech Division" means the AnaTech Division of Borrower. "AnaTech Accounts" means Accounts created by the AnaTech Division. "Appraised Assets" means items of Equipment that are the subject of that certain appraisal, dated December 11, 1996, 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 Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage. "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 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). "Bestinfo" means Bestinfo, Inc., a Delaware corporation. "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. "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. "Chelmsford Property" means the Real Property (and related improvements thereto) of Borrower located in or about Chelmsford, Massachusetts. "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 funding of the Term Loan. "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) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of Foothill, and (i) 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, 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 the chief financial officer or the chief accounting 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 Security Agreement" means a Copyright Security Agreement, in the form of Exhibit C-2 attached hereto, 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 4068- 0637 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 Citibank, N.A., whose office is located at 399 Park Avenue, New York, New York 10043, and whose ABA number is 021-000-089. "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%. "Disbursement Letter" means an instructional letter executed and delivered by Borrower to Foothill regarding the extensions of credit to be made on the Closing Date, the form and substance of which shall be reasonably satisfactory to Foothill. "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 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 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) Optronics Accounts or AnaTech Accounts; (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 Domestic Inventory" means Eligible Domestic Finished Goods Inventory and Eligible Domestic Raw Materials Inventory. "Eligible Domestic Finished Goods Inventory" means Inventory consisting of first quality finished goods held for sale or license in the ordinary course of Borrower's business, that are located at or in-transit between Borrower's premises identified on Schedule E-1, and that strictly comply with each and all of the representations and warranties respecting Inventory 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. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with Borrower's current and historical accounting practices. An item of Inventory shall not be included in Eligible Domestic Finished Goods Inventory if: (a) it is not owned solely by Borrower or Borrower does not have good, valid, and marketable title thereto; (b) it is not located at one of the locations set forth on Schedule E-1; (c) it is not located on property owned or leased by Borrower or in a contract warehouse, in each case, subject to a Collateral Access Agreement executed by the mortgagee, lessor, the warehouseman, or other third party, as the case may be, and segregated or otherwise separately identifiable from goods of others, if any, stored on the premises; (d) it is not subject to a valid and perfected first priority security interest in favor of Foothill; (e) it consists of goods returned or rejected by Borrower's customers or goods in transit; (f) it is Inventory of the Optronics Division or the AnaTech Division; or (g) it is obsolete or slow moving, a restrictive or custom item, raw materials, work-in-process, a component that is not part of finished goods, or constitutes spare parts (other than spare parts located at the Huntsville Property), packaging and shipping materials, supplies used or consumed in Borrower's business, Inventory subject to a Lien in favor of any third Person, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment. "Eligible Domestic Raw Materials Inventory" means Inventory that does not qualify as Eligible Domestic Finished Goods Inventory solely because it constitutes raw materials consisting of components used as a part of first quality finished goods held for sale in the ordinary course of Borrower's business. "Eligible Unbilled Accounts" means those Domestic Accounts created by Borrower that would qualify as Eligible Domestic Accounts except for the fact that 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. "Existing Lender" means Citicorp USA, Inc., as the representative of certain banks and other financial institutions. "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 Subsidiary" means any Subsidiary organized under the laws of a jurisdiction other than the United States or any State thereof. "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. "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. "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. "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. "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. "InterCAP" means InterCAP Graphic Systems, Inc., a Delaware corporation. "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. "Inventory Advance Rate" means 25%; provided, however, that the Inventory Advance Rate shall at no time exceed the quotient, expressed as a percentage, equal to 100% of the Liquidation Value based upon the most recent third party appraisal of Borrower's Inventory located in the United States conducted by an appraiser selected by Foothill, divided by the value of Eligible Domestic Inventory on the date of such appraisal. "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. "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 Inventory or Equipment, the net orderly liquidation value of such item of Inventory or 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 Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the Mortgages, the Aircraft Security Agreement, the Copyright Security Agreement, the Patent Security Agreement, the Pledge Agreement, the Trademark Security Agreement, the VCOC Letter, 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 one of the Lockbox Banks. "Lockbox Banks" means Citibank, N.A., First National Bank of Chicago, and NationsBank of Georgia. "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. "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. "Meadlock Note" means that certain promissory note, dated May 1, 1996, made by James Meadlock to the order of Borrower in the original principal amount of approximately $4,400,000. "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 (including the Meadlock Note), 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 and IG Delaware. "Optronics Division" means the Optronics Division of Borrower. "Optronics Accounts" means Accounts created by the Optronics Division. "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. "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 a Patent Security Agreement, in the form of Exhibit P-1 attached hereto, dated as of even date herewith, between Borrower and Foothill. "Pay-Off Letter" means a letter, in form and substance reasonably satisfactory to Foothill, from Existing Lender respecting the amount necessary to repay in full all of the obligations of Borrower owing to Existing Lender and obtain a termination or release of all of the Liens existing in favor of Existing Lender in and to the properties or assets of Borrower. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted AnaTech Dispositions" means, subject to the prior or concurrent satisfaction of the Release Condition therefor, Asset Dispositions of the assets of the AnaTech Division, free and clear of Foothill's Lien thereon (other than Foothill's Lien in the proceeds of such Asset Disposition). "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 $100,000 or more, the chief financial 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 Disposition" means, subject to the prior or concurrent satisfaction of the Release Condition therefor, Asset Dispositions of the Bentley Equity Interests. "Permitted Bestinfo Disposition" means, subject to the prior or concurrent satisfaction of the Release Condition therefor, Asset Dispositions of the capital stock of Bestinfo, free and clear of Foothill's Lien thereon (other than Foothill's Lien in the proceeds of such Asset Disposition). "Permitted Disposition" means (a) Ordinary Course Dispositions, (b) Permitted Optronics Dispositions, Permitted AnaTech Dispositions, the Permitted Bentley Disposition, and the Permitted Bestinfo Disposition, (c) the Reston Sale/Leaseback, (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, and (f) subject to the prior or concurrent satisfaction of the applicable Release Condition therefor, other Asset Dispositions (but excluding Asset Dispositions of Equipment constituting Appraised Assets) not in the ordinary course of Borrower's business that do not exceed, on a book value basis, $1,000,000 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 Investments" means: (a) Permitted Ordinary Course Investments; (b) Permitted Repayment Investments; (c) Permitted Toehold Investments; (d) Permitted Subsidiary Loans and Capital Contributions; and (e) Permitted Other 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, (l) software escrow arrangements entered into in the ordinary course of business consistent with past practice, and (m) if and to the extent required under the Payoff Letter, cash collateral pledged to Existing Lender to secure the outstanding obligations, as of the Closing Date, under letters of credit issued by Existing Lender or the financial institutions for which it is acting as representative in respect of the Indebtedness that is the subject of the Payoff Letter. "Permitted Optronics Dispositions" means, subject to the prior or concurrent satisfaction of the Release Condition therefor, (a) Asset Dispositions of the assets of the Optronics Division, free and clear of Foothill's Lien thereon (other than Foothill's Lien in the proceeds of such Asset Disposition) to any Person other than a Subsidiary of Borrower, or (b) the capital contribution by Borrower to Scansystems of the operating assets of the Optronics Division. "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 (exclusive of loans evidenced by the Meadlock Note) in the ordinary course of business in an aggregate amount at any one time outstanding not to exceed $3,000,000, (f) loans evidenced by the Meadlock Note, (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 Subsidiary Loans and Capital Contributions" means loans and capital contributions made after the 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, and (c) $30,000,000 during the 1999 calendar year. "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 a Pledge Agreement, in the form of Exhibit P-2 attached hereto, dated as of even date herewith, among Borrower, IG Delaware, M&S, and Foothill. "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 variable rate of interest, per annum, most recently announced by Norwest Bank Minnesota, National Association, or any successor thereto, as its "base rate," irrespective of whether such announced rate is the best rate available from such financial institution. "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 the product of (a) $238,000 times (b) the number of months separating such date from the Closing Date. "Reston Property" means the Real Property (and related improvements thereto) of Borrower located in or about Reston, Virginia. "Reston Sale/Leaseback" means the sale and lease-back transaction in respect of the Reston Property. "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. "Scansystems" means Scansystems, Inc., a Delaware corporation. "Securities Account" means a "securities account" as that term is defined in Section 8-501 of official text of the Uniform Commercial Code and as defined in California Senate Bill 1591 which was approved by the Governor on September 14, 1996 and will be effective on January 1, 1997. "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. "Term Loan" has the meaning set forth in Section 2.3. "Trademark Security Agreement" means a Trademark Security Agreement, in the form of Exhibit T-1 attached hereto, 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. "VCOC Letter" means a letter agreement between Borrower and Foothill's Participants that meets the Venture Capital Operating Company requirements and that is in substantially the form of Exhibit V-1. "VeriBest" means VeriBest, Inc., a Delaware corporation. "Voidable Transfer" has the meaning set forth in Section 15.8. 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 the context 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 Letter of Credit Usage, or (ii) the Borrowing Base less the Letter of Credit Usage. 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 this clause (x), and (3) $20,000,000, minus (C) 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, plus (y) the lowest of (i) $30,000,000, (ii) the product of (A) the Inventory Advance Rate times (B) the value (calculated at the lower of cost or market) of Eligible Domestic Inventory, and (iii) 30% of the amount of credit availability created by clause (x) above, minus (z) the sum of (i) prior to the full satisfaction of the condition subsequent set forth in Section 3.3(b), $20,000,000, and (ii) the 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, Eligible Unbilled Accounts, or Eligible Domestic Inventory 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) Foothill shall have the right to have the Inventory reappraised by a qualified appraiser selected by Foothill from time to time after the Closing Date for the purpose of redetermining the Liquidation Value of the Inventory. In the absence of the occurrence and continuation of an Event of Default, such appraisals shall occur annually. (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 amount of outstanding Advances, or (ii) the Letter of Credit Usage would exceed the lower of (y) the Maximum Revolving Amount less the amount of outstanding Advances, 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, 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. Foothill has agreed to make a term loan (the "Term Loan") to Borrower in the original principal amount of $20,000,000. 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 [Intentionally omitted]. 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. (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 1.0% 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, all Obligations (except for undrawn Letters of Credit) shall bear interest at a per annum rate equal to 3.625 percentage points above the Reference Rate, and (ii) the Letter of Credit fee provided in Section 2.6(b) shall be increased to 4.0% 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. The Reference Rate as of the date of this Agreement is 8.25% per annum. 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 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 Banks shall enter into the Lockbox Agreements, which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at a 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 Banks 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 Banks 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 any 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) Closing Fee. On the Closing Date, a closing fee of $500,000; (b) 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 Maximum Revolving Amount; (c) 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 Maximum Amount; (d) 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 (e) Agency Fee. On the first day of each month after the Closing Date during the term of this Agreement, an agency fee in an amount equal to $12,500. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance, and Letter of Credit, and the Term Loan. The obligation of Foothill to make the initial Advance, to issue the initial Letter of Credit, or to make the Term Loan 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 January 17, 1997; (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: (1) if and to the extent available on or before the Closing Date, the Lockbox Agreements; (2) the Disbursement Letter; (3) the Pay-Off Letter, together with UCC termination statements and other documentation evidencing the termination by Existing Lender of its Liens in and to the properties and assets of Borrower and its Subsidiaries and the termination of any lockbox or other dominion account arrangements in favor of Existing Lender; (4) either (y) the IG Australia Existing Lender Pay-Off Letter, together with termination statements and other documentation evidencing the termination by IG Australia Existing Lender of its Liens in and to the properties and assets of Borrower and its Subsidiaries, or (z) satisfactory evidence of the consent of IG Australia Existing Lender to the refinancing by Borrower of its Indebtedness owed to Existing Lender pursuant hereto and the transactions contemplated hereby; (5) the Mortgage on the Huntsville Property, and such Mortgage shall have been recorded in the office of the county recorder for Madison County, Alabama; and, if and to the extent available on or before the Closing Date, a Mortgage Policy in respect of the Huntsville Property assuring Foothill that the Mortgage on the Huntsville Property is a valid and enforceable first priority mortgage Lien on the Huntsville Property free and clear of all defects and encumbrances except Permitted Liens, and such Mortgage Policy shall otherwise be in form and substance reasonably satisfactory to Foothill; (6) the Aircraft Security Agreement; (7) the Copyright Security Agreement; (8) the Patent Security Agreement; (9) the Trademark Security Agreement; (10) the Pledge Agreement; and (11) the VCOC Letter; (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 Meadlock Note and the Intercompany Notes, together with endorsements with respect thereto duly endorsed in blank; (f) Foothill shall have received a certificate from the 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 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, each dated within 15 days of the Closing Date, 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; (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) after giving effect to the payment of fees due to Foothill on or before the Closing Date and the payment of the "Payoff Amount" (under and as defined in the Payoff Letter) to the Existing Lender, the sum of Borrower's Availability plus Borrower's unrestricted cash and cash equivalents shall not be less than Twenty Million Dollars ($20,000,000); (m) Foothill shall have received appraisals of the Real Property Collateral and appraisals of the Equipment, in each case satisfactory to Foothill; (n) Foothill shall have completed "field surveys" and location inspections of the Inventory, and the results of each of them shall be satisfactory to Foothill; (o) Foothill shall have completed reference checks regarding key employees and executive officers of Borrower, the results of which shall be satisfactory to Lender; (p) Foothill shall have received satisfactory evidence (which evidence may be in the form of a Certificate of the chief accounting officer or the chief financial 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; and (q) 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 the Term Loan. The following shall be conditions precedent to all Advances, all Letters of Credit, and the Term Loan hereunder: (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) 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. (b) on or as soon as possible after the Closing Date (and, in any event, within 30 days of the Closing Date): (i) to the extent not available on or before the Closing Date under Section 3.1, Foothill shall have received a Mortgage Policy in respect of the Huntsville Property assuring Foothill that the Mortgage on the Huntsville Property is a valid and enforceable first priority mortgage Lien on the Huntsville Property free and clear of all defects and encumbrances except Permitted Liens, and such Mortgage Policy shall otherwise be in form and substance reasonably satisfactory to Foothill; and (ii) Foothill shall have received a phase- I environmental report and a real estate survey shall have been completed with respect to the Huntsville 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; and (iii) to the extent not available on or before the Closing Date under Section 3.1, Foothill shall have received the Lockbox Agreements, duly executed, and each such document shall be in full force and effect. (c) upon the request of Foothill (if ever) after the Closing Date, within 60 days after the date of such request: (i) the Mortgage on the Chelmsford Property 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 Middlesex County, Massachusetts; (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 the Chelmsford Property; (iii) Foothill shall have received a preliminary title report in respect of the Chelmsford 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 the Chelmsford 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. (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 Real Property; (iii) Foothill shall have received a preliminary title report in respect of such 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 the such 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) in the event the Reston Sale/Leaseback is not consummated within 180 days of the Closing Date: (i) the Mortgage on the Reston Property 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 Fairfax County, Virginia; (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 the Reston Property; (iii) Foothill shall have received a preliminary title report in respect of the Reston 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 the Reston 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. (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. (g) within 90 days of the Closing Date, Foothill shall have completed appraisals of the Equipment and the results of such appraisals shall be satisfactory to Foothill. (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; (i) from and after the Closing Date up until the date that is 90 days after the Closing Date, Borrower shall use its continued best efforts to obtain Collateral Access Agreements from lessors, warehousemen, bailees, and other third persons as Foothill may require. 