-----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, Jo+Q4qzSJNrcZjYks6nLIZHyZ+IW0sHwupXZ45Lm2m0A+UPPUcHctbkK7MOpLupQ pejgdeDIlxmxvIoY1bwwMw== 0000351145-99-000025.txt : 19990331 0000351145-99-000025.hdr.sgml : 19990331 ACCESSION NUMBER: 0000351145-99-000025 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99577000 BUSINESS ADDRESS: STREET 1: THIGPEN HQ011 #9384 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2567302000 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, 1998 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: (256) 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, 1999, there were 48,690,820 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 $231,974,000 based on the closing sale price of such stock as reported by NASDAQ on January 29, 1999, 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, 1998 Part I, Part II, Part IV Portions of the Proxy Statement for the May 13, 1999 Annual Shareholders' Meeting Part III PART I ITEM 1. BUSINESS Overview Intergraph Corporation (the "Company"), founded in 1969, is a vendor of enterprise computing solutions, including hardware, software, consulting and support services, for technical, creative, and information technology (IT) professionals working in a variety of industry sectors and government. The Company offers open, industry standard technical solutions for the enterprise, 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 industry-focused direct and indirect channels worldwide, with United States and European revenues representing approximately 80% of total revenues for 1998. Background Until the mid 1990s, the unique demands of high end technical computing required tremendous processing and graphics capabilities that could only be performed using reduced instruction set computing (RISC) workstations for the UNIX operating system. These systems cost considerably more than the Intel microprocessor-powered/Microsoft Windows-based PCs widely used today 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. This decision, in effect, expanded the availability of the Company's workstations and software applications to Windows-based computing environments not previously addressed by the Company. It also allowed the Company's software applications to operate on a variety of other hardware architectures provided by vendors using the Windows NT operating system. Prior to this decision, the Company's software applications operated principally on its proprietary hardware platforms. 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 of its workstations. Sales of Windows-based software grew to represent 48% of software revenues in 1994, 70% in 1995, 78% in 1996, 87% in 1997, and 90% in 1998. The Company ceased development of its own Clipper RISC microprocessor at the end of 1993 and made a substantial investment in the redesign of its hardware platform for utilization of Intel's microprocessor. The Company chose to use only Intel microprocessors and to focus its efforts and image creation toward its core capabilities, specifically very high performance computational and 3D graphics capabilities. This high-end market place in the Windows NT operating system environment is supported only by Intel products. The transition from its proprietary hardware architecture to that of Intel was substantially completed during 1994. Intel-based systems grew to represent 74% of hardware unit sales in 1994, 95% in 1995, and approximately 100% in 1996, 1997 and 1998. See "Manufacturing and Sources of Supply" and Item 3, Legal Proceedings, following for discussion of litigation between the Company and Intel, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 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. Reflecting a trend toward outsourcing in the industry, on November 13, 1998, the Company completed a transaction with SCI Technology, Inc. (SCI), a wholly owned subsidiary of SCI Systems, Inc., pursuant to which the Company sold substantially all of its U.S. manufacturing inventory and assets to SCI, and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. In addition, the Company licensed certain related intellectual property to SCI, and SCI employed approximately 300 of the Company's manufacturing employees. For a complete description of the SCI transaction, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 annual report, portions of which are incorporated by reference in this Form 10-K annual report. Significant contingencies related to the SCI transaction include the right of SCI to return to the Company any inventory included in the initial sale that proves unusable in the manufacturing of current products, the ability of the Company to obtain most favorable pricing for products purchased from SCI through higher volumes, and the ability of the Company to accurately forecast its requirements of SCI. The Company expects to benefit from its outsourcing to SCI through lower employee headcount and lower per unit costs for materials and overhead expenses, both of which should improve earnings and cash flow. Outsourcing will also allow Intergraph Computer Systems, the Company's hardware business unit, to focus on its core competencies of graphics, workstations, and systems integration. However, the Company retains the risk associated with inventory excess and obsolescence, defined in the agreement as any component or material in SCI's inventory for more than 60 days and which is in excess of demand as reflected in the Company's six month forecast, if not mitigated by SCI with the vendor. The Company has the option to either purchase this inventory from SCI or authorize SCI to obtain liquidation offers from third parties. Currently, the Company, through its Intergraph Computer Systems business unit, markets and sells a complete line of workstations, personal computers (PCs), and servers based on Intel's Pentium, Pentium Pro, Pentium II and Pentium III Xeon microprocessors and the Windows NT operating system. The Company's Intel/Windows- based solutions include low to high-end workstations and PCs, servers, software applications, peripherals, consulting, networking, system migration, training, and maintenance and support services. Depending upon user requirements, these products and services can be provided as point solutions or as integrated, complete 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. However, 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, and will further depend on its ability to successfully implement its strategic direction. In addition, the Company faces significant operational and financial uncertainty of unknown duration due to its dispute with Intel. In terms of broad market segments, the Company's mapping/geographic information systems and architecture/engineering/construction product applications continue to dominate the Company's product mix at approximately 47% and 19% of total systems sales in 1998, respectively, compared to 57% and 27%, respectively, in 1997. In March 1998, the Company sold its Solid Edge and Engineering Modeling System product lines to Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary. As a result, mechanical design, engineering and manufacturing applications no longer represent a significant portion of the Company's product mix. These applications represented 14% of total systems sales in 1997. For further information regarding the sale of these product lines, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 annual report, portions of which are incorporated by reference in this Form 10-K annual report. Business Entities Effective January 1, 1998, the Company divided its business into four separate units for operational and management purposes: Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc. (IPS), VeriBest, Inc., and the Software and Federal Systems business (Intergraph). The Company believes that this business structure provides greater focus and clear accountability for each as a business enterprise. For further information regarding the Company's operating segments, including financial information for 1998, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 11 of Notes to Consolidated Financial Statements contained in the Company's 1998 annual report, which are incorporated herein by reference. Intergraph Computer Systems - --------------------------- In January 1998, Intergraph Computer Systems (ICS) was established as a wholly-owned subsidiary of the Company. Headquartered in Huntsville, Alabama with a staff of approximately 1,200 people worldwide, ICS develops and supplies high performance Intel/Windows NT-based graphics workstations and PCs, servers, and 3D graphics subsystems. Intergraph Computer Systems is comprised of three business units: Visual Computing, Intense3D, and Enterprise Solutions. Visual Computing develops and supplies high performance Windows NT-based graphics solutions for creative professionals in markets that include publishing and prepress, digital media, and production broadcasting. Intense3D develops and supplies state of the art three dimensional graphics subsystems to major workstation OEMs, including the Visual Computing business unit of ICS. Enterprise Solutions provides Intel/Windows-based PCs, workstations, and servers for enterprise computing, other hardware products, and enterprise service solutions that include networking solutions, firewalls, installation packages, systems management solutions, consulting, training, and support. Visual Computing offers workstation products for a range of users. TDZ 3D graphics workstations offer animators, mechanical CAD designers, and other graphics professionals high end, industry standard graphics and computing power on price competitive Pentium II-based systems running Windows NT. 