-----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, S329BMK8KrY9pZYpAOxcQKOtlfT5lTt5UG5i13SDT3Tp7RqJbxuSJTxJUhRMztre 7Jq8RK8DFd8xKkXE4NeflA== 0000351145-98-000003.txt : 19980331 0000351145-98-000003.hdr.sgml : 19980331 ACCESSION NUMBER: 0000351145-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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-K SEC ACT: SEC FILE NUMBER: 000-09722 FILM NUMBER: 98578927 BUSINESS ADDRESS: STREET 1: THIGPEN HQ011 #9384 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2057302000 10-K 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, 1997 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. ( ) As of January 31, 1998, there were 48,220,459 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 $400,159,000 based on the closing sale price of such stock as reported by NASDAQ on January 31, 1998, 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, 1997 Part I, Part II, Part IV Portions of the Proxy Statement for the May 28, 1998 Annual Shareholders' Meeting Part III ============================================================================== PART I ITEM 1. BUSINESS Overview Intergraph Corporation (the "Company" or "Intergraph"), founded in 1969, is a vendor of automated business solutions including hardware, software, consulting and support services for technical, creative, and information technology (IT) professionals found in a variety of industry sectors and government. Effective for 1998 management and reporting purposes, the Company's business organization is comprised of Intergraph Corporation, the parent company (also referred to as "Intergraph Industry Solutions"), Intergraph Computer Systems, Inc., Intergraph Public Safety, Inc., and VeriBest, Inc. The Company believes that this business structure will provide greater focus and provide clear accountability of each as a business enterprise. Industry Solutions supplies automated business solutions, including hardware, software, consulting and support services, to three primary industries: process and building, infrastructure (including transportation, utilities and state and local governments), and federal government. Computer Systems supplies high performance Windows NT-based graphics workstations and personal computers (PCs), three dimensional (3D) graphics subsystems, servers, and other hardware products. Public Safety develops, markets, and implements systems for public safety agencies. VeriBest serves the electronics design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. 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 77% of total revenues for 1997. 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 PCs currently used widely for word processing, spreadsheets, and other less demanding applications. In 1992 the Company began evaluation of a transition from its own Clipper RISC microprocessor to the Intel microprocessor and from the UNIX operating system to Microsoft's Windows NT, a 32 bit operating system powerful enough to run both technical and business applications on a less expensive hardware platform. In late 1992, the Company concluded that systems with Intel microprocessors and Windows operating systems would become capable of supporting high end computing and other enterprise wide computing environments, while at the same time maintaining interoperability with existing UNIX-based systems. The Company, therefore, chose to migrate products from its own Clipper microprocessor to Intel's and from the UNIX operating system to Windows NT. 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 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. 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. Sales of Windows-based software grew to represent 48% of software revenues in 1994, 70% in 1995, 78% in 1996, and 87% in 1997. The Company ceased development of its microprocessor at the end of 1993 and made a substantial investment in the redesign of its hardware platform for utilization of Intel's microprocessor. Intergraph chose to use only Intel microprocessors and to focus its efforts and image creation toward its core capabilities, which are very high performance computation and graphics. This high end market place in the Windows NT environment is only supported by Intel products. The transition from its proprietary hardware architecture to that of Intel was substantially completed during 1994. Intel based systems grew to represent 74% of hardware unit sales in 1994, 95% in 1995, and approximately 100% in 1996 and 1997. See "Manufacturing and Sources of Supply" and Item 3, Legal Proceedings following for discussion regarding litigation between the Company and Intel, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1997 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for discussion of effects of the Intel dispute on operating results of the Company. Currently, Intergraph markets and sells a complete line of workstations and servers based on Intel's Pentium, Pentium Pro, and Pentium II microprocessors and the Windows NT operating system. The Company's Intel/Windows-based solutions include 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 support services. The Company believes that its operating system and hardware architecture strategies are the correct choices, that the industry has accepted Windows NT, and that Windows NT is becoming the dominant operating system in the majority of markets served by the Company. Competing operating systems and products are available in the market, and competitors of the Company offer or are adopting Windows NT and Intel as the systems for their products. Improvement in the Company's operating results will depend on its ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new hardware and software products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability. In terms of broad market segments, the Company's mapping/geographic information systems (GIS), architectural, engineering and construction (AEC), and mechanical design, engineering, and manufacturing product applications continue to dominate the Company's product mix at approximately 57%, 27%, and 14%, respectively, of total systems sales in 1997 (52%, 27%, and 13%, respectively, for 1996). Business Entities Intergraph Industry Solutions - ----------------------------- Intergraph Industry Solutions develops, markets, and supports total solutions which offer technical professionals open, interdisciplinary software applications, specialized industry specific hardware, consulting, and support services. Industry Solutions provides business solutions to three primary industries: process and building, infrastructure (including transportation, utilities, and state and local government), and federal government. The graphics software foundation for certain Industry Solutions' software applications is MicroStation, graphics software owned by Bentley Systems, Inc., an Intergraph affiliate. MicroStation provides fundamental graphics element creation, maintenance, and display functions for Industry Solutions' UNIX- and Intel-based workstations. See Item 3, Legal Proceedings following 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 1997 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for discussion of the Company's arbitration proceedings and business relationship with Bentley Systems, Inc. Process and Building. Industry Solutions' 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. Industry Solutions' 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. Products are also offered for space planning, facility layout, maintenance management, lease management, and asset tracking. 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. Infrastructure. To help agencies strategically and efficiently manage transportation networks, Industry Solutions' transportation solutions integrate maps, photos, property records, survey and engineering data, inspection reports, traffic safety, and congestion statistics. Industry Solutions' mapping, civil engineering, and photogrammetry products provide transportation solutions including imaging, training, reprographics, plotting, and integration and professional services. The dominant mapping/GIS solution for transportation agencies is Industry Solutions' GeoMedia and MGE, a high end software for base map analysis. GeoMedia offers dynamic segmentation in a client/server environment while accessing legacy data, providing open access to spatial data and information, and distributing spatial data and information across the World Wide Web. Industry Solutions' ImageStation Z photogrammetric workstation, an end-to- end digital photogrammetry production system on Windows NT, offers tools for aerotriangulation, mapping, automatic digital terrain model collection, and orthophoto generation. Industry Solutions' InRoads suite of civil engineering software addresses transportation engineering, site design, data reduction, coordinate geometry, rail design, and water resources. InRoads includes Windows-based standalone applications, as well as software that can be used simultaneously for AutoCAD and MicroStation. For state and local governments, Industry Solutions develops and implements mapping & geographic information systems and civil engineering solutions for land records and mapping, asset management, public works, public safety, transportation engineering, infrastructure modeling, planning, and other functions. Industry Solutions' mapping/GIS solutions help governments improve public service, respond more efficiently to legislated and political mandates, implement successful GIS systems quickly, and reduce the total cost of GIS ownership. Industry Solutions' civil engineering software helps governments design and analyze projects from site design to water resources to transportation. The easy to use software is based upon an enterprise wide data warehouse for collection and dissemination of information (including GIS data) to all participants in the government organization. For more than 25 years, Industry Solutions' Infrastructure business unit has provided state of the art software to the telecommunications, electric, gas, pipeline, and water industries. The unit's full spectrum solutions integrate geo-based data with core information technology systems, giving a broad base of users access to spatial information. Environmental and natural resource management applications address monitoring, evaluating and managing, conservation and remediation of the environment. Energy exploration and production products assist geoscientists in geological analysis for energy exploration and production and mineral extraction. Industry Solutions also provides solutions for end-to-end digital map and chart publishing, digital image processing, orthophoto production, and digital photogrammetry. Federal Systems. The Federal Systems business unit of Industry Solutions markets and sells commercial off-the-shelf and specially developed products and services to government agencies around the world. Federal Systems' major offerings include mapping and information systems and integrated ship design and production software products. Industry Solutions has been a top provider of computer graphics solutions to the U.S. government for a number of years. Intergraph Computer Systems - --------------------------- On January 1, 1998, Intergraph Computer Systems began operating as an independent entity, with full transition to be completed by the end of 1998. Intergraph plans to build Computer Systems into the leading supplier of high performance, Intel/Windows NT-based graphics workstations and PCs, servers, and 3D graphics subsystems. As a separate company with profit and loss responsibility, the Company believes Intergraph Computer Systems is positioned to respond and grow quickly in its rapidly evolving target markets. Computer Systems offers workstation products for a range of users. The TD line of computer systems offers Intel Pentium, Pentium Pro, and Pentium II 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 II-based systems running Windows NT. All computer systems offer numerous options that permit customers to select systems that meet their unique needs, including a selection of display monitors, upgradeable memory, and specialized peripherals. Computer Systems also offers Intel/Windows-based InterServe symmetric multiprocessing servers for work groups, 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. StudioZ workstations are Pentium II/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. ExtremeZ 2D graphics workstations are Pentium II-based systems for prepress and publishing professionals. Industry standard 3D graphics accelerators are available, including RealiZm II 3D Graphics with DirectBurst technology, a patented 3D graphics subsystem, Intense 3D Pro 1000, an original professional OpenGL add-in card that is based on RealiZm 3D graphics technology for Windows NT, and Intense 3D 100, a mainstream graphics accelerator ideal for general purpose Windows 95/Windows NT PC productivity. Computer Systems also offers large format production scanners, imaging systems for scanning and plotting images, and laser imagesetters for electronic map 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 Public Safety - ------------------------ In January of 1997, Intergraph Public Safety became a subsidiary corporation wholly owned by Intergraph. Headquartered in Huntsville, Alabama with a staff of approximately 500 people worldwide, Public Safety is the only company providing total public safety solutions on a global basis. Public Safety solutions include computer hardware and software systems, training, maintenance, customer support, and outsourcing services. Public Safety develops, markets and implements computer-based systems for public safety agencies such as emergency medical and rescue units, fire departments and law enforcement organizations around the world. The computer solutions offered by Public Safety feature its proprietary technology and rely on the Windows NT operating system, Intel-based workstations, and Oracle Corporation's relational data bases. By incorporating industry standard hardware and software with its products, Public Safety is able to provide customers with the best price and performance features available. Public Safety is aggressively expanding its products and services to address other industries, such as utilities, automobile club roadside assistance, airport security, campus security and military base security. The computer aided dispatch system is the foundation product for Public Safety. This product fully integrates interactive, intelligent mapping with dispatching, records management, and state of the art communications capabilities. Designed specifically to support command and control operations, the system is composed of high performance graphics workstations and software. Records management is enhanced by a database that includes geographic map information as well as address, incident history, and traffic pattern data. All Public Safety products are designed to participate in a comprehensive, integrated public safety information system. The Public Safety product offering includes CAD dispatch, police, fire, and emergency management systems, records management systems, jail management systems, civil process and mug shot systems, mobile computer systems, integrated radio and telephony solutions, interfaces to alarm systems, management information reporting systems, personnel rostering systems, and training management systems. Public Safety's strategy is to provide products representing a complete solution for public safety agencies, with approximately 45 products currently offered. VeriBest - -------- In January 1996, VeriBest became a subsidiary corporation wholly owned by Intergraph. Formerly the Electronics division of Intergraph, VeriBest employs approximately 300 people worldwide with concentrations at its headquarters in Boulder, Colorado and development centers in Huntsville, Alabama and Mountain View, California. The first electronic design automation (EDA) company to port its tools to Windows NT and fully support computer-aided- engineering/computer-aided-design/printed circuit board tools in the Intel/Windows environment, VeriBest is a provider of electronic system design solutions to the computer, telecommunications, automotive, industrial control, and consumer industries. Core competencies include simulation, signal integrity, PCB implementation, and enterprise wide design process management. This technology foundation leverages the Windows NT platform, the fastest growing operating system within the mainstream EDA industry segment, and provides users with excellent price and performance. VeriBest has over 15,000 seats installed worldwide. In 1997, VeriBest made a strategic decision to pursue a multichannel distribution strategy that leverages its core technologies to create greater market access and market awareness through the development of alternate channels such as telesales, original equipment manufacturer (OEM), and value added reseller relationships. This effort resulted in the signing of VeriBest's first multi-year OEM agreement to resell the VeriBest VHSIC hardware description language (VHDL) simulator, a high- performance, high-capacity VHDL simulation system for application specific integrated circuit, field programmable gate array (FPGA), and board-level design. Also in 1997, to satisfy customer retooling needs driven by new technologies and productivity requirements, VeriBest addressed two of the fastest growing segments of the semiconductor industry: the FPGA and signal integrity tools markets. The FPGA marketplace is growing at an estimated rate of 30% per year. To meet this demand, VeriBest teamed with EDA industry leader Synopsys to provide the synthesis component for the FPGA DeskTop Series. Powered by Synopsys FPGA Express, VeriBest FPGA Synthesis provides the leading FPGA/complex programmable logic device synthesis technology. Advanced architecture-specific algorithms and state of the art simulation technology, coupled with knowledge of the target place and route tools, minimize time to market and maximize performance results. To address the rapidly emerging market for signal integrity tools, VeriBest introduced Signal Analyzer, Signal Vision, PCB Planner and PCB Viewer, a tightly integrated, comprehensive design solution that addresses the process of designing high speed systems. Product Development The Company believes a strong commitment to ongoing product development is critical to success in the interactive computer graphics industry. Product development expenditures include all costs related to designing new or improving existing hardware and software. During the year ended December 31, 1997, the Company spent $98.1 million (8.7% of revenues) for product development activities compared to $103.4 million (9.4% of revenues) in 1996, and $111.6 million (10.2% of revenues) in 1995. See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1997 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 rapid technological change, which results in shorter product cycles, higher performance and lower priced product offerings, intense price and performance competition, and development and support of software standards that result in less specific hardware and software dependencies by customers. The Company believes the life cycle 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 Intergraph Computer Systems is responsible for the Company's manufacturing activities, which include the assembly and testing of components and subassemblies manufactured by the Company and others. All of the Company's microprocessor needs are currently supplied by Intel Corporation. See Item 3, Legal Proceedings following and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1997 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for a discussion of the Company's litigation proceedings with Intel and its related effects on the Company's microprocessor supply and results of operations. The Company is not required to carry extraordinary amounts of inventory to meet customer demands or to ensure allotment of parts from its suppliers. Sales and Support Sales. The Company's systems are sold through a combination of direct and indirect channels in approximately 65 countries worldwide. Direct channel sales, which provide the majority of the Company's 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 provided approximately 22% of total Company systems revenues in 1997 and 18% in 1996. Each of the Company's four major entities maintains its own sales force. Intergraph Industry Solutions' selling efforts are organized along key industry lines (process and building, federal government, and infrastructure, including transportation, utilities, and state and local governments) for its major product applications. Industry Solutions believes an industry focus better enables it to meet the specialized needs of customers. In general, the direct sales forces are compensated through a combination of base salary and commission. Sales quotas are established along with certain incentives for exceeding quota. Additional specific incentive programs may be established periodically. Customer Support. The Company believes that a high level of customer support is important to the sale of interactive graphics systems. Customer support includes preinstallation guidance, customer training, onsite installation, hardware preventive maintenance, repair service, software help desk and technical support services in addition to consultative professional services. The Company employs engineers and technical specialists to provide customer assistance, maintenance, and training. Maintenance and repair of systems are covered by standard warranties and by maintenance agreements to which most users subscribe. The trend in the industry toward lower priced products and longer warranty periods has resulted in reduced levels of maintenance revenue for the Company. The Company believes this trend will continue in the future, though it may be partially offset by growth in the Company's professional services business. International Operations International markets, particularly Europe, continue in importance to the industry and to the Company. Sales outside the U.S. represented approximately 53% of total revenues in 1997 and 55% in 1996. European and Asia Pacific revenues represented 31% and 12%, respectively, of total revenues in 1997 (33% and 13%, respectively, in 1996). 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, 1997, the Company had approximately 1,400 employees in Europe, 800 employees in the Asia Pacific region, and 600 employees in other international locations. Fluctuations in the value of the U.S. dollar in international markets can have a significant impact on the Company's results of operations. The Company conducts business in all major markets outside the U.S., but the most significant of these operations with respect to currency risk are located in Europe and Asia. Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. 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 related to certain balance sheet items, primarily 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. The Company does not generally hedge exposures related to foreign currency denominated assets and liabilities that are not of an intercompany nature, unless a significant risk has been identified. It is possible the Company could incur significant exchange gains or losses in the case of significant, abnormal fluctuations in a particular currency. By policy, the Company is prohibited from market speculation via forward exchange contracts and therefore does not take currency positions exceeding its known financial statement exposures, and does not otherwise trade in currencies. The Company has historically experienced slower collection periods for its international accounts receivable than for similar sales to customers in the United States. The Company is experiencing slow 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, 1997 and 1996. 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 1997 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 $177 million in 1997, $161 million in 1996, and $159 million in 1995, 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 and cost plus award fee contracts, and through commercial sales of products not covered by long term contracts. Approximately 42% 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 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, 1997, accounts receivable from the U.S. government was approximately $52.5 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, 1997 and 1996 was $169 million and $181 million, respectively. Substantially all of the December 1997 backlog of orders is expected to be shipped during 1998. 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 rapidly and continuously develop products with enhanced performance that can be offered at competitive prices. The Company, along with other companies in the industry, engages in the practice of price discounting to meet competitive industry conditions. Other important competitive factors include quality, reliability, customer service and support, and training. Management of the Company believes that competition will remain intense, particularly in product pricing. 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, Hewlett Packard Corporation, Digital Equipment Corporation, Sun MicroSystems, Inc., Silicon Graphics, Inc., and Mentor Graphics, Inc. In the low end graphics market, Intergraph competes with the software products of Autodesk, Inc., Bentley Systems, Inc. (an approximately 50%-owned affiliate of the Company), Softdesk, Inc., and several smaller companies. In the hardware market, Intergraph also competes with personal computer vendors, such as Compaq Computer Corporation and Dell Computer Corporation. The primary competitors of Intergraph Public Safety are American TriTech, PRC, Inc., Tiburon, Inc., and Printrack International Incorporated. VeriBest's primary competitors are Cadence Design Systems, Inc., Viewlogic Systems, Inc., and Mentor Graphics, Inc. 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 Windows compliant and 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, Patents, and Proprietary Information The Company develops its own graphics, data management, and applications software as part of its continuing product development activities. The Company has standard license agreements with Microsoft Corporation for use and distribution of the Windows NT operating system and with UNIX Systems Laboratories for use and distribution of the UNIX operating system. The license agreements are perpetual and allow the Company to sublicense the operating systems software upon payment of required sublicensing fees. The Company also has an extensive program for the licensing of third party application and general utility software for use on systems and workstations. The Company has a non-exclusive license agreement with Bentley Systems, Inc. (Bentley), an approximately 50%-owned affiliate of the Company, under which the Company sells MicroStation, a software product developed and maintained by Bentley and utilized in many of the Company's software applications, via its direct sales force, and via its indirect sales channels if MicroStation is sold with other Intergraph products. See Item 3, Legal Proceedings following 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 1997 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. 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, including Intergraph, are attempting to develop patent positions concerning technological improvements related to personal computers and workstations. With the possible exception of its ongoing litigation with Intel (in which the Company expects to prevail), it does not appear that the Company will be prevented from using the patented 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 current technical information or any required patent rights of others through licensing or purchase, all of which are important to success in the industry in which the Company competes, could significantly reduce the Company's revenues and adversely affect its results of operations. Technology significant to the Company is sometimes made available in the form of proprietary information or trade secrets of others. Prior to the dispute with Intel, Intel had made freely available technical information used by the Company to design, market and support its products that use Intel components. Such information is claimed by Intel to be proprietary and is made available by Intel only under nondisclosure agreements. At present, Intel is withholding such information, attempting to cancel existing agreements and refusing to enter into new nondisclosure agreements with the Company. Intel's actions are the subject matter of current litigation (See Item 3, Legal Proceedings, following), and the Company has applied to the Court for relief in the short term, as well as at the conclusion of the lawsuit. Intel's actions are damaging the Company by slowing the introduction of new products using Intel components and preventing proper maintenance and support of Company products using Intel components. The Company expects that relief will be forthcoming from the Court. However, if relief is denied, the Company will be materially affected and may be forced to alter its future business plans or to accept unfavorable terms from Intel in settlement of the lawsuit. Risks and Uncertainties In addition to those described above and in Item 3, Legal Proceedings following, 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 1997 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, 1997, the Company had approximately 7,700 employees. Of these, approximately 2,800 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 450,000 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 Intel Corporation - ----------------- Intergraph filed a legal action on November 17, 1997 in U.S. District Court, the Northern District of Alabama, Northeastern Division, charging Intel Corporation, the supplier of all of the Company's microprocessor needs, with anticompetitive business practices. In the lawsuit, Intergraph alleges that Intel is attempting to coerce the Company into relinquishing to Intel certain computer hardware patents through a series of wrongful acts, including interference with business and contractual relations, interference with technical assistance from third party vendors, breach of contract, negligence, misappropriation of trade secrets, and fraud based upon Intel's failure to promptly notify the Company of defects in Intel's products and the timely correction of such defects, and further alleging that Intel has infringed upon the Company's patents. The Company's patents define the architecture of the cache memory of an Intergraph developed microprocessor. The Company believes this architecture is at the core of Intel's entire Pentium line of microprocessors and systems. On December 3, 1997, the Company amended its complaint to include a count charging Intel with violations of federal antitrust laws. Intergraph asserts claims for compensatory and treble damages resulting from Intel's wrongful conduct and infringing acts, and punitive damages in an amount sufficient to punish and deter Intel's wrongful conduct. Additionally, the Company has requested that Intel be enjoined from continuing the alleged wrongful conduct which is anticompetitive and/or violates federal antitrust laws, so as to permit Intergraph uninterrupted development and sale of Intel- based products. On November 21, 1997, the Company filed a motion in the Alabama Court to enjoin Intel from disrupting or delaying its supply of products and product information, pending resolution of Intergraph's legal action. The Court has not entered a ruling on this motion. Intel filed a retaliatory legal action on November 17, 1997, in the U.S. District Court, the Northern District of California, requesting, among other things, i) that the Court declare Intergraph's patents invalid and/or not infringed by Intel, ii) that Intergraph be enjoined from making further assertions that Intel's customers infringe Intergraph's patents through use of Intel's microprocessors, iii) that the Court declare that Intel has no obligation to disclose any of its trade secrets or other confidential information to Intergraph, and iv) that the Court declare that Intel's decision to discontinue the provision of trade secrets and other confidential information to Intergraph does not violate any doctrine of federal or state statutory or common law. Intel filed a second legal action in the California Court on November 24, 1997, charging Intergraph with breach of contract related to wrongful retention of and failure to return Intel information supplied under nondisclosure agreements, and misappropriation of trade secrets as a result of the same. Intel asserts claims for damages and awards of yet undetermined amounts and requests a preliminary and permanent injunction under which Intergraph would return and make no further use of Intel confidential information. On December 8, 1997, the Alabama Court directed the Company and Intel to file joint motions in the California cases to stay the two legal actions brought by Intel, pending the Court's consideration of a motion to transfer and consolidate venue. The joint motions were filed and stays were granted by the California Court. On January 15, 1998, Intel filed a motion before the Alabama Court for a change in venue to California. A decision to transfer venue has not been reached. The Company believes it was necessary to take legal action against Intel in order to defend its growing workstation business, its intellectual property, and the investments of its shareholders. The Company is vigorously prosecuting its positions and believes it will prevail in these matters, but at present is unable to predict an outcome. Bentley Systems, Inc. - --------------------- The Company is the owner of approximately 50% of the outstanding stock of Bentley Systems, Inc. (Bentley), the developer and owner of MicroStation, a software product utilized in many of the Company's software applications and for which the Company serves as a nonexclusive distributor. In December 1995, the Company commenced an arbitration proceeding against Bentley with the American Arbitration Association, Philadelphia, Pennsylvania, alleging that Bentley inappropriately and without cause terminated a contractual arrangement between Bentley and the Company. In response, Bentley filed a counterclaim against the Company in January 1996 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 Bentley. In May 1997, the Company received notice of the adverse determination of this arbitration proceeding with Bentley. The arbitrator's award against the Company was in the amount of $6.1 million. In addition, the contractual arrangement that was the subject of this arbitration has been terminated effective with this award, and, as a result, the Company will no longer sell the related software support services under this agreement. The Company and Bentley have entered into a new agreement which establishes single support services between the two companies. In a second proceeding, Bentley commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia in March 1996, alleging that the Company failed to properly account for and pay to Bentley certain royalties on its sales of Bentley software products, and seeking significant damages. Hearings on this matter are in process and may continue through the end of the Company's third quarter of 1998. The Company denies that it has breached any of its contractual obligations to Bentley and is vigorously defending its position in this proceeding, but at present is unable to predict an outcome. Zydex, Inc. - ----------- 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 November 1995, Zydex filed a counterclaim against the Company alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. In September 1997, the Court issued an order resolving the disputed issues and requiring the parties to settle, and dismissed the case. In November 1997, a hearing was held during which the judge ordered both parties to sign the closing documents. A closing of the final settlement agreement occurred on January 15, 1998. The final settlement included the purchase by Intergraph of 100% of the common stock of Zydex for $26,292,000, with $15,979,000 paid at closing of the agreement and the remaining amount payable in 15 equal monthly installments, including interest. The deferred payment portion of the total purchase price is secured by a subordinate interest in the PDS intellectual property and by an irrevocable letter of credit in favor of the former owner of Zydex. Interest on the unpaid amount accrues at a rate 1% less than the rate charged by Intergraph's primary lender. The former owner of Zydex will retain certain rights to use, but not sell or sublicense, PDS products for a period of 15 years following the date of closing. In addition to the purchase price of the common stock, Intergraph was required to pay additional royalties to Zydex in the amount of $1,027,000 at closing of the agreement. See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the company's 1997 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for further discussion of the Company's business relationship with Intel and Bentley and effects of litigation and arbitration proceedings on the Company's financial position and results of operations. 