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, 2000 (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) 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), in full, together with a premium (the "Early Termination Premium") equal to (a) during the first 18 months after the Closing Date, the product of (i) 0.10% times (ii) the Maximum Amount times (iii) the number of months (including partial months) remaining until the Maturity Date, (b) during the next 6 months, $1,000,000, and (c) thereafter, $500,000. 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 3.7, 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 3.7 shall be deemed included in the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. (a) Borrower hereby grants to Foothill a continuing security interest in 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. (a) 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 made thereafter, as though made on and as of the date of such Advance or Letter of Credit (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 Eligible Domestic Inventory. All Eligible Domestic Inventory is of good and merchantable quality, free from defects. 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) Each 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 Borrower of this Agreement and 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 Borrower of this Agreement and 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 G, T, U, and X of the Federal Reserve Board) applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (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 Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, 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 Borrower. (c) Other than the filing of appropriate financing statements, fixture filings, and mortgages, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which Borrower 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) This Agreement and the Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganiza tion, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by Borrower to Foothill in and to its properties and assets pursuant to this Agreement and the other 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 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 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 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. 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 15th 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 15th 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 a monthly basis and, in any event, by no later than the 15th day of each month during the term of this Agreement, a listing of Borrower's accounts payable, by vendor; (d) on a monthly basis and, in any event, by no later than the 15th 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), Inventory reports specifying Borrower's cost and the wholesale market value of its Inventory by category, including a monthly Inventory roll-forward report; (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, then upon Foothill's reasonable request, 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) on a monthly basis, 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; and (b) as soon as available, but in any event within 90 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. If Borrower is a parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another company, then, in addition to the financial statements referred to above, Borrower agrees to deliver such other information relative to such related entity as Foothill reasonably may request and, solely to the extent available, such financing statements on a consolidating basis so as to present Borrower and 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 1 Business Day 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 its chief financial 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 its chief financial 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 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 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 the chief financial officer of Borrower describing such ERISA Event and any action that is being taking 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. 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 to 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; (b) (i) unsecured guarantees of indebtedness of Borrower's Subsidiaries; and (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; 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 on 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) 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, 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 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 $500,000 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 and Permitted Dispositions, 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, 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 (a) on the Closing Date, (i) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (ii) to pay transactional costs and expenses incurred in connection with this Agreement, and (b) thereafter, 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 7.(yyyy) 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 of at least $325,000,000, measured on a fiscal quarter-end basis. 7.21 Capital Expenditures. Make capital expenditures in any fiscal year in excess of $80,000,000. 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) such 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 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 any state, county, municipal, or other non-federal governmental agency, or if any taxes or debts owing for an amount in excess of $1,500,000 at any time hereafter to any one or more of such entities becomes a lien, whether choate or otherwise, upon any of Borrower's or any of its Subsidiaries' properties or assets and, in any such case, such taxes or debts are not the subject of a Permitted Protest, and the lien, levy, or assessment is not released, discharged, or bonded against before the earlier of 30 days of the date it first arises or 5 days of the date when such property or asset is subject to being forfeited; 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. 8.9 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; 8.10 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; 8.11 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; 8.12 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 8.13 If the obligation of M&S or IG Delaware under the Pledge Agreement 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: (1) 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; (2) The notice shall be personally delivered or mailed, postage prepaid, to such 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 such Borrower claiming an interest in the Personal Property Collateral shall be sent to such addresses as they have furnished to Foothill; (3) 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; and (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. 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 such 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 Attn: Mr. Larry J. Laster Fax No. 205.730.2164 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 AN ANOTHER 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. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. INTERGRAPH CORPORATION, a Delaware corporation By___________________________ Title:_______________________ FOOTHILL CAPITAL CORPORATION, a California corporation By___________________________ Title:_______________________ Schedule R-1 FACILITY ADDRESS CITY COUNTY STATE FOOTHILL NAME AMOUNT NAME AND ZIP LIEN OF OF PRIOR CODE POSITION PRIOR LIEN LIENOR Huntsville One Huntsville Madison Alabama First n/a n/a Campus Madison Industrial Park AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT This AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of January 14, 1997, by and between Foothill Capital Corporation, a California corporation ("Foothill"), on the one hand, and Intergraph Corporation, a Delaware corporation ("Borrower"), with reference to the following facts: A. Foothill and Borrower heretofore have entered into that certain Loan and Security Agreement, dated as of December 20, 1996 (as heretofore amended, supplemented, or otherwise modified, the "Agreement"); B. Borrower has requested Foothill to amend the Agreement to, among other things, permit a subfacility for indemnities in respect of Borrower's Permitted F/X Contracts, as set forth in this Amendment; C. Foothill is willing to so amend the Agreement in accordance with the terms and conditions hereof; and D. All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Agreement, as amended hereby. NOW, THEREFORE, in consideration of the above recitals and the mutual premises contained herein, Foothill and Borrower hereby agree as follows: 1. Amendments to the Agreement. a. Section 1.1 of the Agreement hereby is amended by adding the following new defined terms in alphabetical order: "First Amendment" means that certain Amendment Number One to Loan and Security Agreement, dated as of January 14, 1997, between Foothill and Borrower. "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 January 14, 1997, the amount of the F/X Reserve is $3,500,000. "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 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. b. The following definitions contained in Section 1.1 of the Amendment are amended and restated in their entirety to read as follows: "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. c. The first sentence of Section 2.1(a) of the Agreement hereby is amended and restated in its entirety to read as follows: 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 the Letter of Credit Usage and the F/X Reserve, or (ii) the Borrowing Base less the sum of the Letter of Credit Usage and the F/X Reserve. d. The second sentence of Section 2.2(a) of the Agreement hereby is amended and restated in its entirety to read as follows: 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. e. Section 2.4 of the Agreement hereby is amended and restated in its entirety to read as follows: 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. f. The first sentence of Section 3.5 of the Agreement hereby is amended and restated in its entirety to read as follows: 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. g. The preamble to Section 5 of the Agreement hereby is amended and restated in its entirety to read as follows: 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: h. Section 7.1(a) of the Agreement hereby is amended and restated in its entirety to read as follows: (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; i. The subsection of Section 7.19 of the Agreement that reads "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;" and that is numbered in Section 7.19 of the Agreement as `subsection 7.(yyyy)' hereby is re-numbered as `subsection (h)'. j. A new subsection (n) hereby is added to Section 9.1 of the Agreement in proper numerical order as follows: (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. 2. Representations and Warranties. Borrower hereby represents and warrants to Foothill that: (a) the execution, delivery, and performance of this Amendment and of the Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) this Amendment and the Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms; and (c) attached hereto as Exhibit F-1 is a true, correct, and complete copy of the F/X Bank Parameters Letter. 3. Conditions Precedent to Amendment. The satisfaction of each of the following on or before, unless otherwise specified below, the First Amendment Closing Date shall constitute conditions precedent to the effectiveness of this Amendment: a. Foothill shall have received the reaffirmation and consent of each of the Obligors (other than Borrower) attached hereto as Exhibit A, duly executed and delivered by the respective authorized officials thereof; b. Foothill shall have received a certificate from the Secretary of Borrower attesting to the incumbency and signatures of authorized officers of Borrower and to the resolutions of Borrower's Board of Directors authorizing its execution and delivery of this Amendment and the performance of this Amendment and the Agreement as amended by this Amendment, and authorizing specific officers of Borrower to execute and deliver the same; c. Foothill shall have received all required consents of Foothill's participants in the Obligations to Foothill's execution, delivery, and performance of this Amendment; d. The representations and warranties in this Amendment, the Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); e. No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; f. No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrower, Foothill, or any of their Affiliates; g. The Collateral shall not have declined materially in value from the values set forth in the most recent appraisals or field examinations previously done by Foothill; and h. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Foothill and its counsel. 4. Effect on Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment, of any right, power, or remedy of Foothill under the Agreement, as in effect prior to the date hereof. 5. Further Assurances. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Foothill, and take all actions as Foothill may reasonably request from time to time, to perfect and maintain the perfection and priority of Foothill's security interests in the Collateral and the Real Property, and to fully consummate the transactions contemplated under this Amendment and the Agreement, as amended by this Amendment. 6. Miscellaneous. a. Upon the effectiveness of this Amendment, each reference in the Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. b. Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Agreement shall mean and refer to the Agreement as amended by this Amendment. c. Upon the effectiveness of this Amendment, each reference in the Agreement and the other Loan Documents to Exhibit F-1, Exhibit F-2, or Exhibit F-3 of the Agreement shall mean and refer to Exhibit F-1, Exhibit F-2, or Exhibit F-3 attached hereto, respectively. d. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. [remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. FOOTHILL CAPITAL CORPORATION, a California corporation By____________________________ Title:________________________ INTERGRAPH CORPORATION, a Delaware corporation By____________________________ Title:________________________ EXHIBIT A ---------- Reaffirmation and Consent All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Amendment Number One to Loan and Security Agreement, dated as of January 14, 1997 (the "Amendment"). Each of the undersigned hereby (a) represents and warrants to Foothill that the execution, delivery, and performance of this Reaffirmation and Consent are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the amendment of the Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing to Foothill under the Pledge Agreement and any other Loan Documents to which it is party; and (d) agrees that each of the Pledge Agreement and any other Loan Documents to which it is a party is and shall remain in full force and effect. Although each of the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that Foothill has no obligation to inform it of such matters in the future or to seek its acknowledgement or agreement to future amendments, and nothing herein shall create such a duty. M&S COMPUTING INVESTMENTS, INC., a Delaware corporation By ___________________________ Title:________________________ INTERGRAPH DELAWARE, INC., a Delaware corporation By ___________________________ 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: Mike Schaefer/Ann Johnson FACSIMILE: (612) 667-0513 (2) FROM NORWEST TO: FOOTHILL CAPITAL CORPORATION ATTENTION: Bryan Hamm FACSIMILE: (617) 722-9485 (3) FROM FOOTHILL TO INTERGRAPH AND NORWEST: Reference hereby is made to that certain Loan and Security Agreement, dated as of December 20, 1996 (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 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 FACSIMILE: (205) 730-2742 ATTENTION: Roger Fulton By:_______________________ Its:______________________ NORWEST BANK MINNESOTA, N.A. By:_______________________ Its:______________________ FOOTHILL CAPITAL CORPORATION By:_______________________ Its:______________________ Exhibit F-3 ----------- F/X RESERVE INCREASE CERTIFICATE Today's date:____________________ (1) FROM INTERGRAPH TO: FOOTHILL CAPITAL CORPORATION ATTENTION: Bryan Hamm FACSIMILE: (617) 722-9485 (2) FROM FOOTHILL TO: NORWEST BANK MINNESOTA ATTENTION: Mike Schaefer/Ann Johnson FACSIMILE: (612) 667-0513 (3) FROM NORWEST TO INTERGRAPH AND FOOTHILL: Reference hereby is made to that certain Loan and Security Agreement, dated as of December 20, 1996 (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 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 FACSIMILE: (205) 730-2742 ATTENTION: Roger Fulton By:_______________________ Its:______________________ FOOTHILL CAPITAL CORPORATION By:_______________________ Its:______________________ NORWEST BANK MINNESOTA, N.A. By:_______________________ Its:______________________ EX-10.D 8 INTERGRAPH CORPORATION 1997 STOCK OPTION PLAN 1. PURPOSE This 1997 Stock Option Plan of Intergraph Corporation (the "Plan") is intended as an incentive for key employees which will foster increased productivity, encourage them to remain in the employ of Intergraph Corporation (the "Corporation"), and enable them to acquire or increase their proprietary interest in the Corporation. At the discretion of the Committee, as defined below, options issued pursuant to this Plan may be either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Options"), or options which are not Incentive Options ("Non-Statutory Options"). 