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. ExtremeZ 2D graphics workstations are Pentium II-based systems for prepress and publishing professionals. 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. Intense3D provides high-performance, Windows NT-based 3D graphics accelerators for visualization, CAD, digital content creation, virtual reality, and simulation software applications. Options include a complete range of Intense3D Wildcat and Intense3D Pro accelerators for mainstream 3D applications up to the most demanding creative and technical applications. Enterprise Solutions' product and service offerings include Intel/Windows-based PCs, workstations, servers, fully integrated optical disk products, backup solutions, firewalls, networking and system management solutions, as well as consulting, installation packages, rapid application deployment solutions, and Microsoft training. Depending on user requirements, Enterprise Solutions' products and services can be provided as point solutions or as integrated solutions that include all necessary hardware, software, and support services for an enterprise. Intergraph Computer Systems also offers special purpose peripherals such as disk and tape drives, printers, and other devices which may be manufactured in house or sold as original equipment from third parties. Intergraph Public Safety, Inc. - ------------------------------ In January 1997, Intergraph Public Safety, Inc. (IPS) was established as a wholly-owned subsidiary of the Company. Headquartered in Huntsville, Alabama, IPS provides total public safety solutions on a global basis. IPS solutions include computer hardware and software systems, training, maintenance, customer support, and outsourcing services. On January 1, 1999, the Utilities business of Intergraph was formally merged into IPS, increasing the subsidiary's total headcount to approximately 660 people worldwide. IPS's popular dispatch technology is a complementary application to the Utilities mainstream geospatial products, such as ActiveFRAMME. By linking the two, the Company is responding to utilities' increased demand for a total solution that integrates AM/FM/GIS, outage management and computer-aided dispatch. The Utilities business will continue to further develop the Company's core geospatial offerings, while collaboration with Intergraph Public Safety will augment those offerings by adding computer-aided dispatch and outage management components. IPS utility solutions assist companies in the management of customer centric geographic information systems (GIS) data containing all the information necessary for distributing electricity or gas, tracking distribution, and managing service disruptions. IPS's geospatial resource management solution spatially enables this data, integrating operational support systems such as outage analysis, providing real time information for customer service, and increasing operational efficiency enterprisewide. Utility solutions offered by IPS include engineering design and facilities management, technical document workflow and archiving, mobile computing and field support, outage management, spatial data analysis and data warehouse, and real time display facility analysis. The merger allows the Utilities group to focus expertise and resources in three strategic industry sectors: electric; gas, water and pipeline; and telecommunications. Sales, marketing and project services efforts are vertically focused along these segment lines. IPS public safety develops, markets, and implements computer- based solutions for emergency medical and rescue units, fire departments, law enforcement organizations, and other public safety agencies around the world. Other industries utilizing IPS solutions include automobile clubs for roadside assistance, and airports, campuses, and military bases for security systems. IPS's public safety strategy is to provide products representing a complete solution for public safety agencies. All IPS products are designed to participate in a comprehensive, integrated public safety information system. These products include computer-aided dispatch, police, fire, and emergency management systems, records management systems, jail management systems, civil process and mug shot systems, mobile computer systems, integrated radio and telephony solutions, interfaces to alarm systems, management information reporting systems, personnel rostering systems, and training management systems. The foundation product for IPS is its computer-aided dispatch system. This product fully integrates interactive, intelligent mapping with dispatching, records management, and state of the art communications capabilities. Designed specifically to support command and control operations, the system is composed of high performance graphics workstations and software. Records management is enhanced by a database that includes geographic map information as well as address, incident history, and traffic pattern data. IPS solutions are Intel processor/Windows NT-based and rely on Oracle Corporation's relational databases. By incorporating industry standard hardware and software with its products, IPS is able to provide customers with the best price and performance features available. IPS distributes its products worldwide through direct and indirect sales channels. IPS distributes its Utilities products directly in the U.S. Outside the U.S., Utilities products are sold through the Intergraph Corporation distribution channels. VeriBest, Inc. - -------------- In January 1996, VeriBest, Inc. was established as a wholly- owned subsidiary of the Company. VeriBest employs a staff of approximately 270 people worldwide, with concentrations at its corporate headquarters in Boulder, Colorado and development centers in Huntsville, Alabama and Mountain View, California. VeriBest serves the electronics design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. 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 provides its electronic system design solutions to the computer, telecommunications, automotive, industrial control, and consumer industries. VeriBest's core competencies include analog and digital simulation, signal integrity, printed circuit board (PCB) implementation, and enterprisewide design data and process management, and full FPGA/PLD design support including integration with logic synthesis tools from Synopsys and Synplicity. These core competencies are focused on several current market trends: the switch from point tools to integrated tools suites, the switch to hardware description languages for FPGA and PLD design, very high speed PCB's in the telecommunications and computer market segments, and the adoption of Windows NT as a workstation class operating system. Integration is particularly important because it increases the efficiency of the product development process, which substantially improves the customer's ability to get their products to market. To further improve customer's time to market, VeriBest offers consulting services to customize the product design process for each customer's unique product development needs and enterprise data management philosophy. VeriBest distributes its products worldwide through a direct sales channel, telesales, value added resellers, e-commerce (the Web), and through original equipment manufacturer (OEM) arrangements. VeriBest's multi-level distribution strategy, started in 1997, was enhanced by two events that occurred at the end of 1998. In December 1998, VeriBest shipped new versions of all of its products. This release of software, some two years in the making, allows VeriBest to more efficiently sell its technology at multiple price points through multiple channels. In November of 1998 it was announced that the FPGA vendor Actel had selected VeriBest as the source from which it would OEM a full tool suite for the design of its high performance FPGA and PLD silicon products. The addition of the Actel installed base is expected to substantially enhance the over 18,000 seats of VeriBest software currently installed around the world. Intergraph - ---------- Intergraph develops, markets, and supports technical solutions for the enterprise, including open, interdisciplinary software applications, specialized industry specific hardware, consulting, and support services. Intergraph provides these business solutions to three primary industries: process and building, mapping and geoengineering (including transportation and state and local governments), and federal government. Intergraph's principal software applications are based on Microsoft Windows, including operating systems, architecture components, and development environments. This open technology foundation enables Intergraph's software to interoperate with thousands of third-party Windows-based technical and business applications as well as with UNIX-based applications. An additional graphics foundation used by the Company for certain Intergraph software applications is MicroStation, software owned by Bentley Systems, Inc., an approximately 50%-owned affiliate of the Company. MicroStation provides fundamental graphics element creation, maintenance, and display functions for the Company's UNIX- and Intel-based workstations. In 1998, MicroStation sales represented approximately 8% of the Company's total software revenue. 