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 64 Chairman of the Board and Chief Executive Officer 1969 James F. Taylor Jr. 53 Executive Vice President and Director, Intergraph Corporation, and Chief Executive Officer, Intergraph Public Safety, Inc. 1977 Robert E. Thurber 57 Executive Vice President and Director 1977 Lawrence F. Ayers Jr. 65 Executive Vice President 1987 Klaas Borgers 53 Executive Vice President 1994 Edward F. Boyle 49 Executive Vice President 1986 Penman R. Gilliam 60 Executive Vice President 1994 Richard H. Lussier 52 Executive Vice President 1996 Nancy B. Meadlock 59 Executive Vice President 1969 Wade C. Patterson 36 Executive Vice President, Intergraph Corporation, and Chief Executive Officer and President, Intergraph Computer Systems, Inc. 1994 Stephen J. Phillips 56 Executive Vice President 1987 Charles E. Robertson Jr. 44 Chief Executive Officer and President, VeriBest, Inc. 1992 William E. Salter 56 Executive Vice President 1984 K. David Stinson Jr. 44 Executive Vice President 1996 Edward A. Wilkinson 64 Executive Vice President 1987 Allan B. Wilson 49 Executive Vice President 1982 Manfred Wittler 57 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. 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 Chief Executive Officer of Intergraph Public Safety, Inc. 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 development of requirements and strategic direction 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 serves on the Intergraph Industry Solutions staff as Executive Vice President. Mr. Ayers holds a bachelor's degree in civil engineering and a master's degree in public administration. Mr. Ayers has served on a number of national policy committees for the National Academy of Science and the National Academy of Public Administration, including the Transportation Research and Highway Research committees. Klaas Borgers joined the Company in 1991. He was elected Vice President in 1994 and has served as Executive Vice President of Intergraph Corporation and Chief Operating Officer for Intergraph Computer Systems since 1997. A key person in the development and growth of Intergraph Computer Systems worldwide operations, Mr. Borgers directs the subsidiary's sales, services, manufacturing and distribution operations. 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 business in May 1987. From 1993 through the fall of 1995, he was Vice President for the Company's solutions engineering business. 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 business for Intergraph Industry Solutions. 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 Intergraph's 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. 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. In addition, he is currently responsible for InterCAP, a wholly owned Intergraph subsidiary, which develops and markets world-leading technical illustration software as well as WEB enabling technology. 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, Inc., the Company's hardware subsidiary, since August 1994. He was elected Vice President at that same time and is currently an Executive Vice President of the Company and Chief Executive Officer and President of Intergraph Computer Systems, Inc. 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. Charles E. Robertson Jr. joined the Company in 1992. He has served as Chief Executive Officer and President of VeriBest, Inc. since its inception in January 1996. Prior to his current position, Mr. Robertson held executive positions within Intergraph and at Mentor Graphics, Daisy Systems, and Cadnetix. He holds a bachelor's degree in electrical engineering and computer science. William E. Salter joined the Company in April 1973. Since that time, he has served in several managerial positions in the Company's federal systems business and as Director of Marketing Communications. Dr. Salter was elected Vice President in August 1984 and is currently an Executive Vice President of the Company. He holds a doctorate in electrical engineering. K. David Stinson Jr. joined the Company in 1996. Prior to joining the Company, Mr. Stinson acted as Vice President of Engineering and Nuclear Projects for the Tennessee Valley Authority (TVA), the nation's largest government owned electric power utility. Before joining TVA, he was founder and Chief Executive Officer of Digital Engineering, responsible for developing software to assist with the operations, maintenance, and environmental qualification of nuclear facilities and other process plants. Mr. Stinson was elected Executive Vice President in 1996, responsible for the process and building business of Intergraph Industry Solutions. He is a graduate of the U.S. Air Force Academy and holds a masters degree in management administration science. 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 47 of the Intergraph Corporation 1997 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, 1997, appearing under "Five Year Financial Summary" on the inside front cover page of the Intergraph Corporation 1997 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 14 to 26 of the Intergraph Corporation 1997 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 27 to 46 of the Intergraph Corporation 1997 annual report to shareholders are incorporated by reference in this Form 10-K annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information appearing under "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on pages 3 to 5 of the Intergraph Corporation proxy statement relative to the annual meeting of shareholders to be held May 28, 1998, 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 12 to 14 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 28, 1998, is incorporated by reference in this Form 10-K annual report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information appearing under "Common Stock Outstanding and Principal Shareholders" on pages 1 to 3 of the Intergraph Corporation proxy statement relative to the annual meeting of shareholders to be held May 28, 1998, 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 28, 1998, 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 1997 annual report to shareholders: Consolidated Balance Sheets at December 31, 1997 and 1996 27 Consolidated Statements of Operations for the three years 28 ended December 31, 1997 Consolidated Statements of Cash Flows for the three years ended December 31, 1997 29 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1997 30 Notes to Consolidated Financial Statements 31 - 45 Report of Independent Auditors 46 * Incorporated by reference from the indicated pages of the 1997 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, 1997 20 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 loss before income taxes, and the investments in and advances to the companies are less than 20% of consolidated total assets. 3) Exhibits Page in Number Description Form 10-K ------ ----------- --------- 3(a) Certificate of Incorporation, Bylaws, and Certificate of Merger. (1) 3(b) Amendment to Certificate of Incorporation. (2) 3(c) Restatement of Bylaws. (3) 4 Shareholder Rights Plan, dated August 25, 1993. (4) 10(a)* Employment Contract of Manfred Wittler dated November 1, 1989 (5) and amendment dated February 18, 1998. 10(b)* Loan program for executive officers of the Company as amended, dated May 1, 1996. (6) 10(c) Loan and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated December 20, 1996 and amendments dated January 14, 1997 (6) and November 25, 1997. 10(d)* Intergraph Corporation 1997 Stock Option Plan. (6) 10(e)* Agreement between Intergraph Corporation and Green Mountain, Inc. dated April 1, 1997. (7) 10(f) Indemnification Agreement between Intergraph Corporation and each member of the Board of Directors of the Company dated June 3, 1997. (8) 10(g)* Employment Contract of Wade Patterson dated May 30, 1997. (8) 10(h)* Intergraph Corporation Nonemployee Director Stock Option Plan. 10(i) Amended and Restated First Mortgage and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated November 25, 1997. 13 Portions of the Intergraph Corporation 1997 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report 21 Subsidiaries of the Company 21 23 Consent of Independent Auditors 22 27 Financial Data Schedule * Denotes management contract or compensatory plan, contract, or arrangement required to be filed as an Exhibit to this Form 10-K - ---------------- (1) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1984, under the Securities Exchange Act of 1934, File No. 0-9722. (2) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1987, under the Securities Exchange Act of 1934, File No. 0-9722. (3) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, under the Securities Exchange Act of 1934, File No. 0-9722. (4) Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated August 25, 1993, under the Securities Exchange Act of 1934, File No. 0-9722. (5) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992, under the Securities Exchange Act of 1934, File No. 0-9722. (6) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1996, under the Securities Exchange Act of 1934, File No. 0-9722. (7) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997, under the Securities Exchange Act of 1934, File No. 0-9722. (8) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, under the Securities Exchange Act of 1934, File No. 0-9722. - ----------------- (b) Reports on Form 8-K - on November 24, 1997, the Company filed a Current Report on Form 8-K which reported the filing of a lawsuit against Intel Corporation as described in Item 3, Legal Proceedings, of this Form 10-K annual report. (c) Exhibits - the response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial statement schedules - the response to this portion of Item 14 is submitted as a separate section of this report. - ----------------- Information contained in this Form 10-K annual report may include statements that are forward looking as defined in Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements is contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's 1997 annual report, portions of which are incorporated by reference in this Form 10-K annual report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERGRAPH CORPORATION By /s/ James W. Meadlock Date: March 30, 1998 --------------------- 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 30, 1998 - -------------------------- Chairman of the Board James W. Meadlock (Principal Executive Officer) /s/ James F. Taylor Jr. Executive Vice President and March 30, 1998 - -------------------------- Director, Intergraph James F. Taylor Jr. Corporation, and Chief Executive Officer, Intergraph Public Safety, Inc. /s/ Robert E. Thurber Executive Vice President and March 30, 1998 - -------------------------- Director Robert E. Thurber /s/ Keith H. Schonrock Jr. Director March 30, 1998 - -------------------------- Keith H. Schonrock Jr. Director March 30, 1998 - -------------------------- Larry J. Laster Director March 30, 1998 - -------------------------- Thomas J. Lee Director March 30, 1998 - -------------------------- Sidney L. McDonald /s/ John W. Wilhoite Vice President and Controller March 30, 1998 - -------------------------- (Principal Accounting Officer) John W. Wihoite 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 1997 $16,703,000 2,844,000 5,059,000 (1) $14,488,000 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 Allowance for obsolete inventory deducted from inventories in the balance sheet 1997 $43,223,000 15,582,000 22,297,000 (2) $36,508,000 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 (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-21 2 INTERGRAPH CORPORATION AND SUBSIDIARIES EXHIBIT 21 ---- SUBSIDIARIES OF REGISTRANT Percentage of Voting State or Other Securities Jurisdiction of Owned by Name Incorporation Parent - --------------------------------- --------------- -------------- InterCAP Graphics Systems, Inc. Delaware 100 Intergraph Computer Systems Holding, Inc. Delaware 100 Intergraph European Manufacturing, L.L.C. Delaware 100 Intergraph (Italia), L.L.C. Delaware 100 Intergraph (Middle East), L.L.C. Delaware 100 Intergraph Public Safety, Inc. Delaware 100 VeriBest, Inc. Delaware 100 Intergraph Benelux B.V. The Netherlands 100 Intergraph CAD/CAM (Danmark) A/S Denmark 100 Intergraph CR, spol. s r.o. Czech Republic 100 Intergraph (Deutschland) GmbH Germany 100 Intergraph Espana, S.A. Spain 100 Intergraph Europe (Polska) Sp. z o.o. Poland 100 Intergraph Finland Oy Finland 100 Intergraph (France) Sorl 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 Portugal 100 Computacao Grafica, S.A. Intergraph SR s.r.o. Slovac Republic 100 Intergraph (Scandinavia) AB Sweden 100 Intergraph (Switzerland) A.G. Switzerland 100 Intergraph (UK), Ltd. United Kingdom 100 Public Safety U.K., 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) China 100 Co. Ltd. Intergraph Corporation (N.Z.) New Zealand 100 Limited 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 Public Safety Pty., Australia 100 Ltd. Intergraph Systems Singapore Pte Singapore 100 Ltd. VeriBest K.K. Japan 100 Intergraph Computer Services Turkey 97 Industry & Trade, A.S. Intergraph Canada, Ltd. Canada 100 Intergraph de Mexico, S.A. de C.V. Mexico 100 Intergraph Electronics Ltd. Israel 100 Intergraph Servicios de Venezuela Venezuela 100 C.A. Intergraph Saudi Arabia Ltd. Saudi Arabia 75 EX-23 3 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 29, 1998 (except for paragraph 2 of Note 15, as to which the date is March 2, 1998), included in the 1997 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 29, 1998 (except for paragraph 2 of Note 15, as to which the date is March 2, 1998), 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, 1997. /s/ Ernst & Young LLP Birmingham, Alabama March 27, 1998 EX-10.A 4 INTERGRAPH - ---------- Business Operations and Finance Europe Memorandum - ------------------------------------------------------------------------- CONFIDENTIAL Date: February 18,1998 Ref: 9804 To: Manfred Wittler Copy: Jim Meadlock Manfred Wittler Personnel File From: Henk de Klerk Subject: Extension of your Netherlands Contract - ------------------------------------------------------------------------- With reference to the Contract between you and Intergraph European Manufacturing BV, effective November 1, 1989 and subsequently assigned to Intergraph European Manufacturing L.L.C. and Jeff Heath's memorandum dated May 27, 1994 reference 03-034, the aforementioned contract is hereby extended from November 1, 1997 until October 31, 1999 under the same terms and conditions as referenced in Jeff Heath's mentioned memorandum with the following change: Your title is "Executive Vice President Sales and Support, Europe, Canada, Latin America. Approved on February 18, 1998, Hoofddorp, The Netherlands /s/ Henk de Klerk /s/ Manfred Wittler Feb. 18, 1998 - ----------------- -------------------- ------------- Henk de Klerk Manfred Wittler Date Director Business Operations Executive Vice President and Finance, Europe Sales and Support Managing Director Intergraph Europe, Canada, European Manufacturing L.L.C. Latin America EX-10.C 5 AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT This AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of November 25, 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, extend the Maturity Date, increase the amount of the Term Loan and modify the Reserve in connection therewith, and increase the Maximum Amount, 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: "Additional Term Loan" has the meaning set forth in Section 2.3. "Initial Term Loan" has the meaning set forth in Section 2.3. "Second Amendment" means that certain Amendment Number Two to Loan and Security Agreement, dated as of November 25, 1997, between Foothill and Borrower. "Second Amendment Closing Date" means the first date on which all of the conditions to the effectiveness of the Second Amendment have been satisfied (or waived or postponed by Foothill in its sole discretion) pursuant to the terms thereof. b. The following definitions contained in Section 1.1 of the Agreement are amended and restated in their entirety to read as follows: "Maximum Amount" means $125,000,000. "Reserve" means, as of any date of determination, an amount equal to: (a) from and after the Second Amendment Closing Date until December 31, 1997, zero (-0-); and (b) thereafter, an amount equal the product of (i) $297,619 times (ii) the number of months (or any portions thereof) separating such date from December 31, 1997. Without limiting the generality of the foregoing and solely by way of example, the amount of the Reserve would equal: (x) zero (-0-) as of December 1, 1997; (y) $297,619 as of January 1, 1998; and (z) $595,238 as of February 1, 1998. c. Section 2.2(a)(ii) of the Agreement hereby is amended and restated in its entirety to read as follows: (ii) the Letter of Credit Usage would exceed the lower of (y) the Maximum Revolving Amount less the amount of outstanding Advances, or (z) $75,000,000, or d. Section 2.3 of the Agreement hereby is amended and restated in its entirety to read as follows: 2.3 Term Loan. Subject to the terms and conditions of this Agreement, Foothill: (a) agreed to make a term loan to Borrower on the Closing Date (in the original principal amount of $20,000,000 (the "Initial Term Loan"); and (b) has agreed to make an additional term loan to Borrower on the Second Amendment Closing Date in the original principal amount of $5,000,000 (the "Additional Term Loan"; the Initial Term Loan and the Additional Term Loan are referred to, collectively, as the "Term Loan"). The outstanding principal balance and all accrued and unpaid interest under the Term Loan shall not be due and payable until the earlier to occur of (a) the Maturity Date, and (b) the date of termination of this Agreement, whether by its terms, by acceleration, or otherwise. The unpaid principal balance of the Term Loan may not be prepaid in whole or in part. All amounts outstanding under the Term Loan shall constitute Obligations. e. Section 3.4 of the Agreement hereby is amended and restated in its entirety to read as follows: 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, 2001 (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. f. Section 3.6 of the Agreement hereby is amended and restated in its entirety to read as follows: 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 30 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. 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; and (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. 3. Conditions Precedent to Amendment. The satisfaction of each of the following on or before the Second Amendment Closing Date, unless otherwise specified below, shall constitute conditions precedent to the effectiveness of this Amendment: a. Payment to Foothill by Borrower in immediately available funds of an amendment fee in the amount of $225,000, which fee shall be fully earned, non-refundable, due, and payable, upon the execution and delivery of this Amendment by Foothill and Borrower, and which fee Borrower hereby authorizes Foothill to charge to Borrower's loan account. Solely for reference purposes among Foothill and its participants in the Obligations, such amendment fee shall be segregated into 3 components, consisting of "Component A" in the amount of $100,000, "Component B" in the amount of $62,500, and "Component C" in the amount of $62,500; b. 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; c. Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (1) duly executed amendments of the Mortgages and endorsements to the Mortgage Policies as Foothill may require, in each case in form and substance satisfactory to Foothill; (2) all required consents of Foothill's participants in the Obligations to Foothill's execution, delivery, and performance of this Amendment and the commitments of such participants (on terms and conditions satisfactory to Foothill) to participate in the Obligations after giving effect to this Amendment; d. 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; e. Foothill shall have received an opinion of Borrower's counsel in form and substance satisfactory to Foothill in its sole discretion; f. [intentionally omitted] g. 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); h. 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; i. 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; j. 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 k. 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. Condition Subsequent to Second Amendment and Related Reserve. Each of the following shall constitute a condition subsequent to the Second Amendment: a. Foothill shall have received searches reflecting the filing of such supplemental financing statements as Foothill may require (including with respect to the filing offices for: Arizona; Hawaii; and Allegheny County, Pennsylvania); and b. Foothill shall have received updates of the most recent appraisals of the Real Property Collateral and of the Equipment that were conducted on or prior to the Closing Date, in each case satisfactory to Foothill. Until such time as each of the conditions in this Section 4 have been satisfied, and notwithstanding anything in the Loan Agreement or the other Loan Documents to the contrary, Foothill may create and maintain against the Borrowing Base an additional reserve in the amount of $5,000,000. 5. 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. 6. 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. 7. 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. 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. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. 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 /s/ Bryan Hamm -------------------------- Title: Vice President ---------------------- INTERGRAPH CORPORATION, a Delaware corporation By /s/ Larry J. Laster ---------------------------- Title: Executive Vice President ------------------------- 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 Two to Loan and Security Agreement, dated as of November 25, 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 /s/ Larry J. Laster ------------------------------ Title: Treasurer -------------------------- INTERGRAPH DELAWARE, INC., a Delaware corporation By /s/ Larry J. Laster ------------------------------ Title: Treasurer -------------------------- EX-10.H 6 Exhibit A INTERGRAPH CORPORATION NONEMPLOYEE DIRECTOR STOCK OPTION PLAN -------------------------------------- 1. Purpose The purpose of the Intergraph Corporation Nonemployee Director Stock Option Plan (the "Plan") is to secure for Intergraph Corporation (the "Company") and its shareholders the benefits of the long-term incentives inherent in increased common stock ownership by the members of the Board of Directors (the "Board") of the Company who are not employees of the Company or its Affiliates, by strengthening the identification of Nonemployee Directors with the interests of all Intergraph Corporation shareholders. 2. Definitions The terms defined in this Section 2 shall have the following meanings, unless the context otherwise requires. a. "Affiliate" shall mean any corporation, partnership, joint venture or other entity in which the Company holds an equity, profit or voting interest of more than fifty percent (50%). b. "Annual Meeting of Shareholders" shall mean the annual meeting of shareholders of the Company held each calendar year. c. "Code" shall mean the Internal Revenue Code of 1986, as amended to date and as it may be amended from time to time. d. "Company" shall mean Intergraph Corporation, a Delaware corporation. e. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended to date and as it may be amended from time to time. f. "Fair Market Value" per Share shall mean as of any day (1) The fair market value of a share of the Company's common stock is the closing price reported by the NASDAQ Stock Market on the business day immediately preceding the date as of which fair market value is being determined or, if there were no sales of shares of the Company's common stock reported on such day, on the most recently preceding day on which there were sales, or (2) if the shares of the Company's stock are not listed on the NASDAQ Stock Market on the day as of which the determination is made, the amount determined by the Board or its delegate to be the fair market value of a share on such day. g. "Nonemployee Director" shall mean a member of the Board of Directors of the Company who is not also an officer or other employee of the Company or an Affiliate. h. "Nonstatutory Stock Option" ("NSO") shall mean a stock option, which does not qualify for special tax treatment under Sections 421 or 422 of the Internal Revenue Code. i. "Option" shall mean either a First Option or an Annual Option granted pursuant to the provisions of Section 4 of this Plan. j. "Participant" shall mean any person who holds an Option granted under this Plan. k. "Plan" shall mean this Intergraph Corporation Nonemployee Director Stock Option Plan. 3. Administration a. The Plan shall be administered by the Board. The Board may, by resolution, delegate part or all of its administrative powers with respect to the Plan. b. The Board shall have all of the powers vested in it by the terms of the Plan, such powers to include the authority, within the limits prescribed herein, to establish the form of the agreement embodying grants of Options made under the Plan. c. The Board shall, subject to the provisions of the Plan, have the power to construe the Plan, to determine all questions arising thereunder and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable, such administrative decisions of the Board to be final and conclusive. d. The Board shall have no discretion to select the Nonemployee Directors to receive Option grants under the Plan, to determine the number of shares of the Company's common stock subject to the Plan or to each grant, nor the exercise price of the Options granted pursuant to the Plan. e. The Board may authorize any one or more of their number or the Secretary or any other officer of the Company to execute and deliver documents on behalf of the Board. The Board hereby authorizes the Secretary to execute and deliver all documents to be delivered by the Board pursuant to the Plan. f. The expenses of the Plan shall be borne by the Company. 4. Automatic Grants to Nonemployee Directors a. As of the date of adoption of this Plan by the shareholders of the Company, each current Nonemployee Director shall be granted an option to purchase three thousand (3,000) shares of the Company's common stock under the Plan (the "First Option"). Thereafter, as of the day upon which shareholders vote to elect directors at each annual meeting of the Company, each Nonemployee Director of the Board shall be granted an additional option to purchase fifteen hundred (1,500) shares of the Company's common stock under the Plan (the "Annual Option"); provided, however, that a Nonemployee Director who has not previously been elected as a member of the Board of Directors of the Company shall also be granted an option to purchase three thousand (3,000) shares of the Company's common stock under the Plan, on the first business day of the Nonemployee Director's election to the Board, including election by the Board of Directors to fill a vacancy on the Board. b. The automatic grants to Nonemployee Directors shall not be subject to the discretion of any person. c. Each Option granted under the Plan shall be evidenced by a written Agreement. Each Agreement shall be subject to, and incorporate, by reference or otherwise, the applicable terms of this Plan. d. During the lifetime of a Participant, each Option shall be exercisable only by the Participant. No Option granted under the Plan shall be assignable or transferable by the Participant, except by will or by the laws of descent and distribution. 5. Shares of Stock Subject to the Plan a. Subject to adjustment as provided in Section 10 of the Plan, an aggregate of two hundred fifty thousand (250,000) shares of the Company's common stock, $.10 par value, shall be available for issuance to Nonemployee Directors under the Plan. No fractional shares shall be issued. b. First Option Grants and Annual Option Grants shall reduce the shares available for issuance under the Plan by the number of shares subject thereto. The shares deliverable upon exercise of any First Option Grant or Annual Option Grant may be made available from authorized but unissued shares or shares reacquired by the Company, including shares purchased in the open market or in private transactions. If any unexercised First Option Grant or Annual Option Grant shall terminate for any reason, the shares subject to, but not delivered under, such First Option Grant or Annual Option Grant shall be available for other First Option Grants or Annual Option Grants. 6. Nonstatutory Options All Options granted to Nonemployee Directors pursuant to the Plan shall be NSOs. 7. Exercise Price a. The price per share of the shares of the Company's common stock which may be purchased upon exercise of an Option ("Exercise Price") shall be one hundred percent (100%) of the Fair Market Value per Share on the date the Option is granted and shall be payable in full at the time the Option is exercised as follows: (1) in cash or by certified check, (2) by delivery of shares of common stock to the Company which shall have been owned by the Nonemployee Director for at least six (6) months and have a Fair Market Value per Share on the date of surrender equal to the Exercise Price, or (3) by delivery to the Company of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company from sale or loan proceeds the amount required to pay the exercise price. b. Such price shall be subject to adjustment as provided in Section 10 hereof. 8. Duration and Vesting of Options a. The term of each Option granted to a Nonemployee Director shall be for ten (10) years from the date of grant, unless terminated earlier pursuant to the provisions of Section 9 hereof. b. Each Option shall vest and become exercisable according to the following schedule: (1) thirty-three and one-third (33-1/3) of the total number of shares covered by the Option shall become exercisable beginning with the first anniversary date of the grant of the Option; (2) thirty-three and one-third (33-1/3) of the total number of shares covered by the Option shall become exercisable on each subsequent anniversary date of the grant of the Option until the third anniversary date of the grant of the Option upon which the total number of shares covered by Option shall become exercisable. 9. Effect of Termination of Membership on the Board The right to exercise an Option granted to a Nonemployee Director shall be limited as follows, provided the actual date of exercise is in no event after the expiration of the term of the Option: a. If a Nonemployee Director ceases being a director of the Company for any reason other than the reasons identified in subparagraph b. of this Section 9, the Nonemployee Director shall have the right to exercise the Options as follows, subject to the condition that no Option shall be exercisable after the expiration of the term of the Option: (1) If the Nonemployee Director was a member of the Board of Directors of the Company for five (5) or more years, all outstanding Options become immediately exercisable upon the date the Nonemployee Director ceases being a director. The Nonemployee Director may exercise the Options for a period of thirty-six (36) months from the date the Nonemployee Director ceased being a director, provided that if the Nonemployee Director dies before the thirty-six (36) month period has expired, the Options may be exercised by the Nonemployee Director's legal representative or any person who acquires the right to exercise an Option by reason of the Nonemployee Director's death for a period of twelve (12) months from the date of the Nonemployee Director's death. (2) If the Nonemployee Director was a member of the Board of Directors of the Company for less than five (5) years, the Nonemployee Director may exercise the Options, to the extent they were exercisable at the date the Nonemployee Director ceases being a member of the Board, for a period of thirty (30) days following the date the Nonemployee Director ceased being a director, provided that, if the Nonemployee Director dies before the thirty (30) day period has expired, the Options may be exercised by the Nonemployee Director's legal representative, or any person who acquires the right to exercise an Option by reason of the Nonemployee Director's death, for a period of twelve (12) months from the date of the Nonemployee Director's death. (3) If the Nonemployee Director dies while a member of the Board, the Options, to the extent exercisable by the Nonemployee Director at the date of death, may be exercised by the Nonemployee Director's legal representative, or any person who acquires the right to exercise an Option by reason of the Nonemployee Director's death, for a period of twelve (12) months from the date of the Nonemployee Director's death. (4) In the event any Option is exercised by the executors, administrators, legatees, or distributees of the estate of a deceased optionee, the Company shall be under no obligation to issue stock thereunder unless and until the Company is satisfied that the person or persons exercising the Option are the duly appointed legal representatives of the deceased optionee's estate or the proper legatees or distributees thereof. b. If a Nonemployee Director ceases being a director of the Company due to an act of (1) fraud or intentional misrepresentation or (2) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Affiliate of the Company or (3) any other gross or willful misconduct as determined by the Board, in its sole and conclusive discretion, all Options granted to such Nonemployee Director shall immediately be forfeited as of the date of the misconduct. 10. Adjustments and Changes in the Stock a. If there is any change in the common stock of the Company by reason of any stock dividend, stock split, spin-off, split-up, merger, consolidation, recapitalization, reclassification, combination or exchange of shares, or any other similar corporate event, the aggregate number of shares available under the Plan, and the number and the price of shares of common stock subject to outstanding Options shall be appropriately adjusted automatically. b. No right to purchase fractional shares shall result from any adjustment in Options pursuant to this Section 10. In case of any such adjustment, the shares subject to the Option shall be rounded down to the nearest whole share. c. Notice of any adjustment shall be given by the Company to each holder of any Option which shall have been so adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan. 11. Effective Date of the Plan a. The Plan shall become effective on the date it is approved by the shareholders of the Company. b. Any amendment to the Plan shall become effective when adopted by the Board, unless specified otherwise, but no Option granted under any increase in shares authorized to be issued under this Plan shall be exercisable until the increase is approved in the manner prescribed in Section 12 of this Plan. 12. Amendment of the Plan a. The Board of Directors may amend, suspend or terminate the Plan at any time, but without shareholder approval, no amendment shall materially increase the maximum number of shares which may be issued under the Plan (other than adjustments pursuant to Section 10 hereof), materially increase the benefits accruing to Participants under the Plan, materially modify the requirements as to eligibility for participation or extend the term of the Plan. Approval of the shareholders may be obtained, at a meeting of shareholders duly called and held, by the affirmative vote of a majority of the holders of the Company's voting stock who are present or represented by proxy and are entitled to vote on the Plan. b. It is intended that the Plan meet the requirements of Rule 16b-3 or any successor thereto promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, including any applicable requirements regarding shareholder approval. Amendments to the Plan shall be subject to approval by the shareholders of the Company to the extent determined by the Board of Directors to be necessary to satisfy such requirements as in effect from time to time. c. Rights and obligations under any Option granted before any amendment of this Plan shall not be materially and adversely affected by amendment of the Plan, except with the consent of the person who holds the Option, which consent may be obtained in any manner that the Board or its delegate deems appropriate. d. The Board of Directors may not amend the provisions of Sections 4, 6, 7, 8 and 9 hereof more than once every six (6) months, other than to comport with changes in the Code, ERISA, or the rules thereunder. 