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") composed of the entire Board of Directors or a committee of the Board of Directors that is composed solely of two or more Non-Employee Directors. For this purpose, the term "Non-Employee Director" shall mean a person who is a member of the Company's Board of Directors who (a) is not currently an officer or employee of the Company or any parent or subsidiary of the Company, (b) does not directly or indirectly receive compensation for serving as a consultant or in any other non- director capacity from the Company or any parent or subsidiary of the Company that exceeds the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 ("Regulation S-K"), (c) does not possess any interest in any other transaction with the Company or any parent or subsidiary of the Company for which disclosure would be required pursuant to Item 404(a) of Regulation S-K, and (d) is not engaged in a business relationship with the Company or any parent or subsidiary of the Company which would be disclosable under Item 404(b) of Regulation S-K. In the event the Committee is a committee composed of two or more Non-Employee Directors, the Board of Directors may from time to time remove members from, add members to, and fill vacancies on, the Committee. A member of the Committee shall be eligible to participate in the Plan and receive options under the Plan. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Action taken by a majority of the Committee at which a quorum is present, or action reduced to writing or approved in writing by a majority of the members of the Committee, shall be valid acts of the Committee. The Committee may from time to time and at its discretion, grant options to eligible employees. Subject to the terms of this Plan, the Committee shall exercise its sole discretion in determining which eligible employees shall receive options, and the number of shares subject to each option granted. The Committee's interpretation and construction of any provision of the Plan, or any option granted under it, shall be final. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under the Plan. 3. ELIGIBILITY Persons eligible to receive options shall be such key employees (including officers) of the Corporation and its subsidiaries as the Committee shall from time to time select. The determination of whether a company is a subsidiary of the Corporation shall be made in accordance with Section 425(f) of the Internal Revenue Code, as amended. An option recipient may, subject to the terms and restrictions set forth in the Plan, hold more than one option. No person shall be eligible to receive an option for a larger number of shares than is granted to him by the Committee. In selecting the individuals to whom options shall be granted, as well as determining the number of shares subject to each option, the Committee shall weigh the position and responsibility of the individual being considered, the nature of his or her services, his or her present and potential contributions to the Corporation, and such other factors as the Committee deems relevant to accomplish the purposes of the Plan. 4. STOCK The stock subject to options issued under the Plan shall be shares of the Corporation's authorized but unissued, or reacquired, ten cent ($.10) par value common stock (hereafter sometimes called "Capital Stock" or "Common Stock"). The aggregate number of shares which may be issued pursuant to option exercises under the Plan shall not exceed 3,000,000 shares of Capital Stock. The limitations established by each of the preceding sentences shall be subject to adjustment as provided in Article 5(g) of the Plan. In the event that any outstanding option under the Plan for any reason expires or is terminated, the shares of Capital Stock allocable to the unexercised portion of such option may again be subjected to an option under the Plan. 5. TERMS AND CONDITIONS OF THE PLAN No obligation to retain an option recipient as an employee of the Corporation or its subsidiaries, or to provide or continue providing the option recipient with, or to permit the option recipient to retain, any incident associated with or arising, out of employment with the Corporation or its subsidiaries, including but not limited to tenure, salary, benefits, title or position, shall be imposed on the Corporation or its subsidiaries by virtue of the adoption of the Plan, the grant or acceptance of an option granted pursuant to the Plan, or the exercise of an option under the Plan. Stock options granted under the Plan shall be authorized by the Committee and shall be evidenced by agreements in such form as the Committee shall from time to time approve. Such agreements shall conform with, and be subject to, the following terms and conditions: (a) Number of Shares and Form of Option Each option agreement shall state the number of shares to which it pertains and whether the option granted is an Incentive Option or a Non-Statutory Option. (b) Option Price Each option agreement shall state the option exercise price. The per share exercise price for shares obtainable pursuant to an Incentive Option shall not be less than 100% of the Fair Market Value, as defined below, of the shares of Capital Stock of the Corporation on the date the option is granted. The per share exercise price for shares obtainable pursuant to a Non- Statutory Option shall not be less than the par value of the shares. For all purposes under the Plan, Fair Market Value shall be deemed to be the closing sale price of the Common Stock as reported on the Nasdaq National Market (or the mean between the highest and lowest per share sales price should the Common Stock be listed on an exchange) on a given day, or if such stock is not traded on that day, then on the next preceding day on which such stock was traded (the "Fair Market Value"). Subject to the foregoing, the Committee shall have full authority and discretion, and shall be fully protected, with respect to the price fixed for shares obtainable pursuant to the exercise of options. The aggregate Fair Market Value (determined at the time the Incentive Option is granted) of the Common Stock with respect to which Incentive Options are exercisable for the first time by the option recipient during any calendar year (under all such plans of the Corporation and its subsidiary corporations) shall not exceed $100,000. If an option recipient is granted an Incentive Option which exceeds this limitation, the Incentive Option shall be null and void to the extent such limitation is exceeded. Notwithstanding the foregoing, no Incentive Option shall be granted to an employee who, immediately after such option is granted, owns or has rights to stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation, unless such option is granted at a price which is at least 10% greater than the Fair Market Value of the stock subject to the Incentive Option and such option by its terms is not exercisable after the expiration of five (5) years from the date such option is granted. (c) Medium and Time of Payment The option recipient may pay the option exercise price in cash, by means of unrestricted shares of the Corporation's Common Stock, or in any combination thereof. The option recipient must pay for shares received pursuant to an option exercise on or before the date of delivery of the shares to the option recipient. Subject to the requirements of rules promulgated by the Securities and Exchange Commission and Regulation T promulgated by the Federal Reserve Board, the Committee, in its sole discretion, may establish procedures whereby an option recipient may exercise an option or a portion thereof without making a direct payment of the option price to the Corporation. If the Committee so elects to establish a cashless exercise program, the Committee shall determine, in its sole discretion, and from time to time, such administrative procedures and policies as it deems appropriate and such procedures and policies shall be binding on any option recipient utilizing the cashless exercise program. Payment in currency or by check, bank draft, cashier's check, or postal money order shall be considered payment in cash. In the event of payment in the Corporation's Common Stock, the shares used in payment of the purchase price shall be taken at the Fair Market Value of such shares on the date they are tendered to the Corporation. (d) Term and Exercise of Options No option shall be exercisable either in whole or in part prior to twenty-four (24) months from the date it is granted. Subject to the right of accretion provided in the next to last sentence of this Article 5(d), each option shall be exercisable in four (4) installments, as follows: (1) up to one-fourth of the total shares covered by the option may be purchased after twenty-four (24) months from the date the option is granted; (2) up to one-fourth of the total shares covered by the option may be purchased after thirty-six (36) months from the date the option is granted; (3) up to one-fourth of the total shares covered by the option may be purchased after forty-eight (48) months from the date the option is granted; and (4) up to one-fourth of the total shares covered by the option may be purchased after sixty (60) months from the date the option is granted. The Committee may provide, however, for the exercise of an option after the initial twenty-four month period, either as an increased percentage of shares per year or as to all remaining shares, if the option recipient dies, is or becomes disabled, or, with the permission of the Committee, retires. During the option recipient's lifetime, the option shall be exercisable only by the option recipient, or the option recipient's guardian or legal representative if one has been appointed, and shall not be assignable or transferable other than by will or the laws of descent and distribution. To the extent not exercised, option installments shall accumulate and be exercisable, in whole or in part, in any subsequent period but not later than ten (10) years from the date the option is granted. No option is exercisable after the expiration of ten (10) years from the date it is granted. (e) Termination of Employment Except Death If an option recipient's employment with the Corporation or its subsidiaries ceases for any reason other than the option recipient's death, all options held by him pursuant to the Plan and not previously exercised as of the date of such termination shall terminate and become void and of no effect three (3) months from the date the option recipient's employment is terminated, provided that no option shall be exercisable after the expiration of ten (10) years from the date it is granted. Authorized leaves of absence or absence for military service shall not constitute termination of employment for the purposes of the Plan. (f) Death of Option Recipient and Transfer of Option If an option recipient dies while employed by the Corporation or its subsidiaries and has not fully exercised all of his exercisable options, such options may be exercised, at any time within three (3) months after death, by the option recipient's executors or administrators, or by any person or persons who shall have acquired the option directly from the option recipient by bequest or inheritance. In no event, however, shall the option be exercisable more than ten (10) years after the date such option is granted. An option transferred to an option recipient's estate or to a person to whom such right devolves by reason of the option recipient's death shall be nontransferable by the option recipient's executor or administrator or by such person, except that the option may be distributed by the option recipient's executors or administrators to the distributees of the option recipient's estate entitled thereto. (g) Recapitalization Subject to any required action by the shareholders, the aggregate number of shares which may be issued pursuant to option exercises, the number of shares of Capital Stock covered by each outstanding option, and the price per share applicable to shares under such option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Capital Stock of the Corporation resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Capital Stock), or any other increase or decrease in the number of such shares effected without receipt of consideration by the Corporation. If the Corporation is merged with or consolidated into any other corporation, or if all or substantially all of the business or property of the Corporation is sold, or if the Corporation is liquidated or dissolved, or if a tender or exchange offer is made for all or any part of the Corporation's voting securities, or if any other actual or threatened change in control of the Corporation occurs, the Committee, with or without the consent of the option recipient, may (but shall not be obligated to), either at the time of or in anticipation of any such transaction, take any of the following actions that the Committee may deem appropriate in its sole and absolute discretion: (i) cancel any option by providing for the payment to the option recipient of the excess of the Fair Market Value of the shares subject to the option over the exercise price of the option, (ii) substitute a new option of substantially equivalent value for any option, (iii) accelerate the exercise terms of any option, or (iv) make such other adjustments in the terms and conditions of any option as it deems appropriate. In the event of a change in Capital Stock of the Corporation as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any change shall be deemed to be the Capital Stock within the meaning of the Plan. To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final. Except as otherwise expressly provided in this Article 5(g), the option recipient shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation. Any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Capital Stock subject to the option. The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part of its business or assets. (h) Rights as a Stockholder An option recipient or a transferee of an option shall have no rights as a stockholder with respect to any shares subject to his option until a stock certificate is issued to him for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities, or other property), distributions, or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Article 5(g) of the Plan. (i) Modification, Extension, and Renewal of Options Subject to the terms of the Plan, the Committee may modify, extend, or renew outstanding options granted under the Plan, or accept the surrender of outstanding options (to the extent not theretofore exercised) and authorize the granting of new options in substitution therefor (to the extent not theretofore exercised). The Committee shall not, however, modify any outstanding Incentive Options so as to specify a lower price, or accept the surrender of outstanding Incentive Options and authorize the granting of new options in substitution therefor specifying a lower price. Notwithstanding the foregoing, however, no modification of an option shall, without the consent of the option recipient, alter or impair any rights or obligations under any option theretofore granted under the Plan. (j) Withholding Whenever the Corporation proposes or is required to issue or transfer shares of Capital Stock under the Plan, the Corporation shall have the right to require the option recipient, prior to the issuance or delivery of any certificates for such shares, to remit to the Corporation, or provide indemnification satisfactory to the Corporation for, an amount sufficient to satisfy any federal, state, local, and foreign withholding tax requirements incurred as a result of an option exercise under the Plan by such option recipient. (k) Other Provisions The option agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of the option, as the Committee shall deem advisable. Limitations and restrictions shall be placed upon the exercise of Incentive Options, in the Incentive Option agreement, so that such option will be an "incentive stock option" as defined in Section 422 of the Internal Revenue Code of 1986. 6. TERM OF PLAN Incentive Options and Non-Statutory Options may be granted pursuant to the Plan from time to time within a period of five (5) years commencing on June 1, 1997, and continuing through May 31, 2002. 7. INDEMNIFICATION OF COMMITTEE In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against the reasonable expenses, including, attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any option granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit, or proceeding, that such Committee member is liable for willful misconduct in the performance of his duties; provided, that within sixty (60) days after institution of any such action, suit, or proceeding a Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. 8. AMENDMENT OF THE PLAN The Board of Directors, insofar as permitted by law, shall have the right from time to time with respect to any shares at the time not subject to options, to suspend or discontinue the Plan or revise or amend it in any respect whatsoever, except that without approval of the shareholders of the Company, no such revision or amendment shall: (a) change the number of shares for which options may be granted under the Plan either in the aggregate or to any individual employee, (b) change the provisions relating to the determination of employees to whom options shall be granted, (c) remove the administration of the Plan from the Committee, or (d) decrease the price at which Incentive Options may be granted. 9. APPLICATION OF FUNDS The proceeds received by the Corporation from the sale of Capital Stock pursuant to the exercise of options will be used for general corporate purposes. 10. NO OBLIGATION TO EXERCISE OPTION The granting of an option shall impose no obligation upon the option recipient to exercise such option. 