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 1998 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 & Building. Intergraph provides total life cycle solutions to the process and building industries, including plant design, architectural, and shipbuilding solutions, as well as global service and support. For more than 20 years, engineering/procurement/and construction (EPC) contractors, and process plant owner/operators have used Intergraph solutions to design, construct, operate and maintain petrochemical, chemical, pharmaceutical, food and beverge, oil and gas, power generation, and mining industries from small stand-alone facilities to large global projects. Intergraph life cycle solutions increase the value of plant data by optimizing its storage, creation, management, integration, and access across the global enterprise. Intergraph solutions reduce design and contruction time, lower costs, enhance global execution, extend the life and usability of engineering data, and make data an integral part of the facility asset. According to industry analyst Daratech of Cambridge, Massachusetts, in 1998 Intergraph held a 56.6% revenue share of the 3D plant design and visualization market, more than 3.5 times more than the closest competitor. In the 2D plant design market segment, Intergraph held a 15.5% revenue share, an increase of 18.6% over 1997. Combined with revenue share from the recently acquired PID business, Intergraph holds a 22.2% revenue share - virtually tied with the number two vendor, Bentley Systems, (22.3%) in the 2D plant design market place. Demand for Intergraph Plant Design System (PDS), the Company's flagship plant design solution, remains strong. PDS provides: - - Automation that improves productivity - - Three-dimensional modeling that helps designers create a better design - - Interference-checking to reduce or eliminate field rework - - Accurate material takeoffs that cut costs - - Specification-driven design and checking that improves accuracy PDS supports process flow diagrams, piping and instrumentation diagrams, instrumentation data management, piping, equipment, heating/ventilation/air conditioning, electrical, structural, and other engineering aspects of a plant. The Intergraph SmartPlant family of process solutions, including SmartPlant P&ID, SmartPlant Explorer, and SmartSketch, is an open line of discipline-specific software tools that provides an integrated solution for the entire plant life cycle. Knowledge-based, intuitive, easy-to-use, accessible, flexible, and data neutral, SmartPlant supports global workflows. It enables users to create logical and physical definitions of the plant model and enables access to plant data from conceptual design to decommissioning. The successor to PDS, SmartPlant includes expanded functionality for front-end engineering and design (FEED), operation, and maintenance phases. An open system that preserves legacy plant data, SmartPlant will access and use PDS project and related data, enabling users to migrate to SmartPlant on a module- by-module basis, as their resources allow. Relying on 20 years of industry experience and market leadership, Intergraph develops life cycle information management solutions that unlock the true value of plant data, making it easily accessible and usable. Intergraph's engineering information management solution is the Asset & Information Management (AIM) suite. Intergraph's architectural solutions automate the building design process. With the Project Architect family, architecture/engineering firms and corporate or governmental offices can develop and model building concepts as well as produce construction documents. Included in the Project Architect family are capabilities for producing three-dimensional models of design concepts, architectural drawings, reports, engineering plans, and construction drawings. Intergraph FrameWorks Plus models the physical structure of buildings. FrameWorks Plus integrates with third-party analysis software for evaluating designs by simulating stresses encountered in end use. Shipbuilding solutions provide software systems and services for commercial and military ship design, construction, and management. In cooperation with international industry partners, Intergraph is developing the next generation solution that will streamline shipbuilding processes, lower manpower and material costs, and reduce the time to construct world class marine vessels. This software solution will provide the capability to create a ship design that speeds product development from conception to market delivery. It also provides capabilities for performing risk analysis, design integrity and functional engineering review of new and modified product designs. Mapping and Geoengineering. To help agencies strategically and efficiently manage transportation networks, Intergraph transportation solutions integrate maps, photos, property records, survey and engineering data, inspection reports, traffic safety, and congestion statistics. Intergraph photogrammetry, civil engineering, and mapping products provide transportation solutions that include imaging, design, modeling, reprographics, plotting, training, integration, and professional services. Industry and government transportation professionals use Intergraph photogrammetry solutions as a front end to mapping, geographic information systems (GIS), and civil engineering software from a variety of leading vendors. Photogrammetry is used for spatial and volume measurement of terrain in studies of the earth's surface. By comparing sequences of aerial photographs taken over time, professionals can monitor land use and environmental compliance, develop site plans for highways and railways, perform defense reconnaissance, and plan improvements in urban infrastructure and utilities. Intergraph's Windows NT- based end-to-end digital photogrammetry production system includes tools for aerotriangulation, mapping, automatic digital terrain model collection, and orthophoto generation. Intergraph also offers a software kit that transforms a PC into a low-cost, high-performance photogrammetry seat for applications such as model orientation, stereo compilation, and digital terrain modeling (DTM) collection and editing. For civil engineering, Intergraph's SelectCAD family of products allows departments of transportation and engineering/construction firms to easily switch between AutoCAD, IntelliCad 98 and MicroStation platforms, while using the same civil engineering tools for each of the various graphics engines. InRoads SelectCAD provides features needed for projects ranging from field design to construction. The software offers advanced DTM capability plus associative alignments with spirals, user-defined typical sections, and parametrically driven decision tables. Plans, profiles, cross sections, contour maps or shaded analytical models can be extracted to the user's standards. For state and local governments, Intergraph develops and implements civil engineering and mapping/GIS solutions for land records and mapping, asset management, public works, public safety, transportation engineering, infrastructure modeling, planning, and other functions. Intergraph's suite of civil engineering solutions offers local governments a full complement of solutions, from data collection to site design to water resources. Intergraph civil design products integrate with Intergraph GIS solutions to meet the needs of state and city governments around the world. Both civil and GIS product lines remove proprietary barriers by providing automated mapping, spatial analysis, network modeling, and integration with multimedia, satellite imagery, spreadsheets, documents, and more. The software also provides seamless integration with major vendor data formats. Intergraph's 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. The dominant mapping/GIS solution for transportation agencies is Intergraph's GeoMedia, a complete Windows-based desktop GIS solution for all decision support query and reporting activities. Using GeoMedia software, GIS professionals can access multiple geographic data sources simultaneously for display, analysis, and presentation. GeoMedia uses data servers to enable users to view and analyze multiple databases simultaneously, allows integration of multiple data types in a single environment, includes a complete set of advanced analysis, and provides an open development platform for creating custom applications. Designed to accommodate the enterprisewide GIS environment, GeoMedia and GeoMedia Web Map together enable open data access, analysis, and distribution of spatial data and information across the World Wide Web for use throughout the enterprise. Intergraph's MGE is used by transportation agencies as a high- end software for basemap analysis. MGE is the foundation for Intergraph's Modular GIS Environment (MGE) family of mapping and GIS software products. MGE offers project management, coordinate system operations, data query and access, multiple configuration options, and a range of common tools valuable to MGE modules. MGE is interoperable with the GeoMedia product suite. Also provided are solutions for end-to-end digital map and cartographic production. These solutions help cartographers manage the map production environment. From map scanning to map printing, Intergraph's end-to-end cartographic production tools provide the means to collect, process, and output data. Federal Systems. The Federal Systems business unit of Intergraph markets and sells commercial off-the-shelf and specially developed products and services to government agencies around the world. Federal Systems' offerings include ruggedized workstations, mapping and information systems, environmental management solutions, modeling and simulation systems, and state of the art security systems. Intergraph has been a top provider of computer hardware, software, and professional services solutions to the U.S. government for many years. 