13. Termination of the Plan a. The Plan, unless sooner terminated, shall terminate at the end of ten (10) years from the date the Plan is approved by the shareholders of the Company. No Option may be granted under the Plan while the Plan is suspended or after it is terminated. b. Rights or obligations under any Option granted while the Plan is in effect, including the maximum duration and vesting provisions, shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person who holds the Option, which consent may be obtained in any manner that the Board or its delegate deems appropriate. 14. Registration, Listing, Qualification, Approval of Stock and Options If the Board shall determine, in its discretion, that it is necessary or desirable that the shares of common stock subject to any Option a. be registered, listed or qualified on any securities exchange or under any applicable law, or b. be approved by any governmental regulatory body, or c. approved by the shareholders of the Company, as a condition of, or in connection with, the granting of such Option, or the issuance or purchase of shares upon exercise of the Option, then the Option may not be exercised in whole or in part unless such registration, listing, qualification or approval has been obtained free of any condition not acceptable to the Board of Directors. 15. No Right to Option or as Shareholder a. No Nonemployee Director or other person shall have any claim or right to be granted an Option under the Plan, except as expressly provided herein. Neither the Plan nor any action taken hereunder shall be construed as giving any Nonemployee Director any right to be retained in the service of the Company. b. Neither a Nonemployee Director, the Nonemployee Director's legal representative, nor any person who acquires the right to exercise an Option by reason of the Nonemployee Director's death shall be, or have any of the rights or privileges of, a shareholder of the Company in respect of any shares of common stock receivable upon the exercise of any Option granted under this Plan, in whole or in part, unless and until certificates for such shares shall have been issued. 16. Governing Law The validity, construction, interpretation, administration and effect of this Plan and any rules, regulations and actions relating to this Plan will be governed by and construed exclusively in accordance with the laws of the State of Delaware. EX-10.I 7 AMENDED AND RESTATED FIRST MORTGAGE AND SECURITY AGREEMENT by and between INTERGRAPH CORPORATION, a Delaware corporation, Mortgagor and FOOTHILL CAPITAL CORPORATION, a California corporation, Mortgagee Dated as of November 25, 1997 Prepared by, and after recordation return to: Jerome K. Lanning Johnston Barton Proctor & Powell LLP 2900 AmSouth/Harbert Plaza 1901 Sixth Avenue North Birmingham, Alabama 35203-2618 NOTE: This instrument constitutes an amendment and restatement of the mortgage by and between Intergraph Corporation, as Mortgagor, and Foothill Capital Corporation, as Mortgagee, dated January 6, 1997, and recorded in the Office of the Judge of Probate of Madison County, Alabama on January 6, 1997, in Mortgage Book 2248, Page 538, et seq. (the "Mortgage") securing the payment of a $20,000,000 term loan from Mortgagee to Mortgagor. THIS INSTRUMENT AMENDS AND RESTATES THE MORTGAGE TO SECURE A $5,000,000 INCREASE IN THE SAID TERM LOAN. A MORTGAGE TAX HAS BEEN PAID IN FULL ON THE MORTGAGE WITH RESPECT TO THE ORIGINAL $20,000,000 TERM LOAN BALANCE. This Amended and Restated First Mortgage and Security Agreement is to be cross-indexed in the Uniform Commercial Code Records as a fixture filing. AMENDED AND RESTATED FIRST MORTGAGE AND SECURITY AGREEMENT TABLE OF CONTENTS Article Page 1 Warranty of Title 6 2 Payment of Secured Indebtedness 6 3 Requirements; Proper Care and Use 7 4 Taxes on Secured Property or Mortgagee 8 5 Payment of Impositions 9 6 Insurance 10 7 Condemnation/Eminent Domain 13 8 Sale and Lease of Secured Property 14 9 Liens 15 10 Right of Contest 15 11 Leases and Ground Leases 16 12 Loan Document Expenses 19 13 Mortgagee's Right to Perform 20 14 Mortgagee's Costs and Expenses 20 15 Defaults 21 16 Remedies 21 17 Security Agreement under Uniform Commercial Code 24 18 Additional Representations and Warranties 25 19 No Waivers. Etc. 25 20 Additional Rights 26 21 Waivers by Mortgagor 26 22 Not Joint Venture or Partnership 27 23 Notices 27 24 Inconsistency with the Loan Documents 27 25 No Modification: Binding Obligations 27 26 Miscellaneous 27 27 Enforceability 28 28 Receipt of Copy 28 29 Termination of Security Interest 28 Exhibit A - Description of the Land Index of Defined Terms Additional Mortgages 2 Additional Term Loan 1 Awards 5 Buildings 3 Code 24 Contractor's Claims 15 Event of Default 21 Fixtures 14 GAAP 15 Governmental Authority 7 Ground Leases 4 Impositions 9 Initial Term Loan 1 Insurance Proceeds 5 Interest Rate 8 Land 3 Leases 4 Legal Requirements 7 Letters of Credit 2 Liens 15 Loan Agreement 1 Loan Documents 2 Material Adverse Effect 15 Mortgage 1 Mortgagee 1 Mortgagor 2 Obligations 2 Permitted Encumbrances 6 Person 2 Provisions 27 Real Estate 3 Rents 4 Secured Indebtedness 2 Secured Obligations 3 Secured Property 3 Subsidiaries 15 Taking 14 Tax 8 Taxes 8 Term Loan 2 AMENDED AND RESTATED FIRST MORTGAGE AND SECURITY AGREEMENT THIS AMENDED AND RESTATED FIRST MORTGAGE AND SECURITY AGREEMENT ("Amendment") is made as of this ____ day of ____________, 1997, by INTERGRAPH CORPORATION, a Delaware corporation, having an office at One Madison Industrial Park, Huntsville, AL 35894-0001 ("Mortgagor"), and FOOTHILL CAPITAL CORPORATION, a California corporation having an address at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025- 3333 ("Mortgagee"). WITNESSETH: WHEREAS, Mortgagor previously made, executed and delivered, inter alia, the following documents to Mortgagee: (a) that certain Loan and Security Agreement dated as of December 20, 1996, as amended by Amendment Number One to Loan and Security Agreement dated as of January 15, 1997, and Amendment Number Two To Loan and Security Agreement dated as of November 25, 1997 (collectively, the "Loan Agreement"); and (b) that certain First Mortgage And Security Agreement from Mortgagor to Mortgagee dated January 6, 1997, and recorded on January 6, 1997, in the Offices of the Probate Judge of Madison County, Alabama at Mortgage Book 2248, Page 538 et seq. (as amended and restated by this Amendment, the "Mortgage"); and WHEREAS, the Loan Agreement evidences, inter alia, a $20,000,000 term loan from Mortgagee to Mortgagor (herein referred to as the "Initial Term Loan"); and WHEREAS, Mortgagee has made an additional term loan to Mortgagor in the amount of Five Million and No/100 Dollars ($5,000,000), such term loan being identified in the Loan Agreement as the "Additional Term Loan," and Mortgagor has agreed that the repayment of the Initial Term Loan and the Additional Term Loan shall be secured, equally and ratably, by the lien of the Mortgage as amended and restated in accordance with the terms of this Amendment; and WHEREAS, the parties now desire to amend and restate the terms, covenants, conditions and warranties of the Mortgage as hereinafter provided. NOW, THEREFORE, in consideration of the premises, the foregoing representations of Mortgagor, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby covenant and agree as follows: Mortgagor covenants and agrees that the Mortgage is hereby amended and restated such that the Mortgage, as amended and restated hereby, shall secure the following obligations and liabilities: (a) the payment of (i) the Initial Term Loan and the Additional Term Loan (collectively, the "Term Loan") together with all accrued interest thereon to be paid pursuant to the provisions of the Loan Agreement, (ii) any future advances and readvances of such principal amount made from time to time pursuant to the Loan Agreement, (iii) any Letter of Credit (said term and other capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Loan Agreement) reimbursement obligations that may arise under Letters of Credit or L/C Guaranties issued pursuant to the Loan Agreement; (iv) any and all other sums due or to become due and any other monetary Obligations under the Loan Agreement, this Mortgage or any other document evidencing or securing the Loan or any other obligations of Mortgagor entered into, executed or delivered pursuant to the terms of the Loan Agreement, (v) any further or subsequent advances made under the Loan Agreement this Mortgage or any other Loan Document, and (vi) any extensions, renewals, replacements or modifications of the Loan Agreement or any other Loan Document (the items set forth in clauses (i) through (vi) hereof, collectively, the "Secured Indebtedness"), and (b) the performance of all of the terms, covenants, conditions, agreements, obligations and liabilities of Mortgagor under (i) this Mortgage, (ii) the Loan Agreement, (iii) the Loan Documents, (iv) any mortgages or deeds of trust in addition to this Mortgage now or hereafter made by Mortgagor to secure the Secured Indebtedness (such additional mortgages and deeds of trust, collectively, the "Additional Mortgages"), (v) any supplemental agreements, undertakings, instruments, documents or other writings executed by Mortgagor as a condition to advances under the Loan Agreement or otherwise in connection with the Loan Agreement (including, without limitation, the "Obligations", as defined in the Loan Agreement), (vi) all security agreements, chattel mortgages, pledges, powers of attorney, consents, assignments, notices, leases and financing statements heretofore, now or hereafter executed by or on behalf of Mortgagor or any other Person and/or delivered to Mortgagee in connection with the Loan Agreement or the transactions contemplated thereby, and (vii) any extensions, renewals, replacements or modifications of any of the foregoing (all obligations and liabilities of Mortgagor arising under this Mortgage, the Loan Agreement, the Loan Documents, the Additional Mortgages and any other supplemental agreements, undertakings, instruments, documents, or other writings executed in connection with any of the foregoing, together with (x) the foregoing powers of attorney, consents, assignments, notices, leases and financing statements, (y) any guarantees of the Secured Indebtedness and (z) any deeds of trust, mortgages, security agreements or assignments now or hereafter made to secure the Secured Indebtedness and the obligations and liabilities described herein are hereinafter collectively referred to as the "Secured Obligations"); and For and in consideration of the Secured Obligations and to secure payment of the same, with interest thereon, and any extensions or renewals of the same, and to further secure the performance of the covenants and conditions and agreements provided for in the Loan Agreement and as herein set forth, and for other good and valuable consideration to Mortgagor, the receipt and legal sufficiency hereby of which are acknowledged, Mortgagor does hereby mortgage, give, grant, bargain, sell, warrant, alienate, remise, release, convey, assign, transfer, hypothecate, deposit, pledge, set over and confirm unto Mortgagee the following described real and other property and all substitutions for and all replacements, reversions and remainders of such property, whether now owned or held or hereafter acquired by Mortgagor (collectively, the "Secured Property"): The fee simple and leasehold estate of Mortgagor with respect to those plots, pieces or parcels of land more particularly described in Exhibit A annexed hereto and made a part hereof (which Exhibit A identifies the fee or leasehold estate held by Mortgagor with respect to each such parcel), together with the right, title and interest of Mortgagor, if any, in and to the streets and in and to land lying in the bed of any streets, roads or avenues, open or proposed, public or private, in front of, adjoining or abutting said land to the center line thereof, the air space and development rights pertaining to said land and the right to use such air space and development rights, all rights of way, privileges, liberties, tenements, hereditaments and appurtenances belonging to, or in any way appertaining to, said land, all easements now or hereafter benefiting said land and all royalties and rights appertaining to the use and enjoyment of said land, including, but without limiting the generality of the foregoing, all alley, vault, drainage, mineral, water, oil, coal, gas, timber and other similar rights (collectively, the "Land"); TOGETHER with the buildings and other improvements now or hereafter erected on the Land (the buildings and other improvements, collectively, the "Buildings" and the Land together with the Buildings and the Fixtures (hereinafter defined), collectively, the "Real Estate"); TOGETHER with all and singular the reversion or reversions, remainder or remainders, rents, issues, profits and revenues of the Real Estate and all of the estate, right, title, interest, dower and right of dower, curtesy and right of curtesy, property, possession, claim and demand whatsoever, both in law and at equity, of Mortgagor of, in and to the Real Estate and of, in and to every part and parcel thereof, with the appurtenances, at any time belonging or in any way appertaining thereto; TOGETHER with all of the fixtures, systems, machinery, apparatus, equipment and fittings of every kind and nature whatsoever and all appurtenances and additions thereto and substitutions or replacements thereof now owned or hereafter acquired by Mortgagor and now or hereafter attached or affixed to, or constituting a part of, the Real Estate or any portion thereof (collectively the "Fixtures"), including, but without limiting the generality of the foregoing, all heating, electrical, mechanical, lighting, lifting, plumbing, ventilating, air conditioning and air-cooling fixtures, systems, machinery, apparatus and equipment, refrigerating, incinerating and power fixtures, systems, machinery, apparatus and equipment, loading and unloading fixtures, systems, machinery, apparatus and equipment, escalators, elevators, boilers, communication systems, switchboards, sprinkler systems and other fire prevention and extinguishing fixtures, systems, machinery, apparatus and equipment, and all engines, motors, dynamos, machinery, wiring, pipes, pumps, tanks, conduits and ducts constituting a part of any of the foregoing, it being understood and agreed that all of the Fixtures are appropriated to the use of the Real Estate and, for the purposes of this Mortgage, shall be deemed conclusively to be Real Estate and mortgaged hereby; TOGETHER with all drainage, mineral, water, oil, gas, timber and sewer pipes, conduits and wires, and other facilities furnishing utility or other services and other similar rights now or hereafter benefitting the Real Estate or any portion thereof or appertaining thereto; TOGETHER with all of Mortgagor's right, title and interest and leasehold estate under any leases held by Mortgagor, as lessee, with respect to any portion of the Real Estate (as described in Exhibit A hereto), including all powers, options, renewal rights and other rights and interest of Mortgagor, as lessee, under the terms of any such leases (collective the "Ground Leases"); TOGETHER with Mortgagor's right, title and interest in, to and under all leases, subleases, underlettings, concession agreements, licenses and other occupancy agreements which now exist or which may hereafter be granted by Mortgagor, as lessor, affecting the Real Estate or any portion thereof and under any and all guarantees, modifications, renewals and extensions thereof (collectively, the "Leases"), and in and to any and all deposits made or hereafter made as security under the Leases, subject to the prior legal rights under the Leases of the lessees making such deposits, together with any and all of the benefits, revenues, income, rents, issues and profits due or to become due or to which Mortgagor is now or hereafter may become entitled arising out of the Leases or the Real Estate or any portion thereof (collectively, the "Rents"); TOGETHER with (a) all unearned premiums accrued, accruing or to accrue under any insurance policies now or hereafter obtained by Mortgagor and Mortgagor's interest in and to all proceeds which now or hereafter may be paid in connection with the conversion of the Secured Property or any portion thereof into cash or liquidated claims, together with the interest payable thereon and the right to collect and receive the same, including, but without limiting the generality of the foregoing, proceeds of casualty insurance, title insurance and any other insurance now or hereafter maintained by Mortgagor with respect to the Real Estate or in connection with the use or operation thereof (collectively, the "Insurance Proceeds"), and (b) all awards, payments and/or other compensation, together with the interest payable thereon and the right to collect and receive the same, which now or hereafter may be made with respect to the Secured Property as a result of (i) a taking by eminent domain, condemnation or otherwise, (ii) the change of grade of any street, road or avenue or the widening of any streets, roads or avenues adjoining or abutting the land, or (iii) any other injury to, or decrease in the value of, the Secured Property or any portion thereof (collectively, the "Awards"), in any of the foregoing circumstances described in clauses (a) or (b) above to the extent of the entire amount of the Secured Indebtedness outstanding as of the date of Mortgagee's receipt of any such Insurance Proceeds or Awards, notwithstanding that the entire amount of the Secured Indebtedness may not then be due and payable, and also to the extent of reasonable attorneys' fees, costs and disbursements incurred by Mortgagee in connection with the collection of any such Insurance Proceeds or Awards. Mortgagor hereby assigns to Mortgagee, and Mortgagee is hereby authorized to collect and receive, all Insurance Proceeds and Awards and to give proper receipts and acquittances therefor and to apply the same toward the Secured Indebtedness as herein set forth notwithstanding that the entire amount of the Secured Indebtedness may not then be due and payable. Mortgagor hereby agrees to make, execute and deliver, from time to time, upon demand, such further documents, instruments or assurances as may be requested by Mortgagee to confirm the assignment of the Insurance Proceeds and the Awards to Mortgagee, free and clear of any interest of Mortgagor whatsoever therein and free and clear of any other Liens (hereinafter defined), claims or encumbrances of any kind or nature whatsoever; TOGETHER with all right, title and interest of Mortgagor in and to all extensions, improvements, betterments, renewals, substitutes and replacements of, and all additions and appurtenances to, the Real Estate, and in each such case, the foregoing shall be deemed a part of the Real Estate and shall become subject to the Lien of this Mortgage as fully and completely, and with the same priority and effect, as though now owned by Mortgagor and specifically described herein, without any further mortgage, conveyance, assignment or other act by Mortgagor; TOGETHER with all of Mortgagor's rights to further encumber the Secured Property for debt. TO HAVE AND TO HOLD the Secured Property and the rights and privileges hereby mortgaged or intended so to be unto Mortgagee and its successors and assigns for the uses and purposes herein set forth, until the Secured Indebtedness is fully paid and the Secured Obligations are fully performed in accordance with the provisions set forth herein and in the other Loan Documents. Mortgagor, for itself and its successors and assigns, further represents, warrants, covenants and agrees with Mortgagee as follows: 1 Warranty of Title. Except as otherwise set forth on Exhibit A, Mortgagor warrants that it is lawfully seized of a good and marketable leasehold estate under the Ground Leases or fee simple absolute title (as particularly described in Exhibit A hereto) to the Real Estate and has the right to mortgage the same in accordance with the provisions set forth in this Mortgage and that this Mortgage is a valid and enforceable first Lien on the Secured Property, subject only to the exceptions to title more particularly described in Commitment for Title No. 050122-041 dated December 10, 1996, as redated to the date hereof, issued by First American Title Insurance Company to Mortgagee (collectively, the "Permitted Encumbrances"). Mortgagor shall (a) preserve such title and the validity and priority of the Lien of this Mortgage and shall forever warrant and defend the same unto Mortgagee against the claims of all and every Person or Persons, corporation or corporations and parties whomsoever, and (b) make, execute, acknowledge and deliver all such further or other deeds, documents, instruments or assurance and cause to be done all such further acts and things as may at any time hereafter be required by Mortgagee to confirm and fully protect the Lien and priority of this Mortgage. 2 Payment of Secured Indebtedness. 2.1 Mortgagor shall pay the Secured Indebtedness at the times and places and in the manner specified in the Loan Documents and shall perform all of the Secured Obligations in accordance with the provisions set forth herein and in the other Loan Documents. Anything to the contrary herein notwithstanding, the maximum principal amount (exclusive of costs, expenses, protective advances, and interest) at any time secured by this Mortgage shall not exceed Twenty-Five Million and No/100 Dollars ($25,000,000.00); furthermore, the Secured Obligations shall not include any obligations for the payment of principal or interest with respect to any revolving loans or future loan advances under the terms of any of the Loan Documents. 2.2 Any payment made in accordance with the terms of this Mortgage by any Person at any time liable for the payment of the whole or any part of the Secured Indebtedness, or by any subsequent owner of the Secured Property, or by any other Person whose interest in the Secured Property might be prejudiced in the event of a failure to make such payment, or by any stockholder, officer or director of a corporation or by any partner of a partnership which at any time may be liable for such payment or may own or have such an interest in the Secured Property shall be deemed, as between Mortgagee and all Persons who at anytime may be liable as aforesaid or may own the Secured Property, to have been made on behalf of all such Persons. 3 Requirements: Proper Care and Use. 3.1 Subject to the right of Mortgagor to contest a Legal Requirement (hereinafter defined) as provided in Article 10 hereof, Mortgagor promptly shall comply with, or cause to be complied with, all present and future laws, statutes, codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations, restrictions and requirements (collectively "Legal Requirements") of every federal, state, county, municipal or other governmental authority having jurisdiction over Mortgagor or the Secured Property (a "Governmental Authority") (and, unless such contest operates to suspend compliance with such Governmental Authority, in no case later than the time period allowed under any order or other form of notice issued by such Governmental Authority) or the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or restoration of the Real Estate, without regard to the nature of the work to be done or the cost of performing the same, whether foreseen or unforeseen, ordinary or extraordinary, and shall perform, or cause to be performed, all obligations, agreements, covenants, restrictions and conditions now or hereafter of record which may be applicable to Mortgagor or to the Secured Property or to the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or restoration of the Real Estate. 3.2 Except as it may otherwise be permitted by the Loan Agreement, Mortgagor shall (i) not abandon the Real Estate or any portion thereof, (ii) subject to Articles 6 and 7 hereof, maintain the Real Estate in good repair, order and condition, (iii) subject to Articles 6 and 7 hereof, promptly make all necessary repairs to the Real Estate, (iv) not commit or suffer waste with respect to the Real Estate, (v) refrain from impairing or diminishing the value or integrity of the Secured Property or the priority or security of the Lien of this Mortgage, (vi) not remove, demolish or materially alter any of the Real Estate without the prior written consent of Mortgagee in each instance, except that Mortgagor shall have the right without the consent of Mortgagee to remove and dispose of, free of the Lien of this Mortgage, such Fixtures as may, from time to time, become worn out or obsolete, provided that if Mortgagor shall replace the same with other Fixtures then such replacement Fixtures shall be free of any security agreements or other Liens or encumbrances of any kind or nature whatsoever, and by such removal and replacement, Mortgagor shall be deemed to have subjected such replacement Fixtures to the Lien and priority of this Mortgage, (vii) not make, install or permit to be made or installed,any material alterations or additions to the Real Estate if doing so would materially impair the use of the Secured Property by Mortgagor in the conduct of its business, (viii) not make, suffer or permit any nuisance to exist on the Real Estate or any portion thereof, and (ix) permit Mortgagee and its agents, at the times and in the manner set forth in the Loan Agreement and subject to the rights of tenants under Leases, to enter upon the Real Estate for the purpose of inspecting and appraising the Real Estate or any portion thereof. 3.3 Mortgagor shall not by any act or omission permit any building or other improvement located on any property which is not subject to the Lien of this Mortgage to rely upon the Real Estate or any portion thereof or any interest therein to fulfill any Legal Requirement and Mortgagor hereby assigns to Mortgagee any and all rights to give consent for all or any portion of the Real Estate or any interest therein to be so used. The Real Estate is zoned as one or more lots separate and apart from all other premises and Mortgagor shall not, by any act or omission, impair the integrity of the Real Estate as such lot or lots or initiate or join in any zoning change, private easement or any other modification of the zoning regulating the Real Estate. Unless first approved in writing by Mortgagee, Mortgagor shall not (i) impose any restrictive covenants or encumbrances upon the Real Estate, execute or file any subdivision plot affecting the Real Estate or consent to the annexation of the Real Estate to any municipality or (ii) permit or suffer the Real Estate to be used by the public or any Person in such manner as might make possible a claim of adverse usage or possession or of any implied dedication or easement. To the extent allowed by applicable law, any act or omission by Mortgagor which would result in a violation of any of the provisions of this Article shall be null and void. 4 Taxes on Secured Property or Mortgagee. 4.1 If any Governmental Authority shall levy, assess or charge any tax, assessment, fee or imposition upon this Mortgage or any other Loan Document, the Secured Indebtedness, the interest of Mortgagee in the Secured Property, or Mortgagee by reason of this Mortgage or any other Loan Document, the Secured Indebtedness or Mortgagee's interest in the Secured Property (individually a "Tax", and collectively "Taxes") (excepting therefrom any taxes measured by Mortgagee's net income, and franchise taxes imposed on it, by the jurisdiction (or any political subdivision thereof under the laws of which Mortgagee is organized), Mortgagor shall pay all such Taxes to, for, or on account of, Mortgagee as they become due and payable and, on demand, shall furnish proof of such payment to Mortgagee. If Mortgagor shall fail to so pay any such Tax, then, Mortgagee, at its option and upon simultaneous notice, may pay any such Tax and, in such event, the amount so paid (i) shall be deemed to be Secured Indebtedness, (ii) shall be a Lien on the Secured Property prior to any right or title to, interest in, or claim upon, the Secured Property subordinate to the Lien of this Mortgage, and (iii) immediately shall be due and payable, on demand, together with interest thereon at the rate of interest then payable under the Loan Agreement, including, in calculating such rate of interest, any additional interest which is then imposed under the Loan Agreement by reason of any Event of Default thereunder (such rate of interest, the "Interest Rate"), from the date of any such payment by Mortgagee to the date of repayment to Mortgagee. 4.2 If any Governmental Authority shall at any time require revenue, documentary or similar stamps to be affixed to this Mortgage or any other Loan Document or shall require the payment of any Taxes with respect to the ownership or recording of this Mortgage or any other Loan Document, Mortgagor, upon demand, shall pay for such stamps in the required amount and shall deliver the same to Mortgagee, together with a copy of the receipted bill therefor. If Mortgagor shall fail to so pay for any such stamps, then, Mortgagee, upon simultaneous notice to Mortgagor, may pay for the same and, in such event, the amount so paid (i) shall be deemed to be Secured Indebtedness, (ii) shall be a Lien on the Secured Property prior to any right or title to, or interest in, or claim upon, the Secured Property subordinate to the Lien of this Mortgage, and (iii) immediately shall be due and payable, on demand, together with interest thereon at the Interest Rate, from the date of any such payment by Mortgagee to the date of repayment to Mortgagee. Mortgagor shall indemnify Mortgagee for, and shall hold Mortgagee harmless from and against, any and all liability which Mortgagee may incur on account of such revenue, documentary or other similar stamps or by reason of any Taxes referred to in Paragraph 4.1 hereof, whether such liability arises before or after payment of the Secured Indebtedness and whether or not the Lien of this Mortgage shall have been released. 5 Payment of Impositions. 5.1 Subject to the provisions of Article 10 hereof and except to the extent the failure to comply with any of the following is permitted by the Loan Agreement, not later than the date on which payment of the same shall be due, that is, the day before the date on which any fine, penalty, interest, late charge or loss may be added thereto or imposed by reason of the non-payment thereof, Mortgagor shall pay and discharge all Taxes (including, but without limiting the generality of the foregoing, all real property taxes and assessments, personal property taxes, income, franchise, withholding, profits and gross receipts taxes), charges for any easement or agreement maintained for the benefit of the Secured Property or any portion thereof, general and special assessments and levies, permit, inspection and license fees, water and sewer rents and charges and any other charges of every kind and nature whatsoever, foreseen or unforeseen, ordinary or extraordinary, public or private, which, at any time, are imposed upon or levied or assessed against Mortgagor or the Secured Property or any portion thereof, or which arise with respect to, or in connection with, the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or restoration of the Real Estate or any portion thereof, together with any penalties, interest or late charges which may be imposed in connection with any of the foregoing (all of the foregoing taxes, assessments, levies and other charges, together with such interest, penalties and late charges, collectively, "Impositions"). If, however, any Legal Requirement shall allow that any Imposition may, at Mortgagor's option, be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Mortgagor may exercise the option to pay such Imposition in such installments and, in such event, Mortgagor shall be responsible for the payment of all such installments, together with the interest, if any, thereon, in accordance with the provisions of the applicable Legal Requirement. Within five (5) days after a request by Mortgagee, Mortgagor shall deliver to Mortgagee evidence acceptable to Mortgage showing the payment of such Imposition. Mortgagor also shall deliver to Mortgagee, within five (5) days after a request by Mortgagee, copies of all settlements and notices pertaining to any imposition that may be issued by any Governmental Authority. 5.2 Nothing contained in this Mortgage shall affect any right or remedy of Mortgagee under this Mortgage or otherwise to pay, upon simultaneous notice, any imposition from and after the date on which such Imposition shall have become due and payable and, in such event, the amount so paid (i) shall be deemed to be Secured Indebtedness, (ii) shall be a Lien on the Secured Property prior to any right or title to, interest in, or claim upon, the Secured Property subordinate to the Lien of this Mortgage, and (iii) shall be immediately due and payable, on demand; together with interest thereon at the Interest Rate, from the date of any such payment by Mortgagee to the date of repayment to Mortgagee. 6 Insurance. 6.1 Mortgagor shall provide and keep in full force and effect, or require to be provided and kept in full force and effect, for the benefit of Mortgagee, as hereinafter provided: A. insurance for the Buildings and the Fixtures (w) against loss or damage by fire, lightning, windstorm, tornado, hail and such other further and additional hazards of whatever kind or nature as are now or hereafter may be covered by standard extended coverage "all risk" endorsements (including, but without limiting the generality of the foregoing, and specifically, vandalism, malicious mischief and damage by water) of whatsoever kind, (x) against flood disaster pursuant to the Flood Disaster Protection Act of 1973,84 Stat. 572,42 U.S.C. 4001 if the Real Estate is located in an area identified by the United States Department of Housing and Urban Development as a flood hazard area, (y) against loss of rentals and business interruption due to any of the foregoing causes, and (z) when and to the extent reasonably required by Mortgagee, against any other risk insured against by Persons operating properties similar to the Real Estate and located in the vicinity of the Real Estate or operations similar to the operations conducted at the Real Estate; B. insurance for demolition and increased cost of construction coverage; C. if a sprinkler system shall be located in the Buildings, sprinkler leakage insurance; D. comprehensive public liability insurance with respect to the Real Estate and the operations related thereto, whether conducted on or off the Real Estate, against liability for personal injury, including bodily injury and death, and property damage. Such comprehensive public liability insurance shall be on an occurrence basis and shall specifically include, but not be limited to, sprinkler leakage legal liability (if a sprinkler shall be located in the Buildings), water damage legal liability, products liability, motor vehicle liability for all owned and non-owned vehicles, including rented and leased vehicles, and contractual indemnification; and E. such other insurance in such amounts as may from time to time be reasonably required by Mortgagee against such other insurable hazards as at the time are commonly insured against in the case of properties similar to the Real Estate and located in the vicinity of the Real Estate or operations similar to the operations conducted at the Real Estate. All insurance provided hereunder shall be in such form and in such amounts as, from time to time, shall be acceptable to Mortgagee, in its reasonable discretion, shall name Mortgagee as a named insured under a standard "noncontributory mortgagee" endorsement or its equivalent, which shall be reasonably acceptable to Mortgagee, shall be provided by insurance companies which have a Best's rating of at least "AXII" and otherwise shall be acceptable to Mortgagee in its reasonable discretion. In the event Mortgagor shall receive any Insurance Proceeds, then Mortgagor shall promptly pay such Insurance Proceeds directly to Mortgagee in the manner set forth in the Loan Agreement. Anything contained herein to the contrary notwithstanding, in no event shall the insurance provided under Paragraph 6.1.A.w hereof or under Paragraph 6.1.B hereof be in an amount which is less than One Hundred Percent (100%) of the full replacement cost of the Buildings and the Fixtures, including the cost of debris removal, but excluding the value of foundations and excavations, as reasonably determined from time to time by Mortgagee. Every policy of insurance referred to in this Paragraph shall contain an agreement by the insurer that it will not cancel such policy except alter thirty (30) days prior written notice to Mortgagee and that any loss payable thereunder shall be payable notwithstanding any act or negligence of Mortgagor or Mortgagee which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding (A) occupancy or use of the Secured Property for purposes more hazardous than permitted by the terms of such policy, (B) any foreclosure or other action or proceeding taken by Mortgagee pursuant to this Mortgage upon the happening of an Event of Default (hereinafter defined) or (C) any change in title or ownership of the Secured Property. Mortgagor shall assign and deliver to Mortgagee all such policies of insurance, or duplicate originals thereof or certificates evidencing the coverage thereunder. If any insurance required to be provided hereunder shall expire, be withdrawn, become void by breach of any condition thereof by Mortgagor or by any lessor under the Ground Leases or any lessee of the Real Estate or any portion thereof, or-become void or questionable by reason of the failure or impairment of the capital of any insurer, or if for any other reason whatsoever any such insurance shall become unsatisfactory to Mortgagee in its reasonable discretion, Mortgagor immediately shall obtain new or additional insurance which shall be satisfactory to Mortgagee in its reasonable discretion. Mortgagor shall not take out any separate or additional insurance which is contributing in the event of loss unless it is properly endorsed and otherwise satisfactory to Mortgagee in all respects. 