11. APPROVAL OF STOCKHOLDERS This Plan shall take effect on June 1, 1997, subject to approval by the affirmative vote of the holders of the majority of the outstanding shares of Capital Stock of the Corporation present, or represented, and entitled to vote at a meeting of the shareholders, which approval must occur within the period beginning twelve (12) months before and ending twelve (12) months after the date the Plan is adopted by the Board of Directors. EX-13 9 Five Year Financial Summary - ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------- (In thousands except per share amounts) Revenues $1,095,333 $1,097,978 $1,041,403 $1,050,277 $1,176,661 Restructuring charge (credit) --- 6,040 ( 4,826) 89,806 4,418 Nonrecurring operating charges 10,545 --- --- --- --- Gains on sales of investments in affiliates 11,173 6,493 5,815 --- --- Net income (loss) (69,112) (45,348) (70,220) (116,042) 8,442 Net income (loss) per share ( 1.46) ( .98) ( 1.56) ( 2.51) .18 Working capital 230,804 261,140 282,893 348,756 430,974 Total assets 756,347 826,045 839,618 855,329 986,663 Total debt 65,644 69,541 61,114 26,606 21,887 Shareholders' equity 447,263 504,064 522,337 588,710 736,863 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following summarized financial data sets forth the results of operations of the Company for the three year period ended December 31, 1996. The complete consolidated financial statements of the Company, including footnote disclosures, are presented on pages 23 to 44 of this annual report. - --------------------------------------------------------------- 1996 1995 1994 - --------------------------------------------------------------- (In millions except per share amounts) Revenues $1,095 $1,098 $1,041 Cost of revenues 692 668 619 - --------------------------------------------------------------- Gross profit 403 430 422 Operating expenses 461 478 500 Restructuring charge (credit) --- 6 ( 5) Nonrecurring operating charges 11 --- --- - --------------------------------------------------------------- Loss from operations ( 69) ( 54) ( 73) Gains on sales of investments in affiliates 11 7 6 All other income (expense) - net ( 8) 2 ( 7) - --------------------------------------------------------------- Loss before income taxes ( 66) ( 45) ( 74) Income tax benefit (expense) ( 3) --- 4 - --------------------------------------------------------------- Net loss $( 69) $( 45) $( 70) =============================================================== Net loss per share $(1.46) $( .98) $(1.56) =============================================================== RESULTS OF OPERATIONS Summary. The industry in which the Company competes continues to be characterized by rapidly changing technologies, a move to higher performance, lower priced product offerings, intense price and performance competition, shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers. Strategic Decisions. Beginning in late 1992, the Company made strategic decisions regarding its operating systems and hardware architecture that were designed to better position the Company to effectively compete under the industry conditions described above. At the end of 1994, the Company completed a two year development effort to port its technical software applications to Microsoft Corporation's Windows NT operating system, and to make Windows NT available on Intergraph workstations. The effect of this effort has been to expand the availability of the Company's workstations and software applications to Windows-based computing environments not previously addressed by the Company, including the availability of Intergraph software applications operating across a variety of both the Intergraph hardware architecture and the hardware architectures of other vendors that use the Windows NT operating system. In addition, the transition from a proprietary hardware architecture to that of Intel Corporation was substantially completed during this same period. Sales of Windows-based software represented 48% of the Company's software revenues in 1994 and grew to 70% in 1995 and 78% in 1996. Intel-based systems represented 74% of hardware unit sales in 1994, 95% in 1995, and 99% in 1996. Operating Results. Industry conditions and changes in operating system and hardware architecture strategies resulted in a transition period for the Company characterized by revenues that declined from 1992 through 1994, by restructuring charges in 1993 and 1995, and by annual net losses from 1993 through 1995. Although the Company substantially completed its operating system and hardware architecture transition in 1995, revenue to date associated with resulting new product offerings has not met expectations, and gross margin on product sales has continued to decline due primarily to price competition in the industry. The Company continues to believe its operating system and hardware architecture strategies will prove to be the correct choices. However, to achieve profitability, the Company must substantially increase sales volume while continuing to control cost. The Company believes that industry trends toward higher performance and lower priced products, intense competition, and rapidly changing technology will continue, and that improvement in its 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, deliver enhanced performance, and meet customer requirements for standardization and interoperability. In addition, while the Company believes the industry is accepting Windows NT, and that it will become the dominant operating system in the markets served by the Company, acceptance of this system by customers has been slower than anticipated, and the timing of such acceptance is unpredictable, since adoption of any new operating system requires considerable effort and expense. Competing operating systems are available in the market, and several competitors of the Company offer or are adopting Windows NT as the operating system for their products. There can be no assurance that the Windows NT operating system will become dominant in the markets served by the Company or that the Company's operating system and hardware strategies will result in the restoration of profitability. Restructuring and Nonrecurring Operating Charges. The strategic decisions described above led to actions that resulted in an $89.8 million ($1.34 per share) charge to earnings in 1993. The 1993 restructuring plan and resulting charge consisted of direct workforce reductions, elimination or restructuring of certain business operations, and revaluation of certain assets as the result of new product strategies. The plan was completed in 1994 substantially as planned, with the exception of disposition of the Company's European manufacturing and distribution facility (IEM), which continues to be utilized as a distribution center for Europe. Included in the statement of operations for the year ended December 31, 1994, is a $4.8 million credit representing reversal of the remaining unincurred portion of the restructuring charge related to IEM. Cash outlays during 1994 related to the 1993 restructuring were approximately $10 million, all of which were funded by cash from operations or borrowings under credit facilities. Cash outlays in 1995 were insignificant. During the second quarter of 1995, the Company undertook a second restructuring plan designed to further adapt the Company's cost structure to the changing industry and market conditions described above. The plan as originally conceived consisted of direct reductions in workforce, other workforce reductions through attrition, and disposition of four unprofitable business units over the twelve month period ended June 30, 1996. The 1995 plan, had it been fully executed with respect to the four business units, was expected to provide an operating expense reduction of approximately $100 million annually on a prospective basis. Of this total anticipated annual savings, approximately $66 million was to be derived from disposition of the four unprofitable business units. During the fourth quarter of 1996, the Company determined that two of the four business units included in the original 1995 plan should be retained based on their improving future prospects and strategic value to other business units. The Company has terminated this plan effective December 31, 1996. However, it will continue to seek buyers for the two remaining business units. Revenues and losses of the two units held for sale totaled $24 million and $16 million, respectively, for 1996, $43 million and $7 million for 1995, and $43 million and $16 million for 1994. Assets of the units totaled $14 million and $26 million at December 31, 1996 and 1995, respectively. The Company estimates that its operating expenses have been reduced by approximately $35 million annually as a result of employee headcount reductions under the 1995 plan. The 1995 restructuring charge totaled $6 million, primarily for employee severance pay and related costs. Approximately 450 positions were eliminated through direct reductions in workforce, with approximately 350 others eliminated through attrition. All employee groups were affected, but the majority of eliminated positions derived from the research and development, systems engineering and support, and sales and marketing areas. Cash outlays related to the restructuring totaled $3.6 million in 1995, funded by cash from operations and borrowings under credit facilities. Cash required in 1996 to fund the 1995 plan was insignificant. The $6 million charge is included in "Restructuring charge (credit)" in the 1995 consolidated statement of operations. In 1996, the Company incurred a nonrecurring operating charge of $10.5 million, consisting of a $7.2 million revaluation of the assets of the two noncore business units held for sale and a $3.3 million write-off of deferred financing costs due to early termination of the Company's revolving credit agreement with a group of lenders. See "Liquidity and Capital Resources, Term Loan and Revolving Credit Agreements" below for further discussion of the Company's refinancing. The $10.5 million charge is included in "Nonrecurring operating charges" in the 1996 consolidated statement of operations. Litigation and Other Risks and Uncertainties. The Company's business is subject to risks and uncertainties, including those described below. The Company is the 50% owner of 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. The Company's business relationship with BSI is the subject of two arbitration proceedings. In December 1995, the Company commenced an arbitration proceeding against BSI with the American Arbitration Association, Philadelphia, Pennsylvania, alleging that BSI inappropriately and without cause terminated a contractual arrangement between BSI and the Company. In response, BSI in January 1996, 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. In March 1996, BSI commenced arbitration against the Company alleging that the Company failed to properly account for and pay to BSI certain royalties on the sale of BSI software products by the Company, and seeking unspecified damages. This matter is currently pending with the American Arbitration Association, Atlanta, Georgia. The Company denies that it has breached any of its contractual obligations to BSI and is defending vigorously in both proceedings, but at present is unable to predict the outcome of the proceedings. Separately, the Company has engaged an investment banking firm to value and sell its ownership interest in BSI. At present, the investment banking firm is not actively pursuing a buyer due to disagreement between the Company and BSI regarding due diligence information to be supplied to potential buyers. See "Revenues" section below for further details relative to the Company's business relationship with BSI, its sales of MicroStation, and the financial effects on the Company of changes in the business relationship. The Company filed a legal action in August 1995, in the U.S. District Court of Alabama, Northeast Division, seeking to dissolve and wind up its business arrangement with Zydex, Inc. (Zydex), 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 response, Zydex filed a counterclaim against the Company in November 1995, alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. The Company denies and is defending these allegations vigorously, but at present is unable to predict the outcome of the proceedings. The Company's sales of PDS products during the year ended December 31, 1996 were approximately $36 million. The Company has certain business risks related to revenues earned under long-term contractual arrangements, and to its ability to obtain patents, trademarks, and copyrights on products it develops, obtain the patented technology of other companies if required as part of the Company's product offerings, and obtain third party product licenses, all of which are important to success in the industry in which the Company does business. See Notes to Consolidated Financial Statements for further discussion of these risks and uncertainties. Substantially all of the Company's microprocessor needs are currently supplied by Intel. The Company does not have a fixed quantity commitment for microprocessors in its agreements with Intel, but believes it has a good relationship with Intel and is unaware of any reason that Intel might encounter difficulties in meeting the Company's microprocessor needs for the long term. Other microprocessors are available in the market, but a change by the Company from Intel to another microprocessor would significantly disrupt the Company's development and manufacturing activities and result in delayed or lost sales, which would have a significant adverse effect on the Company's results of operations and financial position. Orders. Systems orders for 1996 were $723 million, a 1% increase over the prior year after increases of 12% and 2% in 1995 and 1994, respectively. Product transition adversely affected 1994 orders as did slower than anticipated customer acceptance of the Windows NT operating system. The Company's product transition carried over into 1995, but with growing availability of new products and slowly increasing acceptance of the Windows NT operating system, orders sequentially improved with each quarter to end the year with a 12% increase over 1994. Orders for the Company's systems in 1996 were characterized by heavier demand for the Company's hardware product offerings but with offsetting softer demand for its software products. The Company introduced several new hardware and software products during 1996. New software and certain of the new hardware products did not generate significant orders or revenues during the year. Initial releases of the Company's new software products were delayed until late in the year and contained certain performance problems. The Company believes these problems have been resolved in subsequent releases of the products which began in the fourth quarter of 1996. In addition, the Company believes these products are now well positioned within the marketplace and that increased orders and revenues for these products should occur in 1997. New Products. In late 1995, the Company announced its Jupiter technology, a Windows-based component software architecture that is the foundation of many new computer-aided- design/computer-aided-manufacturing/computer-aided-engineering (CAD/CAM/CAE) and geographic information systems (GIS) applications software products under development by the Company. The first two products built on Jupiter technology began shipping in mid-1996. Initial orders for these products have not met Company expectations and have not contributed substantially to 1996 revenues. During 1996, the Company introduced a complete line of workstations and servers for the high end marketplace based on Intel's Pentium Pro microprocessor. In addition, the Company introduced a new add-in 3D graphics card which delivers workstation class 3D graphics to the Pentium- or Pentium Pro- based personal computer. These products began shipping at various times throughout 1996. The Company believes these products have been well accepted, are now well positioned in the marketplace, and that sales of these products should increase with full year availability for 1997. Geographic Regions. International orders totaled $396 million for the year, an increase of 9% after increases of 12% and 2% in 1995 and 1994, respectively. Asia Pacific orders totaled $112 million in 1996, an increase of 45%, after decreasing 7% in 1995 and increasing 22% in 1994. Growth in that region in 1996 was due in large part to orders for the Company's public safety products and related consulting services. European orders totaled $221 million, a 5% decline from the prior year after a 19% increase in 1995 and a 4% decline in 1994. European orders for 1995 were strong as a result of winning several large individual orders in the third and fourth quarters of that year. U.S. orders, including federal government orders, totaled $327 million for the year, down 7% after increases of 11% and 1% in the two preceding years. The decline in U.S. orders results primarily from a decrease in orders in one of the Company's noncore business units held for sale. Excluding this business unit, U.S. orders for the year were flat with the prior year. Revenues. Total revenues for 1996 were $1.1 billion, flat with the previous year after a 5% increase in 1995 and a 1% decline in 1994. Systems. Sales of Intergraph systems in 1996 were $726 million, up 2% after a 7% increase in 1995 and a 1% decline in 1994. Factors previously cited as adversely affecting systems orders 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; workstation and server unit volume increased 42% in 1996, 22% in 1995, and 41% in 1994, while workstation and server revenue increased only 18% in 1996 and 4% in each of the two preceding years. Geographic Regions. U.S. systems sales, including sales to the federal government, increased by 2% in 1996 after a decline of 6% in 1995 and an increase of 7% in 1994. Growth in U.S. systems sales was depressed in 1996 by a revenue decline in one of the Company's noncore business units held for sale. Excluding this business unit, U.S. sales growth was 7% in 1996. In 1995, U.S. systems sales were negatively impacted by the continuation of product transition and weak demand in U.S. indirect selling channels. European sales were down 6% in 1996 as a result of weak demand for the Company's software products, after growth of 19% in 1995 and a 12% decline in 1994. Asia Pacific systems sales were up 25% after increases of 22% in 1995 and 7% in 1994. Software. Sales of the Company's software applications declined by 9% in 1996 after a 4% decline in 1995 and relatively flat sales in 1994. Declines in the last two years are the result primarily of a decrease in sales of MicroStation, the Company's second highest volume software offering, which declined by approximately 39% in both years (see "MicroStation" below for further discussion). However, 1996 sales of the Company's plant design and electronics software applications increased by a combined 38% to soften the effect of the loss in MicroStation sales. In terms of broad market segments, the Company's mapping/geographic information systems, architecture/engineering/construction, and mechanical design, engineering and manufacturing product applications continue to dominate the Company's product mix at approximately 52%, 27%, and 13%,respectively, of total systems sales in 1996 (43%, 34%, and 14%, respectively, for 1995). Sales of Windows-based software represented approximately 80% of total software sales in 1996, up from approximately 72% in 1995 and 50% in 1994. UNIX-based software comprised approximately 20% of total 1996 software sales, down from approximately 28% in 1995 and 50% in 1994. Federal Government Sales. Total revenue from the United States government was approximately $161 million in 1996, $159 million in 1995, and $167 million in 1994, in all three years representing approximately 15% of total revenue. 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 40% of total federal government revenues are 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 (with damages paid to the Company) 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, a 50%-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. Also as a result of the settlement, the per copy royalty payable by the Company to BSI was increased effective January 1, 1995 and again January 1, 1996 and, for 1995 only, BSI paid the Company a per copy distribution fee based on BSI's MicroStation sales to resellers (such fees were $7 million). See "Litigation and Other Risks and Uncertainties" preceding for a description of arbitration proceedings currently pending between the Company and BSI. The Company's sales of MicroStation declined by approximately 39% in 1996 and 1995. The Company estimates this revenue decline, the per copy royalty increase, and the discontinued distribution fee adversely affected its results of operations in 1996 by approximately $26 million, or $.52 per share (in 1995 by approximately $17 million, or $.37 per share). It is possible that the Company's MicroStation sales will be further reduced, but the Company is at present unable to predict the level of MicroStation sales that will occur in future years. Maintenance and Services. Maintenance and services revenue consists of revenues from maintenance of Company systems and from Company provided training, consulting and other services. These forms of revenue totaled $370 million in 1996, down 5% after essentially flat revenues in 1995 and 1994. Maintenance revenues totaled $283 million in 1996, down 12% after a 2% decrease in 1995 and a 1% increase in 1994. 