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, 1998, the Company spent $83.8 million (8.1% of revenues) for product development activities compared to $98.1 million (8.7% of revenues) in 1997, and $103.4 million (9.4% of revenues) in 1996. See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 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 Reflecting a trend toward outsourcing in the industry, on November 13, 1998, the Company sold substantially all of its U.S. manufacturing inventory and assets to SCI Technology, Inc. (SCI), a wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. Prior to the sale, this responsibility, which included the assembly and testing of components and subassemblies manufactured by the Company and others, was that of Intergraph Computer Systems (ICS), a wholly- owned subsidiary of the Company. This outsourcing is expected to bring the manufacturing and materials costs of ICS in line with those of its competitors. ICS does, however, retain certain risks, including its ability to accurately forecast its manufacturing requirements of SCI and risks associated with inventory excess and obsolescence as defined in the agreement. For a complete description of the SCI transaction and its anticipated impact on future operating results and cash flows, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 annual report, portions of which are incorporated by reference in this Form 10-K annual report. Substantially all of the Company's microprocessor needs are currently supplied by Intel Corporation. See Item 3, Legal Proceedings, following and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 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 1998 and 1997, compared to 18% in 1996. Each of the Company's four major business entities maintains its own sales force. Intergraph's selling efforts are organized along key industry lines (process and building, federal systems, and mapping and geoengineering, including transportation, photogrammetry, and state and local governments) for its major product applications. The Company believes an industry focus better enables it to meet the specialized needs of customers. In general, the direct sales forces are compensated through a combination of base salary and commission. Sales quotas are established along with certain incentives for exceeding quota. Additional specific incentive programs may be established periodically. Customer Support. The Company believes that a high level of customer support is important to the sale of interactive graphics systems. Customer support includes preinstallation guidance, customer training, onsite installation, hardware preventive maintenance, repair service, software help desk and technical support services in addition to consultative professional services. The Company employs engineers and technical specialists to provide customer assistance, maintenance, and training. Maintenance and repair of systems are covered by standard warranties and by maintenance agreements to which most users subscribe. The trend in the industry toward lower priced products and longer warranty periods has resulted in reduced levels of maintenance revenue for the Company. The Company believes this trend will continue in the future, though it may be partially offset by growth in the Company's professional services business. The Company is endeavoring to grow its services business and has redirected the efforts of its hardware maintenance organization to focus increasingly on systems integration and training. Revenues on these services, however, produce lower gross margins than maintenance revenues. International Operations International markets, particularly Europe and Asia, continue in importance to the industry and to the Company. Sales outside the U.S. represented approximately 51% of total revenues in 1998 and 53% in 1997. European and Asia Pacific revenues represented 31% and 10%, respectively, of total revenues in 1998 (31% and 12%, respectively, in 1997). The Company's operations are subject to and may be adversely affected by a variety of risks inherent in doing business internationally, such as government policies or restrictions, currency exchange fluctuations, and other factors. There are currently wholly-owned sales and support subsidiaries of the Company located in every major European country. European subsidiaries are supported by service and technical assistance operations located in The Netherlands. Outside of Europe, the Company's systems are sold and supported through a combination of subsidiaries and distributorships. At December 31, 1998, the Company had approximately 1,300 employees in Europe, 780 employees in the Asia Pacific region, and 650 employees in other international locations. Fluctuations in the value of the U.S. dollar in international markets can have a significant impact on the Company's results of operations. The Company conducts business in all major markets outside the U.S., but the most significant of these operations with respect to currency risk are located in Europe and Asia. Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. With respect to the currency exposures in these regions, the objective of the Company is to protect against financial statement volatility arising from changes in exchange rates with respect to amounts denominated for balance sheet purposes in a currency other than the functional currency of the local entity. The Company will therefore enter into forward exchange contracts related to certain balance sheet items, primarily intercompany receivables, payables, and formalized intercompany debt, when a specific risk has been identified. Periodic changes in the value of these contracts offset exchange rate related changes in the financial statement value of these balance sheet items. Forward exchange contracts, generally less than three months in duration, are purchased with maturities reflecting the expected settlement dates of the balance sheet items being hedged, and only in amounts sufficient to offset 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. At December 31, 1998, the Company's only outstanding forward contracts related to formalized intercompany loans between the Company's European subsidiaries. The Company has historically experienced slower collection periods for its international accounts receivable than for similar sales to customers in the United States. The Company is experiencing slow collections throughout the Middle East region, particularly in Saudi Arabia. Total accounts receivable from Middle Eastern customers was approximately $23 million at December 31, 1998 and $21 million at December 31, 1997. 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 1998 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 $166 million in 1998, $177 million in 1997, and $161 million in 1996, representing approximately 16% of total revenue in 1998 and 1997, and 15% in 1996. The majority of these revenues are attributed to the Federal Systems business unit of the Intergraph operating segment. The Company sells to the U.S. government under long term contractual arrangements, primarily indefinite delivery, indefinite quantity and cost plus award fee contracts, and through commercial sales of products not covered by long term contracts. Approximately 44% 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 Intergraph Federal Systems and the Company as a whole. The Company has historically experienced slower collection periods for its U.S. government accounts receivable than for its commercial customers. At December 31, 1998, accounts receivable from the U.S. government was approximately $55 million versus approximately $53 million at December 31, 1997. 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, 1998 and 1997 was $237 million and $169 million, respectively. Substantially all of the December 1998 backlog of orders is expected to be shipped during 1999. 