6.2 Mortgagor shall (i) pay as they become due all premiums for the insurance required hereunder, and (ii) not later than thirty (30) days prior to the expiration of each such policy, deliver a renewal policy or a duplicate original thereof and a certificate of insurance indicating that the insurance is then in effect or accompanied by such other evidence of payment as shall be satisfactory to Mortgagee in its discretion. 6.3 If Mortgagor shall be in default of its obligation to so insure or deliver any such-prepaid policy or policies of insurance to Mortgagee in accordance with the provisions hereof, Mortgagee, at its option and upon simultaneous notice to Mortgagor, may effect such insurance from year to year, and pay the premium or premiums therefor, and, in such event, the amount of all such premium or premiums (i) shall be deemed to be Secured Indebtedness, (ii) shall be a Lien on the Secured Property prior to any right or title to, or interest in, or claim upon, the Secured Property subordinate to the Lien of this Mortgage, and (iii) shall be immediately due and payable, on demand, together with interest thereon at the Interest Rate, from the date of any such payment by Mortgagee to the date of repayment to Mortgagee. 6.4 At the request of Mortgagee, Mortgagor shall increase the amount of insurance required to be provided pursuant to the provisions of Paragraph 6.1.A.w hereof and Paragraph 6.1.B hereof by using the Factory Mutual Index to determine whether there shall have been an increase in the replacement cost of the Buildings and the Fixtures since the most recent adjustment to any such policy and, if there shall have been any such increase, the amount of insurance required to be provided hereunder shall be adjusted accordingly. 6.5 Mortgagor promptly shall comply with, and shall cause the Buildings and the Fixtures to comply with, (i) all of the provisions of each such insurance policy, and (ii) all of the requirements of the insurers thereunder applicable to Mortgagor or to any of the Buildings or the Fixtures or to the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or restoration of any of the Buildings or the Fixtures if the failure to comply therewith could foreseeably permit the insurer to deny coverage or to cancel any insurance required hereunder, even if such compliance would necessitate structural changes or improvements or would result in interference with the use or enjoyment of the Real Estate or any portion thereof. If Mortgagor shall use the Real Estate or any portion thereof in any manner which would permit the insurer to cancel any insurance required to be provided hereunder, Mortgagor shall obtain prior to the cancellation thereof a substitute policy which shall be satisfactory to Mortgagee and which shall be effective on or prior to the date on which any such other insurance policy shall be cancelled. 6.6 If the Buildings or the Fixtures or any portion thereof shall be materially damaged, destroyed or injured by fire or any other casualty (whether insured or uninsured), Mortgagor shall give prompt notice thereof to Mortgagee. 6.7 In the event of any damage, destruction or injury, then, if no Event of Default has occurred and is then continuing, Mortgagee and Mortgagor shall jointly adjust, collect and compromise all such claims under all policies of insurance and execute and deliver on behalf of Mortgagor all necessary proofs of loss, receipts, vouchers and releases required by the insurers. If any Event of Default shall have occurred and then be continuing, Mortgagee may, at its option, adjust, collect and compromise all such claims. If, prior to the payment of any Insurance Proceeds, the Secured Property or any portion thereof shall have been sold on foreclosure of this Mortgage, then Mortgagor shall direct each insurer to pay to Mortgagee the amount of any deficiency found to be due upon such sale, whether or not a deficiency judgment on this Mortgage shall have been sought or recovered or denied, together with interest thereon at the Interest Rate. 6.8 The insurance required by this Mortgage may, at the option of Mortgagor, be effected by blanket and/or umbrella policies issued to Mortgagor covering the Buildings and the Fixtures as well as other properties (real and personal) which are owned or leased by Mortgagor, provided that, in each case, the policies otherwise comply with the provisions of this Mortgage and allocate to the Buildings and the Fixtures, from time to time, the coverage specified by Mortgagee, without possibility of reduction or coinsurance by reason of, or damage to, any other property (real or personal) named therein. If the insurance required by this Mortgage shall be effected by any such blanket or umbrella policies, Mortgagor shall furnish to Mortgagee original certificates evidencing policies thereof, with, if requested by Mortgagee, schedules attached thereto showing the amount of the insurance provided under such policies which is applicable to the Buildings and the Fixtures. 6.9 Any transfer of the Secured Property, in accordance with the provisions hereof, including a transfer by foreclosure or deed in lieu of foreclosure, shall transfer therewith all of Mortgagor's interest in all property insurance policies then covering the Buildings and the Fixtures or the operations conducted at the Real Estate, including, but without limiting the generality of the foregoing, any unearned premiums. 7 Condemnation/Eminent Domain. 7.1 Mortgagor shall notify Mortgagee promptly upon obtaining knowledge of the institution of (i) any taking by eminent domain, condemnation or otherwise of all or any portion of the Secured Property, or (ii) the change of grade of any street, road or avenue or the widening of streets, roads or avenues adjoining or abutting the Land, or (iii) any other, injury to, or decrease in value of, the Secured Property caused in any manner by any Governmental Authority (any of the foregoing events, a "Taking"). 7.2 If no Event of Default has occurred and is then continuing, Mortgagee and Mortgagor shall jointly negotiate and settle any such proceedings with respect to such a Taking and the amount of any Award to be made in connection therewith and shall jointly execute and deliver on behalf of Mortgagor all necessary proofs of loss, receipts, vouchers and releases required in connection with any such Taking. If any Event of Default shall have occurred and then be continuing, then Mortgagee may, at its option, negotiate and settle such claims. Mortgagor agrees to execute, upon demand by Mortgagee, all such proofs of loss, receipts, vouchers and releases and to cooperate with Mortgagee in connection therewith. Mortgagor shall direct the applicable Governmental Authority to make payment of any such Award directly to Mortgagee and Mortgagee is hereby authorized to endorse any draft therefor as Mortgagor's attorney-in-fact. If, prior to the payment of any Award, the Secured Property or any portion thereof shall have been sold on foreclosure of this Mortgage, Borrower shall direct the applicable Governmental Authority to pay to Mortgagee the amount of any deficiency found to be due upon such sale, whether or not a deficiency judgment on this Mortgage shall have been sought or recovered or denied, together with interest thereon at the Interest Rate. 8 Sale and Lease of Secured Property. Except to the extent permitted under the Loan Agreement, Mortgagor shall not, at any time, without the prior written consent of Mortgagee in each instance, 8.1 sell, assign, transfer or convey all or any part of the Secured Property or any interest therein; or 8.2 lease or sublease the Real Estate or any portion thereof except in accordance with the terms hereof; or 8.3 (i) make any new or additional mortgage, deed of trust or other loan which is secured by the Secured Property or any portion thereof (whether superior or junior to the Lien of this Mortgage and whether recourse or non-recourse) unless such loan is made by Mortgagee, or (ii) except for the Permitted Encumbrances and subject to the provisions of Articles 9 and 10 hereof and except for other Liens permitted by the Loan Agreement, otherwise create, grant, permit or suffer any Lien, security interest, claim, charge or encumbrance of any kind or nature whatsoever, whether recorded or unrecorded, against the Secured Property or any portion thereof. Mortgagor shall comply with or otherwise perform, keep or observe, all terms, provisions, conditions, covenants, warranties and representations contained in any mortgage that is subordinate to this Mortgage and shall not permit or suffer a default under any such mortgage or deed of trust. 9 Liens. Subject to the provisions of Article 10 hereof, Mortgagor at all times shall keep the Secured Property free from any and all "Liens" (which term shall hereinafter have the meaning ascribed thereto in the Loan Agreement) except as permitted under the Loan Agreement and except for the Permitted Encumbrances. 10 Right of Contest. Mortgagor, at its sole cost and expense, may, in good faith, contest, by proper legal actions or proceedings, the validity of any Legal Requirement or the application thereof to Mortgagor or the Secured Property, or the validity or amount of any Imposition or the validity of the claims of any mechanics, laborers, subcontractors, contractors or materialmen ("Contractor's Claims"). During the pendency of any such action or proceeding, compliance with such contested Legal Requirement or payment of such contested Imposition or payment of such contested Contractor's Claim may be deferred provided that, in each case, at the time of the commencement of any such action or proceeding, and during the pendency of such action or proceeding (a) no Event of Default shall exist hereunder and no other event shall have occurred which, with the giving of notice or lapse of time, or both, would constitute an Event of Default hereunder, (b) adequate reserves with respect thereto are maintained on Mortgagor's books in accordance with GAAP (as defined in the Loan Agreement) and the applicable provisions of the Loan Agreement, (c) such contest operates to suspend enforcement of compliance with the contested Legal Requirement or collection of the contested Imposition or collection or enforcement of such contested Contractor's Claim, (d) during the pendency of such action or proceeding, Mortgagor is able to make full use and benefit of the Secured Property and (e) such contest is maintained and prosecuted continuously and with diligence, notwithstanding any such reserves, Mortgagor promptly shall comply with any contested Legal Requirement or shall pay any contested Imposition or Contractor's Claim, and compliance therewith or payment thereof shall not be deferred, if, at any time, the Secured Property or any portion thereof shall be, in Mortgagee's judgment, in danger of being forfeited or lost by reason of any such contest or Mortgagor's non-compliance with any such Legal Requirement or non-payment of any such Imposition or Contractor's Claim and such claim has or could foreseeably have a Material Adverse Effect (as defined in the Loan Agreement) on the Borrower and its Subsidiaries (as defined in the Loan Agreement) taken as one enterprise. If such action or proceeding is terminated or discontinued adversely to Mortgagor, Mortgagor, upon demand, shall deliver to Mortgagee evidence satisfactory to Mortgagee, in its reasonable discretion, of Mortgagor's compliance with such contested Legal Requirement or payment of such contested Imposition or Contractor's Claim, as the case may be. 11 Leases and Ground Leases. 11.1. Leases. A. Mortgagor has no right or power, as against Mortgagee, without the prior written consent of Mortgagee, to enter into any Lease affecting the Secured Property, except as permitted under the Loan Agreement. B. Each Lease hereinafter entered into by Mortgagor shall (i) by its express terms not permit the lessee thereunder to terminate or invalidate the terms of its Lease as a result of any action taken by Mortgagee to enforce this Mortgage either by foreclosure, or acceptance of a deed in lieu of foreclosure, or by resort to any other rights or remedies available to Mortgagee hereunder or at law or in equity, (ii) include a subordination clause providing that the Lease and the interest of the lessee thereunder in the Secured Property are in all respects subject and subordinate to this Mortgage, (iii) provide that, at the option of Mortgagee or the purchaser at a foreclosure sale or the grantee in a voluntary conveyance in lieu of foreclosure, the lessee thereunder shall attorn to Mortgagee or to such purchaser or grantee under all of the terms of the Lease and recognize such entity as the lessor under the Lease for the balance of the term of the Lease, and (iv) provide that, in the event of the enforcement by Mortgagee of the rights and remedies provided by law or in equity or by this Mortgage, any Person succeeding to the interest of Mortgagee as a result of such enforcement shall not be bound by any prepayment of installments of rent for more than thirty (30) days in advance of the time when the same shall become due, except for security deposits not in excess of three months' rent, or by any amendment, modification, extension, cancellation or renewal of the Lease made without the prior written consent of Mortgagee. C. As to all Leases, Mortgagor shall (i) promptly perform all of the provisions of the Leases on the part of the lessor thereunder to be performed, (ii) promptly enforce all of the provisions of the Leases on the part of the lessees thereunder to be performed, (iii) refrain from taking any action that would result in the termination of the Lease by any lessee thereunder or the diminution of the Rents thereunder, (iv) appear in and prosecute or defend any action or proceeding arising under, growing out of, or in any manner connected with, the Leases or the obligations of the lessor or the lessees thereunder, as the case may be, (v) exercise, within five (5) days after demand by Mortgagee, any right to request from the lessee under any Lease a certificate with respect to the status thereof, (vi) deliver to Mortgagee, within twenty (20) days after demand by Mortgagee, a written statement containing the names of all lessees, the terms of all Leases and the spaces occupied and rentals payable thereunder and a statement of all Leases which are then in default, including the nature and magnitude of any such default and (vii) provide Mortgagee with a copy of each notice of default received by Mortgagor under any Lease immediately upon receipt thereof and deliver to Mortgagee a copy of each notice of material default sent by Mortgagor under any Lease simultaneously with its delivery of such notice under such Lease, and (viii) promptly deliver to Mortgagee a copy of any Lease. Notwithstanding the foregoing, Mortgagor shall not be required to perform any of the actions described in clauses (i) through (iv) of this paragraph if the failure to do so would not cause a Material Adverse Effect (as defined in the Loan Agreement). D. Mortgagor hereby assigns to Mortgagee, from and after the date hereof (including any period allowed by law for redemption after any foreclosure or other sale), primarily, on a parity with the Secured Property, and not secondarily, as further security for the payment of the Secured Indebtedness and the performance of the Secured Obligations, the Leases and the Rents. Nothing contained in this Article shall be construed to bind Mortgagee to the performance of any of the terms, covenants, conditions or agreements contained in any Lease or otherwise impose any obligation on Mortgagee (including, but without limiting the generality of the foregoing, any liability under the covenant of quiet enjoyment contained in any Lease in the event that any lessee shall have been joined as a party defendant in any action to foreclose this Mortgage or commenced by reason of an Event of Default hereunder or in the event any lessee shall have been barred and foreclosed of any or all right, title and interest and equity of redemption in the Secured Property), except that Mortgagee shall be accountable for any money actually received pursuant to the aforesaid assignment. Mortgagor hereby further grants to Mortgagee the right, but not the obligation, following the occurrence and during the continuation of an Event of Default (i) to enter upon and take possession of the Real Estate for the purpose of collecting the Rents, (ii) to dispossess by the usual summary proceedings any lessee defaulting in making any payment due under any Lease to Mortgagee or defaulting in the performance of any of its other obligations under its Lease, (iii) to let the Real Estate or any portion thereof, (iv) to apply the Rents on account of the Secured Indebtedness, and (v) to perform such other acts as Mortgagee is entitled to perform pursuant to this Article. Such assignment and grant shall continue in effect until this Mortgage terminates in accordance with the terms hereof, the execution of this Mortgage constituting and evidencing the irrevocable consent of Mortgagor to the entry upon and taking possession of the Real Estate by Mortgagee following the Occurrence and during the continuation of an Event of Default pursuant to such grant, whether or not an action to foreclose this Mortgage has been instituted and without applying for a receiver. Mortgagee, however, grants to Mortgagor, not as a limitation or condition hereof, but as a personal covenant available only to Mortgagor and its successors and not to any lessee or other Person, a license, revocable upon five (5) days' written notice to Mortgagor following and during the continuation of an Event of Default, to collect all of the Rents and to retain, use and enjoy the same, unless an Event of Default shall exist hereunder or, unless any event shall have occurred which, with the giving of notice or the lapse of time, or both, would constitute an Event of Default hereunder or, at Mortgagee's option, for any other reason whatsoever. E. Mortgagor shall receive the Rents as set forth in Section 11.4 hereof and shall hold the Rents as a fund to be applied first to the payment of the Impositions and then to the payment of insurance coverages required under Article 6 hereof before applying any portion of the same to other purposes. F. Upon notice and demand, Mortgagor shall, from time to time, execute, acknowledge and deliver to Mortgagee, or shall cause to be executed, acknowledged and delivered to Mortgagee, in form reasonably satisfactory to Mortgagee, one or more separate assignments (confirmatory of the general assignment provided in this Article) of the lessor's interest in any Lease, and shall pay to Mortgagee the reasonable expenses incurred by Mortgagee in connection with the preparation and recording of any such instrument, a as provided in the Loan Agreement. 11.2 Ground Leases. A. Mortgagor will not do or omit to do any act or thing which could impair the security of this Mortgage with respect to Mortgagor's leasehold estate under the Ground Leases. B. Mortgagor (i) shall comply with the provisions of the Ground Leases, (ii) shall give immediate written notice to Mortgagee of any default by the lessor under the Ground Leases or of any notice received by Mortgagor from such lessor of any default under a Ground Lease by Mortgagor, (iii) shall give immediate written notice to Mortgagee of the commencement of any remedial proceedings under the Ground Leases by any party thereto and, if required by Mortgagee, shall permit Mortgagee as Mortgagor's attorney-in-fact to control and act for Mortgagor in any such remedial proceedings and (iv) shall within thirty (30) days after reasonable request by Mortgagee obtain from the lessor under the Ground Leases and deliver to Mortgagee the lessor's estoppel certificate required thereunder, if any. The Mortgagor hereby expressly transfers and assigns to Mortgagee the benefit of all covenants contained in the Ground Leases, whether or not such covenants run with the land, but Mortgagee shall have no liability with respect to such covenants nor any other covenants contained in the Ground Leases. C. Mortgagor shall not surrender the leasehold estate and interests herein conveyed nor terminate or cancel the Ground Leases creating said estate and interests, and the Mortgagor shall not, without the express written consent of Mortgagee alter or amend any Ground Lease. The Mortgagor agrees that there shall not be a merger of the Ground Lease, or of the leasehold estate created thereby, with the fee estate covered by the Ground Lease by reason of the leasehold estate or the fee estate, or any part of either, coming into common ownership, unless Mortgagee shall consent in writing to such merger. In the event Mortgagor shall acquire fee title to all or any portion of such Real Estate, this Mortgage shall further constitute a mortgage with respect to such fee interest or estate of Mortgagor in such Real Estate, upon the terms provided for herein without any amendment to or modification of this Mortgage being required. In such event, notwithstanding the fact that the provisions hereof shall be self-executing, Mortgagor agrees, immediately upon the written request of Mortgagee, to execute any amendment to this Mortgage or any additional mortgage or other agreement or instrument with respect to said Real Estate to further evidence and effect the existence of a valid mortgage in favor of Mortgagee with respect to Mortgagor's fee interest in all or any portion of said Real Estate, the form and content of any such amendment, mortgage or other instrument not inconsistent with the terms of this Mortgage to be approved by Mortgagee. D. Mortgagee represents, covenants and warrants that: (i) each Ground Lease is in full force and effect and unmodified except as hereinbefore provided; (ii) that all rents reserved in the Ground Leases have been paid to the extent they were payable prior to the date hereof; and (iii) that there is no existing default under the provisions of the Ground Leases or in the performance of the Ground Leases on the part of the Mortgagor to be observed or performed. 12 Loan Document Expenses. Subject to the provisions of Article 10 hereof, Mortgagor shall pay, together with any interest or penalties imposed in connection therewith, all reasonable expenses of Mortgagee incident to the preparation, execution, acknowledgement, delivery and/or recording of this Mortgage and the other Loan Documents, including, but without limiting the generality of the foregoing, all filing, registration and recording fees and charges, documentary stamps, intangible taxes and all Federal, State, county and municipal taxes, duties, imposts, assessments and charges now or hereafter required by reason of, or in connection with, this Mortgage or any other Loan Document. 13 Mortgagee's Right to Perform. In the event and for so long as an Event of Default shall be continuing hereunder and upon simultaneous notice to Mortgagor, Mortgagee may (but shall be under no obligation to), at any time perform the Secured Obligations, without waiving or releasing Mortgagor from any Secured Obligations or any Event of Default under this Mortgage, and, in such event, the reasonable cost thereof, including, but without limiting the generality of the foregoing, reasonable attorneys' fees, costs and disbursements incurred the connection therewith (a) shall be deemed to be Secured Indebtedness, and (b) shall be payable, promptly on demand, together with interest thereon at the Interest Rate (except in the case of items under clause (e) of Section 14 prior to any Event of Default), from the date of any such payment by Mortgagee to the date of repayment to Mortgagee. No payment or advance of money by Mortgagee pursuant to the provisions of this Article shall cure, or shall be deemed or construed to cure, any such Event of Default by Mortgagor hereunder or waive any rights or remedies of Mortgagee hereunder or at law or in equity by reason of any such Event of Default. 14 Mortgagee's Costs and Expenses. If (a) upon the occurrence and during the continuance of any Event of Default, or (b) Mortgagee shall exercise any of its rights or remedies hereunder, or (c) any action or proceeding is commenced in which it becomes necessary to defend or uphold the Lien or priority of this Mortgage or any action or proceeding is Commenced to which Mortgagee is or becomes a party, or (d) the taking, holding or servicing of this Mortgage by Mortgagee is alleged to subject Mortgagee to any civil or criminal fine or penalty, or (e) Mortgagee's review and approval of any document, including, but without limiting the generality of the foregoing, any Lease, is requested by Mortgagor or required by Mortgagee, then, in any such event, all actual reasonable costs, expenses and fees incurred by Mortgagee in connection therewith (including, but without limiting the generality of the foregoing, any civil or criminal fines or penalties and reasonable attorneys' fees, costs and disbursements) (i) shall be deemed to be Secured Indebtedness, and (ii) shall be payable, promptly on demand, together with interest thereon at the Interest Rate (except that no interest shall be payable in the case of items incurred under clause (e) of this paragraph prior to any Event of Default), from the date of any such payment by Mortgagee to the date of repayment to Mortgagee. In any action to foreclose this Mortgage or to recover or collect the Secured Indebtedness or any portion thereof, the provisions of this Article with respect to the recovery of costs, expenses, disbursements and penalties shall prevail unaffected by the provisions of any Legal Requirement with respect to the same to the extent that the provisions of this Article are not inconsistent therewith or violative thereof. 15 Defaults. The occurrence of any Event of Default (as defined in the Loan Agreement) under the Loan Agreement (regardless of the reason therefor), shall constitute a default ("Event of Default") hereunder. 16 Remedies. 16.1 Upon the occurrence of any Event of Default hereunder, Mortgagee may, without notice, presentment, demand or protest, all of which are hereby expressly waived by Mortgagor to the extent permitted by applicable law, take such action to protect and enforce its rights in and to the Secured Property, including, but without limiting the generality of the foregoing, the following actions, each of which may be pursued concurrently or otherwise, at such time and in such manner as Mortgagee may determine, without impairing or otherwise affecting the other rights and remedies of Mortgagee hereunder or at law or in equity: A. Mortgagee may declare the entire amount of the Secured Indebtedness immediately due and payable. Thereupon, all of the other Secured Obligations also shall become immediately due and payable. B. Mortgagee may, without releasing Mortgagor from any Secured Obligation or Secured Indebtedness under this Mortgage or any other Loan Document and without waiving any Event of Default, exercise any of its rights and remedies under Article 13 hereof. C. Mortgagee may (w) institute and maintain an action of mortgage foreclosure against any of the Secured Property and against any of the property subject to any of the Additional Mortgages, (x) institute and maintain an action with respect to the Secured Property under any other Loan Document, or (y) take such other action as may be allowed at law or in equity for the enforcement of this Mortgage, the Additional Mortgages and the other Lean Documents. Mortgagee may proceed in any such action to final judgment and execution thereon for the whole of the Secured Indebtedness, together with interest thereon at the Interest Rate, from the date on which Mortgagee shall declare the same to be due and payable to the date of repayment to Mortgagee, and all costs of any such action, including, but without limiting the generality of the foregoing, reasonable attorneys' fees, costs and disbursements. D. Mortgagee may sell the Secured Property at public outcry to the highest bidder for cash in front of the courthouse door in the county where the Secured Property is located, either in person or by auctioneer, after having first given notice of the time, place and terms of sale by publication once a week for three (3) successive weeks prior to said sale in some newspaper published in said county. Upon payment of the purchase money, the Mortgagee or any person conducting the sale for the Mortgagee is authorized to execute to the purchaser at said sale an assignment of Mortgagor's leasehold estate under any Ground Lease, or a deed to the Real Estate if then owned in fee by Mortgagor. The Mortgagee may bid at said sale and purchase said property or any part thereof if the highest bidder therefor. At any foreclosure sale the Secured Property may be offered for sale and sold as a whole without first offering it in any other manner or may be offered for sale and sold in any other manner the Mortgagee may elect in its sole discretion. E. Mortgagee may, without releasing Mortgagor from any Secured Obligation or Secured Indebtedness, and without waiving any Event of Default, enter upon and take possession of the Real Estate or any portion thereof, either personally or by its agents, nominees or attorneys, and dispossess Mortgagor and its agents and servants therefrom and, thereupon, Mortgagee may (x) subject to lease rights in favor of third parties to the extent permitted by the Loan Agreement, use, manage and operate the Real Estate, and (y) exercise all rights and powers of Mortgagor with respect to the Secured Property, either in the name of Mortgagor or otherwise, including, but without limiting the generality of the foregoing, the right to make, cancel, enforce or modify Leases, obtain and evict lessees. After deduction of all actual costs and expenses of operating and managing the Real Estate, including, but without limiting the generality of the foregoing, reasonable attorneys' fees, costs and disbursements, administration expenses, management fees and brokers' commissions, satisfaction of Liens on any of the Secured Property, payment of Impositions, claims and Insurance Premiums, invoices of Persons who may have supplied goods and services to or for the benefit of any of the Secured Property and all costs and expenses of the maintenance, repair, restoration, alteration or improvement of any of the Secured Property, Mortgagee shall apply the Rents received by Mortgagee to payment of the Secured Indebtedness or performance of the Secured Obligations. Mortgagee shall apply the Rents received by Mortgagee as provided in Section 16.2 hereof. Mortgagee may, in its sole discretion, determine the method by which, and extent to which, the Rents will be collected and the obligations of the lessees under the Leases enforced and Mortgagee may waive or fail to enforce any right or remedy of the lessor under any Lease. 16.2 In the case of a sale either pursuant to an order, decree or judgment of foreclosure or by power-of-sale as herein provided, the Real Estate may, at Mortgagee's election, be sold in one (1) or more parcels. Mortgagee shall receive the proceeds of any such sale and shall apply the proceeds of such sale as follows, in the following order: First, to all costs, fees, charges and expenses recurred by Mortgagee and its counsel in connection with any Event of Default hereunder, the exercise of any of the rights and remedies of Mortgagee hereunder and any such sale, including, without limitation, attorneys' fees, costs and disbursements, all expenses of such sale, or pursuant to Section 4.2 hereof, including publication costs, stenographic charges, title searches and title insurance premiums, surveys, guarantee policies, and transfer taxes and recording fees and charges; Second, to the payment of all sums expended by Mortgagee under the terms of this Mortgage and not yet repaid, together with interest thereon at the Interest Rate. Third, to the payment of the Term Loan Obligations, including all accrued and unpaid interest due under the Loan Agreement with respect to the Term Loan. Fourth, to the payment of all other unpaid Secured Obligations, whether due or to become due, in whatever order and proportion to the Mortgagee may elect, in its sole discretion. Fifth, the remainder, if any, to the Persons appearing of record to be the owner of the Secured Property sold. 16.3 Mortgagor shall bear all expenses, including without limitation reasonable attorneys' fees, costs and disbursements, of or incidental to, enforcement of any provision of this Mortgage or the Secured Indebtedness and for the compromise, curing, defending or asserting any provision, right or claim with respect thereto, by litigation or otherwise. 16.4 Mortgagee, in any action to enforce this Mortgage, shall be entitled to the appointment of a receiver. 16.5 The remedies and rights granted to Mortgagee hereunder are cumulative and are not in lieu of, but are in addition to, and shall not be affected by the exercise of, any other remedy or right available to Mortgagee whether now or hereafter existing either at law or inequity or under this Mortgage or any other Loan Document. 16.6 Except as otherwise provided herein, any sale of the Secured Property pursuant to this Mortgage, without further notice, shall create the relation of landlord and tenant at sufferance between the Purchaser and Mortgagor or any Person holding possession of the Real Estate through Mortgagor, and upon failure of Mortgagor or such Person to surrender possession thereof immediately, Mortgagor, or such Person may be removed by an action for unlawful detainer by the purchaser, in any court having venue. 16.7 Mortgagor shall indemnify and hold Mortgagee harmless and defend it from any loss, liability, cost and expense (including without limitation attorneys' fees and disbursements) and all claims, actions, proceedings and suits arising out of, or in connection with, any lawful action by Mortgagee to enforce this Mortgage or any Loan Document, whether or not any action, proceeding or suit is filed, except where such loss, liability, cost, expense, claim, action, proceeding or suit is caused by or resulting from the gross negligence or willful misconduct of Mortgagee as determined by a court of competent jurisdiction in a final non-appealable judgment or order, but in no event shall Mortgagor be liable for any exemplary or punitive damages to the extent permitted by applicable law. 17 Security Agreement under Uniform Commercial Code. A. Mortgagor hereby grants to Mortgagee a security interest in all of the Secured Property (including, without limitation, the Fixtures) and in Mortgagor's present and future "equipment" and "general intangibles" as said quoted terms are defined in the Uniform Commercial Code of the State of Alabama (the "Code") and Mortgagee shall have, in addition to all rights and remedies provided herein, and in any other agreements made between Mortgagor and Mortgagee, all of the rights and remedies of a "secured creditor" under the Code. To the extent permitted under applicable law, this Mortgage shall be deemed to be a "security agreement" as defined in said Code. B. Notwithstanding the filing of a financing statement covering any of the mortgaged Property in the records normally pertaining to personal property, all of the Mortgaged Property, for all purposes and in all proceedings, legal or equitable, shall be regarded, at Mortgagee's option legal or equitable, shall be regarded, at Mortgagee's option to the extent permitted by law), as part of the Real Estate whether or not any such item is physically attached to the Real Estate or serial numbers are used for the better identification of certain items. The mention in any such financing statement of any item of the Mortgaged Property shall not be construed as in any way derogating from or impairing this declaration and hereby stated intention of the parties. Pursuant to the provisions of the Code, Mortgagor hereby authorizes Mortgagee, without the signature of Mortgagor, to execute and file financing and continuation statements if Mortgagee shall determine in its sole discretion, that such are necessary or advisable in order to perfect its security interest in the Secured Property and Fixtures covered by this Mortgage, and Mortgagor shall pay to Mortgagee, upon demand, any reasonable expenses incurred by Mortgagee in connection with the preparation, execution, and filing of such statements that may be filed by Mortgagee. C. Certain of the Secured Property and Fixtures are or may become fixtures related to the Real Estate, and with respect thereto this Mortgage shall be effective as a financing statement filed on a fixture filing from the date of its filing in the real estate records of the county wherein the Real Estate is located. For purposes hereof, Mortgagor is the "Debtor" and Mortgagee is the "Secured Party," and the addresses of both are as set forth above. A photographic or other reproduction of this Mortgage shall be sufficient as a financing statement and may be filed as a financing statement with any filing officer as deemed necessary or desirable by Mortgagee. Information concerning the security interest created by this instrument may be obtained from the Mortgagee, as Secured Party, at the address set forth above. 