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 8% of total revenues in 1996 and increased by 31% from the previous year. Growth in services revenue has acted to partially offset the decline in maintenance revenue. The Company is endeavoring to increase revenues from its services business. Such revenues, however, produce lower gross margins than maintenance revenues. Gross Margin. The Company's total gross margin was 36.8% in 1996, down 2.3 points after a decline of 1.4 points in 1995 and no substantial change in 1994. Margin on systems sales declined 2.3 points in 1996, 1.6 points in 1995, and 5.1 points in 1994. The decline in 1996 results primarily from an increase in hardware content in the product mix and from an increase in MicroStation product cost (see "MicroStation" above for further discussion). Competitive pricing conditions in the industry reduced margin on systems sales in all three years, accounting for the majority of the decline in 1995 and 1994. In general, the Company's systems margin may be lowered by price competition, a stronger U.S. dollar in international markets, the effects of technological changes on the value of existing inventories, and a higher mix of federal government sales, which generally produce lower margins than commercial sales. Systems margins may be improved by higher software content in the product, a weaker dollar in international markets, a higher mix of international systems sales to total systems sales, and reductions in prices of component parts, which generally tend to decline over time in the industry. The Company is unable to predict the effects that many of these factors may have, but expects continuing pressure on its systems margin due primarily to industry price competition. Margin on maintenance and services revenue declined by 2.2 points in 1996 after a decline of 1.1 points in 1995 and an improvement of 8.6 points in 1994. The margin declines in 1996 and 1995 result primarily from a higher mix of services revenues, which generally produce lower margins than maintenance revenues. Improvement in 1994 was the result of changes in product strategy in 1993, in which oldest generation spare parts were revalued, resulting in lower obsolescence charges. The Company believes the trend in the industry toward lower priced products and longer warranty periods may continue to reduce its maintenance revenues, which will pressure maintenance and services 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 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 to date for any such declines in inventory value, any unanticipated change in technology could significantly affect the value of the Company's inventories and thereby adversely affect margins and reported results of operations. Operating Expenses (exclusive of nonrecurring operating charges and restructuring charges). Operating expenses declined by 3% in 1996, 4% in 1995, and 1% in 1994. The total number of employees of the Company has declined by 14% in the three year period ended December 31, 1996. Product development expense declined 7% in 1996 after declines of 19% and 14% in the two preceding years. Employee headcount in the development areas has been significantly reduced over the last three years through the cessation of microprocessor design activities, declining proprietary software development activity resulting from migration to the Windows NT operating system, restructuring actions, and attrition. In addition, new product development costs qualifying for capitalization substantially increased in 1995 as a result of development of the Company's Jupiter technology. Sales and marketing expense decreased 5% in 1996 after increases of 2% and 10% in the two preceding years. The expense decline results from restructuring actions taken in 1995 and from closer monitoring of costs. The Company achieved substantial sales and marketing headcount and related expense reductions in 1995, but those gains were more than offset by weakness of the U.S. dollar in international locations and by expenses of pursuit of new business in the Asia Pacific region in that year. Increased costs of presales support activities and advertising and promotion costs of the Company's new product offerings resulted in the increase in 1994 sales and marketing expense. General and administrative expense increased by 4% in 1996 after declines of 3% and 4% in the two preceding years. Installation of new internal business systems, increased legal expenses, and amortization of deferred financing costs related to the Company's revolving line of credit (see "Liquidity and Capital Resources, Term Loan and Revolving Credit Agreements" for further discussion) increased general and administrative expenses in 1996. The decline in 1995 was the result of headcount reductions, but was limited by the weakness of the U.S. dollar in international locations and by the increasing level of business activity in the Asia Pacific region. Workforce reductions and other cost control measures, partially offset by a $5.5 million write-off of an account receivable from a Middle Eastern customer, accounted for the 1994 savings. The Company capitalizes a portion of the cost of development of new products 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 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 product development expenses and results of operations. Nonoperating Income and Expense. Interest expense was $5.1 million in 1996, $4.2 million in 1995, and $2.4 million in 1994. Both the Company's average outstanding debt and average rate of interest have increased over the period. In 1996, the Company entered into an interest rate swap agreement in the principal amount (approximately $19 million at December 31, 1996) of its Australian floating rate term loan agreement. The agreement is for a period of approximately six years, and its expiration date coincides with that of the term loan. The agreement was entered into to reduce the risk of increase in interest rates. Under the agreement, 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 future decreases in interest rates. The weighted average pay and receive rates of the agreement at December 31, 1996 were 9.58% and 7.06%, respectively. The agreement had an insignificant effect on the total cash flows of the Company in 1996. The Company does no trading in this form of derivative instrument. See "Liquidity and Capital Resources" below for further description of the Company's borrowing arrangements. The Company sold stock investments in affiliated companies at gains of $11.2 million or $.23 per share in 1996, $6.5 million or $.14 per share in 1995, and $5.8 million or $.12 per share in 1994. These gains are included in "Gains on sales of investments in affiliates" in the consolidated statements of operations. "Other income (expense) - net" in the consolidated statements of operations consists primarily of interest income, foreign exchange losses, other miscellaneous items of nonoperating income and expense, and nonrecurring charges. Included in these amounts are foreign exchange losses of $4.6 million in 1996 and $2.6 million in 1994, and a $3.4 million write-down of investments in affiliated companies in 1994. Income Taxes. The Company incurred a loss before income tax expense of $66.1 million in 1996 and losses before income tax benefit of $45.3 million in 1995 and $74.2 million in 1994. Note 8 of Notes to Consolidated Financial Statements contains a reconciliation of statutory to actual income tax benefit or expense, and further details of the Company's tax position, including net operating loss carryforwards. Operating Results, Geographic Areas. International markets, particularly Europe, continue in importance to the industry and to the Company. 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. For 1996, sales outside the U.S. represented 55% of total revenues versus 54% in 1995 and 49% in 1994. European revenues were 33% of total revenues in 1996, 36% in 1995, and 33% in 1994. Asia Pacific revenues represented 13% of total Company revenues in 1996 and approximately 8% in the two previous years. The Company incurred losses from operations of $68.7 million in 1996 (including $10.5 million in nonrecurring charges), $54.1 million in 1995 (including a restructuring charge of $6 million), and $72.6 million in 1994 (including a credit from revision of the 1993 restructuring charge of $4.8 million). The factors that have limited the Company's revenue growth and reduced profitability over the past three years, including declining per unit sales prices due to competitive conditions, have similarly affected each of the geographic areas in which the Company does business. The Company expects that intense price competition will continue in the future. The increased loss from operations in 1996 results primarily from flat revenues and a decline in gross margin, partially offset by a decline in product development and sales and marketing expenses. The U.S. region incurred a loss from operations of $30.3 million in 1996 (including $10.5 million in nonrecurring charges) after operating losses of $12.3 million in 1995 (including a restructuring charge of $4.8 million) and $27.6 million in 1994. Systems revenue increased slightly during 1996, but systems margin declined by 2.5 points. The margin decline, along with a 13% increase in general and administrative expense due to implementation of new internal business systems and higher legal expenses, resulted in increased operating losses for the year. U.S. systems revenue declined by 6% in 1995, and systems margin declined slightly, reflecting continued product transition and weakness in indirect selling channels. These negative factors were more than offset by a 17% decline in product development expense in 1995, the result of employee headcount reductions and increased development costs qualifying for capitalization. The European region incurred losses from operations of $32.3 million in 1996, $27.7 million in 1995 (including a restructuring charge of $1 million), and $33.1 million in 1994 (including a restructuring credit of $4.8 million from revision of the 1993 restructuring charge). Revenues and gross margin declined 7% and 1.7 points, respectively, during 1996, offset to a degree by an approximate 6% decline in both sales and marketing and general and administrative expenses. Software sales were weak during the year, while maintenance revenues were adversely impacted by lower priced products and longer warranty periods. Operating expenses continue to decline as a result of restructuring actions and other cost control measures. Improvement in 1995 was the result of a 19% increase in systems revenue (a portion of which relates to weakness of the U.S. dollar in Europe for most of 1995), and reduced operating expenses. Operations from 1994 through mid-1995 were adversely affected by product transition but also by poor economic conditions, particularly in 1994, in the Company's primary German and U.K. markets. The Asia Pacific region incurred losses from operations of $5.9 million in 1996, $10.8 million in 1995, and $5.7 million in 1994. This region is the Company's fastest growing with total revenue increases in excess of approximately 30% in each of the past two years. The increased 1995 operating loss resulted from operating expenses incurred primarily in pursuit of new business. Other international regions, in total representing approximately 9% of total Company revenues in 1996, are comprised of operations in the Middle East, Canada, and Non- U.S. Americas. These regions incurred operating losses of $5.4 million in 1996, $10.1 million in 1995, and $11.7 million in 1994 (including the write-off of a $5.5 million Middle Eastern account receivable). The 1995 operating loss increase resulted from cost increases associated with maintenance and professional services revenues. See Note 11 of Notes to Consolidated Financial Statements for further details of operations by geographic area. Impact of Currency Fluctuations and Currency Risk Management. Fluctuations in the value of the U.S. dollar in international markets can have a significant impact on the Company's results of operations. For 1996, approximately 55% of the Company's revenues were derived from customers outside the United States, primarily through subsidiary operations. Most subsidiaries sell to customers and incur and pay operating expenses in local currency. These local currency revenues and expenses are translated to dollars for U.S. reporting purposes. A stronger U.S. dollar will decrease the level of reported U.S. dollar orders and revenues, decrease the dollar gross margin, and decrease reported dollar operating expenses of the international subsidiaries. During 1996, the U.S. dollar strengthened on average from its 1995 level, which decreased reported dollar revenues, orders, and gross margin, but also decreased reported dollar operating expenses in comparison to the prior year period. Such currency effects did not materially affect the Company's results of operations in 1996 or 1994. The Company estimates that weakness of the U.S. dollar in 1995 in its international markets, primarily Europe, improved 1995 results of operations by approximately $.22 per share. 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 (specifically Germany, U.K., The Netherlands, France and Italy) and Australia. Primarily, but not exclusively in these locations, the Company has certain currency related asset and liability exposures against which certain measures, primarily hedging, are taken to reduce currency risk. With respect to these exposures, 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 therefore enters into forward exchange contracts primarily related to these balance sheet items (intercompany receivables, payables, and formalized intercompany debt). 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 these balance sheet items (generally three months or less), and only in amounts sufficient to offset possible significant currency rate related changes in the recorded values of these balance sheet items, which represent a calculable exposure for the Company from period to period. Since this risk is calculable, and these contracts are purchased only in offsetting amounts, neither the contracts themselves nor the exposed foreign currency denominated balance sheet items are likely to have a significant effect on the Company's financial position or results of operations. Based on the terms of contracts outstanding and the amount of the Company's balance sheet exposures at December 31, 1996, 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 being hedged. The Company's positions in these derivatives are continuously monitored to ensure protection against the known balance sheet exposures described above. By policy, the Company is prohibited from market speculation via such instruments and therefore does not take currency positions exceeding its known financial statement exposures, and does not otherwise trade in currencies. At December 31, 1996, the Company had net outstanding forward exchange contracts of approximately $47 million ($46 million at December 31, 1995), maturing at various dates through February 13, 1997. The fair values of these contracts approximated original contract amounts based on the insignificant amounts the Company would pay or receive to transfer the contracts to third parties at December 31, 1996. Neither the gains and losses resulting from changes in exchange rates underlying the exposed balance sheet amounts nor the offsetting gains and losses from the Company's hedging activity were material to results of operations in 1996, 1995, or 1994. Net negative 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 $1.7 million in 1996, $825,000 in 1995, and $1.1 million in 1994. Deferred gains and losses as of December 31, 1996 and 1995 were not significant. See Notes 1 and 4 of Notes to Consolidated Financial Statements for further information related to management of currency risk. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, cash totaled $50.7 million, down $5.7 million from year end 1995. Cash generated from operations in 1996 was $26 million versus $59.8 million in 1995 (including $22.3 million in tax refunds) and $35.7 million in 1994 (including $34.5 million in tax refunds). Tax refunds in 1995 and 1994 resulted primarily from carryback of U.S. taxable losses to prior years. Net cash used for investing activities totaled $31.7 million in 1996, $83.0 million in 1995, and $54.4 million in 1994. Included in investing activities were capital expenditures of $30.6 million in 1996, $54.7 million in 1995, and $68 million in 1994 primarily for Intergraph products used in hardware and software development and sales and marketing activities. In addition, investing activity in 1995 also included capital expenditures for facilities and equipment utilized in a long- term Australian public safety contract. Other significant investing activities included expenditures of $15.5 million in 1996, $25.4 million in 1995, and $16.6 million in 1994 for capitalizable software development activity, and proceeds from sales of investments in affiliated companies of $11.6 million in 1996, $7.9 million in 1995 and $7.3 million in 1994. Net cash used for financing activities totaled $600,000 in 1996 versus a net positive generation of cash from financing activities of $17.8 million in 1995 and $26.1 million in 1994. Significant sources of cash included $8.3 million from exercise of employee stock options in 1995 and a net borrowing of $32.5 million to fund capital expenditures and restructuring charges in 1994. Cash used to purchase Company stock for the treasury totaled $10.4 million in 1994. The Company's collection period for accounts receivable was approximately 83 days as of December 31, 1996, unchanged from the prior year. Approximately 70% of the Company's 1996 revenues were derived from the U.S. government and international customers, both of which traditionally carry longer collection periods. The Company is experiencing slow collection periods throughout the Middle East region, particularly in Saudi Arabia. Total accounts receivable from Middle Eastern customers was approximately $21 million at December 31, 1996 ($13.6 million at December 31, 1995). Total U.S. government accounts receivable was $48 million at December 31, 1996 and 1995. The Company endeavors to enforce its payment terms with these and other customers, and grants extended payment terms only in very limited circumstances. Over the last nine years, the Board of Directors of the Company has authorized the purchase of up to 20 million shares of the Company's stock in the open market. As of December 31, 1996, the Company had purchased approximately 18.8 million shares for the treasury. There were no treasury stock purchases in 1996 or 1995. Under the provisions of its term loan and revolving credit agreement, the Company is prohibited from further purchases of its stock in the open market without the consent of the lending organization. The Company expects that capital expenditures will require $40 million to $50 million in 1997, primarily for Intergraph products used in product development and sales and marketing activities. The Company's revolving credit agreement contains certain restrictions on the level of the Company's capital expenditures. Term Loan and Revolving Credit Agreements. In October 1995, the Company entered into a three year revolving credit agreement with a group of lenders. Borrowings available under the agreement were determined by the amounts of eligible assets of the Company, with maximum borrowings of $50 million. At December 31, 1996, the Company had outstanding borrowings of $20 million, and an additional $22 million of the available credit line was allocated to support letters of credit issued by the Company. Borrowings were secured by a pledge of substantially all of the Company's assets in the U.S. and Canada and, under certain circumstances, the accounts receivable of some European subsidiaries of the Company. The rate of interest on all borrowings under the agreement was, at the Company's option, the Citibank base rate of interest plus 1.75% or the Eurodollar rate plus 2.75%. The average effective rate of interest was 10.6% for the period of time in 1996 during which the Company had outstanding borrowings under the agreement. The agreement required the Company to pay a commitment fee at an annual rate of .5% of the average unused daily portion of the revolving credit commitment. In addition, the agreement contained certain financial and restrictive covenants of the Company. In January 1997, the Company terminated its agreement with this group of lenders and replaced it with a term loan and revolving credit agreement with another lender. As a result, the Company wrote off $3.3 million of deferred financing costs associated with the previous agreement. The charge is included in "Nonrecurring operating charges" in the 1996 consolidated statement of operations. Under the Company's January 1997 three year fixed term loan and revolving credit agreement, available borrowings are determined by the amounts of eligible assets of the Company, as defined in the agreement, including accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $100 million. The term loan portion of the agreement is in the principal amount of $20 million, with principal due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.25% at inception of the agreement) plus .625%. The agreement requires the Company to pay a facility fee at an annual rate of .15% of the maximum amount available under the credit line, an unused credit line fee at an annual rate of .25% of the average unused portion of the revolving credit line, and a monthly agency fee. At February 21, 1997, the Company had outstanding borrowings of $20 million, all of which was classified as long-term debt, and an additional $33 million of the available credit line was allocated to support letters of credit issued by the Company. As of this same date, the maximum available credit under the line was $83 million. The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures. In addition, the agreement includes restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes. At December 31, 1996, the Company had $65.6 million in debt on which interest is charged under various floating rate arrangements, primarily its revolving credit agreement, mortgages, and Australian term loan (see Note 7 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. The Company believes that existing cash balances, together with cash generated by operations and cash available under its term loan and revolving credit agreement, will be adequate to meet cash requirements for 1997. FOURTH QUARTER 1996 Revenues for the fourth quarter were $294 million, down 2% from fourth quarter 1995. The Company incurred a net loss of $33.6 million ($.71 per share) for the quarter, including a $10.5 million ($.21 per share) nonrecurring operating charge, versus a fourth quarter 1995 net income of $7.1 million ($.15 per share). In addition to the adverse effects of the revenue decline and nonrecurring charge, the decline in fourth quarter 1996 earnings is due to a 6 point decline in gross margin versus fourth quarter 1995, the result of continuation of the factors cited in "Gross Margin" above as affecting full year 1996 margins. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------- December 31, 1996 1995 - -------------------------------------------------------------------------- (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 50,674 $ 56,407 Accounts receivable, net 326,117 324,051 Inventories 89,411 111,813 Other current assets 37,718 49,581 - -------------------------------------------------------------------------- Total current assets 503,920 541,852 Investments in affiliates 19,102 11,636 Other assets 59,106 59,900 Property, plant, and equipment, net 174,219 212,657 - -------------------------------------------------------------------------- Total Assets $756,347 $826,045 ========================================================================== Liabilities and Shareholders' Equity Trade accounts payable $ 51,205 $ 54,352 Accrued compensation 50,364 51,301 Other accrued expenses 72,798 79,199 Billings in excess of sales 62,869 63,707 Short-term debt and current maturities of long-term debt 35,880 32,153 - -------------------------------------------------------------------------- Total current liabilities 273,116 280,712 Deferred income taxes 6,204 3,881 Long-term debt 29,764 37,388 - -------------------------------------------------------------------------- Total liabilities 309,084 321,981 - -------------------------------------------------------------------------- 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 229,675 233,940 Retained earnings 339,679 408,791 Unrealized holding gain on securities of affiliate 6,858 --- Cumulative translation adjustment 6,049 8,650 - -------------------------------------------------------------------------- 587,997 657,117 Less -- cost of 9,656,295 treasury shares at December 31, 1996, and 10,501,309 treasury shares at December 31, 1995 (140,734) (153,053) - -------------------------------------------------------------------------- Total shareholders' equity 447,263 504,064 - -------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $756,347 $826,045 ========================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------ Year Ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ (In thousands except per share amounts) Revenues Systems $ 725,828 $ 710,168 $ 665,583 Maintenance and services 369,505 387,810 375,820 - ------------------------------------------------------------------------------ Total revenues 1,095,333 1,097,978 1,041,403 - ------------------------------------------------------------------------------ Cost of revenues Systems 465,645 439,502 401,515 Maintenance and services 226,263 228,785 217,756 - ------------------------------------------------------------------------------ Total cost of revenues 691,908 668,287 619,271 - ------------------------------------------------------------------------------ Gross profit 403,425 429,691 422,132 Product development 103,397 111,587 137,247 Sales and marketing 256,482 268,702 262,322 General and administrative 101,725 97,507 100,031 Restructuring charge (credit) --- 6,040 ( 4,826) Nonrecurring operating charges 10,545 --- --- - ------------------------------------------------------------------------------ Loss from operations (68,724) (54,145) (72,642) Interest expense ( 5,137) ( 4,198) ( 2,359) Equity in earnings (losses) of affiliates 825 4,322 ( 3,055) Gains on sales of investments in affiliates 11,173 6,493 5,815 Other income (expense) -- net ( 4,249) 2,180 ( 1,950) - ------------------------------------------------------------------------------ Loss before income taxes (66,112) (45,348) (74,191) Income tax benefit (expense) ( 3,000) --- 3,971 - ------------------------------------------------------------------------------ Net loss $ (69,112) $ (45,348) $ (70,220) ============================================================================== Net loss per share $ ( 1.46) $ ( .98) $ ( 1.56) ============================================================================== Weighted average shares outstanding 47,195 46,077 44,860 ============================================================================== 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, 1996 1995 1994 - ------------------------------------------------------------------------------ (In thousands) Cash Provided By (Used For): Operating Activities: Net loss $(69,112) $(45,348) $(70,220) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 75,820 80,157 73,640 Noncash portion of nonrecurring operating charges and restructuring charge (credit) 10,545 2,449 ( 4,826) Deferred income tax expense 2,496 3,175 15,625 Collection of income tax refunds 2,113 22,264 34,472 Gains on sales of investments in affiliates (11,173) ( 6,493) ( 5,815) Equity in (earnings) losses of affiliates ( 825) ( 4,322) 3,055 Write-off of investments in affiliates --- --- 3,361 Net changes in current assets and liabilities 16,149 7,951 (13,610) - ------------------------------------------------------------------------------ Net cash provided by operating activities 26,013 59,833 35,682 - ------------------------------------------------------------------------------ Investing Activities: Purchases of securities --- --- (86,620) Sales and maturities of securities --- 1,000 111,126 Proceeds from sales of investments in affiliates 11,561 7,908 7,315 Purchase of property, plant, and equipment (30,563) (54,689) (67,967) Capitalized software development costs (15,492) (25,370) (16,584) Other 2,816 (11,799) ( 1,683) - ------------------------------------------------------------------------------ Net cash used for investing activities (31,678) (82,950) (54,413) - ------------------------------------------------------------------------------ Financing Activities: Gross borrowings 18,366 65,652 44,609 Debt repayment (22,764) (59,844) (12,138) Proceeds of employee stock purchases and exercise of stock options 3,834 12,027 4,019 Acquisition of treasury stock --- --- (10,379) - ------------------------------------------------------------------------------ Net cash provided by (used for) financing activities ( 564) 17,835 26,111 - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash 496 296 ( 1,963) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents ( 5,733) ( 4,986) 5,417 Cash and cash equivalents at beginning of year 56,407 61,393 55,976 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 50,674 $ 56,407 $ 61,393 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------- Unrealized Holding Additional Gain on Cumulative Total Common Paid-in Retained Securities Translation Treasury Shareholders' Stock Capital Earnings of Affiliate Adjustment Stock Equity - ------------------------------------------------------------------------------------------------------------- (In thousands except share amounts) Balance at January 1, 1994 $5,736 $246,642 $524,359 --- $(7,606) $(180,421) $588,710 Acquisition of 1,080,000 treasury shares --- --- --- --- --- ( 10,379) (10,379) Issuance of 510,625 shares under employee stock purchase plan --- (3,489) --- --- --- 7,508 4,019 Translation adjustments --- --- --- --- 10,064 --- 10,064 Issuance of 120 shares for other purposes --- 142 --- --- --- 1 143 Net loss for the year --- --- (70,220) --- --- --- (70,220) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 5,736 243,295 454,139 --- 2,458 (183,291) 522,337 Issuance of 358,687 shares under employee stock purchase plan --- (1,512) --- --- --- 5,228 3,716 Issuance of 836,469 shares upon exercise of stock options --- (3,881) --- --- --- 12,192 8,311 Issuance of 797,931 shares upon purchase of a business --- (4,130) --- --- --- 11,630 7,500 Translation adjustments --- --- --- --- 6,192 --- 6,192 Issuance of 81,686 shares for other purposes --- 168 --- --- --- 1,188 1,356 Net loss for the year --- --- (45,348) --- --- --- (45,348) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 5,736 233,940 408,791 --- 8,650 (153,053) 504,064 Issuance of 352,759 shares under employee stock purchase plan --- (1,594) --- --- --- 5,143 3,549 Issuance of 53,898 shares upon exercise of stock options --- ( 501) --- --- --- 786 285 Issuance of 438,357 shares in connection with a professional services agreement --- (2,390) --- --- --- 6,390 4,000 Unrealized holding gain on securities of affiliate --- --- --- $6,858 --- --- 6,858 Translation adjustments --- --- --- --- (2,601) --- ( 2,601) Other --- 220 --- --- --- --- 220 Net loss for the year --- --- (69,112) --- --- --- (69,112) - ------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $5,736 $229,675 $339,679 $6,858 $ 6,049 $(140,734) $447,263 =============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES. Basis of Presentation: The consolidated financial statements include the accounts of Intergraph Corporation and its majority- owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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 business is principally in one industry segment - the development, manufacturing, marketing, and service of interactive computer graphics systems. Graphics workstations, servers, and peripheral hardware manufactured by the Company and others are combined with operating systems developed by others and application- specific software programs developed by the Company and third-party applications software developers. The Company's hardware products and integrated software applications are used for computer-aided design, manufacturing, and engineering, mapping and geographic information services, public safety, and technical information management in technical fields such as utilities, facilities management, architecture, engineering, construction, mechanical and electronics design, and mapping and geographic information systems. The Company's products are sold worldwide, with United States and European revenues representing approximately 78% of total revenues for 1996. See Note 11. 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. All 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, 1996 and 1995, the Company held various debt securities, all within three months of maturity at these dates, with fair market values of $16,000,000 and $27,200,000, respectively. Gross realized gains and losses on debt securities sold during the years ended December 31, 1996 and 1995, were not significant, and there were no unrealized holding gains or losses on debt securities at December 31, 1996 or 1995. Inventories: Inventories are stated at the lower of average cost or market and are summarized as follows: - ------------------------------------------------------------- December 31, 1996 1995 - ------------------------------------------------------------- (In thousands) Raw materials $26,601 $ 36,336 Work-in-process 24,008 25,037 Finished goods 12,945 17,140 Service spares 25,857 33,300 - ------------------------------------------------------------- Totals $89,411 $111,813 ============================================================= 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 reported results of operations. Investments in Affiliates: Investments in companies in which the Company has the ability to influence operations or finances, generally 20%- to 50%-owned companies, are accounted for by the equity method. Investments in companies in which the Company does not exert such influence, generally in less than 20%-owned companies, are accounted for at fair value if such values are readily determinable, and at cost if such values are not readily determinable. The Company's investments accounted for by the cost method are insignificant. During 1996, a company in which the Company holds a minority interest underwent an initial public offering of its stock. At December 31, 1996, the remaining unrealized portion of this investment at fair market value totaled $6,858,000 and is included in "Investments in affiliates" and "Unrealized holding gain on securities of affiliate" in the consolidated balance sheet at December 31, 1996. 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, 1996 1995 - ------------------------------------------------------------- (In thousands) Land and improvements (15-30 years) $ 14,943 $ 15,256 Buildings and improvements (30 years) 146,251 152,759 Equipment, furniture, and fixtures (3-8 years) 320,561 349,263 - ------------------------------------------------------------- 481,755 517,278 Allowances for depreciation (307,536) (304,621) - ------------------------------------------------------------- Totals $174,219 $212,657 ============================================================= Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. For long-lived assets and certain intangible assets to be held and used by an entity, the Statement requires a review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss, based on comparison of carrying value to the fair value of the asset, must be recognized if the sum of the expected future cash flows from the asset is less than the carrying amount of the asset. For long-lived assets and certain intangible assets to be disposed of, the Statement requires financial statement reporting at the lower of carrying amount or fair value of the asset less cost to sell. Application of this Statement did not materially affect the Company's results of operations or financial position in 1996. 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. From the initial authorization in 1987 through the end of 1996, the Company had purchased approximately 18,800,000 shares for the treasury. Further purchases of treasury stock are restricted by terms of the Company's term loan and revolving credit agreement. See Note 7. 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 software are shipped, with any post-shipment costs accrued at that time. Revenues on systems sales with significant post- shipment obligations 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 these contracts is 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 the Company's long-term contracts, which could delay revenue recognition and decrease the gross margin to be earned on these contracts. 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. Billings may not coincide with the recognition of revenue. Unbilled accounts receivable occur when revenue recognition precedes billing to the customer, arising 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, arising 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 over a two-year period on a straight-line basis. Amortization expense included in "Cost of revenues - Systems" in the consolidated statements of operations amounted to $16,100,000 in 1996, $14,700,000 in 1995, and $11,300,000 in 1994. The unamortized balance of capitalized software development costs, included in "Other assets" in the consolidated balance sheets, totaled $26,400,000 and $27,000,000 at December 31, 1996 and 1995, respectively. Although the Company regularly reviews its capitalized development costs to ensure recognition of any decline in value, it is possible that revenues expected to be generated by these development activities 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 product development expenses 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 losses totaled $4,600,000 in 1996, $300,000 in 1995, and $2,600,000 in 1994. 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 "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. 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. Bank fees charged on the contracts are amortized over the period of the contract. The Company accounts for its interest rate swap agreements as hedges of its debt obligations. The difference in amounts paid and received under the contracts is accrued and recognized as an adjustment to interest expense on the debt. Deferred gains related to terminated interest rate swap agreements, which are not significant to the Company's results of operations, are amortized to interest expense over the remaining terms of the agreements. 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, 1996 or 1995. Cash flows from derivative financial instruments are classified in the consolidated statements of cash flows consistent with the cash flows from the assets and liabilities being hedged. See Note 4 for further details of the Company's derivative financial instruments. Stock-Based Compensation Plans: The Company has two stock-based compensation plans, a fixed stock option plan and a stock purchase plan. Under the fixed stock option plan, stock options may be granted to 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 fair market value at the date of grant and exercise price, is recognized over the vesting period of the options. 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. Effective December 31, 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. This Statement, effective for transactions entered into during calendar year 1996 for the Company, establishes accounting and reporting standards for stock-based employee compensation plans including, with respect to the Company, stock options and employee stock purchase plans. The Statement also establishes fair value as the measurement basis for transactions in which goods or services are acquired from nonemployees in exchange for equity instruments. The Statement defines a fair value-based method of accounting for employee stock options under which compensation cost is measured at the date options are granted and recognized by charges to expense over the employees' service periods, and it encourages entities to adopt that method of accounting. It also allows entities to continue to measure compensation cost using the method prescribed under Accounting Principles Board (APB) Opinion No. 25, under which compensation expense is recognized only for the excess, if any, of the market price of the stock at grant date over the amount the employee must pay to acquire stock. The Company has elected to continue to account for its employee stock options and its employee stock purchases under the provisions of APB No. 25. This decision results in recognition of no compensation expense for employee stock options that are granted at market price at the date of grant or for employee stock purchases. However, in accordance with the disclosure provisions of the Statement, the Company has provided proforma basis information to reflect results of operations and earnings per share had compensation expense been recognized for these items. See Note 9. 