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, Compaq Computer 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 personal computer market, Intergraph competes with vendors such as Compaq Computer Corporation and Dell Computer Corporation. The primary competitors of Intergraph Public Safety are TriTech Software Systems, Litton PRC, Tiburon, Inc., and Printrak International Inc. 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 1998 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 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. Prior to the April 1998 ruling of the Alabama Court (See Item 3, Legal Proceedings, following), Intel was withholding such information, attempting to cancel existing agreements and refusing to enter into new nondisclosure agreements with the Company. Intel's actions are the subject matter of current litigation, and Intel has appealed the April 1998 court ruling. Intel's actions have damaged the Company by slowing the introduction of new products using Intel components and preventing proper maintenance and support of Company products using Intel components. The Company expects the Appeals Court to uphold the April 1998 ruling. However, if the ruling is overturned, 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 1998 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, 1998, the Company had approximately 6,700 employees. Of these, approximately 2,730 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. With the exception of VeriBest, all of the Company's operating segments have corporate headquarters located within the Huntsville facilities. VeriBest is headquartered in Boulder, Colorado with development centers in Huntsville, Alabama and Mountain View, California. The Company's operating segments maintain sales and support facilities throughout the world. The Company owns over 1,800,000 square feet of space in Huntsville that is utilized for manufacturing, product development, sales and administration. The Huntsville facilities also includes over 500 acres of unoccupied land. The Company maintains subsidiary company facilities, including those of its VeriBest operating segment, and sales and support locations in major U.S. cities outside of Huntsville through operating leases. Under the terms of its manufacturing outsourcing agreement with SCI, the Company is leasing its Huntsville manufacturing facilities, consisting of approximately 248,000 square feet of space, to SCI for a period of six to twelve months before SCI moves the former Intergraph manufacturing operation to another facility. It is anticipated that the transition of manufacturing from Intergraph to SCI facilities will take place in the second quarter of 1999. 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 - ----------------- The Company filed a legal action on November 17, 1997, in U.S. District Court, the Northern District of Alabama, Northeastern Division (the "Alabama Court"), charging Intel Corporation, the supplier of all of the Company's microprocessor supply, with anticompetitive business practices. In the lawsuit, Intergraph alleges that Intel 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 requested that Intel be enjoined from continuing the alleged wrongful conduct which is anticompetitive and/or violates federal antitrust laws, so as to permit Intergraph uninterrupted development and sale of Intel-based products. On November 21, 1997, the Company filed a motion in the Alabama Court to enjoin Intel from disrupting or delaying its supply of products and product information, pending resolution of Intergraph's legal action. On April 10, 1998, the Alabama Court ruled in favor of Intergraph and ordered that Intel be preliminarily enjoined from terminating Intergraph's rights as a strategic customer in current and future Intel programs, and from otherwise taking any action adversely affecting Intel's business relationship with Intergraph or Intergraph's ability to design, develop, produce, manufacture, market or sell products incorporating, or based upon, Intel products or information. The Court's ruling requires that Intel carry out business with Intergraph under the same terms and conditions, with the same rights, privileges, and opportunities as Intel makes available to Intergraph's competitors who are also strategic customers of Intel. In response to the Alabama Court's decision, on April 16, 1998, Intel appealed to the United States Court of Appeals for the Federal Circuit (the "Appeals Court"). Intel and the Company have each filed briefs with the Appeals Court, and oral arguments were presented on December 9, 1998. No decision has been entered. Intel filed a retaliatory legal action on November 17, 1997, in the U.S. District Court, the Northern District of California (the "California Court"), 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 asserted claims for damages and awards and requested 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. On May 18, 1998, the Alabama Court denied this motion, and Intel subsequently dropped the two retaliatory lawsuits which Intel had brought against the Company in California. On June 17, 1998, Intel filed its answer in the Alabama case, which included counterclaims against Intergraph, including claims that Intergraph has infringed seven patents of Intel. On July 8, 1998, the Company filed its answer to the Intel counterclaims, among other things denying any liability under the patent infringement asserted by Intel. On June 17, 1998, Intel filed a motion before the Alabama Court seeking a summary judgment holding that Intel is licensed to use the patents that the Company asserted against Intel in the Company's original complaint. This "license defense" is based on Intel's interpretation of the facts surrounding the acquisition by the Company of the Advanced Processor Division of Fairchild Semiconductor Corporation in 1987. The Company is vigorously contesting Intel's motion for summary judgment on the license defense, and filed a cross motion with the Alabama Court September 15, 1998 requesting summary adjudication in favor of the Company. No decision has been entered. On November 13, 1998, the Company amended its complaint to include two additional counts of patent infringement against Intel. The Company requested the court to issue a permanent injunction enjoining Intel from further infringement, and to order that the financial impact of the infringement be calculated and awarded in treble to Intergraph. No decision has been entered. On January 29, 1999, Intergraph filed a motion requesting the Alabama Court to require Intel to show cause why it should not be held in contempt for its failure to comply with the Court's automated discovery order and for improperly designating discovery materials as protected by the attorney client privilege. In its motion, Intergraph requested the Court to set a status conference on discovery and a hearing on its motion. No decision has been entered. In a scheduling order entered June 25, 1998, the Alabama Court set a trial date of February 14, 2000. The Company believes it was necessary to take legal action against Intel in order to defend its workstation business, its intellectual property, and the investments of its shareholders. The Company is vigorously prosecuting its positions and defending against Intel's claims and believes it will prevail in these matters, but at present is unable to predict an outcome. 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 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. 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. In a second proceeding brought in March 1996, Bentley commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia, 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 are scheduled to conclude with a decision from the arbitration panel in second quarter of 1999. 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. See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1998 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. Name Age Position Officer Since - ---- --- -------- ------------- James W. Meadlock 65 Chairman of the Board and Chief Executive Officer 1969 James F. Taylor Jr. 54 Executive Vice President and Director, Intergraph Corporation and Chief Executive Officer, Intergraph Public Safety, Inc. 1977 Robert E. Thurber 58 Executive Vice President and Director 1977 Lawrence F. Ayers Jr. 66 Executive Vice President 1987 Klaas Borgers 54 Executive Vice President 1994 Penman R. Gilliam 61 Executive Vice President 1994 Lewis N. Graham Jr. 44 Executive Vice President 1997 Richard H. Lussier 53 Executive Vice President 1996 Nancy B. Meadlock 60 Executive Vice President 1969 Wade C. Patterson 37 Executive Vice President, Intergraph Corporation and Chief Executive Officer and President, Intergraph Computer Systems 1994 Stephen J. Phillips 57 Executive Vice President 1987 Preetha R. Pulusani 38 Executive Vice President 1997 Charles E. Robertson Jr. 45 Chief Executive Officer and President, VeriBest, Inc. 1992 William E. Salter 57 Executive Vice President 1984 K. David Stinson Jr. 45 Executive Vice President 1996 John W. Wilhoite 47 Executive Vice President and Chief Financial Officer 1988 Edward A. Wilkinson 65 Executive Vice President 1987 Allan B. Wilson 50 Executive Vice President 1982 Manfred Wittler 58 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 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 the Company and Chief Operating Officer of Intergraph Computer Systems since 1997. A key person in the development and growth of Intergraph Computer Systems worldwide operations, Mr. Borgers directs ICS's sales, services, manufacturing and distribution operations. Penman R. Gilliam joined the Company in April 1994 as Executive Vice President responsible for federal programs. Mr. Gilliam is the manager responsible for the federal mapping and information systems organization and the Company'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. Lewis N. Graham Jr. joined the Company in 1985 and has been involved in the design and delivery of imaging and mapping systems during most of his career with the Company. He was elected Vice President in 1997 and has served as Executive Vice President, managing the mapping and geoengineering division of Intergraph, since August 1998. Mr. Graham holds a bachelor's degree in physics and a master's degree in electrical engineering. 