18 Additional Representations and Warranties. Mortgagor represents and warrants that: (a) Mortgagor is qualified to do business in the State in which the Secured Property is located; (b) on the date hereof, no portion of the Buildings or the Fixtures have been damaged, destroyed or injured by fire or other casualty which is not now fully restored; (c) Mortgagor has all necessary licenses, authorizations, registrations and approvals to own, use, occupy and operate the Real Estate and has full power and authority to carry on its business at the Real Estate as currently conducted and has not received any notice of any violation of any Legal Requirement; (d) as of the date hereof, Mortgagor has not received any notice of any Taking of the Secured Property or any portion thereof and Mortgagor has no knowledge that any such Taking is contemplated; (e) Mortgagor is a business and commercial organization, and the transaction reflected in, and effectuated by, the Loan Documents is made solely to acquire or to carry on business and commercial enterprise; and (f) at the date hereof there are no Leases affecting the Real Estate or any portion thereof, other than as identified on Exhibit A. 19 No Waivers, Etc. A failure by Mortgagee to insist upon the strict performance by Mortgagor of any of the terms and provisions of this Mortgage shall not be deemed to be a waiver of any of the terms, covenants, conditions and provisions hereof and Mortgagee, notwithstanding any such failure, shall have the right thereafter to insist upon the strict performance by Mortgagor of any and all of the terms, covenants, conditions and provisions of this Mortgage to be performed by Mortgagor. Mortgagee may release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate Lien on the Secured Property, any part of the security held for payment of the Secured Indebtedness or any portion thereof or for the performance of the Secured Obligations secured by this Mortgage without, as to the remainder of the security, in any manner whatsoever, impairing or affecting the Lien of this Mortgage or the priority of the Lien of this Mortgage over any subordinate Lien. Mortgagee may resort for the payment of the Secured Indebtedness secured by this Mortgage to any other security therefor held by Mortgagee in such order and manner as Mortgagee may elect. 20 Additional Rights. Upon confirmation of a sale pursuant to any order, decree or judgment of foreclosure of this Mortgage, the appropriate governmental officer making such sale, or his successor in office, shall be and is hereby authorized immediately to execute and deliver to the purchaser at such sale, a deed, assignment or appropriate document conveying the Secured Property to such purchaser. To the extent allowed by applicable law, upon the execution of such deed, assignment or appropriate document, the recitals therein of facts such as the terms of the sale, the sale, the purchase, payment of purchase money and other facts affecting the regularity or validity of such sale shall, absent manifest error, be conclusive proof of the truthfulness thereof, that such sale was regularly and validly made, and any such deed, assignment or appropriate document shall be conclusive against all persons as to all matters and facts recited therein. 21 Waivers by Mortgagor. 21.1 To the extent allowed by applicable law, Mortgagor hereby waives errors and imperfections in any proceedings instituted by Mortgagee under this Mortgage, the Loan Agreement or any other Loan Document and all benefit of any present or future statute of limitations or any other present or future statute, law, stay, moratorium, appraisal or valuation law, regulation or judicial decision which, nor shall Mortgagor at any time insist upon or plead, or in any manner whatsoever, claim or take any benefit or advantage of any such statute, law, stay, moratorium, regulation or judicial decision which (i) provides for the valuation or appraisal of the Secured Property prior to any sale or sales thereof which maybe made pursuant to any provision herein or pursuant to any decree, judgment or order of any court of competent jurisdiction, (ii) exempts any of the Secured Property or any other property, real or personal, or any part of the proceeds arising from any sale thereof, from attachment, levy or sale under execution, (iii) provides for any stay of execution, moratorium, marshalling of assets, exemption from civil process, redemption or extension of time for payment, (iv) requires Mortgagee to institute proceedings in mortgage foreclosure against the Secured Property before exercising any other remedy afforded Mortgagee hereunder in the event of an Event of Default, (v) affects any of the terms, covenants, conditions or provisions of this Mortgage, or (vi) conflicts with or may affect, in a manner which may be adverse to Mortgagee, any provision, covenant, condition or term of this Mortgage, the Loan Agreement or any other Loan Document, nor shall Mortgagor at any time alter any sale or sales of the Secured Property pursuant to any provision herein, including, but without limiting the generality of the foregoing, after any sale pursuant to a judgment of foreclosure, claim or exercise any right under any present or future statute, law, stay, moratorium, regulation or judicial decision to redeem the Secured Property or the portion thereof so sold. 21.2 To the extent allowed by applicable law, Mortgagor hereby waives the right, if any, to require any sale to be made in parcels, or the right, if any, to select parcels to be sold, and there shall be no requirement for marshalling of assets. 22 Not Joint Venture or Partnership. Mortgagor and Mortgagee intend that the relationship created hereunder be solely that of mortgagor and mortgagee or borrower and lender, as the case may be. Nothing herein is intended to create a joint venture, partnership, tenancy-in-common, or joint tenancy relationship between Mortgagor and Mortgagee nor to grant Mortgagee any interest in the Secured Property other than that of mortgagee or lender. 23 Notices. Whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon either Mortgagor or Mortgagee, or whenever either Mortgagor or Mortgagee shall desire to give or serve upon the other any such communication with respect to this Mortgage or the Secured Property, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered in the manner and at the addresses of the parties set forth in the Loan Agreement. 24 Inconsistency with the Loan Documents. Unless this Mortgage expressly provides otherwise, if there shall be any inconsistencies between the terms, covenants, conditions and provisions set forth in this Mortgage and the terms, covenants, conditions and provisions set forth in the Loan Agreement, then the terms, covenants, conditions and provisions of the Loan Agreement shall prevail. 25 No Modification: Binding Obligations. This Mortgage may not be modified, amended, discharged or waived in whole or in part except by an agreement in writing signed by Mortgagor and Mortgagee. The covenants of this Mortgage shall run with the Land and shall bind Mortgagor and the heirs, distributees, personal representatives, successors and assigns of Mortgagor and all present and subsequent encumbrances, lessees and subleases of any of the Secured Property and shall inure to the benefit of Mortgagee and its respective successors, permitted assigns and endorsees. 26 Miscellaneous. The Article headings in this Mortgage are used only for convenience and are not part of this Mortgage and are not to be used in determining the intent of the parties or otherwise in interpreting this Mortgage. As used in this Mortgage, the singular shall include the plural as the context requires and the following words and phrases shall have the following meanings: (a) "provisions" shall mean "provisions, terms, covenants and/or conditions"; (b) "obligation" shall mean "obligation, duty, covenant and/or condition"; (c) "any of the Secured Property" shall mean "the Secured Property or any portion thereof or interest therein"; and (d) "Person" shall have the meaning ascribed thereto in the Loan Agreement. Any act which Mortgagee is permitted to perform under this Mortgage, the Loan Agreement or any other Loan Document may be performed at any time and from time to time by Mortgagee or by any Person or entity designated by Mortgagee. Any act which is prohibited to Mortgagor under this Mortgage, the Loan Agreement or any other Loan Document is also prohibited to all lessees of any of the Secured Property. Each appointment of Mortgagee as attorney-in-fact for Mortgagor under this Mortgage, the Loan Agreement or any other Loan Document shall be irrevocable and coupled with an interest. 27 Enforceability. This Mortgage shall be governed by, and construed in accordance with, the laws of the State in which the Secured Property is located without regard to principles of conflicts of laws, except that the laws of the State of California shall govern the resolution of issues arising under the Loan Agreement to the extent that such resolution is necessary to the interpretation of this Mortgage. Whenever possible, each provision of this Mortgage shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Mortgage shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Mortgage. Nothing in this Mortgage or in any other Loan Documents shall require Mortgagor to pay, or Mortgagee to accept, interest in an amount which would subject Mortgagee to penalty under applicable law. In the event that the payment of any interest due hereunder or under any of the other Loan Documents or a payment which is deemed interest, exceeds the maximum amount payable as interest under the applicable usury laws, such excess amount shall be applied to the reduction of the Secured Indebtedness, and upon payment in full of the Secured Indebtedness, shall be applied to the performance of the Secured Obligations, and upon performance in full of the Secured Obligations, shall be deemed to be a payment made by mistake and shall be refunded to Mortgagor. 28 Receipt of Copy. Mortgagor acknowledges that it has received a true copy of this Mortgage. 29 Termination of Security Interest. This Mortgage, and the security interests created or granted hereby shall automatically terminate and be of no further force and effect on the earlier of (a) the date on which (i) all Secured Obligations, accrued or matured interest and fees, and other accrued and payable monetary Secured Obligations have been paid (subject to reinstatement in accordance with the Loan Agreement), and (ii) the termination, payment in full or cash collateralization of all outstanding Letters of Credit (as defined in the Loan Agreement) in full to the reasonable satisfaction of the Mortgagee, at which time Mortgagee (without recourse upon, or any warranty whatsoever by, Mortgagee) shall execute and deliver to Mortgagor, for recording in each office in which this Mortgage shall have been recorded, an instrument releasing this Mortgage and such other documents and instruments necessary to terminate any security interest of Mortgagee granted hereby as Mortgagor may reasonably request, all without recourse upon, or warranty whatsoever by, Mortgagee, except that the same shall be free and clear of any claims, Liens or encumbrances created by or in respect of Mortgagee, and at the cost and expense of Mortgagor. 29.1 MORTGAGOR HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY. IN WITNESS WHEREOF, Mortgagor has caused this Mortgage to be duly executed and acknowledged under seal the day and year first above written. INTERGRAPH CORPORATION, Mortgagor By: Name: /s/ Larry J. Laster ---------------------- Title: EVP ------------------ STATE OF _______________ ) COUNTY OF ______________ ) I, the undersigned Notary Public in and for said County, in said State, hereby certify that ____________________, whose name as _______________ of Intergraph Corporation, a Delaware corporation, is signed to the foregoing instrument and who is known to me, acknowledged before me on this day that, being informed of the contents of said instrument, _____ as such officer and with full authority, executed the same voluntarily for and as the act of said corporation on the day the same bears date. Given under my hand and official seal, this _____ day of _______________, 1997. ______________________________ Notary Public My Commission Expires: ______________________________ EXHIBIT "A" TRACT I ------- (Foothill) All that part of Sections 21, 27, 28 and 33, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at a concrete monument at the center of the East boundary of Section 21, Township 4 South, Range 2 West; thence from the point of true beginning, South 01 degrees 24 minutes 39 seconds West 2657.77 feet to a concrete monument at the Southeast corner of said Section 21; thence South 01 degree 31 minutes 20 seconds West, 1204.68 feet to a concrete monument; thence South 88 degrees 46 minutes 04 seconds East, 1259.91 feet to a concrete monument; thence South 18 degrees 56 minutes 51 seconds East, 140.57 feet to a concrete monument; thence South 88 degrees 25 minutes 56 seconds East, 2.83 feet to a concrete monument at the Northeast corner of the Southwest Quarter of the Northwest Quarter of Section 27, Township 4 South, Range 2 West; thence along the East boundary of said Quarter- Quarter Section, South 01 degrees 51 minutes 00 seconds West, 1329.29 feet to a concrete monument at the Southeast corner of the Southwest Quarter of the Northwest Quarter of said Section 27; thence along the Quarter-Section line, South 88 degrees 24 minutes 49 seconds East, 2132.29 feet to a concrete monument at the Northwest corner of a Huntsville Utilities lot; thence along the west boundary of said lot, South 01 degrees 35 minutes 11 seconds West, 250.00 feet to a concrete monument; thence South 88 degrees 24 minutes 49 seconds East, 230.00 feet to a concrete monument; thence North 1 degrees 35 minutes 11 seconds East, 250.00 feet to a concrete monument on the Quarter Section line; thence along the Quarter-Section line, South 88 degrees 24 minutes 49 seconds East, 1515.51 feet to a concrete monument on the Westerly margin of Zierdt Road; thence along the westerly margin of Zierdt Road, South 02 degrees 17 minutes 01 seconds West, 1760.18 feet to a concrete monument at the Northeast corner of the University of Alabama-Huntsville Property; thence along the North boundary of said property, North 88 degrees 19 minutes 37 seconds West, 1901.00 feet to a concrete monument; thence South 02 degrees 17 minutes 01 seconds West, 900.00 feet to a concrete monument on the South boundary of Section 27, Township 4 South, Range 2 West; thence along the South boundary of said Section 27, North 88 degrees 19 minutes 37 seconds West, 3245.75 feet to an unmonumented Southwest corner of Section 27, Southeast corner Section 28, Northeast Corner of Section 33 and Northwest corner of Section 34 all in Township 4 South, Range 2 West; thence along the Easterly boundary of Section 33, South 03 degrees 31 minutes 04 seconds West 1330.88 feet to a concrete monument at the center of the Easterly boundary of Section 33, South 03 degrees 31 minutes 04 seconds West 1330.88 feet to a concrete monument at the center of the East boundary of the Northeast Quarter of said Section 33, Township 4 South, Range 2 West; thence along the South boundary of the North one-half of the Northeast Quarter of Section 33, North 88 degrees 52 minutes 27 seconds West, 2121.77 feet to a concrete monument; thence North 2 degrees 15 minutes 55 seconds East, 79.92 feet to a concrete monument; thence North 85 degrees 29 minutes 04 seconds West, 550.00 feet to a concrete monument on the Westerly margin of Old Jim Williams Road; thence North 02 degrees 15 minutes 55 seconds East 614.78 feet to a point; thence continuing along the Westerly margin of said road, around a curve to the left, with a radius of 846.72 feet and a chord bearing and distance of North 05 degrees 10 minutes 18 seconds East, 219.21 feet to a concrete monument on the North-South Quarter Section line of said Section 33; thence along the Quarter-Section line, North 02 degrees 23 minutes 03 seconds East, 383.29 feet to a concrete monument at the center of the North boundary of Section 33; thence along the North boundary of said Section 33, South 88 degrees 54 minutes 24 seconds East, 2728.16 feet to the unmonumented Northeast corner of Section 33, Northwest corner of Section 34, Southeast corner of Section 28 and the Southwest corner of Section 27; thence from the Southwest corner of Section 27, North 01 degrees 31 minutes 20 seconds East, 2652.19 feet to a concrete monument at the center of the East boundary of Section 28; thence along the Quarter Section line of said Section 28, North 88 degrees 53 minutes 06 seconds West 970.05 feet to a concrete monument at the Southeast corner of a Huntsville Utilities Lot; thence along the East boundary of said lot, North 01 degrees 47 minutes 39 seconds East 225.00 feet to a concrete monument at the Northeast corner of said lot; thence along the North boundary of the Huntsville Utilities lot, North 88 degrees 53 minutes 06 seconds West, 387.22 feet to a concrete monument on the North-South Quarter-Quarter Section line; thence North 01 degrees 47 minutes 39 seconds East, along said Quarter-Quarter Section line, 803.83 feet to a concrete monument at the intersection of said Quarter- Quarter Section line with the centerline of Dunlop Boulevard; thence continuing North 01 degrees 47 minutes 39 seconds East along said Quarter-Quarter line 60.00 feet to a concrete monument on the North margin of Dunlop Boulevard; thence along the North margin of Dunlop Boulevard, North 89 degrees 01 minutes 20 seconds West, 10.00 feet to a concrete monument at TRACT I (Continued) ------------------- (Foothill) the intersection of the Northerly margin of Dunlop Boulevard with the Easterly margin of the Southern Railway Systems Right-of-way; thence along the Easterly margin of said railway right-of-way, North 01 degrees 47 minutes 39 seconds East, 1569.13 feet to an iron stake on the South boundary of Section 21; thence along said boundary North 88 degrees 54 minutes 55 seconds West, 1.00 feet to an iron stake; thence North 43 degrees 33 minutes 26 seconds West, 5.62 feet to an iron stake; thence North 01 degrees 53 minutes 36 seconds East, 39.65 feet to an iron stake and the P.C. of a curve to the left; thence around said curve with a radius of 1180.00 feet and a chord bearing and distance of North 12 degrees 25 minutes 34 seconds West, 583.27 feet to an iron stake at the point of tangency; thence North 26 degrees 43 minutes 33 seconds West, 1927.34 feet to a concrete monument at the intersection of the Easterly margin of the Southern Railway right-of-way with the Southerly margin of Lime Quarry Road right-of-way; thence along the Southerly margin of said road right-of-way North 64 degrees 04 minutes 39 seconds East, 447.53 feet to a concrete monument; thence continuing along said right-of-way, North 83 degrees 24 minutes 23 seconds East, 219.35 feet to a concrete monument; thence continuing along said right-of-way, South 87 degrees 57 minutes 53 seconds East, 248.49 feet to a concrete monument; thence continuing along said right-of-way, North 51 degrees 55 minutes 25 seconds East, 130.76 feet to a concrete monument; thence North 02 degrees 02 minutes 07 seconds East, 50.00 feet to a concrete monument on the East-West Quarter Section line of Section 21, Township 4 South, Range 2 West, and the termination of Lime Quarry Road Right-of-way; thence South 88 degrees 08 minutes 47 seconds East, along said Quarter Section line, 1442.99 feet to the point of true beginning and containing 591.495 acres, more or less. TRACT II: --------- (Foothill) All that part of the South one-half of Section 21 and the North one-half of Section 28, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at a concrete monument at the intersection of the Southerly margin of Lime Quarry Road with the Westerly margin of the Southern Railway Systems right-of-way; said point of true beginning is further described as being North 88 degrees 08 minutes 47 seconds West 1442.99 feet, South 02 degrees 02 minutes 07 seconds West, 50.00 feet, South 51 degrees 55 minutes 25 seconds West, 130.76 feet, North 87 degrees 57 minutes 53 seconds West, 248.49 feet, South 83 degrees 24 minutes 23 seconds West, 219.35 feet and South 64 degrees 04 minutes 39 seconds West, 517.53 feet from the center of the East boundary of Section 21, Township 4 South, Range 2 West; thence from the point of true beginning, South 26 degrees 43 minutes 33 seconds East, along the Westerly margin of the Southern Railway right-of-way, 1928.33 feet to an iron stake at the P.C. of a curve to the right; thence around said curve to the right, with a radius of 1110.00 feet and a chord bearing and distance of South 12 degrees 25 minutes 34 seconds East, 548.67 feet to an iron stake at the point of tangency; thence South 01 degrees 53 minutes 36 seconds West, 44.63 feet to an iron stake on the South boundary line of Section 21; thence along said boundary line, North 88 degrees 54 minutes 55 seconds West, 5.00 feet to an iron stake; thence South 01 degrees 47 minutes 39 seconds West, along the westerly margin of the Southern Railway right-of-way, 1569.27 feet to a concrete monument at the intersection of the North margin of Dunlop Boulevard with the West margin of the Southern Railway right-of- way; thence along the North margin of Dunlop Boulevard, North 89 degrees 01 minutes 20 seconds West, 1455.77 feet to a concrete monument; thence North 02 degrees 14 minutes 47 seconds East, 402.10 feet to a concrete monument; thence North 88 degrees 56 minutes 13 seconds West, 436.00 feet to a concrete monument; thence North 02 degrees 14 minutes 47 seconds East, 400.00 feet to a concrete monument on the South margin of Cochran Road Right- of-way; thence along the South margin of said road, South 88 degrees 56 minutes 13 seconds East, 633.47 feet to a concrete monument; thence North 01 degrees 03 minutes 47 seconds East, 70.00 feet to a concrete monument on the North margin of Cochran Road; thence continuing North 01 degrees 03 minutes 47 seconds East 699.86 feet to a concrete monument on the South boundary of Section 21; thence along the South boundary of said Section 21, North 88 degrees 56 minutes 13 seconds West, 425.00 feet to a concrete monument; thence South 01 degrees 03 minutes 47 seconds West, 699.86 feet to a concrete monument on the North margin of Cochran Road; thence along the North margin of Cochran Road, North 88 degrees 56 minutes 13 seconds West, 986.53 feet to a concrete monument ; thence North 02 degrees 14 minutes 45 seconds East, 175.08 feet to a concrete monument at the P.C. of a curve to the right; thence around said curve to the right with a radius of 503.295 feet and a chord bearing and distance of North 34 degrees 27 minutes 28 seconds East, 536.60 feet to a concrete monument at the P.T. of the curve; thence North 02 degrees 14 minutes 46 seconds East, 76.81 feet to a concrete monument on the South boundary of Section 21; thence along the South boundary of said Section 21, North 88 degrees 56 minutes 13 seconds West, 1434.36 feet to a concrete monument at the intersection of the South boundary of Section 21 with the East margin of the Wall- Triana East Bound Ramp - Right-of-Way to Interstate Highway I- 565; thence along said right-of-way line, North 00 degrees 48 minutes 05 seconds East, 687.98 feet to a concrete monument; thence continuing along said ramp right-of-way, North 46 degrees 22 minutes 04 seconds East, 1198.33 feet to a concrete monument on the Southerly right-of-way of I-565; thence continuing along said I-565 southerly right-of-way, North 65 degrees 14 minutes 22 seconds East, 1050.10 feet to a concrete monument; thence continuing along said right-of-way line, North 64 degrees 27 minutes 16 seconds East, 113.00 feet to a concrete monument; thence continuing along said right-of-way South 30 degrees 04 minutes 26 seconds East 244.93 feet to a concrete monument; thence continuing along said right-of-way, North 32 degrees 00 minutes 09 seconds East, 80.99 feet to a concrete monument; thence continuing along said right-of-way, North 55 degrees 22 minutes 38 seconds East, 28.53 feet to a concrete monument; thence continuing along said right-of-way, North 30 degrees 04 minutes 26 seconds West, 196.83 feet to a concrete monument; thence continuing along said right-of-way, North 64 degrees 27 minutes 16 seconds East, 810.29 feet to a concrete monument at the intersection of I-565 southerly right-of-way with the Westerly margin of Southern Railway Systems Right-of-way; thence along the Westerly margin of the Southern Railway right-of-way around a curve to the left, with a radius of 1467.692 feet and a chord bearing and distance of South 23 degrees 41 minutes 00 seconds East, 155.50 feet to a concrete monument; thence along said railway right-of-way, South 26 degrees 43 minutes 33 seconds East, 24.69 feet to the point of beginning and containing 208.150 acres, more or less. TRACT II (Continued) -------------------- (Foothill) LESS AND EXCEPT that certain property located in the Southwest Quarter of Section 21, Township 4 South, Range 2 West, Madison County, Alabama more particularly described as follows: Commencing at a point that is South 87 degrees 30 minutes West 146.17 feet; thence North 2 degrees 47 minutes 20 seconds West 688.41 feet; thence North 42 degrees 46 minutes 39 seconds East 1,198.30 feet and North 61 degrees 38 minutes 54 seconds East 153.58 feet from the Southwest corner of Section 21, Township 4 South, Range 2 West, said point being the true point of beginning; thence from the point of true beginning North 61 degrees 38 minutes 54 seconds East 216.26 feet to a point; thence South 01 degree 33 minutes 06 seconds East 98.12 feet to a point; thence South 88 degrees 37 minutes 54 seconds West 193.03 feet to the point of beginning. PROVIDED, HOWEVER, THAT WITH RESPECT TO THE PARCELS OF TRACT II DESCRIBED BELOW THE INTEREST OF THE MORTGAGOR IS AS LESSEE UNDER THE FOLLOWING DESCRIBED LEASES AND WITH RESPECT TO THE PROPERTY DESCRIBED BELOW FOR EACH SUCH LEASE, AND WITH RESPECT TO SUCH PROPERTIES THE MORTGAGE SHALL BE A LEASEHOLD MORTGAGE: 1. INTERGRAPH CORPORATION'S RIGHTS UNDER THAT CERTAIN LEASE AGREEMENT BETWEEN THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF MADISON, INC. AND SCHAEFER-ALABAMA CORPORATION DATED JUNE 12, 1973 AND RECORDED IN DEED BOOK 479, PAGE 19, JUDGE OF PROBATE, AND AS ASSIGNED TO WELBILT CORPORATION PURSUANT TO MEMORANDUM OF ASSIGNMENT OF LESSEE'S INTEREST IN LEASE DATED OCTOBER 21, 1982 AND RECORDED IN DEED BOOK 607, PAGE 37, AND AS ASSIGNED TO INTERGRAPH CORPORATION PURSUANT TO THAT CERTAIN ASSIGNMENT OF ASSUMPTION OF LEASE DATED NOVEMBER 1, 1983, RECORDED IN DEED BOOK 624, PAGE 113, IN THE OFFICE OF THE JUDGE OF PROBATE, MADISON COUNTY, ALABAMA AND COVERING THE FOLLOWING DESCRIBED REAL PROPERTY: All that part of the South one-half of Section 21, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at a concrete monument on the East margin of the Madison-Triana Road and at the Northwest corner of the U.S. Corrugated Fibre Box Company site, said point of true beginning is further described as being North 87 degrees 30 minutes east, 50.0 feet from the Southwest corner of Section 21, Township 4 South, Range 2 west. Thence from the point of true beginning, along the East margin of the Madison- Triana Road, North 01 degrees 22 minutes 06 seconds West 900 feet to a point; thence North 87 degrees 30 minutes East, 2418.17 feet to a point in the center of a drainage ditch; thence South 01 degrees 15 minutes 57 seconds East 950.34 feet to a concrete monument in the center of said drainage ditch and on the projected North boundary of the U.S. Corrugated Fibre Box Company site; thence South 87 degrees 30 minutes West, along the projected and North boundary of said U.S. Corrugated Fibre Box Company site 2741.67 feet to the point of true beginning and containing 53.29 acres, more or less. AND ALSO - -------- 2. INTERGRAPH CORPORATION'S RIGHTS UNDER THAT CERTAIN LEASE AGREEMENT BETWEEN THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF HUNTSVILLE AND INTERGRAPH CORPORATION DATED AS OF MAY 1, 1983 AND AS OF RECORD IN DEED BOOK 616, PAGE 809, IN THE OFFICE OF THE JUDGE OF PROBATE OF MADISON COUNTY, ALABAMA AND COVERING THE FOLLOWING DESCRIBED PROPERTY: TRACT II (Continued) -------------------- (Foothill) 2. (Continued) All that part of the northeast quarter of Section 28, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at an iron stake at the northwest corner of the tract herein described; said point of true beginning is further described as being North 87 degrees 30 minutes East, 2691.67 feet from the Northwest corner of Section 28, Township 4 South, Range 2 West. Thence from the point of true beginning North 87 degrees 30 minutes 52 seconds East, 1261.66 feet to an iron stake on the west margin of the 80.00 foot Southern Railway Company Right-of-Way; thence along the margin of said Right-of-way, South 01 degree 48 minutes 36 seconds East, 1569.25 feet to an iron stake on the north margin of the 120.00 foot Right- of-Way for Dunlop Boulevard; thence along the north margin of said Right-of-way, South 87 degrees 24 minutes 30 seconds West 444.86 feet to an iron stake; thence North 2 degrees 35 minutes 30 seconds West, 100.00 feet to the P.C. of a curve to the left; thence around said curve, having a radius of 672.63 feet, with a chord bearing and distance of North 25 degrees 33 minutes 59 seconds West, 525.09 feet to the P.T. of said curve; thence North 48 degrees 32 minutes 27 seconds West, 27.03 feet to the P.C. of a curve to the left; thence around said curve, having a radius of 708.29 feet, with a chord bearing and distance of North 70 degrees 31 minutes 14 seconds West, 530.19 feet to the P.T. of said curve; thence South 87 degrees 30 minutes West, 80.77 feet to a point on the south margin of the 70.00 foot Right-of-Way for Cochran Road; thence North 2 degrees 30 minutes West, 70.00 feet to an iron stake on the north margin of the Right-of-way for Cochran Road and the southeast corner of the Harris Pine Mills property; thence along the east boundary of said Harris Pine Mills site, North 2 degrees 30 minutes West, 699.85 feet to the point of true beginning and containing 33.00 acres, more or less. TOGETHER WITH: All that part of the northeast quarter of Section 28, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at an iron stake on the east margin of the 80.00 foot Southern Railway Company Right-of-way; said point of true beginning is further described as being North 87 degrees 30 minutes East, 4033.33 feet from the northwest corner of Section 28, Township 4 South, Range 2 West. Thence from the point of true beginning North 87 degrees 30 minutes 52 seconds East, 10.00 feet to a concrete monument at the center of the north boundary of the northeast quarter of Section 28, Township 4 South, Range 2 West; thence along the quarter-quarter section line, South 01 degree 48 minutes 36 seconds East, 1569.08 feet to an iron stake on the north margin of the 120.00 foot Right-of-way for Dunlop Boulevard; thence along the north margin of said Right-of-way South 87 degrees 24 minutes 30 seconds West, 10.00 feet to an iron stake on the east margin of the 80.00 foot Southern Railroad Company Right-of-way; thence along the east margin of said Right-of-way, North 01 degrees 48 minutes 36 seconds West, 1569.10 feet to the point of true beginning and containing 0.36 acres more or less. TRACT III: ---------- (Foothill) INTERGRAPH CORPORATION'S RIGHTS UNDER THAT CERTAIN LEASE AGREEMENT BETWEEN THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF HUNTSVILLE AND THE H. D. LEE COMPANY, INC. DATED SEPTEMBER 1, 1973 AND RECORDED IN DEED BOOK 484, PAGE 437, JUDGE OF PROBATE, AND AS ASSIGNED FROM THE H.D.LEE COMPANY, INC. TO THE LEE APPAREL COMPANY, INC. DATED FEBRUARY 14, 1983 AND RECORDED IN MORTGAGE BOOK 1459, PAGE 264, JUDGE OF PROBATE, AND ASSIGNED AND ASSUMED BY INTERGRAPH CORPORATION BY THAT CERTAIN ASSIGNMENT AND ASSUMPTION OF LEASE DATED NOVEMBER 14, 1986 AND RECORDED IN MORTGAGE BOOK 1459, PAGE 267, JUDGE OF PROBATE AND COVERING THE FOLLOWING DESCRIBED REAL PROPERTY: All that part of the Southwest Quarter of Section 28, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at a concrete monument at the intersection of the North margin of the 70.00 foot right-of-way for the old Jim Williams Road, with the Easterly margin of the right-of-way for Martin Road; said point of true beginning is described as being North 02 degrees 15 minutes 24 seconds East, 70.03 feet and North 86 degrees 01 minutes 06 seconds East, 47.15 feet from the Southwest corner of Section 28, Township 4 South, Range 2 West; thence from the point of true beginning, along the Easterly margin of Martin Road around a curve to the right, having a radius of 2980.71 feet and a chord bearing and distance of North 00 degrees 19 minutes 42 seconds West, 268.82 feet to a concrete monument at the P.T. of the curve; thence continuing along the Easterly margin of Martin Road, North 02 degrees 15 minutes 24 seconds East, 412.83 feet to a concrete monument at the intersection of the Easterly margin of said Martin Road with the Southerly margin of Kellner Road; thence along said Southerly margin of Kellner Road, North 48 degrees 02 minutes 50 seconds East, 132.49 feet to a concrete monument on the South margin of a 120.00 foot right-of-way for Kellner Road; thence South 89 degrees 10 minutes 36 seconds East, along the South margin of Kellner Road; 1070.20 feet to a concrete monument; thence South 25 degrees 34 minutes 36 seconds East, 884.12 feet to a concrete monument on the North margin of Old Jim Williams Road; thence along the North margin of Old Jim Williams Road, North 89 degrees 05 minutes 25 seconds West, 1013.28 feet to a concrete monument at the P.C. of a curve to the right; thence continuing along the North margin of Old Jim Williams Road, around said curve to the right, having a radius of 2931.22 feet and a chord bearing and distance of North 86 degrees 46 minutes 31 seconds West, 236.97 feet to a concrete monument at the point of a reverse curve; thence continuing along the North margin of said road, around a curve to the left, having a radius of 2777.05 feet, and a chord bearing and distance of North 86 degrees 57 minutes 43 seconds West, 242.83 feet to a concrete monument at the P.T. of the curve; thence continuing along the North margin of said road, North 89 degrees 28 minutes 22 seconds West, 72.80 feet to the point of true beginning and containing 24.629 acres, more or less. TRACT IV: --------- (Foothill) All that part of Madison Industrial Park as recorded in Plat Book 6, Page 21, Probate Records of Madison County, Alabama, and further described as being a part of the Southwest Quarter of Section 15, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at a concrete monument on the Easterly boundary of Research Boulevard; said point of true beginning is further described as being North 01 degrees 57 minutes 26 seconds East, 1538.11 feet and South 64 degrees 35 minutes 25 seconds West, 955.28 feet from the Southeast corner of the Southwest Quarter of Section 15, Township 4 South, Range 2 West; thence from the point of true beginning North 25 degrees 24 minutes 35 seconds West, 300.00 feet to a concrete monument at the intersection of a ninety degree corner of Research Boulevard; thence along the Southerly margin of said Boulevard North 64 degrees 35 minutes 25 seconds East, 561.92 feet to a concrete monument at the P.C. of a curve to the left; thence around said curve to the left with a radius of 160.00 feet and a chord bearing and distance of 18.92 feet to a concrete monument at a point on the curve; thence continuing around said curve and along the Easterly margin of Research Boulevard, with a radius of 160.00 feet and a chord bearing and distance of North 29 degrees 52 minutes 50 seconds East, 149.86 feet to a concrete monument at the P.T. of the curve; thence South 88 degrees 02 minutes 34 seconds East, 164.01 feet to a concrete monument; thence South 01 degrees 57 minutes 26 seconds West, 181.36 feet to a concrete monument; thence South 64 degrees 35 minutes 25 seconds West, 185.49 feet to a concrete monument; thence South 25 degrees 24 minutes 35 seconds East, 150.01 feet to a concrete monument; thence South 64 degrees 35 minutes 25 seconds West, 580.80 feet to the point of beginning and containing 5.00 acres, more or less. TRACT V: -------- (Foothill) INTERGRAPH CORPORATION'S RIGHTS UNDER THAT CERTAIN LEASE AGREEMENT BETWEEN THE INDUSTRIAL DEVELOPMENT BOARD OF THE CITY OF MADISON, INC. AND INTERGRAPH CORPORATION DATED AS OF SEPTEMBER 1, 1982 AND AS OF RECORD IN DEED BOOK 609, PAGE 636 OF THE JUDGE OF PROBATE AND COVERING THE FOLLOWING DESCRIBED REAL PROPERTY: All that part of Madison Industrial Park as recorded in Plat Book 6, Page 21, Probate Records of Madison County, Alabama, and further described as being a part of the Southwest Quarter of Section 15, Township 4 South, Range 2 West of the Huntsville Meridian, Madison County, Alabama. Particularly described as beginning at a concrete monument on the Westerly Boundary of Research Boulevard; said point of true beginning is further described as being North 01 degrees 57 minutes 26 seconds East 1765.79 feet and North 88 degrees 02 minutes 34 seconds West, 460.80 feet to a concrete monument at the P.C. of a curve on the Westerly margin of Research Boulevard; thence along the Westerly margin of said Boulevard, around a curve to the right, with a radius of 90.00 feet and chord bearing and distance of South 33 degrees 16 minutes 33 seconds West, 103.95 feet to a concrete monument at the P.T. of the curve; thence continuing along the Northerly margin of Research Boulevard, South 64 degrees 35 minutes 25 seconds West, 741.94 feet to a concrete monument at the P.C. of a curve to the right; thence around said curve to the right with a radius of 25.00 feet and a chord bearing and distance of North 70 degrees 24 minutes 06 seconds West, 35.36 feet to a concrete monument at the P.T. of the curve; thence North 25 degrees 24 minutes 38 seconds West, 123.48 feet to a concrete monument at the P.C. of a curve to the right; thence around said curve to the right, and continuing along the Easterly margin of Research Boulevard with a radius of 176.84 feet and a chord bearing and distance of North 11 degrees 49 minutes 25 seconds West, 83.11 feet to a concrete monument at the P.T. of the curve; thence continuing along the Easterly margin of Research Boulevard, North 01 degrees 45 minutes 35 seconds East, 584.53 feet to a concrete monument at the P.C. of a curve to the right; thence around said curve to the right, with a radius of 100.00 feet and a chord bearing and distance of North 46 degrees 46 minutes 03 seconds East, 141.44 feet to a concrete monument at the P.T. of the curve; thence South 88 degrees 13 minutes 34 seconds East, along the Southerly margin of Research Boulevard, 625.21 feet to a concrete monument at the P.C. of a curve to the right; thence around said curve to the right, with a radius of 100.00 feet and a chord bearing and distance of South 43 degrees 08 minutes 06 seconds East, 141.65 feet to a concrete monument at the P.T. of the curve; thence along the Westerly margin of Research Drive, South 01 degrees 57 minutes 26 seconds East, 358.11 feet to the point of beginning and containing 13.495 acres, more or less. EX-13 8 Five Year Financial Summary - ------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- (In thousands except per share amounts) Revenues $1,124,305 $1,095,333 $1,097,978 $1,041,403 $1,050,277 Restructuring charges (credit) --- --- 6,040 ( 4,826) 89,806 Nonrecurring operating charges 1,095 10,545 --- --- --- Gains on sales of investments in affiliates 4,858 11,173 6,493 5,815 --- Net loss (70,237) (69,112) (45,348) (70,220) (116,042) Net loss per share, basic and diluted ( 1.46) ( 1.46) ( .98) ( 1.56) ( 2.51) Working capital 204,534 230,804 261,140 282,893 348,756 Total assets 720,989 756,347 826,045 839,618 855,329 Total debt 104,665 65,644 69,541 61,114 26,606 Shareholders' equity 368,783 447,263 504,064 522,337 588,710 Information contained in this report may include statements that are forward-looking as defined in Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward- looking statements is contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Annual Report. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Summary. The following summarized financial data sets forth the results of operations of the Company for the three year period ended December 31, 1997. The complete consolidated financial statements of the Company, including footnote disclosures, are presented on pages 27 to 45 of this annual report. - ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- (In millions except per share amounts) Revenues $1,124 $1,095 $1,098 Cost of revenues 724 692 668 - ---------------------------------------------------------------------------- Gross profit 400 403 430 Operating expenses 454 461 478 Restructuring charge --- --- 6 Nonrecurring operating charges 1 11 --- - ---------------------------------------------------------------------------- Loss from operations ( 55) ( 69) ( 54) Arbitration award ( 6) --- --- Gains on sales of investments in affiliates 5 11 7 All other income (expense) - net ( 10) ( 8) 2 - ---------------------------------------------------------------------------- Loss before income taxes ( 66) ( 66) ( 45) Income tax expense ( 4) ( 3) --- - ---------------------------------------------------------------------------- Net loss $( 70) $( 69) $( 45) ============================================================================ Net loss per share, basic and diluted $(1.46) $(1.46) $( .98) ============================================================================ In 1993 the Company began the process of transformation from its proprietary, closed-system product offerings to the open computing environment of products based on Intel Corporation hardware and Microsoft Corporation software. The dedication of significant Company resources to hardware, software, and system implementation for this new environment contributed substantially to the Company's operating losses for 1993 through 1996. For hardware implementation, the Company chose to use only Intel processors and to focus its efforts and image creation on its core capabilities, specifically very high performance computational and graphics capabilities. This high-end market in the Windows NT operating system environment is supported only by Intel-based hardware products. The Company expected that its four year hardware development effort and investment in the high-end graphics market would result in substantially increased revenues and profits in 1997, but these benefits were not realized due to actions of Intel described separately in the "Intel Litigation" section of this report. In addition to the factors noted above, demand for the Company's software products has not met expectations, and gross margin on product sales has continued to decline due to price competition in the industry. The Company expects that the industry will continue to be characterized by higher performance and lower priced products, intense competition, rapidly changing technologies that result in shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers. The Company believes that its operating system and hardware architecture strategies are the correct choices, that the industry has accepted Windows NT, and that Windows NT is becoming the dominant operating system in the majority of markets served by the Company. Competing operating systems and products are available in the market, and competitors of the Company offer or are adopting Windows NT and Intel as the systems for their products. Improvement in the Company's operating results will depend on its ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new hardware and software products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability. To achieve and maintain profitability, the Company must substantially increase sales volume and/or further align its operating expenses with the level of revenue and gross margin being generated. Restructuring and Nonrecurring Operating Charges. In response to industry conditions, the Company undertook its first restructuring plan in 1993. During 1995, the Company undertook a second restructuring plan designed to further adapt the Company's cost structure to changing industry and market conditions. The 1995 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. 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" in the 1995 consolidated statement of operations. 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 future prospects and strategic value to other business units. At this same time, the Company recorded 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 an unrelated $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. The $10.5 million charge is included in "Nonrecurring operating charges" in the 1996 consolidated statement of operations. In early 1997, the Company sold the two noncore business units to third parties. The total loss on these sales was $8.3 million, of which $7.2 million had been included in the asset revaluation recorded in 1996. The remaining loss of $1.1 million is included in "Nonrecurring operating charges" in the 1997 consolidated statement of operations. Revenues and losses of the two units totaled $24 million and $16 million, respectively, for 1996, and $43 million and $7 million, respectively, for 1995. Total assets of the units totaled $14 million at December 31, 1996. The two business units did not have a material effect on the Company's results of operations for the period in 1997 prior to their disposal. See "Subsequent Events" following for description of the February 1998 restructuring plan for the Company's European operations. Litigation and Other Risks and Uncertainties. The Company has ongoing litigation, and its business is subject to certain risks and uncertainties, including those described below. Intel Litigation. The Company filed a legal action on November 17, 1997, in U.S. District Court, the Northern District of Alabama, Northeastern Division, charging Intel Corporation, the supplier of all of the Company's microprocessor needs, with anticompetitive business practices. In the lawsuit, Intergraph alleges that Intel is attempting to coerce the Company into relinquishing to Intel certain computer hardware patents through a series of wrongful acts, including interference with business and contractual relations, interference with technical assistance from third party vendors, breach of contract, negligence, misappropriation of trade secrets, and fraud based upon Intel's failure to promptly notify the Company of defects in Intel's products and timely correction of such defects, and further alleging that Intel has infringed upon the Company's patents. The Company's patents define the architecture of the cache memory of an Intergraph developed microprocessor. The Company believes this architecture is at the core of Intel's entire Pentium line of microprocessors and systems. On December 3, 1997, the Company amended its complaint to include a count charging Intel with violations of federal antitrust laws. Intergraph asserts claims for compensatory and treble damages resulting from Intel's wrongful conduct and infringing acts, and punitive damages in an amount sufficient to punish and deter Intel's wrongful conduct. Additionally, the Company has requested that Intel be enjoined from continuing the alleged wrongful conduct which is anticompetitive and/or violates federal antitrust laws, so as to permit Intergraph uninterrupted development and sale of Intel-based products. On November 21, 1997, the Company filed a motion in the Alabama Court to enjoin Intel from disrupting or delaying its supply of products and product information, pending resolution of Intergraph's legal action. The Court has not entered a ruling on this motion. Intel filed a retaliatory legal action on November 17, 1997, in the U.S. District Court, the Northern District of California, requesting, among other things, i) that the Court declare Intergraph's patents invalid and/or not infringed by Intel, ii) that Intergraph be enjoined from making further assertions that Intel's customers infringe Intergraph's patents through use of Intel's microprocessors, iii) that the Court declare that Intel has no obligation to disclose any of its trade secrets or other confidential information to Intergraph, and iv) that the Court declare that Intel's decision to discontinue the provision of trade secrets and other confidential information to Intergraph does not violate any doctrine of federal or state statutory or common law. Intel filed a second legal action in the California Court on November 24, 1997, charging Intergraph with breach of contract related to wrongful retention of and failure to return Intel information supplied under nondisclosure agreements, and misappropriation of trade secrets as a result of the same. Intel asserts claims for damages and awards of yet undetermined amounts and requests a preliminary and permanent injunction under which Intergraph would return and make no further use of Intel confidential information. On December 8, 1997, the Alabama Court directed the Company and Intel to file joint motions in the California cases to stay the two legal actions brought by Intel, pending the Court's consideration of a motion to transfer and consolidate venue. The joint motions were filed and stays were granted by the California Courts. On January 15, 1998, Intel filed a motion before the Alabama Court for a change in venue to California. A decision to transfer venue has not been reached. Background. The Company's patents relate to its RISC (reduced instruction set computing)-based Clipper microprocessor, which was the industry's first attempt to bring mainframe computing power to compact, low cost, integrated circuit technology. In 1992, Intergraph began evaluation of a transition from Clipper to Intel's microprocessor for use in its future workstation products. At that time, Intel had little experience with workstations or the workstation market and had been unsuccessful in the development of its own RISC-based microprocessor for the workstation market. In 1993, Intergraph began discussions with Intel regarding this transition. Based on Intel's representations regarding its microprocessor development plans for the workstation market, Intergraph began the transition from Clipper to Intel-based design, and the two companies cooperated in introduction to the market of the Intel/Windows NT platform as an alternative to the RISC/UNIX platform. The Company ceased further design of its Clipper microprocessor at the end of 1993, and made a substantial investment in redesign of its hardware platform for utilization of Intel microprocessors. The Company relied on the assurances, representations, and commitments of Intel that they would supply Intergraph's microprocessor needs on fair and reasonable terms, and would provide Intergraph with the essential technical information, assistance, and advice necessary to utilize the microprocessors to be developed and supplied by Intel. As a result of the assurances of Intel and its transition to Intel-based workstations, Intergraph is technologically and economically bound to the use of Intel's microprocessors. Effects. The Company's workstations are developed for and sold in the high-end workstation market. Successful participation in this market requires involvement in Intel product development programs that provide advance information for the development of new products to be sold by Intergraph and others and permit formulation of standards and specifications for those new products. Intergraph's product design and release cycle has been severely impacted by Intel's refusal to provide Intergraph with advance technology and product information and immediate information on Intel defects and corrections. Intel has continued to provide that information to the Company's competitors. As a result of Intel's refusal to provide this vital information, the launch of Intergraph's TDZ 2000 line of workstations was delayed by approximately two months. Additionally, Intel's delay in shipment to the Company of its Deschutes microprocessor and its refusal to provide related advance technical information to the Company is impairing Intergraph's ability to compete. The Company's competitors began shipping hardware products based on this microprocessor in January 1998. The Company expects it will begin shipping its hardware products based on the Deschutes microprocessor at the end of March, two months behind its competitors. It is Intel's customary practice among all customers to allocate a quarterly supply of microprocessors one quarter in advance of shipment. The Company believes Intel has allocated it an adequate supply of microprocessors through June 30, 1998, with the exception of the yet to be released Deschutes microprocessors. The Company believes that Intel's actions have and will continue to have significant adverse effects on its financial position and results of operations, specifically in terms of lost revenues, uncertainty of supply, and legal expenses. The cost of converting the Company's products to use of another microprocessor would be prohibitive. The Company believes it was necessary to take legal action against Intel in order to defend its growing workstation business, its intellectual property, and the investments of its shareholders. The Company is vigorously prosecuting its positions and believes it will prevail in these matters, but at present is unable to predict an outcome. See "Other Risks and Uncertainties" below for additional information regarding Intel's actions. Bentley Litigation. The Company is the owner of approximately 50% of the outstanding stock of Bentley Systems, Inc. (Bentley), the developer and owner of MicroStation, a software product utilized in many of the Company's software applications and for which the Company serves as a nonexclusive distributor. In May 1997, the Company received notice of the adverse determination of an arbitration proceeding with Bentley in which the Company had alleged that Bentley inappropriately and without cause terminated a contractual arrangement with the Company, and in which Bentley had filed a counterclaim against the Company seeking significant damages as the result of the Company's alleged failure to use best efforts to sell software support services pursuant to terms of the contractual arrangement terminated by Bentley. The arbitrator's award against the Company was in the amount of $6.1 million and is included in "Arbitration award" in the 1997 consolidated statement of operations. Approximately $5.8 million in fees otherwise owed the Company by Bentley were offset against the amount awarded Bentley. In addition, the contractual arrangement that was the subject of this arbitration was terminated effective with the award and, as a result, the Company no longer sells the related software support services under this agreement. The Company and Bentley have entered into a new agreement which establishes single support services between the two companies. The Company believes that neither the arbitration related change in Bentley software support services or its new agreement with Bentley relative to such services will have a material impact on the Company's financial position, results of operations or cash flows in future periods. In a second proceeding, Bentley commenced arbitration against the Company in March 1996, alleging that the Company failed to properly account for and pay to Bentley certain royalties on its sales of Bentley software products, and seeking significant damages. Hearings on this matter are in process and may continue through the end of the Company's third quarter of 1998. The Company denies that it has breached any of its contractual obligations to Bentley and is vigorously defending its position in this proceeding, but at present is unable to predict an outcome. Zydex Litigation. The Company filed a legal action in August 1995 seeking to dissolve and wind up its business arrangement with Zydex, Inc., a company with which it jointly developed its plant design software application ("PDS"), and seeking an order allowing the Company to continue the business of that arrangement without further responsibility or obligation to Zydex. In November 1995, Zydex filed a counterclaim against the Company alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. In September 1997, the Court issued an order resolving all disputed issues and requiring the parties to settle, and dismissed the case. A closing of the final settlement agreement occurred on January 15, 1998. The final settlement included the purchase by Intergraph of 100% of the common stock of Zydex for $26.3 million, with $16 million paid at closing of the agreement and the remaining amount payable in 15 equal monthly installments, including interest. The deferred payment portion of the total purchase price is secured by a subordinate interest in the PDS intellectual property and by an irrevocable letter of credit in favor of the former owner of Zydex. Interest on the unpaid amount accrues at a rate 1% less than the rate charged by Intergraph's primary lender. The former owner of Zydex will retain certain rights to use, but not sell or sublicense, PDS products for a period of 15 years following the date of closing. In addition to the purchase price of the common stock, Intergraph was required to pay additional royalties to Zydex in the amount of $1 million at closing of the agreement. These royalties have been included in the Company's 1997 results of operations. The January 15, 1998 cash payment to Zydex was funded by the Company's primary lender. See "Liquidity and Capital Resources" section below for discussion of the Company's liquidity. The Company has recorded the settlement in its books of account as of the date of closing of the final settlement agreement. The Company believes its settlement with Zydex will improve its annual operating results by an estimated $5 million. PDS is currently the Company's second highest volume software offering. Sales of PDS software and maintenance for 1997 totaled $48 million. Total process and building solutions industry sales for 1997 were $101 million, including PDS software and maintenance, horizontal products and maintenance, and training and consulting revenues. Other Risks and Uncertainties. The Company develops its own graphics, data management, and applications software as part of its continuing product development activities. The Company has standard license agreements with Microsoft Corporation for use and distribution of the Windows NT operating system and with UNIX Systems Laboratories for use and distribution of the UNIX operating system. The license agreements are perpetual and allow the Company to sublicense the operating systems software upon payment of required sublicensing fees. The Company also has an extensive program for the licensing of third-party application and general utility software for use on systems and workstations. The Company owns and maintains a number of registered patents and registered and unregistered copyrights, trademarks, and service marks. The patents and copyrights held by the Company are the principal means by which the Company preserves and protects the intellectual property rights embodied in the Company's hardware and software products. Similarly, trademark rights held by the Company are used to preserve and protect the goodwill represented by the Company's registered and unregistered trademarks. As industry standards proliferate, there is a possibility that the patents of others may become a significant factor in the Company's business. Personal computer technology is widely available, and many companies, including Intergraph, are attempting to develop patent positions concerning technological improvements related to personal computers and workstations. With the possible exception of its ongoing litigation with Intel (in which the Company expects to prevail), it does not appear 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 current technical information or any required patent rights of others through licensing or purchase, all of which are important to success in the industry in which the Company competes, could significantly reduce the Company's revenues and adversely affect its results of operations. Technology significant to the Company is sometimes made available in the form of proprietary information or trade secrets of others. Prior to the dispute with Intel, Intel had made freely available technical information used by the Company to design, market and support its products that use Intel components. Such information is claimed by Intel to be proprietary and is made available by Intel only under nondisclosure agreements. At present Intel is withholding such information, attempting to cancel existing agreements and refusing to enter into new nondisclosure agreements with the Company. Intel's actions are the subject matter of current litigation, and the Company has applied to the Court for relief in the short term, as well as at the conclusion of the lawsuit. Intel's actions are damaging the Company by slowing the introduction of new products using Intel components and preventing proper maintenance and support of Company products using Intel components. The Company expects that relief will be forthcoming from the Court. However, if relief is denied, the Company will be materially affected and may be forced to alter its future business plans or to accept unfavorable terms from Intel in settlement of the lawsuit. See Notes 1, 4, 6, 7, and 11 to Consolidated Financial Statements for further discussion of risks and uncertainties related to the Company. Year 2000 Issue. Until recently, most computer programs were written to store only two digits of date-related information. Such programs are thus unable to distinguish between the year 1900 and the year 2000. Unless corrected or replaced, programs with this inability could cause widespread data processing malfunctions and computer system failures. The Company has reviewed its product line to identify and resolve Year 2000 issues. All hardware and software products offered in the Company's standard price list at January 1, 1998 are Year 2000 compliant or will be so certified as new versions and utilities are released in 1998. The Company is evaluating prior generations of its hardware and software products to determine which products it will make Year 2000 compliant. The Company's experience with this issue reinforces general industry expectations that engineering and related technical applications, which typically perform few date manipulations or comparisons, will be affected minimally by this issue as compared to business and financial systems, which are heavily date dependent. The Company does not anticipate that its product compliance costs will have a material impact on its results of operations or financial condition. However, there can be no guarantee that its estimates will be achieved, and actual results could differ materially from those anticipated. An effort has been underway since 1996 to identify and resolve Year 2000 issues affecting the Company's internal business systems. The Company expects to successfully implement all internal systems and programming changes necessary to resolve Year 2000 issues. This effort is expected to increase the Company's operating costs in 1998 and 1999; however, the Company does not anticipate that these costs will have a material effect on its results of operations or financial condition for either of those years. To ensure the Company's critical suppliers are able to continue uninterrupted supply, the Company is conducting a program of investigation with these suppliers and includes Year 2000 provisions in its new supplier agreements. The Company is also initiating discussions with other entities with which it interacts electronically, including customers and financial institutions, to ensure those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company could be adversely impacted if suppliers, customers, and other businesses do not address this issue successfully. The Company continues to assess these risks in order to reduce any potential adverse impact. Orders. Systems orders for 1997 were $774 million, a 7% increase over the prior year after increases of 1% and 12% in 1996 and 1995, respectively. The Company substantially completed its product transition in 1995; however, order levels in all three years were affected by slower than anticipated customer acceptance of the Company's products based on its Windows NT/Intel strategy, and further affected in 1997 by the previously described actions of Intel. The growing availability of new products throughout 1995 resulted in orders sequentially improving with each quarter to end that year with a 12% increase. In 1996 and 1997, orders for the Company's systems were characterized by heavier, though less than anticipated, demand for the Company's hardware product offerings, which was offset by softer demand for its software products. New software and certain of the new hardware products released in 1996 did not generate significant orders or revenues during the year. Initial releases of the Company's new software products were delayed until late 1996 and contained certain performance problems. These problems were resolved in subsequent releases of the products during fourth quarter 1996 and first quarter 1997, and sales momentum began to increase during the second quarter of 1997. However, hardware orders in the last half of 1997 were adversely impacted by a two month delay in shipment of the Company's new TDZ 2000 line of workstations resulting from Intel's wrongful conduct and delays. Geographic Regions. U.S. orders, including federal government orders, totaled $407 million for the year, up 24% after a decline of 7% in 1996 and an increase of 11% in 1995. Growth in the Company's hardware business and a 25% increase in orders received from the federal government accounted for the majority of the 1997 increase. The orders decline in 1996 resulted primarily from a decrease in orders in one of the Company's noncore business units sold in early 1997. Excluding this business unit, U.S. orders for 1997 were up 29% and flat for 1996. International orders totaled $367 million for the year, a 7% decline from the prior year after increases of 9% and 12% in 1996 and 1995, respectively. Asia Pacific orders totaled $73 million in 1997, a decrease of 35%, after increasing 45% in 1996 and decreasing 7% in 1995. Growth in that region in 1996 was due to several individually significant orders for the Company's public safety products and related consulting services. Such orders did not recur in 1997. Additionally, devaluation of Asian currencies, most notably the Korean Won, had a negative impact on orders for the region during the fourth quarter of 1997 and the first quarter of 1998, and could have a significant impact on business in this region during the remainder of 1998. European orders totaled $222 million, relatively unchanged from the prior year, after a 5% decline in 1996 and a 19% increase in 1995. European orders for 1995 were strong as a result of winning several large individual orders in the last half of that year. European and Asian order levels in terms of U.S. dollars were reduced by approximately 10% and 5%, respectively, in 1997 due to strengthening of the U.S. dollar against currencies of those regions. 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 developed by the Company. 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 did not meet Company expectations and did not contribute substantially to 1996 revenues. Subsequent releases of the products in 1997 resulted in substantial orders growth for those products. During 1997, the Company introduced and began shipping GeoMedia 1.0, a Jupiter-based software product which allows users to access data warehouses virtually anywhere in the world and simultaneously perform analyses with varying data types and formats. 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 provides workstation class 3D graphics to the Pentium- or Pentium Pro- based personal computer. Sales of the Company's graphics cards were initially strong and grew throughout 1997, though sales were below the Company's expectations. During 1997, the Company added a line of Intel/Windows-based personal workstations priced to compete in the PC market. The workstations have features and performance required by professional users and provide 3D graphics that the Company believes will be required by users in the future. The Company also introduced twelve new workstations in its TD and TDZ lines, including the first Windows NT- based workstations using dual Intel Pentium II processors. Also introduced were two new InterServe servers, the ImageStation Z digital photogrammatic workstation, and the first 28-inch, high resolution, wide-format monitor. These new products commenced shipping at various dates throughout the year of introduction but, as previously described, the Company is suffering delays in new product development and shipping due to actions of Intel, placing the Company at a competitive disadvantage. The Company does not expect that introduction of these new hardware products will adversely affect the carrying value of its existing inventories. Additionally, the Company is unable to predict the financial impact of these new products. However, the Company believes its ability to compete in the hardware business has been materially impacted by the previously described actions of Intel. Revenues. Total revenues for 1997 were $1.1 billion, up 3% from the prior year level after flat revenues in 1996 and a 5% increase in 1995. Systems. Sales of Intergraph systems in 1997 were $786 million, up 8% after a 2% increase in 1996 and a 7% increase in 1995. Factors previously cited as affecting systems orders in total and on a geographic basis, including the actions of Intel in 1997, 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. Geographic Regions. U.S. systems sales, including sales to the federal government, increased by 17% in 1997 after an increase of 2% in 1996 and a decline of 6% in 1995. Growth in U.S. systems sales was depressed in 1996 by a revenue decline in one of the Company's noncore business units sold in early 1997. Excluding this business unit, U.S. sales growth was 22% in 1997 and 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. International sales totaled $385 million for the year, up slightly from the prior year after increases of 3% and 21% in 1996 and 1995, respectively. European sales were up 3%, after a decline of 6% in 1996 as a result of weak demand for the Company's software products, and growth of 19% in 1995. Asia Pacific systems sales were down 12% after increases of 25% in 1996 and 22% in 1995. Software. Sales of the Company's software applications declined by 1% in 1997 after a 9% decline in 1996 and a 4% decline in 1995. Declines in the last three years are the result primarily of a decrease in sales of MicroStation, which declined by 34% in 1997 and approximately 39% in each of the previous two years (see "MicroStation" below for further discussion), and of delays in software releases in 1996. Sales in 1997 of the Company's plant design and mechanical software applications increased by a combined 22% to offset 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 57%, 27%, and 14%, respectively, of total systems sales in 1997 (52%, 27%, and 13%, respectively, for 1996). Sales of Windows-based software represented approximately 87% of total software sales in 1997, up from approximately 80% in 1996 and 72% in 1995. UNIX-based software comprised approximately 13% of total 1997 software sales, down from approximately 20% in 1996 and 28% in 1995. See "Subsequent Events" section following for description of the March 1998 sale of the Company's Solid Edge and Engineering Modeling System mechanical product lines. Hardware. Total hardware revenue increased 22% in 1997, after an increase of 12% in 1996 and flat revenues in 1995. Workstation and server unit volume increased 67% in 1997, 42% in 1996, and 22% in 1995, while workstation and server revenue increased only 6% in 1997, 18% in 1996 and 4% in 1995. Price competition continues to erode per unit selling prices, and volumes were held down in 1997 by the actions of Intel. Revenue from other hardware products increased 64% in 1997, after decreases of 1% and 9% in 1996 and 1995, respectively. The increase in 1997 results primarily from an increase in graphics cards and storage device revenues. Intel-based systems represented approximately 100% of hardware unit sales in 1997 and 1996 and approximately 95% in 1995. Federal Government Sales. Total revenue from the United States government was approximately $177 million in 1997, $161 million in 1996, and $159 million in 1995, representing in all three years 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 42% 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 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 Bentley Systems, Inc., an approximately 50%- owned affiliate of the Company, under which the Company distributed MicroStation, a software product developed and maintained by Bentley 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 Bentley was increased effective January 1, 1995 and again January 1, 1996 and, for 1995 only, Bentley paid the Company a per copy distribution fee based on its MicroStation sales to resellers (such fees were $7 million). See "Litigation and Other Risks and Uncertainties" preceding for a description of arbitration proceedings between the Company and Bentley. The Company's sales of MicroStation have declined each year since the 1994 change in the license agreement, by approximately 34% in 1997 and by 39% in both 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 by approximately $7 million, or $.14 per share in 1997, by approximately $26 million, or $.52 per share in 1996, and by approximately $17 million, or $.37 per share in 1995. The Company is unable to predict the level of MicroStation sales that will occur in the future, but it is likely that such sales will be further reduced. Maintenance and Services. Maintenance and services revenue consists of revenues from maintenance of Company systems and from Company provided services, primarily training and consulting. These forms of revenue totaled $338 million in 1997, down 9% after a decline of 5% in 1996 and essentially flat revenues in 1995. Maintenance revenues totaled $246 million in 1997, down 13% after decreases of 12% and 2% in 1996 and 1995, respectively. The trend in the industry toward lower priced products and longer warranty periods has resulted in reduced levels of maintenance revenue, and the Company believes this trend will continue in the future. Services revenue represented 8% of total revenues in 1997 and increased by 6% from the previous year, after increasing by 31% in 1996 and 36% in 1995. 