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 8. Net Loss Per Share: Net loss per share is computed using the weighted average number of common and equivalent common shares outstanding. Stock options are the only common stock equivalent. See Note 9. Reclassifications: Certain reclassifications have been made to the previously reported consolidated balance sheet at December 31, 1995 and to the consolidated statements of operations and cash flows for the years ended December 31, 1995 and 1994 to provide comparability with the current year presentation. NOTE 2 -- LITIGATION AND OTHER RISKS AND UNCERTAINTIES. In addition to those described in Notes 1, 4, 6, 7, and 11, the Company has risks related to its business and economic environment, including those described below. The Company is the 50% owner of 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. The Company's business relationship with BSI is the subject of two arbitration proceedings. In December 1995, the Company commenced an arbitration proceeding against BSI with the American Arbitration Association, Philadelphia, Pennsylvania, alleging that BSI inappropriately and without cause terminated a contractual arrangement between BSI and the Company. In response, BSI in January 1996, 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. In March 1996, BSI commenced arbitration against the Company alleging that the Company failed to properly account for and pay to BSI certain royalties on the sale of BSI software products by the Company, and seeking unspecified damages. This matter is currently pending with the American Arbitration Association, Atlanta, Georgia. The Company denies that it has breached any of its contractual obligations to BSI and is defending vigorously in both proceedings, but at present is unable to predict the outcome of the proceedings. Separately, the Company has engaged an investment banking firm to value and sell its ownership interest in BSI. At present, the investment banking firm is not actively pursuing a buyer due to disagreement between the Company and BSI regarding due diligence information to be supplied to potential buyers. The Company filed a legal action in August 1995, in the U.S. District Court of Alabama, Northeast Division, seeking to dissolve and wind up its business arrangement with Zydex, Inc. (Zydex), 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 response, Zydex filed a counterclaim against the Company in November 1995, alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. The Company denies and is defending these allegations vigorously, but at present is unable to predict the outcome of the proceedings. The Company's sales of PDS products during the year ended December 31, 1996 were approximately $36,000,000. Substantially all of the Company's microprocessor needs are currently supplied by Intel Corporation. The Company does not have a fixed quantity commitment for microprocessors in its agreements with Intel, but believes it has a good relationship with Intel and is unaware of any reason that Intel might encounter difficulties in meeting the Company's microprocessor needs for the long term. Other microprocessors are available in the market, but a change by the Company from Intel to another microprocessor would significantly disrupt the Company's development and manufacturing activities and result in delayed or lost sales, which would have a significant adverse effect on the Company's results of operations and financial position. 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 is widely available, and many companies are attempting to develop patent positions concerning technological improvements related to personal computers and workstations. At present, 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. 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 any required patent rights of others through licensing or purchase could significantly reduce the Company's revenues and adversely affect its results of operations. NOTE 3 -- RESTRUCTURING AND NONRECURRING OPERATING CHARGES. 1995 Charge: During the second quarter of 1995, the Company undertook a second restructuring plan designed to further adapt the Company's cost structure to changed industry and market conditions. The program, as originally planned, consisted of direct reductions in workforce, other workforce reductions through attrition, and disposition of four unprofitable business units over the twelve month period ended June 30, 1996. The program, had it been fully executed with respect to the four business units, was expected to provide an operating expense reduction of approximately $100,000,000 annually on a prospective basis. Of this total anticipated annual savings, approximately $66,000,000 was to be derived from disposition of the business units. During the fourth quarter of 1996, the Company determined that two of the four business units included in the original plan should be retained based on their improving future prospects and strategic value to other business units. The Company has terminated this plan effective December 31, 1996. However, it will continue to seek buyers for the remaining two business units. Revenues and losses of the two business units held for sale totaled $24,000,000 and $16,000,000, respectively, for 1996, $43,000,000 and $7,000,000, respectively, for 1995, and $43,000,000 and $16,000,000, respectively, for 1994. Assets of the business units totaled $14,000,000 and $26,000,000 at December 31, 1996 and 1995, respectively. The 1996 loss and asset amounts reflect a $7,245,000 revaluation of the assets of these two units (see 1996 Nonrecurring Operating Charge below). The Company estimates that its operating expenses have been reduced by approximately $35,000,000 annually as a result of employee headcount reductions under the 1995 plan. The 1995 restructuring charge totaled $6,040,000, primarily for employee severance pay and related costs. Approximately 450 positions were eliminated through direct reductions in workforce, with approximately 350 others eliminated through attrition. All employee groups were affected, but the majority of eliminated positions derived from the research and development, systems engineering and support, and sales and marketing areas. Cash expenditures related to the restructuring totaled $3,600,000 in 1995, funded by cash from operations and borrowings under credit facilities, with an insignificant amount paid in 1996. The $6,040,000 charge is included in "Restructuring charge (credit)" in the 1995 consolidated statement of operations. 1993 Charge: During late 1992 and 1993, the Company made several changes in its product, sales, and manufacturing strategies designed to make the Company more competitive in its industry and economic environment. These strategic decisions resulted in the Company's 1993 restructuring plan. The plan was completed in 1994 substantially as planned, with the exception of disposition of the Company's European manufacturing and distribution facility (IEM), which continues to be utilized as a distribution center for Europe. Included in the statement of operations for the year ended December 31, 1994 is a $4,826,000 credit representing reversal of the remaining unincurred portion of the restructuring charge related to IEM. Cash outlays during 1994 related to the 1993 restructuring were approximately $10,000,000, all of which were funded by cash from operations or borrowings under credit facilities. Cash outlays in 1995 were insignificant. See Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion of industry conditions and strategic decisions leading to the 1993 and 1995 restructuring plans. 1996 Nonrecurring Operating Charge: During 1996, the Company incurred a nonrecurring operating charge of $10,545,000, consisting of a $7,245,000 revaluation of the assets of the Company's two noncore business units held for sale and a $3,300,000 write-off of deferred financing costs due to early termination of the Company's revolving credit agreement with a group of lenders (see Note 7). The $10,545,000 charge is included in "Nonrecurring operating charges" in the 1996 consolidated statement of operations. NOTE 4 -- FINANCIAL INSTRUMENTS. Information related to the Company's financial instruments other than cash equivalents and stock investments in less than 20%-owned companies is summarized below. Short- and Long-Term Debt: The balance sheet carrying amounts of the Company's floating rate debt (approximately $55,000,000 at December 31, 1996), consisting of loans under a revolving credit agreement, mortgages, and a term loan (see Note 7), 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 term loan (see Note 7), 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. Forward exchange contracts: The Company has certain currency related asset and liability exposures related to its international operations against which certain measures, primarily hedging, are taken to reduce currency risk. 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 (specifically Germany, U.K., The Netherlands, France, and Italy) and Australia. With respect to these exposures, 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 enters into forward exchange contracts primarily related to these balance sheet items (intercompany receivables, payables, and formalized intercompany debt). 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 these balance sheet items, which are generally less than three months. The Company is prohibited by policy from taking currency positions exceeding its known balance sheet currency exposures and from otherwise trading in currencies. The Company had outstanding net forward exchange contracts of $47,468,000 and $46,344,000 at December 31, 1996 and 1995, respectively. Such amounts approximated the Company's currency related asset and liability exposures at those dates. The table below summarizes in U.S. dollars the face amounts of these contracts by major currency. For purposes of presentation, foreign currency amounts are translated to dollars at the rates in effect at each balance sheet date. "Sell" amounts represent the U.S. dollar equivalent of commitments to sell currencies, and "buy" amounts represent the U.S. dollar equivalent of commitments to purchase currencies. - ------------------------------------------------------------------------- December 31, 1996 1995 -------------------------- --------------------------- Net Forward Net Forward Contract Contract Sell Buy Position Sell Buy Position - ------------------------------------------------------------------------- (In thousands) German mark $18,127 $ 4,736 $13,391 $19,919 $2,016 $17,903 British pound 9,317 3,419 5,898 3,900 2,340 1,560 Swiss franc 7,638 235 7,403 3,487 1,928 1,559 Italian lira 6,754 395 6,359 8,055 302 7,753 French franc 6,018 656 5,362 6,831 --- 6,831 Belgian franc 2,186 75 2,111 3,550 345 3,205 Spanish peseta 2,081 1,059 1,022 4,778 --- 4,778 Other currencies 7,581 1,659 5,922 3,455 700 2,755 - ------------------------------------------------------------------------- Totals $59,702 $12,234 $47,468 $53,975 $7,631 $46,344 ========================================================================= Based on the terms of outstanding forward exchange contracts and the amount of the Company's balance sheet exposures at December 31, 1996 and 1995, 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 negative 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 $1,700,000 in 1996, $825,000 in 1995, and $1,100,000 in 1994. Interest rate swap agreements: 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 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 future decreases in interest rates. In 1996, the Company entered into an interest rate swap agreement in the principal amount of its Australian term loan agreement (approximately $19,000,000 at December 31, 1996). The agreement is for a period of approximately six years, and its expiration date coincides with that of the term loan. Weighted average pay and receive rates under this agreement were 9.58% and 7.06%, respectively, at December 31, 1996. Through March 1995, the Company had interest rate swap agreements in the principal amounts of its two European mortgages (approximately $20,000,000). Weighted average pay and receive rates at termination in 1995 were 7.36% and 5.22%, respectively. Cash requirements of the agreements, which are not significant, are limited to the differential between the fixed rate paid and the variable rate received. The Company does no trading in this form of derivative instrument. The fair market values of the Company's forward exchange contracts and interest rate swap agreements were determined by obtaining quotes from banks, and are expressed in terms of amounts the Company would receive or pay should the Company's obligations under the instruments be transferred to a third party at the reporting date. The fair values of the Company's forward exchange contracts and interest rate swap agreements approximated the original contract amounts on that basis. NOTE 5 -- SUPPLEMENTARY CASH FLOW INFORMATION. Changes in current assets and liabilities, net of the effects of business acquisitions and divestitures, restructuring charges, and nonrecurring operating charges, in reconciling net loss to net cash provided by operations are as follows: - ----------------------------------------------------------------------- Cash Provided By (Used For) Operations Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- (In thousands) (Increase) decrease in: Accounts receivable $( 8,547) $27,440 $(20,738) Inventories 21,299 11,915 8,331 Other current assets 10,522 (20,462) (26,501) Increase (decrease) in: Trade accounts payable ( 1,513) 2,720 8,013 Accrued compensation and other accrued expenses ( 5,344) 3,008 2,461 Billings in excess of sales ( 268) (16,670) 14,824 - ----------------------------------------------------------------------- Net changes in current assets and liabilities $16,149 $7,951 $(13,610) ======================================================================= Cash payments for income taxes totaled $4,900,000, $4,800,000, and $4,600,000 in 1996, 1995, and 1994, respectively. Cash payments for interest in those years totaled $5,000,000, $4,100,000, and $2,400,000, respectively. Investing and financing transactions in 1996 that did not require cash included the issuance of 438,357 shares of the Company's common stock with a fair market value of $4,000,000 in connection with a professional services agreement related to the Company's efforts to build its public safety business in the Asia Pacific region and a $6,858,000 favorable mark-to-market adjustment of an investment in an affiliated company. See Note 1. Investing and financing transactions in 1995 that did not require cash consisted of acquisition of a business for total consideration of $7,500,000, consisting of issuance of 797,931 shares of the Company's common stock and the granting of stock options on 148,718 of the Company's shares to employees of the acquired company. There were no significant non-cash investing and financing transactions in 1994. NOTE 6 -- 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 at December 31, 1996 and 1995 was $20,700,000 and $13,600,000, respectively. Revenues from the U.S. government were $160,800,000 in 1996, $159,300,000 in 1995, and $167,000,000 in 1994, representing approximately 15% of total revenue in all three years. Accounts receivable from the U.S. government was approximately $48,000,000 at December 31, 1996 and 1995. 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 40% of total federal government revenues are 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 (with damages paid to the Company) 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. Included in accounts receivable are unbilled amounts of $82,300,000 and $75,800,000 at December 31, 1996 and 1995, respectively. The Company maintained reserves for uncollectible accounts, included in "Accounts receivable" in the consolidated balance sheets at December 31, 1996 and 1995, of $16,700,000 and $20,400,000, respectively. NOTE 7 -- DEBT AND LEASES. Short- and long-term debt is summarized as follows: - --------------------------------------------------------------- December 31, 1996 1995 - --------------------------------------------------------------- (In thousands) Revolving credit agreement $20,000 $15,000 Term loan 19,029 21,607 Long-term mortgages 12,889 12,626 Other secured debt 7,911 13,946 Short-term credit facilities 3,310 1,432 Other 2,505 4,930 - --------------------------------------------------------------- Total debt 65,644 69,541 Less amounts payable within one year 35,880 32,153 - --------------------------------------------------------------- Total long-term debt $29,764 $37,388 =============================================================== In October 1995, the Company entered into a three year revolving credit agreement with a group of lenders. Borrowings available under the agreement were determined by the amounts of eligible assets of the Company, as defined in the agreement, including cash, accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $50,000,000. Borrowings were secured by a pledge of substantially all of the Company's assets in the U.S. and Canada and, under certain circumstances, the accounts receivable of some European subsidiaries of the Company. At December 31, 1996 and 1995, the Company had outstanding borrowings of $20,000,000 and $15,000,000, respectively, and approximately $22,000,000 and $20,000,000, respectively, of the available credit line was allocated to support letters of credit issued by the Company. The rate of interest on all borrowings under the agreement was, at the Company's option, the Citibank base rate of interest plus 1.75% or the Eurodollar rate plus 2.75%. The weighted average interest rate on combined debt outstanding under short-term credit arrangements and revolving credit agreements for 1996 and 1995 was 9.7% and 10.4%, respectively. The agreement required the Company to pay a commitment fee at an annual rate of .5% of the average unused daily portion of the revolving credit commitment. In addition, the agreement contained certain financial and restrictive covenants of the Company. In January 1997, the Company terminated its agreement with this group of lenders and replaced it with a term loan and revolving credit agreement with another lender. As a result, the Company wrote off $3,300,000 million of deferred financing costs associated with the previous agreement. The charge is included in "Nonrecurring operating charges" in the 1996 consolidated statement of operations. Under the Company's January 1997, three year fixed term loan and revolving credit agreement, available borrowings are determined by the amounts of eligible assets of the Company, as defined in the agreement, including accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $100,000,000. The term loan portion of the agreement is in the principal amount of $20,000,000, payable at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.25% at inception of the agreement) plus .625%. The agreement requires the Company to pay a facility fee at an annual rate of .15% of the maximum amount available under the credit line, an unused credit line fee at an annual rate of .25% of the average unused portion of the maximum revolving credit line, and a monthly agency fee. At February 21, 1997, the Company had outstanding borrowings of $20,000,000, all of which was classified as long-term debt, and an additional $33,000,000 of the available credit line was allocated to support letters of credit issued by the Company. The effective interest rate on this amount was 8.9%. As of this same date, maximum available credit under the line was approximately $83,000,000. The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures. In addition, the agreement includes restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes. In August 1995, the Company entered into a term loan agreement with an Australian bank totaling 35,000,000 Australian dollars (approximately $26,000,000). 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 6.8% to 9.6% in 1996 (7.5% to 8.2% in 1995). Letters of credit totaling $19,100,000 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%. The Company has two long-term mortgages on certain of its European facilities. Prior to refinancing in December 1995 and January 1996, the mortgages were payable in varying installments through the year 2017 and bore interest at the floating Amsterdam Interbank Offering Rate (AIBOR), which ranged from 3.9% to 4.6% in 1996 and from 3.9% to 5.7% in 1995. The refinanced mortgages are payable in varying installments through the year 2010 and bear interest at the floating AIBOR rate plus 1%. During 1993, the Company entered into two year interest rate swap agreements in the amounts of the mortgages to reduce the risk of increases in interest rates, effectively converting the interest rates on these mortgages to a fixed rate of 7.4%. The agreements expired in first quarter 1995. Other secured debt consists of debt to various financial institutions payable in varying installments through 1999 and secured by certain internally used computer equipment. The weighted average interest rate on this debt was approximately 11.5% for 1996 and 1995. See Note 4 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 $34,200,000 in 1996, $38,200,000 in 1995, and $38,600,000 in 1994. 