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 the Company in 1990 to pursue personal business interests. He rejoined the Company in 1996 as Executive Vice President of U.S. Sales. 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 an Executive Vice President. She holds a master's degree in business administration. Mrs. Meadlock and James W. Meadlock are wife and husband. Wade C. Patterson joined the Company in 1984 as a design engineer developing UNIX and central processing unit (CPU) subsystems for Intergraph workstation products. In 1992, Mr. Patterson managed Windows NT workstation projects as the Company made the transition from reduced instruction set computing CPUs to Intel microprocessor-based CPUs. Mr. Patterson has been responsible for hardware development and marketing for Intergraph Computer Systems, the Company's hardware subsidiary, since August 1994. He was elected Vice President at that time and is currently an Executive Vice President of the Company and Chief Executive Officer and President of Intergraph Computer Systems. 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. Preetha R. Pulusani joined the Company in 1980 as a software engineer, and since that time has held several positions in the areas of marketing and development of mapping technology for the Company. She was elected Vice President in 1997 and has served as Executive Vice President, responsible for the mapping and geographic information systems business of Intergraph, since August 1998. Ms. Pulusani holds a master's degree in computer science. 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 the Company 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. He is a graduate of the U.S. Air Force Academy and holds a masters degree in management administration science. John W. Wilhoite joined the Company in July 1985 after eleven years with Price Waterhouse & Co. He has been Controller of the Company since 1986 and was elected Vice President in 1988. In May 1998, he was elected Executive Vice President of Finance and was named Chief Financial Officer in December 1998. Mr. Wilhoite holds a bachelor's degree in business administration and is a certified public accountant. Edward A. Wilkinson joined the Company in 1985 as Director of Government Relations. He was elected Vice President of Federal Systems in 1987 and Executive Vice President in 1994. Prior to joining the Company, Mr. Wilkinson served 34 years in the U.S. Navy, retiring with the rank of Rear Admiral. He holds a master's degree in mechanical engineering. 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 56 of the Intergraph Corporation 1998 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, 1998, appearing under "Five Year Financial Summary" on the inside front page of the Intergraph Corporation 1998 annual report to shareholders is incorporated by reference in this Form 10-K annual report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 18 to 33 of the Intergraph Corporation 1998 annual report to shareholders is incorporated by reference in this Form 10-K annual report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Information relating to the Company's market risks appearing under "Impact of Currency Fluctuations and Currency Risk Management" and "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on pages 30 to 33 of the Intergraph Corporation 1998 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 34 to 55 of the Intergraph Corporation 1998 annual report to shareholders are incorporated by reference in this Form 10-K annual report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information appearing under "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" on pages 4 to 5 of the Intergraph Corporation proxy statement relative to the annual meeting of shareholders to be held May 13, 1999, 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 16 to 18 in this Form 10-K annual report is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information appearing under "Executive Compensation" on pages 6 to 13 of the Intergraph Corporation proxy statement relative to the annual meeting of shareholders to be held May 13, 1999, 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 13, 1999, is incorporated by reference in this Form 10-K annual report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K Page in Annual Report * --------------- (a) 1) The following consolidated financial statements of Intergraph Corporation and subsidiaries and the report of independent auditors thereon are incorporated by reference from the Intergraph Corporation 1998 annual report to shareholders: Consolidated Balance Sheets at December 31, 1998 and 1997 34 Consolidated Statements of Operations for the three years ended December 31, 1998 35 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 36 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998 37 Notes to Consolidated Financial Statements 38-54 Report of Independent Auditors 55 * Incorporated by reference from the indicated pages of the 1998 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, 1998 24 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Financial statements of 50%-or-less-owned companies have been omitted because the registrant's proportionate share of income before income taxes of the companies is less than 20% of consolidated loss before income taxes, and the investments in and advances to the companies are less than 20% of consolidated total assets. 3) Exhibits Page in Number Description Form 10-K ------ ----------- ---------------- 3(a) Certificate of Incorporation, Bylaws, and Certificate of Merger (1). 3(b) Amendment to Certificate of Incorporation (2). 3(c) Restatement of Bylaws (3). 4 Shareholder Rights Plan, dated August 25, 1993 (4) and amendment dated March 16, 1999. 10(a)* Employment Contract of Manfred Wittler dated November 1, 1989 (5) and amendment dated February 18, 1998 (9). 10(b) Loan and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated December 20, 1996 and amendments dated January 14, 1997 (6), November 25, 1997 (9), and October 30, 1998 (10). 10(c)* Intergraph Corporation 1997 Stock Option Plan (6). 10(d)* Agreement between Intergraph Corporation and Green Mountain, Inc. dated April 1, 1998 (7). 10(e) Indemnification Agreement between Intergraph Corporation and each member of the Board of Directors of the Company dated June 3, 1997 (8). 10(f)* Employment Contract of Wade Patterson dated May 30, 1997 (8) and amendment dated November 2, 1998. 10(g)* Intergraph Corporation Nonemployee Director Stock Option Plan (9). 10(h) Amended and Restated First Mortgage and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated November 25, 1997 (9). 10(i)* Employment Contract of Klaas Borgers dated September 1, 1997. 10(j) Asset Purchase Agreement by and among SCI Technology, Inc. as Buyer and Intergraph Corporation as Seller dated November 13, 1998, with Exhibits and Schedule 1 (10). 