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 35.6% in 1997, down 1.2 points after declines of 2.3 points and 1.4 points in 1996 and 1995, respectively. Margin on systems sales declined 1.2 points in 1997, 2.3 points in 1996, and 1.6 points in 1995. Competitive pricing conditions in the industry reduced margin on systems sales in all three years. Margins in 1997 and 1996 were further reduced by increasing hardware content in the product mix; in general, a higher hardware versus software content will reduce systems margin. Additionally, 1997 margin was adversely affected by a decrease in the mix of international systems revenues to total Company systems revenues, which was partially due to a stronger U.S. dollar in international markets, and 1996 margin was negatively impacted by an increase in MicroStation product cost. In general, the Company's systems margin may be lowered by price competition, a higher hardware content in the product mix, a stronger U.S. dollar in international markets, the effects of technological changes on the value of existing inventories, and a higher mix of federal government sales, which generally produce lower margins than commercial sales. 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 .8 points in 1997 after declines of 2.2 points in 1996 and 1.1 points in 1995. The margin declines over the past three years have resulted primarily from declining maintenance revenues. The Company continues to closely monitor maintenance and services cost and has taken certain measures, including reductions in headcount, to align cost with the current revenue level. The Company believes that the trend in the industry toward lower priced products and longer warranty periods will continue to reduce its maintenance revenue, which will pressure maintenance margin in the absence of corresponding cost reductions. The industry in which the Company competes is characterized by rapid technological change. This technological change is an important consideration in the Company's overall inventory management program, in which the Company endeavors to 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 charge). Operating expenses declined by 2% in 1997, 3% in 1996, and 4% in 1995. The total number of employees of the Company has declined by 16% in the three year period ended December 31, 1997. Product development expense declined 5% in 1997 after declines of 7% and 19% in the two preceding years. Employee headcount in the development areas has been significantly reduced over the last three years through restructuring actions and attrition. Additionally, the sale of two noncore business units in early 1997 resulted in substantial expense savings but was offset, for the most part, by a decline in software development costs qualifying for capitalization. Capitalization of software product development costs related to the Company's Jupiter technology significantly reduced expenses for 1995 and 1996. Development was completed in 1996. Sales and marketing expense decreased 2% in 1997 after a decrease of 5% in 1996 and an increase of 2% in 1995. The expense decline in 1997 results primarily from strengthening of the U.S. dollar against international currencies and the sale of the two noncore business units. These expense reductions were partially offset by an increase in trade show and advertising expenses for the Company's new products. The expense decline in 1996 resulted primarily from restructuring actions taken in 1995. 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 in that year and by expenses of pursuit of new business in the Asia Pacific region. General and administrative expense increased by 3% in 1997 after an increase of 4% in 1996 and a decline of 3% in 1995. The 1997 expense increase results primarily from increased legal expenses (see "Litigation and Other Risks and Uncertainties"), partially offset by strengthening of the U.S. dollar against international currencies. Installation of new internal business systems, increased legal expenses, and amortization of deferred financing costs related to the Company's revolving line of credit increased general and administrative expense 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 in that year and by the increasing level of business activity in the Asia Pacific region. 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, for any given product, revenues will not materialize in amounts anticipated due to industry conditions that include intense price and performance competition, or that product lives will be reduced due to shorter product cycles. Should these events occur, the carrying amount of capitalized development costs would be reduced and produce adverse effects on systems cost of revenues and results of operations. Operating Results, Geographic Areas. International markets, particularly Europe and Asia, 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 1997, sales outside the U.S. represented 53% of total revenues, including Europe at 32% and Asia Pacific at 12% of the total. The Company incurred a loss from operations of $54.9 million in 1997 (including $1.1 million in nonrecurring charges), $68.7 million in 1996 (including $10.5 million in nonrecurring charges), and $54.1 million in 1995 (including a restructuring charge of $6 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 and, in 1997, the previously described actions of Intel, have similarly affected each of the geographic areas in which the Company does business. The operating loss decline in 1997 is the result of a 2% decline in operating expenses. The increased loss from operations in 1996 resulted primarily from flat revenues and a decline in gross margin, partially offset by a decline in product development and sales and marketing expenses. The Company's VeriBest, Inc. business unit incurred losses from operations of $16.4 million in 1997, $15.5 million in 1996, and $20.9 million in 1995, on revenues for these same periods of $29.3 million, $31 million, and $35.1 million, respectively. The U.S. region incurred a loss from operations of $35.4 million in 1997 (including $1.1 million in nonrecurring charges) after operating losses of $30.3 million in 1996 (including $10.5 million in nonrecurring charges) and $12.3 million in 1995 (including a restructuring charge of $4.8 million). Systems revenues increased by 8% over 1996; however, margin on those sales declined 1.9 percentage points. Maintenance and services revenues declined 11% for the same period. These negative factors combined with sales and marketing and general and administrative expense increases of 5% and 12%, respectively, partially offset by a 5% decline in research and development expense, resulted in the operating loss increase. The operating loss increase in 1996 resulted from a 2.5 point systems margin decline, a maintenance and service revenue decline of 10% and a 13% increase in general and administrative expense. Research and development and sales and marketing expenses declined 7% and 5%, respectively, partially offsetting these negative factors. The European region incurred losses from operations of $20.5 million in 1997, $29.8 million in 1996, and $27.7 million in 1995 (including a restructuring charge of $1 million). The improvement in 1997 is due to a 1.1 point increase in gross margin and declines in sales and marketing and general and administrative expenses of 11% and 4%, respectively, due primarily to strengthening of the U.S. dollar. These improvements were partially offset by a 14% decline in maintenance and services revenue. Revenues and gross margin declined 7% and 1 percentage point, 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. The Asia Pacific region incurred losses from operations of $7.9 million in 1997, $5.9 million in 1996, and $10.8 million in 1995. Up until 1997, this region was the Company's fastest growing with total revenue increases exceeding 30% in both 1996 and 1995. In 1997, revenues declined by 13% due to poor economic conditions and reduced demand for the Company's public safety products and services. The large operating loss in 1995 resulted primarily from operating expenses incurred in pursuit of new business. The region's operations in fourth quarter 1997 and first quarter 1998 were adversely impacted by the currency crisis in that region, particularly in Korea. Other international regions, in total representing approximately 9% of total Company revenues in 1997, are comprised of operations in the Middle East, Canada, and non-U.S. Americas. These regions earned a net operating profit of $1.6 million in 1997 after incurring losses of $5.4 million in 1996 and $10.1 million in 1995. The improvement in 1997 results from revenue and gross margin increases of 15% and 3.5 percentage points, respectively. Additionally, operating expenses decreased by 8%. See Note 11 of Notes to Consolidated Financial Statements for further details of operations by geographic area. Nonoperating Income and Expense. Interest expense was $6.6 million in 1997, $5.1 million in 1996, and $4.2 million in 1995. The Company's average outstanding debt has increased over the three year period. The Company's average rate of interest on the debt has declined approximately 2 points from the 1996 level due primarily to a change in lenders and terms under the Company's primary credit facility. See "Liquidity and Capital Resources" below for a discussion of the Company's current financing arrangements. In 1996, the Company entered into an interest rate swap agreement in the principal amount (approximately $13 million at December 31, 1997) 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 9.58% 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 receive rates of the agreement at December 31, 1997 and 1996 were 6.49% and 7.06%, respectively. The agreement had an insignificant effect on the total cash flows of the Company in 1997 and 1996. The Company does no trading in this form of derivative instrument. In 1997, the Company incurred a $6.1 million or $.13 per share charge for a contract arbitration award to Bentley Systems, Inc. This charge is included in "Arbitration award" in the 1997 consolidated statement of operations. See "Litigation and Other Risks and Uncertainties" and "Revenues" preceding for further discussion of the Company's business relationship with Bentley, its sales of MicroStation, and the financial effects on the Company of changes in this business relationship. Also in 1997, the Company sold a stock investment in a publicly traded affiliate, resulting in a gain of $4.9 million or $.10 per share. The Company sold stock investments in affiliated companies at gains of $11.2 million or $.23 per share in 1996 and $6.5 million or $.14 per share in 1995. 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, equity in the earnings of investee companies, and other miscellaneous items of nonoperating income and expense. Significant items included in these amounts are foreign exchange losses of $2.7 million in 1997 and $4.6 million in 1996, and equity in the earnings of investee companies of $4.3 million in 1995. Income Taxes. The Company incurred losses before income taxes of $66.2 million in 1997, $66.1 million in 1996, and $45.3 million in 1995. Income tax expense in 1997 and 1996 results from taxes on individually profitable international subsidiaries. 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. 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 1997, approximately 53% of the Company's revenues were derived from customers outside the United States, primarily through subsidiary operations. Most subsidiaries sell to customers and incur and pay operating expenses in local currency. These local currency revenues and expenses are translated to U.S. dollars for reporting purposes. A stronger U.S. dollar will decrease the level of reported U.S. dollar orders and revenues, decrease the dollar gross margin, and decrease reported dollar operating expenses of the international subsidiaries. During 1997 the U.S. dollar strengthened on average from the prior year level, which decreased reported dollar revenues, orders, and gross margin, but also decreased reported dollar operating expenses in comparison to the prior year period. The Company estimates that strengthening of the U.S. dollar in 1997 in its international markets, primarily Europe, adversely impacted 1997 results of operations by approximately $.30 per share, and weakening of the U.S. dollar in 1995 improved 1995 results of operations by approximately $.22 per share. Such currency effects did not materially affect the Company's results of operations in 1996. The Company conducts business in all major markets outside the U.S., but the most significant of these operations with respect to currency risk are located in Europe and Asia. Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. 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 related to certain balance sheet items, primarily 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 related balance sheet exposures at December 31, 1997, 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 does not generally hedge exposures related to foreign currency denominated assets and liabilities that are not of an intercompany nature, unless a significant risk has been identified. It is possible the Company could incur significant exchange gains or losses in the case of significant, abnormal fluctuations in a particular currency. By policy, the Company is prohibited from market speculation via forward exchange contracts and therefore does not take currency positions exceeding its known financial statement exposures, and does not otherwise trade in currencies. At December 31, 1997, the Company had net outstanding forward exchange contracts of approximately $37 million ($19 million at December 31, 1996), maturing at various dates through March 31, 1998. 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, 1997. Net cash flow from forward contract activity, consisting of realized gains and losses from settlement of exposed assets and liabilities at exchange rates in effect at the settlement date rather than at the time of recording, settlement of the forward contracts purchased to mitigate these exposures, and payment of bank fees on the forward contracts was not significant for any year in the three year period ended December 31, 1997. Deferred gains and losses as of December 31, 1997 and 1996 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, 1997, cash totaled $46.6 million, down $4 million from year end 1996. Net cash consumed by operations in 1997 was $20.9 million versus net cash generated by operations of $26 million in 1996 and $59.8 million in 1995 (including $22.3 million in tax refunds, primarily from carryback of U.S. taxable losses to prior years). An inventory build-up consumed approximately $16 million during 1997 as a result of anticipated increased hardware unit sales volume and customer demand for faster delivery of products. Net cash consumed by investing activities totaled $30.7 million in 1997, $31.7 million in 1996, and $83 million in 1995. Included in investing activities were capital expenditures of $24.8 million in 1997, $30.6 million in 1996, and $54.7 million in 1995 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 $10.6 million in 1997, $15.5 million in 1996, and $25.4 million in 1995 for capitalizable software development activity, and proceeds of $5.7 million in 1997, $11.6 million in 1996, and $7.9 million in 1995 from sales of a business unit and investments in affiliated companies. Net cash generated from financing activities totaled $48.4 million in 1997 and $17.8 million in 1995. Significant sources of financing cash included net borrowings of $44.9 million in 1997 and proceeds from employee stock purchases and exercises of stock options of $12 million in 1995. The Company's collection period for accounts receivable was approximately 80 days as of December 31, 1997, representing a slight improvement from the prior year. Approximately 70% of the Company's 1997 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, 1997 and 1996. Total U.S. government accounts receivable was $52 million at December 31, 1997 ($48 million at December 31, 1996). The Company endeavors to enforce its payment terms with these and other customers, and grants extended payment terms only in very limited circumstances. The Company expects that capital expenditures will require $25 million to $30 million in 1998, 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. 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 four year fixed term loan and revolving credit agreement, available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, including accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $125 million. The $25 million term loan portion of the agreement is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.5% at December 31, 1997) plus .625%. The average effective rate of interest was 9.12% for the period of time in 1997 during which the Company had outstanding borrowings under this agreement. 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 December 31, 1997, the Company had outstanding borrowings of $64.6 million, $25 million of which was classified as long-term debt in the consolidated balance sheet, and an additional $41.3 million of the available credit line was allocated to support letters of credit issued by the Company and the Company's forward exchange contracts. As of this same date, the borrowing base, representing the maximum available credit under the line, was $121 million ($112 million at February 27, 1998). 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 March of 1997, the Company entered into an agreement for the sale and leaseback of one of its facilities. The amount borrowed totals $8.4 million and is included in "Long-term debt" in the 1997 consolidated balance sheet. The borrowing will be repaid over a period of 20 years at an implicit rate of interest of 10.7%. See "Zydex Litigation" preceding for a description of a debt transaction entered into subsequent to December 31, 1997. At December 31, 1997, the Company had approximately $93 million in debt on which interest is charged under various floating rate arrangements, primarily under its four year term loan and revolving credit agreement, mortgages, and an 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 is not currently generating adequate cash to fund its operations and build cash reserves. However, the Company believes that existing cash balances, together with cash generated by the sale of its Solid Edge and Engineering Modeling System product lines to Unigraphics Solutions, Inc. (see "Subsequent Events" following), and cash available under its term loan and revolving credit agreement will be adequate to meet cash requirements for 1998. The Company, in the near term, must increase sales volume and align its operating expenses with the level of revenue being generated in order to fund its operations and build cash reserves without reliance on funds generated from the sale of long-term assets and third party financing. FOURTH QUARTER 1997 Revenues for the fourth quarter were $300.9 million, up 2% from fourth quarter 1996. The Company incurred a net loss of $20.7 million ($.43 per share) for the quarter versus a fourth quarter 1996 net loss of $33.6 million ($.71 per share), including a $10.5 million ($.21 per share) nonrecurring operating charge. In addition to the effect of the nonrecurring charge incurred in 1996, the improvement in fourth quarter 1997 earnings resulted from a 4% decline in operating expenses, primarily for research and development. The Company estimates that the comparative strength of the U.S. dollar in the fourth quarter of 1997 adversely impacted results of operations by $.15 per share from the fourth quarter 1996 level. SUBSEQUENT EVENTS In February 1998, the Company established a plan to restructure its European operations to further align operating expense and revenue levels in that region. The cost of this restructuring is estimated at $4.4 million, primarily for severance pay and related costs. The 60 positions planned for elimination by the end of second quarter 1998 are in the sales and marketing, general and administrative, and pre- and post-sales support areas. The cash outlay related to this charge is expected to approximate the amount of the charge and will be funded by existing cash and/or borrowings under the Company's revolving line of credit. The Company estimates the restructuring action will result in annual savings of approximately $4.5 million. On March 2, 1998, the Company closed its transaction with Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary, in which the Company sold certain of the assets of its Solid Edge and Engineering Modeling System product lines for $105 million in cash. The Company anticipates a gain on this transaction of approximately $100 million. Additionally, the Company estimates the sale of this business will result in a reduction of its 1998 revenues by approximately $30 million, if not replaced, and an improvement in its operating results of approximately $5 million, excluding the impact of the estimated $100 million gain on the sale. See "Zydex Litigation" preceding for a description of a debt transaction entered into subsequent to December 31, 1997. ORGANIZATIONAL CHANGES Effective January 1, 1998, the Company's business organization is comprised of Intergraph Corporation, the parent company, and three subsidiary corporations as follows: Intergraph Corporation, the parent company (may also be referred to as Intergraph Industry Solutions), Intergraph Computer Systems, Inc., Intergraph Public Safety, Inc., and VeriBest, Inc. The Company believes that this business structure will provide greater focus and clear accountability of each entity as a separate business enterprise. Intergraph Computer Systems, Inc., a wholly owned subsidiary of Intergraph Corporation, supplies high performance Windows NT-based graphics workstations and PCs, 3D graphics subsystems, servers, and other hardware products. Intergraph Industry Solutions supplies software and solutions, including hardware, consulting and services, to the federal government and to the process and building and infrastructure industries. Intergraph Public Safety, Inc. and VeriBest, Inc. are wholly owned subsidiaries of Intergraph Corporation. Public Safety develops, markets, and implements systems for public safety agencies. VeriBest serves the electronics design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ----------------------------------------------------------------------- December 31, 1997 1996 - ----------------------------------------------------------------------- (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 46,645 $ 50,674 Accounts receivable, net 324,654 326,117 Inventories 105,032 89,411 Other current assets 25,693 37,718 - ----------------------------------------------------------------------- Total current assets 502,024 503,920 Investments in affiliates 14,776 19,102 Other assets 53,566 59,106 Property, plant, and equipment, net 150,623 174,219 - ----------------------------------------------------------------------- Total Assets $720,989 $756,347 ======================================================================= Liabilities and Shareholders' Equity Trade accounts payable $ 60,945 $ 51,205 Accrued compensation 48,330 50,364 Other accrued expenses 71,126 72,798 Billings in excess of sales 66,680 62,869 Short-term debt and current maturities of long-term debt 50,409 35,880 - ----------------------------------------------------------------------- Total current liabilities 297,490 273,116 Deferred income taxes 460 6,204 Long-term debt 54,256 29,764 - ----------------------------------------------------------------------- Total liabilities 352,206 309,084 - ----------------------------------------------------------------------- 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 226,362 229,675 Retained earnings 269,442 339,679 Unrealized holding gain on securities of affiliate --- 6,858 Cumulative translation adjustment 1,090 6,049 - ----------------------------------------------------------------------- 502,630 587,997 Less -- cost of 9,183,845 treasury shares at December 31, 1997, and 9,656,295 treasury shares at December 31, 1996 (133,847) (140,734) - ----------------------------------------------------------------------- Total shareholders' equity 368,783 447,263 - ----------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $720,989 $756,347 ======================================================================= The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------ Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ (In thousands except per share amounts) Revenues Systems $ 786,278 $ 725,828 $ 710,168 Maintenance and services 338,027 369,505 387,810 - ------------------------------------------------------------------------------ Total revenues 1,124,305 1,095,333 1,097,978 - ------------------------------------------------------------------------------ Cost of revenues Systems 514,416 465,645 439,502 Maintenance and services 209,550 226,263 228,785 - ------------------------------------------------------------------------------ Total cost of revenues 723,966 691,908 668,287 - ------------------------------------------------------------------------------ Gross profit 400,339 403,425 429,691 Product development 98,073 103,397 111,587 Sales and marketing 251,833 256,482 268,702 General and administrative 104,254 101,725 97,507 Restructuring charge --- --- 6,040 Nonrecurring operating charges 1,095 10,545 --- - ------------------------------------------------------------------------------ Loss from operations (54,916) (68,724) (54,145) Interest expense ( 6,614) ( 5,137) ( 4,198) Arbitration award ( 6,126) --- --- Gains on sales of investments in affiliates 4,858 11,173 6,493 Other income (expense) -- net ( 3,439) ( 3,424) 6,502 - ------------------------------------------------------------------------------ Loss before income taxes (66,237) (66,112) (45,348) Income tax expense ( 4,000) ( 3,000) --- - ------------------------------------------------------------------------------ Net loss $(70,237) $(69,112) $(45,348) ============================================================================== Net loss per share-basic and diluted $( 1.46) $( 1.46) $( .98) ============================================================================== Weighted average shares outstanding 47,945 47,195 46,077 ============================================================================== 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, 1997 1996 1995 - ------------------------------------------------------------------------------- (In thousands) Cash Provided By (Used For): Operating Activities: Net loss $(70,237) $(69,112) $(45,348) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 60,332 75,820 80,157 Noncash portion of arbitration award 5,835 --- --- Noncash portion of nonrecurring operating charges and restructuring charge --- 10,545 2,449 Deferred income tax expense 1,555 2,496 3,175 Collection of income tax refunds 719 2,113 22,264 Gains on sales of investments in affiliates ( 4,858) (11,173) ( 6,493) Net changes in current assets and liabilites (14,292) 15,324 3,629 - ------------------------------------------------------------------------------- Net cash provided by (used for) operating activities (20,946) 26,013 59,833 - ------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of divisions and investments in affiliates 5,749 11,561 7,908 Purchases of property, plant, and equipment (24,785) (30,563) (54,689) Capitalized software development costs (10,592) (15,492) (25,370) Other ( 1,038) 2,816 (10,799) - ------------------------------------------------------------------------------- Net cash used for investing activities (30,666) (31,678) (82,950) - ------------------------------------------------------------------------------- Financing Activities: Gross borrowings 75,896 18,366 65,652 Debt repayment (30,950) (22,764) (59,844) Proceeds of employee stock purchases and exercises of stock options 3,483 3,834 12,027 - ------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 48,429 ( 564) 17,835 - ------------------------------------------------------------------------------- Effect of exchange rate changes on cash ( 846) 496 296 - ------------------------------------------------------------------------------- Net decrease in cash and cash equivalents ( 4,029) ( 5,733) ( 4,986) Cash and cash equivalents at beginning of year 50,674 56,407 61,393 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 46,645 $ 50,674 $ 56,407 =============================================================================== 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, 1995 $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 Issuance of 432,263 shares under employee stock purchase plan --- (3,149) --- --- --- 6,301 3,152 Issuance of 40,187 shares upon exercise of stock options --- ( 255) --- --- --- 586 331 Unrealized holding gain on securities of affiliate --- --- --- (6,858) --- --- ( 6,858) Translation adjustments --- --- --- --- (4,959) --- ( 4,959) Other --- 91 --- --- --- --- 91 Net loss for the year --- --- (70,237) --- --- --- (70,237) - --------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $5,736 $226,362 $269,442 $ --- $1,090 $(133,847) $368,783 =====================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 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. Effective January 1, 1998, the Company has divided its business into four separate entities: Intergraph Computer Systems, Inc., Intergraph Industry Solutions, Intergraph Public Safety, Inc., and VeriBest, Inc. Computer Systems supplies high performance Windows NT-based graphics workstations and PCs, 3D graphics subsystems, servers, and other hardware products. Industry Solutions supplies software and solutions, including hardware, consulting, and services to the federal government and to the process and building and infrastructure industries. Public Safety develops, markets, and implements systems for public safety agencies. VeriBest serves the electronics design automation market, providing software design tools, design processes, and consulting services to developers of electronic systems. The Company's products are sold worldwide, with United States and European revenues representing approximately 77% of total revenues for 1997. 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. 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, 1997 and 1996, the Company held various debt securities, all within three months of maturity at those dates, with fair market values of $10,000,000 and $16,000,000, respectively. Gross realized gains and losses on debt securities sold during the years ended December 31, 1997 and 1996, were not significant, and there were no unrealized holding gains or losses on debt securities at December 31, 1997 or 1996. Inventories: Inventories are stated at the lower of average cost or market and are summarized as follows: - ------------------------------------------------------------ December 31, 1997 1996 - ------------------------------------------------------------ (In thousands) Raw materials $ 35,799 $26,601 Work-in-process 37,357 24,008 Finished goods 11,760 12,945 Service spares 20,116 25,857 - ------------------------------------------------------------ Totals $105,032 $89,411 ============================================================ 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 believes it 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 1997 the Company sold its stock investment in a publicly traded affiliate at a gain of $4,858,000. At December 31, 1996, the unrealized gain on this investment resulting from periodic mark- to-market adjustments 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 that date. The Company sold stock investments in affiliated companies at gains of $11,173,000 in 1996 and $6,493,000 in 1995. These gains are included in "Gains on sales of investments in affiliates" in the consolidated statements of operations. 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, 1997 1996 - ---------------------------------------------------------------------- (In thousands) Land and improvements (15-30 years) $ 13,664 $ 14,943 Buildings and improvements (30 years) 136,517 146,251 Equipment, furniture, and fixtures (3-8 years) 290,217 320,561 - ---------------------------------------------------------------------- 440,398 481,755 Allowances for depreciation (289,775) (307,536) - ---------------------------------------------------------------------- Totals $150,623 $174,219 ====================================================================== Treasury Stock: Treasury stock is accounted for by the cost method. The Board of Directors of the Company has authorized the purchase of up to 20,000,000 shares of the Company's common stock in the open market. As of December 31, 1997, the Company had purchased approximately 18,800,000 shares for the treasury with the last purchase occurring in 1994. 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/or 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. The American Institute of Certified Public Accountants has issued Statement of Position 97-2, Software Revenue Recognition, effective for fiscal years beginning after December 15, 1997. The Statement requires each element of a software sale arrangement to be separately identified and accounted for based on the relative fair value of each element. Revenue cannot be recognized on any element of the sale arrangement if undelivered elements are essential to functionality of the delivered elements. The Statement replaces the previous method of software revenue recognition, under which a distinction was made between significant and insignificant post shipment obligations for revenue recognition purposes. The Company does not expect adoption of this new accounting standard to significantly affect its 1998 results of operations since the Company's revenue recognition policies have historically been in substantial compliance with the practices required by the new pronouncement. Billings may not coincide with the recognition of revenue. Unbilled accounts receivable occur when revenue recognition precedes billing to the customer, and arise primarily from commercial sales with predetermined billing schedules, U.S. government sales with billing at the end of a performance period, and U.S. government cost-plus award fee contracts. Billings in excess of sales occur when billing to the customer precedes revenue recognition, and arise primarily from maintenance revenue billed in advance of performance of the maintenance activity and systems revenue recognized on the percentage-of-completion method. Product Development Costs: The Company capitalizes certain costs of computer software development incurred after the technological feasibility of the product has been established. Such capitalized costs are amortized 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 $13,600,000 in 1997, $16,100,000 in 1996, and $14,700,000 in 1995. The unamortized balance of capitalized software development costs, included in "Other assets" in the consolidated balance sheets, totaled $23,300,000 and $26,400,000 at December 31, 1997 and 1996, 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 systems cost of revenues and results of operations. Foreign Currency Exchange and Translation: Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. Foreign currency gains and losses resulting from remeasurement or settlement of receivables and payables denominated in a currency other than the functional currency, together with gains and losses and fees paid in connection with the Company's forward exchange contracts, are included in "Other income (expense) - net" in the consolidated statements of operations. Net exchange losses totaled $2,700,000 in 1997, $4,600,000 in 1996, and $300,000 in 1995. 