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) 1997 $26,300 1998 18,500 1999 11,900 2000 7,400 2001 2,500 Thereafter 23,600 - ---------------------------------------------------------- Total future minimum lease payments $90,200 ========================================================== NOTE 8 -- INCOME TAXES. The components of loss before income taxes are as follows: - ----------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- (In thousands) U.S. $(42,381) $(17,779) $(26,330) International (23,731) (27,569) (47,861) - ----------------------------------------------------------------------- Total loss before income taxes $(66,112) $(45,348) $(74,191) ======================================================================= Income tax benefit (expense) consists of the following: - ----------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- (In thousands) Current benefit (expense): Federal $ 3,351 $ 5,251 $19,799 International ( 3,855) (2,076) ( 203) - ----------------------------------------------------------------------- Total current ( 504) 3,175 19,596 - ----------------------------------------------------------------------- Deferred benefit (expense): Federal ( 2,447) (2,685) (14,775) International ( 49) ( 490) ( 850) - ----------------------------------------------------------------------- Total deferred ( 2,496) (3,175) (15,625) - ----------------------------------------------------------------------- Total income tax benefit (expense) $( 3,000) $ --- $ 3,971 ======================================================================= 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, 1996 1995 - ----------------------------------------------------------------------- (In thousands) Current Deferred Tax Assets (Liabilities): Inventory reserves $23,356 $13,901 Vacation pay and other employee benefit accruals 3,624 6,413 Other financial statement reserves, primarily allowance for doubtful accounts 4,000 9,078 Profit on uncompleted sales contracts deferred for tax return purposes ( 4,297) ( 8,686) Other current tax assets and liabilities, net 912 4,331 - ----------------------------------------------------------------------- 27,595 25,037 Less asset valuation allowance (23,617) (21,209) - ----------------------------------------------------------------------- Total net current asset (1) 3,978 3,828 - ----------------------------------------------------------------------- Noncurrent Deferred Tax Assets (Liabilities): Net operating loss and tax credit carryforwards: U.S. federal and state 47,019 29,577 International operations 38,132 28,964 Depreciation ( 9,256) ( 8,632) Capitalized software development costs ( 9,198) ( 9,322) Other noncurrent tax assets and liabilities, net ( 6,664) ( 1,165) - ----------------------------------------------------------------------- 60,033 39,422 Less asset valuation allowance (66,237) (43,303) - ----------------------------------------------------------------------- Total net noncurrent liability ( 6,204) ( 3,881) - ----------------------------------------------------------------------- Net deferred tax liability $( 2,226) $( 53) ======================================================================= (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 $25,342,000 in 1996 due to the incurrence of additional losses that may be carried forward, the future tax benefits of which cannot be assured. If realized, these 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, 1996, the Company had a U.S. federal net operating loss carryforward of approximately $92,000,000 expiring from the year 2009 through 2011. International net operating loss carryforwards total approximately $102,000,000 and expire as follows: - ------------------------------------------------------------ International Net Operating Loss December 31, 1996 Carryforwards - ------------------------------------------------------------ (In thousands) Expiration: 3 years or less $ 11,000 4 to 5 years 19,000 6 to 10 years 8,000 Unlimited carryforward 64,000 - ------------------------------------------------------------ Total $102,000 ============================================================ Additionally, the Company has $3,500,000 of U.S. alternative minimum tax credit carryforwards which have no expiration date. U.S. research and development tax credit carryforwards of $5,800,000 are available to offset regular tax liability through 2011. A reconciliation from income tax benefit at the U.S. federal statutory tax rate of 35% to the Company's income tax benefit (expense) is as follows: - ----------------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------- (In thousands) Income tax benefit at federal statutory rate $ 23,139 $15,872 $25,967 Benefit from Foreign Sales Corp. (FSC) 1,963 905 1,689 Tax effects of international operations, net ( 8,657) ( 8,629) (9,836) Tax effect of U.S. tax loss carried forward (23,752) (10,967) (3,804) Tax effect of U.S. tax credits carried forward --- --- (7,900) Reduction of taxes provided in prior years 4,712 --- --- Other - net ( 405) 2,819 (2,145) - ----------------------------------------------------------------------------- Income tax benefit (expense) $( 3,000) $ --- $ 3,971 ============================================================================= 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, 1996, the Company had not provided federal income taxes on earnings of individual international subsidiaries of approximately $49,000,000. 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 of approximately $2,700,000 would be payable if all previously unremitted earnings as of December 31, 1996, were remitted to the U.S. company. NOTE 9 -- STOCK-BASED COMPENSATION PLANS. The Company has reserved a total of 3,000,000 shares of common stock to grant as options to key employees under the Intergraph Corporation 1992 Stock Option Plan. 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, 1996, 1,151,641 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 352,759, 358,687, and 510,625 shares of stock in 1996, 1995, and 1994, respectively, under the 1995 and predecessor Plans. At December 31, 1996, 2,655,727 shares were available for future purchases. As allowed under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, 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 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 are not likely to be representative of the effects on reported pro forma net income (loss) for future years as the estimated compensation costs reflect only options granted subsequent to December 31, 1994. - ---------------------------------------------------------------------------- Year Ended December 31, 1996 1995 - ---------------------------------------------------------------------------- (In thousands except per share amounts) Net loss As reported $(69,112) $(45,348) Pro forma $(71,447) $(46,757) Primary and fully diluted loss per share As reported $( 1.46) $( .98) Pro forma $( 1.51) $( 1.01) ============================================================================ 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 1.39 years after vest date and 40% expected volatility for the market price of the Company's stock. 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 each grant and are as follows: - -------------------------------------------------------------- Risk Free Interest Rate Expected Life ----------------------- (in years) 1996 1995 - -------------------------------------------------------------- 3.39 6.55% 5.95% 4.39 6.67% 6.02% 5.39 6.74% 6.09% 6.39 6.79% 6.17% ============================================================== 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 1996 and 1995 were $3.92 and $4.84, respectively, under the 1992 stock option plan and $1.78 and $1.88, respectively, under the 1995 stock purchase plan. Activity in the Company's fixed stock option plan for the years ended December 31, 1996, 1995, and 1994 is summarized as follows: - ------------------------------------------------------------------------------- 1996 1995 1994 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------- Outstanding at beginning of year 1,778,304 $10.42 1,260,637 $10.48 1,408,925 $11.01 Granted at fair value 290,018 9.47 1,244,000 11.12 70,000 9.50 Granted at less than fair value --- --- 148,718 1.25 --- --- Exercised ( 53,898) 5.28 (836,469) 9.94 --- --- Expired ( 14,982) 9.23 --- --- (146,157) 15.00 Forfeited (168,025) 11.02 ( 38,582) 9.97 (72,131) 10.87 - ------------------------------------------------------------------------------- Outstanding at end of year 1,831,417 $10.38 1,778,304 $10.42 1,260,637 $10.48 - ------------------------------------------------------------------------------- Exercisable at end of year 247,874 $ 9.12 160,171 $ 7.68 598,814 $10.91 =============================================================================== Further information relating to stock options outstanding at December 31, 1996 is as follows:
- ----------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------- ------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Prices Number Contractual Life Exercise Price Number Exercise Price - ----------------------------------------------------------------------------------------------- $ .90 to $ 3.75 30,335 7.58 years $ 1.33 22,294 $ 1.40 $ 7.875 to $ 9.50 586,223 7.77 8.97 173,241 8.56 $11.125 to $16.00 1,214,859 8.29 11.28 52,339 14.23 - ----------------------------------------------------------------------------------------------- 1,831,417 8.11 $10.38 247,874 $ 9.12 ===============================================================================================
Options shown above with a weighted average exercise price of $1.25 per share and a range of exercise prices of $.90 to $3.75 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. All other option grants during the three year period ended December 31, 1996 were at the fair market value of the Company's stock at date of grant. NOTE 10 -- 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 makes contributions to the Plan in amounts determined at the discretion of the Board of Directors, and the contributions are funded with Company stock. Amounts are 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. Company contributions to the Plan were $5,687,000, $5,886,000, and $6,169,000 in 1996, 1995, and 1994, 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 $3,678,000, $3,856,000, and $3,331,000 in 1996, 1995, and 1994, respectively. NOTE 11-- OPERATIONS BY GEOGRAPHIC AREA. International markets, particularly Europe, continue in importance to the industry and to the Company. 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. The following summary of operations by geographic area includes both sales to unaffiliated customers and intercompany sales between geographic areas. Sales between geographic areas are accounted for under a transfer pricing policy. Loss from operations by geographic areas reflects these sales. - ----------------------------------------------------------------------- Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------- (In thousands) Revenues United States: Unaffiliated customers - U.S. $ 488,759 $ 500,295 $ 526,082 Unaffiliated customers - export 42,061 49,035 38,908 Consolidated subsidiaries 232,871 217,171 199,663 - ----------------------------------------------------------------------- 763,691 766,501 764,653 - ----------------------------------------------------------------------- Europe: Unaffiliated customers 363,255 390,715 344,579 - ----------------------------------------------------------------------- Asia Pacific: Unaffiliated customers 127,607 91,284 70,645 U.S. parent 2,257 2,252 2,250 - ----------------------------------------------------------------------- 129,864 93,536 72,895 - ----------------------------------------------------------------------- Other International: Unaffiliated customers 73,651 66,649 61,189 U.S. parent 1,320 770 370 - ----------------------------------------------------------------------- 74,971 67,419 61,559 - ----------------------------------------------------------------------- Eliminations -- net ( 236,448) ( 220,193) ( 202,283) - ----------------------------------------------------------------------- Total revenues $1,095,333 $1,097,978 $1,041,403 ======================================================================= Loss From Operations United States $( 30,346) $( 12,261) $( 27,640) Europe ( 32,299) ( 27,663) ( 33,147) Asia Pacific ( 5,917) ( 10,799) ( 5,716) Other International ( 5,424) ( 10,106) ( 11,687) Eliminations -- net 5,262 6,684 5,548 - ----------------------------------------------------------------------- Total loss from operations $( 68,724) $( 54,145) $( 72,642) ======================================================================= Identifiable Assets United States $ 522,966 $ 558,446 $ 586,041 Europe 204,913 248,459 239,649 Asia Pacific 85,197 85,205 59,525 Other International 40,147 46,234 49,934 Eliminations -- net ( 96,876) ( 112,299) ( 95,531) - ----------------------------------------------------------------------- Total identifiable assets $ 756,347 $ 826,045 $ 839,618 ======================================================================= Loss from operations in 1994 includes a restructuring credit (reversal of the unincurred portion of the 1993 restructuring charge) of $4,826,000 in Europe. Loss from operations in 1995 includes restructuring charges of $4,778,000 in the U.S., $978,000 in Europe, and $284,000 in Other International. Loss from operations in 1996 includes a charge of $10,545,000 in the U.S. for a $7,245,000 revaluation of the assets of two noncore business units planned for disposal through sales to third parties and a $3,300,000 write-off of deferred financing fees due to the Company's early termination of its revolving credit agreement with a group of lenders. NOTE 12 -- RELATED PARTY TRANSACTIONS. Bentley Systems, Inc.: Through December 31, 1994, the Company had an exclusive license agreement with Bentley Systems, Inc. (BSI), a 50%-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. Under this agreement, the Company paid royalties to BSI based on its sales of MicroStation. Royalties expense totaled $21,820,000 in 1994. 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. In addition, effective January 1, 1995 and 1996, the per copy fee payable by the Company to BSI was increased and, for 1995 only, BSI paid the Company a per copy distribution fee based on BSI's MicroStation sales to resellers. See Note 2 and Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the Company's business relationship with BSI. The Company's purchases from BSI totaled $14,244,000 in 1996 and $39,329,000 in 1995, and the per copy distribution fees earned by the Company from BSI totaled $7,414,000 in 1995. Amounts due from BSI or for which the Company holds the right to delivery of BSI products totaled $10,700,000 and $13,000,000 at December 31, 1996 and 1995, respectively. 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 may borrow from the Company, on an unsecured basis, an amount not exceeding (1) the current market value of the common stock of the Company owned by any such executive officer, and/or (2) the net value (current market price less exercise price) of currently exercisable stock options owned by any such executive officer. Interest is charged on a monthly basis at the prevailing prime rate. Principal and interest must be repaid by the earliest to occur of termination of employment, the attainment of a designated market price for the Company's stock or the sale of a certain number of shares by loan recipients, or April 30, 1997. At December 31, 1996 and 1995, James W. Meadlock, Chief Executive Officer and Chairman of the Board of the Company, was indebted to the Company in the amounts of $5,530,000 and $5,165,000, respectively, under the program. NOTE 13 -- 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 14 -- 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, 1996: Revenues $256,706 $268,166 $276,313 $294,148 Gross profit 95,401 101,370 103,001 103,653 Net loss ( 6,391) (15,179) (13,930) (33,612) Net loss per share ( .14) ( .32) ( .29) ( .71) Weighted average shares outstanding 46,902 46,922 47,243 47,636 Year ended December 31, 1995: Revenues $257,329 $260,167 $279,231 $301,251 Gross profit 98,148 101,387 105,972 124,184 Net income (loss) (22,472) (21,958) ( 8,049) 7,131 Net income (loss) per share ( .49) ( .48) ( .17) .15 Weighted average shares outstanding 45,601 45,929 46,146 46,616 ============================================================================== First quarter 1996 losses were reduced by a $.20 per share gain on the sale of the Company's stock investment in an affiliated company. Fourth quarter 1996 losses were increased by a $.21 per share charge for nonrecurring operating expenses, primarily revaluation of the assets of two noncore business units and write- off of deferred financing fees. Second quarter 1995 losses were increased by a restructuring charge of $.16 per share and reduced by an $.11 per share gain on the sale of a subsidiary. Fourth quarter 1995 earnings were increased by a $.03 per share reversal of a portion of the restructuring charge recognized in second quarter 1995. 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, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Birmingham, Alabama January 30, 1997 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, 1997, there were 47,758,544 shares of common stock outstanding, held by 6,092 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. - ---------------------------------------------------------- 1996 1995 Period High Low High Low - ---------------------------------------------------------- First Quarter $20 1/8 $14 5/8 $14 3/8 $ 8 1/8 Second Quarter 16 1/4 11 1/8 14 10 Third Quarter 13 1/8 8 5/8 13 10 7/8 Fourth Quarter 12 5/8 8 5/8 18 1/2 11 5/8 ========================================================== TRANSFER AGENT AND REGISTRAR Harris Trust and Savings Bank Shareholder Services Division 311 W. Monroe Street P. O. Box A-3504 Chicago, IL 60690-3504 CORPORATE COUNSEL Lanier Ford Shaver & Payne P.C. 200 West Court Square, Suite 5000 Huntsville, AL 35801 INDEPENDENT AUDITORS Ernst & Young LLP AmSouth/Harbert Plaza, Suite 1900 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 15, 1997, at the Corporate offices in Huntsville, Alabama. BOARD MEMBERS AND OFFICERS BOARD OF DIRECTORS EXECUTIVE VICE PRESIDENTS VICE PRESIDENTS James W. Meadlock Wade C. Patterson Thomas G. Baybrook Chief Executive Officer and President, Intergraph Chairman of the Board Computer Systems Klaas Borgers Roland E. Brown William E. Salter Roger O. Coupland Director President, Intergraph Federal Systems Jeffrey H. Edson Larry J. Laster Executive Vice President Tommy D. Steele Graeme J. Farrell and Director President, Intergraph Software Solutions Milford B. French Keith H. Schonrock Jr. Director Lawrence F. Ayers Jr. Jeffrey P. Heath James F. Taylor Jr. Edward F. Boyle Fred D. Heddens Executive Vice President, President, International Penman R. Gilliam Rune Kahlbom Public Safety, and Director Neil E. Keith William H. McClure Robert E. Thurber Executive Vice President Richard H. Lussier Winston P. Newton and Director Nancy B. Meadlock John R. Owens Stephen J. Phillips Robert Patience Edward A. Wilkinson Stephen B. Rowles Allan B. Wilson David K. Stinson Jr. Manfred Wittler John W. Wilhoite SECRETARY John R. Wynn EX-27 10
5 This schedule contains summary financial information extracted from the Company's Annual Report on Form 10-K for the year ended December 31, 1996, and is qualified in its entirety by reference to such financial statements. 1000 YEAR DEC-31-1996 DEC-31-1996 50,674 0 342,817 16,700 89,411 503,920 481,755 307,536 756,347 273,116 29,764 0 0 5,736 441,527 756,347 725,828 1,095,333 465,645 691,908 472,149 (2,049) 5,137 (66,112) (3,000) (69,112) 0 0 0 (69,112) (1.46) (1.46) Accounts receivable in the Consolidated Balance Sheet is shown net of allowance for doubtful accounts. Other expenses include Product development expenses, Sales and marketing expenses, General and administrative expenses, and Nonrecurring operating charges. The provision for doubtful accounts is included in Other expense above. The Company provides its allowance for doubtful accounts on a specific identification basis. In 1996, significant improvement in collection prospects on several large accounts occurred, resulting in reversal of amounts previously provided in the allowance for doubtful accounts.
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