10(k)* Intergraph Computer Systems Holding, Inc. 1998 Stock Option Plan. 13 Portions of the Intergraph Corporation 1998 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report 21 Subsidiaries of the Company 25 23 Consent of Independent Auditors 26 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, 1998, 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. (9) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997, under the Securities Exchange Act of 1934, File No. 0-9722. (10) Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated November 13, 1998, under the Securities Exchange Act of 1934, File No. 0-9722. - ---------- (b) Reports on Form 8-K - on November 25, 1998, the Company filed a Current Report on Form 8-K (dated November 13, 1998) which reported a transaction pursuant to which the Company sold substantially all of its U.S. manufacturing assets to SCI Technology, Inc. (SCI), and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. (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 1998 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 29, 1999 --------------------------- 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 29, 1999 - --------------------------- Chairman of the Board James W. Meadlock (Principal Executive Officer) /s/ James F. Taylor Jr. Executive Vice President and March 29, 1999 - --------------------------- Director, Intergraph James F. Taylor Jr. Corporation, and Chief Executive Officer, Intergraph Public Safety, Inc. /s/ Robert E. Thurber Executive Vice President and March 29, 1999 - --------------------------- Director Robert E. Thurber /s/ Keith H. Schonrock Jr. Director March 29, 1999 - --------------------------- Keith H. Schonrock Jr. - --------------------------- Director March 29, 1999 Larry J. Laster - --------------------------- Director March 29, 1999 Thomas J. Lee - --------------------------- Director March 29, 1999 Sidney L. McDonald /s/ John W. Wilhoite Executive Vice President March 29, 1999 - --------------------------- and Chief Financial Officer John W. Wilhoite (Principal Financial and Accounting Officer) 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 1998 $14,488,000 3,168,000 3,842,000 (1) $13,814,000 1997 $16,703,000 2,844,000 5,059,000 (1) $14,488,000 1996 $20,399,000 (2,049,000) (3) 1,647,000 (1) $16,703,000 Allowance for obsolete inventory deducted from inventories in the balance sheet 1998 $36,508,000 19,346,000 24,605,000 (2) $31,249,000 1997 $43,223,000 15,582,000 22,297,000 (2) $36,508,000 1996 $34,441,000 24,189,000 15,407,000 (2) $43,223,000 (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 State or Other Voting Jurisdiction Securities Name of Incorporation Owned by Parent - --------------------------------- ---------------- --------------- InterCAP Graphics Systems, Inc. Delaware 100 Intergraph Asia Pacific, Inc. Delaware 100 Intergraph Computer Systems Holding, Inc. Delaware 100 Intergraph European Manufacturing, L.L.C. Delaware 100 Intergraph (Italia), L.L.C. Delaware 100 Intergraph (Middle East), L.L.C. Delaware 100 Intergraph Public Safety, Inc. Delaware 100 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) SA France 100 Intergraph GmbH (Osterreich) Austria 100 Intergraph Hungary, Ltd. Hungary 100 Intergraph Norge A/S Norway 100 Intergraph (Portugal) Sistemas de Computacao Grafica, S.A. Portugal 100 Intergraph SR s.r.o. Slovac Republic 100 Intergraph (Sverige) AB Sweden 100 Intergraph (Switzerland) A.G. Switzerland 100 Intergraph (UK), Ltd. United Kingdom 100 Intergraph Computer Systems Benelux B.V. The Netherlands 100 Intergraph Computer Systems (Deutschland) GmbH Germany 100 Intergraph Computer Systems France, SA France 100 Intergraph Computer Systems Italia Srl Italy 100 Intergraph Computer Systems, Ltd United Kingdom 100 Intergraph Computer Systems Nordic AB Sweden 100 Intergraph Public Safety Belgium N.V. The Netherlands 100 Intergraph Public Safety Deutschland, GmbH Germany 100 Public Safety France, SA France 100 Intergraph Public Safety U.K., Ltd. United Kingdom 100 VeriBest GmbH Germany 100 VeriBest International, Ltd. United Kingdom 100 VeriBest S.A. France 100 Intergraph China, Ltd. Hong Kong 100 Intergraph BEST (Vic) Pty. Ltd. Australia 100 Intergraph Computer (Shenzhen) Co. Ltd. China 100 Intergraph Corporation (N.Z.) Limited New Zealand 100 Intergraph Corporation Pty. Ltd. Australia 100 Intergraph Corporation Taiwan Taiwan, R.O.C 100 Intergraph Hong Kong Limited Hong Kong 100 Intergraph Japan K.K. Japan 100 Intergraph Korea, Ltd. Korea 100 Intergraph Public Safety (NZ) Limited New Zealand 100 Intergraph Public Safety Pty., Ltd. Australia 100 Intergraph Systems Singapore Pte Ltd. Singapore 100 VeriBest K.K. Japan 100 Intergraph Computer Services Industry & Trade, A.S. Turkey 100 Intergraph Canada, Ltd. Canada 100 Intergraph Computer Systems Canada, Inc. Canada 100 Intergraph Public Safety Canada Ltd. Canada 100 Intergraph de Mexico, S.A. de C.V. Mexico 100 Intergraph Electronics Ltd. Israel 100 Intergraph Servicios de Venezuela C.A. Venezuela 100 Intergraph Saudi Arabia Ltd. Saudi Arabia 75 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 February 1, 1999, included in the 1998 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 February 1, 1999, 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, 1998. /s/ Ernst & Young LLP Birmingham, Alabama March 29, 1999 EX-4 4 AMENDMENT NO. 1 TO RIGHTS AGREEMENT Amendment No. 1 to Rights Agreement dated as of March 16, 1999, amending the Rights Agreement, dated as of August 25, 1993 (the "Rights Agreement"), between Intergraph Corporation, a Delaware corporation (the "Company"), and Harris Trust & Savings Bank, an Illinois banking corporation, as Rights Agent (the "Rights Agent," which term shall include any successor Rights Agent under the Rights Agreement at the Company's direction). WITNESSETH: WHEREAS, on August 25, 1993, the Company and the Rights Agent entered into the Rights Agreement; WHEREAS, Section 26 of the Rights Agreement provides that prior to the Distribution Date, the Company and the Rights Agent may amend any provision of the Rights Agreement without the approval of any holders of certificates representing shares of Common Stock; and WHEREAS, on November 5, 1998, the Board of Directors of the Company determined to amend the Rights Agreement and directed the Rights Agent to enter into this Amendment; NOW, THEREFORE, for and in consideration of the premises, the Rights Agreement is amended as follows: 1. Section 1(m) of the Rights Agreement is amended to read as follows: [Intentionally Left Blank] 2. Section 1(r) of the Rights Agreement is amended to read as follows: [Intentionally Left Blank] 3. Section 3(c) of the Rights Agreement is deleted in its entirety and amended to read as follows: (c) Rights shall be issued by the Company in respect of all Common Shares (other than Common Shares issued upon the exercise or exchange of any Right) issued or delivered by the Company (whether originally issued or delivered from the Company's treasury) after the Record Date but prior to the earlier of the Distribution Date and the Expiration Date. Certificates evidencing such Common Shares shall have stamped on, impressed on, printed on, written on or otherwise affixed to them the following legend or such similar legend as the Company may deem appropriate and as is not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or transaction reporting system on which the Common Shares may from time to time be listed or quoted, or to conform to usage: This Certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between Intergraph Corporation and Harris Trust and Savings Bank, dated August 25, 1993, as amended March 16, 1999 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Intergraph Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights may be redeemed, may be exchanged, may expire, may be amended or may be evidenced by separate certificates and no longer be evidenced by this Certificate. Intergraph Corporation will mail to the holder of this Certificate a copy of the Rights Agreement without charge promptly after receipt of a written request therefor. Under certain circumstances as set forth in the Rights Agreement, Rights beneficially owned by an Acquiring Person or any Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement) may become null and void. 4. Section 23(a) of the Rights Agreement is deleted in its entirety and amended to read as follows: (a) The Board of Directors of the Company may, at its option, at any time prior to the earlier of (i) the Distribution Date or (ii) the Final Expiration Date, redeem all, but not less than all, of the then outstanding Rights at the Redemption Price. The redemption of the Rights by the Board may be made effective at such time, on such basis and with such conditions as the Board, in its sole discretion, may establish. 5. Section 26 of the Rights Agreement is deleted in its entirety and amended to read as follows: Supplements and Amendments. Prior to the Distribution Date and subject to the last sentence of this Section 26, if the Company so directs, the Company and the Rights Agent may from time to time supplement or amend any provision of this Agreement without the approval of any holders of certificates representing Common Shares. From and after the Distribution Date and subject to the last sentence of this Section 26, the Company and the Rights Agent may supplement or amend this Agreement without the approval of any holders of Right Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder, or (iv) to supplement or amend the provisions hereunder in any manner which the Company may deem desirable, including, without limitation, the addition of other events requiring adjustment to the Rights under Sections 11 or 13 hereof or procedures relating to the redemption of the Rights, which supplement or amendment shall not, in the good faith determination of the Board of Directors, adversely affect the interests of the holders of Right Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person). Upon the delivery of a certificate from an officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 26 and certification that the Board of Directors has approved the supplement or amendment, the Rights Agent shall execute such supplement or amendment; provided, however, that the failure or refusal of the Rights Agent to execute such supplement or amendment shall not affect the validity of any supplement or amendment adopted by the Company, any of which shall be effective in accordance with the terms thereof. Notwithstanding