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. The Company is prohibited by policy from taking derivative positions exceeding its known balance sheet exposures and from otherwise trading in derivative financial instruments. The Company 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 related to certain balance sheet items, primarily 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. These forward exchange contracts are purchased with maturities reflecting the expected settlement dates of the balance sheet items being hedged, which are generally less than three months, and only in amounts sufficient to offset possible significant currency rate related changes in the recorded values of these balance sheet items. The Company does not generally hedge the exposures related to other foreign currency denominated assets and liabilities, unless a significant risk has been identified. Forward exchange contracts are accounted for under the fair value method. Under this method, realized and unrealized gains and losses on forward exchange contracts are recognized as offsets to gains and losses resulting from the underlying hedged transactions in the period in which exchange rates change and are included in "Other income (expense) - net" in the consolidated statements of operations. Bank fees charged on the contracts are amortized over the period of the contract. Gain or loss on termination of a forward exchange contract is recognized in the period in which the contract is terminated. In the event of early settlement of a hedged intercompany asset or liability, the related forward exchange contract gains or losses are recognized in the period in which exchange rates change. The Company enters into interest rate swap agreements to reduce the risk of increases in interest rates on certain of its outstanding floating rate debt. The Company enters into agreements in which the principal and term of the interest rate swap match those of the specific debt obligation being hedged. The Company pays a fixed rate of interest and receives payment based on a variable rate of interest, and is thus exposed to market risk of potential decreases in interest rates. Interest rate swap agreements are accounted for under the accrual method. Under this method, the differences in amounts paid and received under interest rate swap agreements are recognized in the period in which the payments and receipts occur and are included in "Interest expense" in the consolidated statements of operations. Gain or loss on termination of an interest rate swap agreement is deferred and amortized as an adjustment to interest expense over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of a debt obligation, any realized or unrealized gain or loss on the related swap agreement is recognized in income coincident with the extinguishment gain or loss. Amounts payable to or receivable from counterparties related to derivative financial instruments are included in "Other accrued expenses" or "Other current assets" in the consolidated balance sheets. These amounts were not significant at December 31, 1997 or 1996. 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 exercise price and fair market value at the date of grant, 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. In accordance with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, adopted by the Company December 31, 1996, the Company has provided pro forma basis information to reflect results of operations and earnings per share had compensation expense been recognized for stock options granted at market value at date of grant and for employee stock purchases. 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: Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, Earnings Per Share. Under this Statement, "basic earnings per share" excludes any dilutive effects of common stock equivalents, and "diluted earnings per share" is similar to the previously reported fully diluted earnings per share. Adoption of this Statement had no impact on the Company's loss per share calculations for any year in the three year period ended December 31, 1997, due to the antidilutive impact of the Company's employee stock options, which are the Company's only common stock equivalent (see Note 9). Weighted average common and equivalent common shares outstanding for both the basic and diluted loss per share calculations for the years ended December 31, 1997, 1996, and 1995 were 47,945,000, 47,195,000, and 46,077,000, respectively. Reclassifications: Certain reclassifications have been made to the previously reported consolidated statements of operations and cash flows for the years ended December 31, 1996 and 1995 to provide comparability with the current year presentation. Subsequent Events: See Note 15 for discussion of events occurring subsequent to December 31, 1997 and whose effects therefore are not included in these financial statements. 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 certain litigation and to its business and economic environment, including those described in "Litigation and Other Risks and Uncertainties" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 to 19 of this annual report. NOTE 3 -- RESTRUCTURING AND NONRECURRING OPERATING CHARGES. The Company recorded a restructuring charge totaling $6,040,000 in 1995 and nonrecurring operating charges totaling $10,545,000 in 1996. For a complete description of these charges, see "Restructuring and Nonrecurring Operating Charges" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 15 of this annual report. 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 $93,000,000 at December 31, 1997), consisting primarily 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 Australian 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: Outstanding notional amounts for the Company's forward exchange contracts were $37,357,000 and $18,618,000 at December 31, 1997 and 1996, respectively. 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, 1997 1996 ---------------------------- --------------------------- Net Forward Net Forward Contract Contract Sell Buy Position Sell Buy Position - --------------------------------------------------------------------------- (In thousands) German mark $22,536 $ 5,217 $17,319 $18,127 $ 4,736 $13,391 Italian lira 12,271 814 11,457 6,754 395 6,359 British pound 7,573 8,827 (1,254) 3,952 8,784 (4,832) French franc 4,362 1,836 2,526 6,018 656 5,362 Swiss franc 1,564 5,386 (3,822) 378 7,495 (7,117) Spanish peseta 1,407 1,296 111 2,081 1,059 1,022 Belgian franc 1,254 230 1,024 2,186 75 2,111 Other currencies 14,354 4,358 9,996 5,781 3,459 2,322 - --------------------------------------------------------------------------- Totals $65,321 $27,964 $37,357 $45,277 $26,659 $18,618 =========================================================================== These notional amounts do not necessarily represent amounts to be exchanged between the Company and the counterparties to the forward exchange contracts, and as such, they do not represent the amount of the Company's currency related exposures at those dates. The amounts potentially subject to risk, arising from the possible inability of the counterparties to meet the terms of the contracts, are generally limited to the amounts, if any, by which the counterparties' obligations exceed those of the Company. Net receivables from counterparties related to forward exchange contracts were not significant at December 31, 1997 or 1996. These carrying amounts approximated fair value at those dates due to the short duration (generally three months or less) of the contracts. Based on the terms of outstanding forward exchange contracts and the amount of the related balance sheet exposures at December 31, 1997 and 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 hedged. Cash requirements of forward exchange contracts are limited to receipt of an amount equal to the exchange gain or payment of an amount equal to the exchange loss at the contract settlement date, and payment of bank fees related to the contracts. Net cash flow from forward contract activity, consisting of realized gains and losses from settlement of exposed assets and liabilities at exchange rates in effect at the settlement date rather than at the time of recording, settlement of the forward contracts purchased to mitigate the exposures, and payment of bank fees on the forward contracts, was not significant for any year in the three year period ended December 31, 1997. Interest rate swap agreements: In 1996, the Company entered into an interest rate swap agreement in the principal amount of its Australian term loan agreement (approximately $13,200,000 at December 31, 1997). The agreement is for a period of approximately six years, and its expiration date coincides with that of the term loan. Under the agreement, the Company pays a 9.58% fixed rate of interest and receives payment based on a variable rate of interest. The weighted average receive rate of the agreement at December 31, 1997 and 1996 was 6.49% and 7.06%, respectively. The fair market value of this interest rate swap agreement at December 31, 1997 was approximately $900,000. Fair market value was determined by obtaining a bank quote and represents the amount the Company would pay should the Company's obligation under the instrument be transferred to a third party at the reporting date. Cash requirements of the Company's interest rate swap agreement are limited to the differential between the fixed rate paid and the variable rate received. NOTE 5 -- SUPPLEMENTARY CASH FLOW INFORMATION. Changes in current assets and liabilities, net of the effects of business divestitures, restructuring charges, and nonrecurring operating charges, in reconciling net loss to net cash provided by (used for) operations are as follows: - ------------------------------------------------------------------------------ Cash Provided By (Used For) Operations Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------ (In thousands) (Increase) decrease in: Accounts receivable $(25,624) $(8,547) $27,440 Inventories (21,296) 21,299 11,915 Other current assets 9,186 9,697 (24,784) Increase (decrease) in: Trade accounts payable 11,449 (1,513) 2,720 Accrued compensation and other accrued expenses 4,123 (5,344) 3,008 Billings in excess of sales 7,870 ( 268) (16,670) - ------------------------------------------------------------------------------ Net changes in current assets and liabilities $(14,292) $15,324 $ 3,629 ============================================================================== Cash payments for income taxes totaled $6,100,000, $4,900,000, and $4,800,000 in 1997, 1996, and 1995, respectively. Cash payments for interest in those years totaled $6,400,000, $5,000,000, and $4,100,000, respectively. Investing and financing transactions in 1997 that did not require cash included the sale of two noncore business units of the Company in part for notes receivable and future royalties totaling $3,950,000. 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. Investing and financing transactions in 1995 that did not require cash consisted of the 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. 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 approximated $20,700,000 at both December 31, 1997 and 1996. Revenues from the U.S. government were $177,100,000 in 1997, $160,800,000 in 1996, and $159,300,000 in 1995, representing approximately 15% of total revenue in all three years. Accounts receivable from the U.S. government was approximately $52,500,000 and $48,000,000 at December 31, 1997 and 1996, respectively. The Company sells to the U.S. government under long-term contractual arrangements, primarily indefinite delivery, indefinite quantity and cost-plus award fee contracts, and through commercial sales of products not covered by long-term contracts. Approximately 42% 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 at the election of the government. Any loss of a significant government contract would have an adverse impact on the results of operations of the Company. Accounts receivable includes unbilled amounts of $80,900,000 and $82,300,000 at December 31, 1997 and 1996, respectively. These amounts include amounts due under long-term contracts of approximately $35,000,000 and $27,000,000, at December 31, 1997 and 1996, respectively. The Company maintained reserves for uncollectible accounts, included in "Accounts receivable" in the consolidated balance sheets at December 31, 1997 and 1996, of $14,500,000 and $16,700,000, respectively. NOTE 7 -- DEBT AND LEASES. Short- and long-term debt is summarized as follows: - ----------------------------------------------------------------- December 31, 1997 1996 - ----------------------------------------------------------------- (In thousands) Revolving credit agreement and term loan $ 64,640 $20,000 Australian term loan 13,237 19,029 Long-term mortgages 10,323 12,889 Other secured debt 10,187 7,911 Short-term credit facilities 5,153 3,310 Other 1,125 2,505 - ----------------------------------------------------------------- Total debt 104,665 65,644 Less amounts payable within one year 50,409 35,880 - ----------------------------------------------------------------- Total long-term debt $ 54,256 $29,764 ================================================================= 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 $50,000,000. At December 31, 1996, the Company had outstanding borrowings of $20,000,000, and approximately $22,000,000 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 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 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 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 four year fixed term loan and revolving credit agreement, available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, including accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $125,000,000. The $25,000,000 term loan portion of the agreement is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.5% at December 31, 1997) plus .625%. The average effective rate of interest was 9.12% for the period of time in 1997 during which the Company had outstanding borrowings under this agreement. The agreement requires the Company to pay a facility fee at an annual rate of .15% of the amount available under the credit line, an unused credit line fee at an annual rate of .25% of the average unused portion of the revolving credit line, and a monthly agency fee. At December 31, 1997, the Company had outstanding borrowings of $64,640,000, $25,000,000 of which was classified as long-term debt in the consolidated balance sheet, and an additional $41,300,000 of the available credit line was allocated to support letters of credit issued by the Company and the Company's forward exchange contracts. As of this same date, the borrowing base, representing the maximum available credit under the line, was approximately $121,000,000 ($112,000,000 at February 27, 1998). 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 $23,000,000). The loan is payable in varying installments through August 2002 and bears interest at the bank's variable short-term lending rate, which ranged from 5.8% to 7.1% in 1997 (6.8% to 9.6% in 1996). Letters of credit totaling $13,200,000 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, payable in varying installments through the year 2010 and bearing interest at the floating Amsterdam Interbank Offering Rate, which ranged from 3.1% to 3.8% in 1997 (2.9% to 3.6% in 1996), plus 1%. Other secured debt consists of debt to various financial institutions payable in varying installments through 2017 and secured by certain assets of the Company, including facilities and internally used computer equipment. In March of 1997, the Company entered into an agreement for the sale and leaseback of one of its facilities. The amount borrowed totals approximately $8,400,000 and is payable over a period of 20 years at an implicit rate of interest of 10.7%. The weighted average interest rate on this and all other secured debt was approximately 11.2% for 1997 and 11.5% for 1996. 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 $30,400,000 in 1997, $34,200,000 in 1996, and $38,200,000 in 1995. 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) 1998 $21,500 1999 16,100 2000 9,400 2001 5,500 2002 2,900 Thereafter 22,500 - ------------------------------------------------------ Total future minimum lease payments $77,900 - ------------------------------------------------------ NOTE 8 -- INCOME TAXES. The components of loss before income taxes are as follows: - ------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------- (In thousands) U.S. $(57,527) $(42,381) $(17,779) International ( 8,710) (23,731) (27,569) - ------------------------------------------------------------------------- Total loss before income taxes $(66,237) $(66,112) $(45,348) ========================================================================= Income tax expense consists of the following: - ------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------- (In thousands) Current benefit (expense): Federal $ 1,400 $ 3,351 $ 5,251 International (3,845) (3,855) (2,076) - ------------------------------------------------------------------------- Total current (2,445) ( 504) 3,175 - ------------------------------------------------------------------------- Deferred benefit (expense): Federal (1,726) (2,447) (2,685) International 171 ( 49) ( 490) - ------------------------------------------------------------------------- Total deferred (1,555) (2,496) (3,175) - ------------------------------------------------------------------------- Total income tax expense $(4,000) $(3,000) $ --- ========================================================================= Deferred income taxes included in the Company's balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax return purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: - ---------------------------------------------------------------------------- December 31, 1997 1996 - ---------------------------------------------------------------------------- (In thousands) Current Deferred Tax Assets (Liabilities): Inventory reserves $ 15,235 $ 23,356 Vacation pay and other employee benefit accruals 5,617 5,980 Other financial statement reserves, primarily allowance for doubtful accounts 9,226 7,624 Profit on uncompleted sales contracts deferred for tax return purposes ( 1,759) ( 4,297) Other current tax assets and liabilities, net ( 5,916) ( 5,068) - ---------------------------------------------------------------------------- 22,403 27,595 Less asset valuation allowance (22,275) (23,617) - ---------------------------------------------------------------------------- Total net current asset (1) 128 3,978 - ---------------------------------------------------------------------------- Noncurrent Deferred Tax Assets (Liabilities): Net operating loss and tax credit carryforwards: U.S. federal and state 78,559 47,019 International operations 40,316 38,132 Depreciation ( 9,907) ( 9,256) Capitalized software development costs ( 7,604) ( 9,198) Other noncurrent tax assets and liabilities, net ( 7,051) ( 6,664) - ---------------------------------------------------------------------------- 94,313 60,033 Less asset valuation allowance (94,773) (66,237) - ---------------------------------------------------------------------------- Total net noncurrent liability ( 460) ( 6,204) - ---------------------------------------------------------------------------- Net deferred tax liability $( 332) $( 2,226) ============================================================================ (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 $27,194,000 in 1997 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, 1997, the Company had a U.S. federal net operating loss carryforward of approximately $180,000,000 expiring from the year 2009 through 2012. International net operating loss carryforwards total approximately $103,000,000 and expire as follows: - ------------------------------------------------------ International Net Operating Loss December 31, 1997 Carryforwards - ------------------------------------------------------ (In thousands) Expiration: 3 years or less $ 12,000 4 to 5 years 17,000 6 to 10 years 6,000 Unlimited carryforward 68,000 - ------------------------------------------------------ Total $103,000 ====================================================== 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 $6,800,000 are available to offset regular tax liability through 2012. A reconciliation from income tax benefit at the U.S. federal statutory tax rate of 35% to the Company's income tax expense is as follows: - ------------------------------------------------------------------------------- Year Ended December 31, 1997 1996 1995 - ------------------------------------------------------------------------------- (In thousands) Income tax benefit at federal statutory rate $ 23,183 $ 23,139 $ 15,872 Benefit from Foreign Sales Corp. (FSC) 150 1,963 905 Tax effects of international operations, net ( 5,617) ( 8,657) ( 8,629) Tax effect of U.S. tax loss carried forward (23,205) (23,752) (10,967) Reduction of taxes provided in prior years 1,165 4,712 --- Other - net 324 ( 405) 2,819 - ------------------------------------------------------------------------------- Income tax expense $( 4,000) $( 3,000) $ --- =============================================================================== The Company does not provide for federal income taxes or tax benefits on the undistributed earnings or losses of its international subsidiaries, because earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely. At December 31, 1997, the Company had not provided federal income taxes on earnings of individual international subsidiaries of approximately $41,000,000. 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 $2,000,000 would be payable if all previously unremitted earnings as of December 31, 1997, were remitted to the U.S. company. NOTE 9 -- STOCK-BASED COMPENSATION PLANS. The Intergraph Corporation 1997 Stock Option Plan was approved by shareholders in May 1997. Under the 1997 Plan and the Intergraph Corporation 1992 Stock Option Plan, the Company reserved a total of 6,000,000 shares of common stock to grant as options to key employees. 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, 1997, 2,347,250 shares were available for future grants, all of which relate to the 1997 Plan. 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 432,263, 352,759, and 358,687 shares of stock in 1997, 1996, and 1995, respectively, under the 1995 and predecessor Plans. At December 31, 1997, 2,223,464 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, 1997 1996 1995 - ------------------------------------------------------------------------------- (In thousands except per share amounts) Net loss As reported $(70,237) $(69,112) $(45,348) Pro forma $(72,497) $(71,447) $(46,757) Basic and diluted loss per share As reported $( 1.46) $( 1.46) $( .98) Pro forma $( 1.51) $( 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 1.38 years after vest date in 1997 (1.39 years in 1996 and 1995) and 43% expected volatility for the market price of the Company's stock in 1997 (40% in 1996 and 1995). 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:
- ----------------------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------- ---------------------------- ----------------------------- Expected Life Risk Free Expected Life Risk Free Expected Life Risk Free (in years) Interest Rate (in years) Interest Rate (in years) Interest Rate - ---------------------------- ---------------------------- ----------------------------- 3.38 6.28% 3.39 6.55% 3.39 5.95% 4.38 6.38% 4.39 6.67% 4.39 6.02% 5.38 6.34% 5.39 6.74% 5.39 6.09% 6.38 6.46% 6.39 6.79% 6.39 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 1997, 1996, and 1995 were $3.66, $3.92, and $4.84, respectively, under the 1992 and 1997 stock option plans and $1.29, $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, 1997, 1996, and 1995 is summarized as follows:
- ------------------------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ------------------------------------------------------------------------------------------- Outstanding at beginning of year 1,831,417 $10.38 1,778,304 $10.42 1,260,637 $10.48 Granted at fair value 672,250 7.99 290,018 9.47 1,244,000 11.12 Granted at less than fair value --- --- --- --- 148,718 1.25 Exercised ( 40,187) ( 8.23) ( 53,898) 5.28 (836,469) 9.94 Expired ( 30,000) (16.00) ( 14,982) 9.23 --- --- Forfeited (173,557) (10.65) (168,025) 11.02 ( 38,582) 9.97 - ------------------------------------------------------------------------------------------- Outstanding at end of year 2,259,923 $ 9.61 1,831,417 $10.38 1,778,304 $10.42 =========================================================================================== Exercisable at end of year 540,922 $ 9.62 247,874 $ 9.12 160,171 $ 7.68 ===========================================================================================
Further information relating to stock options outstanding at December 31, 1997 is as follows:
- ---------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable --------------------------------------------- --------------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Prices Number Contractual Life Exercise Price Number Exercise Price - ---------------------------------------------------------------------------------------------- $ .90 to $ 3.75 17,690 6.88 years $ 1.30 17,690 $ 1.30 $ 7.00 to $ 9.50 1,194,973 8.16 8.41 261,232 8.63 $10.125 to $12.25 1,047,260 7.61 11.12 262,000 11.17 - ---------------------------------------------------------------------------------------------- 2,259,923 7.89 $ 9.61 540,922 $ 9.62 ==============================================================================================
Options shown above with a grant date 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, 1997 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 $4,575,000, $5,687,000, and $5,886,000, in 1997, 1996, and 1995, 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 $3,244,000, $3,678,000, and $3,856,000 in 1997, 1996, and 1995, respectively. NOTE 11-- OPERATIONS BY GEOGRAPHIC AREA. International markets, particularly Europe and Asia, 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, 1997 1996 1995 - -------------------------------------------------------------------------- (In thousands) Revenues United States: Unaffiliated customers - U.S. $ 528,411 $ 488,759 $ 500,295 Unaffiliated customers - export 58,589 42,061 49,035 Consolidated subsidiaries 202,792 232,871 217,171 - -------------------------------------------------------------------------- 789,792 763,691 766,501 - -------------------------------------------------------------------------- Europe: Unaffiliated customers 341,476 363,255 390,715 U.S. parent 1,151 --- --- - -------------------------------------------------------------------------- 342,627 363,255 390,715 - -------------------------------------------------------------------------- Asia Pacific: Unaffiliated customers 111,449 127,607 91,284 U.S. parent 1,910 2,257 2,252 - -------------------------------------------------------------------------- 113,359 129,864 93,536 - -------------------------------------------------------------------------- Other International: Unaffiliated customers 84,380 73,651 66,649 U.S. parent 1,849 1,320 770 - -------------------------------------------------------------------------- 86,229 74,971 67,419 - -------------------------------------------------------------------------- Eliminations -- net (207,702) (236,448) (220,193) - -------------------------------------------------------------------------- Total revenues $1,124,305 $1,095,333 $1,097,978 ========================================================================== Loss From Operations United States $ ( 35,350) $ ( 30,346) $( 12,261) Europe ( 20,504) ( 29,837) ( 27,663) Asia Pacific ( 7,930) ( 5,917) ( 10,799) Other International 1,638 ( 5,424) ( 10,106) Eliminations -- net 7,230 2,800 6,684 - -------------------------------------------------------------------------- Total loss from operations $ ( 54,916) $ ( 68,724) $( 54,145) ========================================================================== Identifiable Assets United States $ 506,542 $ 522,966 $ 558,446 Europe 183,826 204,913 248,459 Asia Pacific 70,848 85,197 85,205 Other International 49,611 40,147 46,234 Eliminations -- net ( 89,838) ( 96,876) (112,299) - -------------------------------------------------------------------------- Total identifiable assets $ 720,989 $ 756,347 $ 826,045 ========================================================================== 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 sold to third parties in 1997 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. Loss from operations in 1997 includes a charge of $1,095,000 in the U.S. for additional losses incurred upon final disposition of the two noncore business units. NOTE 12 -- RELATED PARTY TRANSACTIONS. Bentley Systems, Inc.: The Company owns approximately 50% of Bentley Systems, Inc., the developer and owner of MicroStation, a software product utilized in many of the Company's software applications and for which the Company serves as a nonexclusive distributor. Under the Company's distributor agreement with Bentley, the Company purchases MicroStation products for resale to third parties. The per copy fee payable by the Company under this agreement was increased effective January 1, 1995 and again January 1, 1996 and, for 1995 only, Bentley paid the Company $7,414,000 in distribution fees based on Bentley's MicroStation sales to resellers. The Company's purchases from Bentley totaled $5,656,000 in 1997, $14,244,000 in 1996, and $39,329,000 in 1995. Amounts due from Bentley or for which the Company holds the right to delivery of Bentley products totaled $1,076,000 and $10,700,000 at December 31, 1997 and 1996, respectively. During the second quarter of 1997, the Company offset receivables from Bentley of $5,835,000 against a $6,126,000 obligation to Bentley resulting from an adverse contract arbitration award. See "Litigation and Other Risks and Uncertainties" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 to 19 of this annual report for further discussion of the Company's arbitration proceedings and business relationship with Bentley. 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, the sale of a certain number of shares of the Company's stock by loan recipients, or the April 30, 1998 expiration of the program. At December 31, 1996, James W. Meadlock, Chief Executive Officer and Chairman of the Board of the Company, was indebted to the Company in the amount of $5,530,000 under the program. On November 21, 1997, the loan and related interest, totaling $6,129,000 as of that date, were paid in full. As of December 31, 1997, there were no outstanding loans under this 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, 1997: Revenues $252,758 $288,609 $282,067 $300,871 Gross profit 87,610 109,115 101,177 102,437 Net loss (26,289) (16,027) ( 7,186) (20,735) Net loss per share, basic and diluted ( .55) ( .33) ( .15) ( .43) Weighted average shares outstanding 47,758 47,888 48,006 48,121 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, basic and diluted ( .14) ( .32) ( .29) ( .71) Weighted average shares outstanding 46,902 46,922 47,243 47,636 ================================================================================ Second quarter 1997 losses were increased by a $.13 per share charge for an adverse contract arbitration award to Bentley Systems, Inc. Third quarter 1997 losses were reduced by a $.10 per share gain on the sale of an investment in an affiliated company. The Company estimates that the strength of the U.S. dollar in the fourth quarter of 1997 adversely impacted fourth quarter 1997 results of operations by approximately $.15 per share in comparison to fourth quarter 1996. 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. NOTE 15 -- SUBSEQUENT EVENTS. On January 15, 1998, the Company closed a settlement agreement related to its litigation with Zydex, Inc. Under terms of the agreement, the Company purchased 100% of the common stock of Zydex for $26,292,000, with $15,979,000 paid in cash at closing and the remaining amount payable in fifteen monthly installments with interest. The closing date payment of cash was funded by the Company's primary lender. See "Zydex Litigation" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 17 of this annual report for further details. In February 1998, the Company established a plan to restructure its European operations to further align operating expense and revenue levels in that region. The cost of this restructuring is estimated at $4,400,000, primarily for severance pay and related costs. The 60 positions planned for elimination by the end of second quarter 1998 are in the sales and marketing, general and administrative, and pre- and post-sales support areas. The cash outlay related to this charge is expected to approximate the amount of the charge and will be funded by existing cash and/or borrowings under the Company's revolving line of credit. The Company estimates the restructuring action will result in annual savings of approximately $4,500,000. On March 2, 1998, the Company closed its transaction with Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary, in which the Company sold certain of the assets of its Solid Edge and Engineering Modeling System product lines, for $105,000,000 in cash. The Company anticipates a gain on this transaction of approximately $100,000,000. Additionally, the Company estimates the sale of this business will result in a reduction of its 1998 revenues by approximately $30,000,000, if not replaced, and an improvement in its operating results of approximately $5,000,000, excluding the impact of the estimated $100,000,000 gain on the sale. 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/Ernst & Young LLP Birmingham, Alabama January 29, 1998, except for paragraph 2 of Note 15, as to which the date is March 2, 1998. 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, 1998, there were 48,220,459 shares of common stock outstanding, held by approximately 6,000 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. - -------------------------------------------------------------------- 1997 1996 Period High Low High Low - -------------------------------------------------------------------- First Quarter $11 1/4 $ 7 3/8 $20 1/8 $14 5/8 Second Quarter 8 13/16 6 1/4 16 1/4 11 1/8 Third Quarter 12 7 5/8 13 1/8 8 5/8 Fourth Quarter 14 3/16 8 15/16 12 5/8 8 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 (312) 360-5116 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 28, 1998, 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 Theron E. Anders Chief Executive Officer Chief Executive Officer and Chairman of the Board and President, Intergraph Randall C. Bachmeyer Computer Systems, Inc. Larry J. Laster Lawrence F. Ayers Jr. Thomas G. Baybrook Thomas J. Lee Klaas Borgers Roger O. Coupland Sidney L. McDonald Edward F. Boyle Thomas J. Doran Keith H. Schonrock Jr. Penman R. Gilliam George H. Dudley James F. Taylor Jr. Richard H. Lussier Jeffrey H. Edson Executive Vice President, Intergraph Corporation, Nancy B. Meadlock Graeme J. Farrell and Chief Executive Officer, Intergraph Stephen J. Phillips Milford. B. French Public Safety, Inc. William E. Salter Aggie L. Frizzell Robert E. Thurber Executive Vice President K. David Stinson Jr. Lewis N. Graham Edward A. Wilkinson Jeffrey P. Heath Allan B. Wilson Rune Kahlbom Manfred Wittler Milton H. Legg Winston P. Newton John R. Owens VeriBest, Inc. Robert Patience Charles E. Robertson Jr. Preetha Pulusani Chief Executive Officer and President Stephen B. Rowles James H. Slate John W. Wilhoite SECRETARY John R. Wynn EX-27 9
5 This schedule contains summary financial information extracted from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 DEC-31-1997 46,645 0 339,154 14,500 105,032 502,024 440,398 289,775 720,989 297,490 54,256 0 0 5,736 363,047 720,989 786,278 1,124,305 514,416 723,966 455,255 2,844 6,614 (66,237) (4,000) (70,237) 0 0 0 (70,237) (1.46) (1.46) Accounts receivable in the Consolidated Balance Sheet is shown net of allowances 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 expenses above. Adoption of Statement of Financial Accounting Standards No. 128, Earnings Per Share, had no impact on the Company's loss per share calculations for any year in the three year period ended December 31, 1997, due to the antidilutive impact of the Company's employee stock options, which are the Company's only common stock equivalent.
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