anything in this Agreement to the contrary, no supplement or amendment shall be made which decreases the stated Redemption Price or the period of time remaining until the Final Expiration Date or which modifies a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable. Further, notwithstanding anything in this Agreement to the contrary, no supplement or amendment that changes the rights and duties of the Rights Agent under this Agreement will be effective against the Rights Agent without the execution of such supplement or amendment by the Rights Agent. IN WITNESS THEREOF, the parties hereto have caused this Amendment No.1 to Rights Agreement to be duly executed as of the date first above written. INTERGRAPH CORPORATION By: /s/ Stephen J. Phillips ______________________________________ Name: Stephen J. Phillips Title: Assistant Secretary HARRIS TRUST AND SAVINGS BANK By: /s/ Dennis M. Sneyers _____________________________________ Name: Dennis M. Sneyers Title: Vice President EX-10.F 5 November 2, 1998 Mr. Wade Patterson 117 Woodrow Balch Drive Huntsville, Alabama 35806 Dear Wade: You and Intergraph Corporation have entered into an Employment Agreement in the form of a letter agreement dated May 30, 1997. A copy of that Employment Agreement is attached hereto. That Agreement continues in full force and effect until its termination. By this letter, Intergraph Corporation extends to you the option to terminate that Employment Agreement on or after December 31, 1999 under all terms set forth in this letter, by providing written notice delivered to General Counsel of Intergraph Corporation. Termination of the Employment Agreement shall not constitute termination of your employment with Intergraph Corporation, which will continue on an employment-at-will basis, under all the terms set forth in this letter. Within thirty (30) days following the delivery of written notice of your termination of the Employment Agreement on or after December 31, 1999, Intergraph Corporation will pay to you the sum of two million dollars ($2,000,000). During the period of your continuing at-will employment following the termination of your Employment Agreement, the following terms and conditions will apply: 1. Your employment will be subject to the policies set forth in the Intergraph Policy Manual as it may be modified from time-to-time for all employees. 2. It is understood and agreed that you will continue to be engaged in outside business for Intellicomp Corporation and that this business is not a violation of Intergraph's policy on Conflicts of Interest, so long as it does not interfere unduly with your ability to perform your duties for Intergraph. 3. The Proprietary Information and Inventions Agreement, separately executed May 31, 1997, the terms of which comprise a material part of the Employment Agreement, is attached hereto and incorporated herein and shall continue in full force and effect and comprises a material part of this Letter Agreement. Page 2 November 2, 1998 Mr. Wade C. Patterson 4. Inventions made for Intellicomp Corporation are not covered by the terms of the attached Proprietary Information and Inventions Agreement. 5. For a period of one (1) year after your employment with Intergraph or its subsidiary ends for any reason, you will not accept employment with or act as a consultant to any Intergraph competitor in the United States in any technical field in which Intergraph has a business interest. 6. This Letter Agreement supersedes all prior discussions and documents that relate to the subject matter covered herein. This Letter Agreement can be altered only in writing and signed by you and by the CEO of Intergraph. 7. All amounts set forth in this Letter Agreement shall be subject to tax and other withholding under Intergraph's usual compensation practices. Please indicate your acceptance of the above terms by signing in the space indicated below. INTERGRAPH CORPORATION By: /s/ James M. Meadlock _______________________ James M. Meadlock, Chief Executive Officer of Intergraph Corporation AGREED and ACCEPTED: /s/ Wade C. Patterson _______________________ Wade C. Patterson Attachments SJP:lee EX-10.I 6 CONTRACT OF EMPLOYMENT 710-008 The private company, Intergraph European Manufacturing LLC, having its principal place of business at Nijmegen with a subsidiary office at Hoofddorp, The Netherlands, hereinafter referred to as "the company", and Name Klaas Borgers Address Hoofdstr. 161 Sassenheim, Netherlands hereinafter referred to as "the employee", hereby declare to have entered into an agreement effective date, September 1, 1997, the terms of which are as follows: Appointment and Duration - ------------------------ The employee will be employed by the company at Intergraph European Manufacturing LLC located in the Nijmegen Distribution Facility, as Executive Vice President, World- wide Operations for Intergraph Computer Systems, Inc., and Executive Vice President, Intergraph Corporation, reporting to Mr. Wade Patterson, President, Intergraph Computer Systems, Inc. (ICS), and Executive Vice President Intergraph Corporation, in job grade 1, commencing on October 1, 1997. For the remuneration provided herein the employee shall perform all of the duties of Executive Vice President, World-wide Operations for ICS (this includes world-wide sales, manufacturing, distribution and support as well as the product marketing for ICS in Hoofddorp) for the assigned territory. This agreement has been entered into for a unlimited period of time until, but will be terminated by rights, without a formal notice being required, on the last day of the month during which the employee becomes eligible for a pension or retirement. The company is entitled to redefine the duties entrusted to the employee or to adapt them to new circumstances or transfer the employee to another office-location should such measures be in the interest of the company; decisions on such measures being at the sole discretion of the company. Should such alterations be of a more permanent nature, the company will discuss its measures with the employee prior to effectuation. The employee shall devote his entire working time and intention to the business of the company and use his best efforts to carry out the appointed tasks to the best of his ability. Termination and Severance - ------------------------- If the employee resigns voluntarily the employee must give Intergraph a minimum of two (2) months written notice. Upon involuntary termination the company will give the employee two (2) months written notice, during which time the employee may be required to work, at the Company's discretion. Intergraph may wish to repatriate you elsewhere within the worldwide Intergraph organization after your assignment in Hoofddorp, the Netherlands. It you accept a job within Intergraph, you will be transferred to the new location according to local transfer policy. If the Company and the Employee cannot reach acceptable terms, and the Company wishes to end your contract, a termination according to Dutch Law will be established. Remuneration - ------------ On entering upon his duties the employee will receive a gross base salary of DFL 270,000 per annum. In addition, the employee shall receive the standard employee benefits package for the Netherlands. Representation Costs - -------------------- You will be paid representation costs of DFL 750.00 per month beginning October 1, 1997, according to the Personnel Policy Manual. Office Hours - ------------ The employee shall work at least 40 hours per week for the company. The office hours are from 8.30 - 12.30 and from 13.00 - 17.00 hrs. The employee is obliged, should this be essential for the satisfactory execution of the business of the company, to carry out duties outside the agreed working hours if his superior(s) request him to do so. Transfer Assistance - ------------------- Intergraph will pay annually tax consulting services with documented receipts, for the preparation of your tax returns both in The Netherlands and The United States. The payment for preparation of tax returns will conclude one year after termination. Company Car - ----------- The company provides a company car in accordance with job grade 1 for the use of the employee, subject to the current Company Car Policy as recorded in the Personnel Policy Manual. Within reason private use of the car is allowed, but subject to the current Company Car Policy. A monthly net charge for the private use of the company car will be deducted from the employee's salary. In case the employee is unable to perform his duties for more than two months because of illness or other reasons, the company has the right to reclaim the car immediately. Vacation/Leave - -------------- The employee is entitled to a vacation of 25 working days annually. Any remaining leave to which rights have been acquired during any year must have been taken up by 1st April of the following year. If the employee neglects to take his vacation before this date he forfeits his rights. Pension Plan - ------------ The employee is eligible to continue to participate in the company Pension Plan for ececutives, the C-Polis Plan, to which both the employee and the company contribute, provided the employee is 25 years old. The premiums which the employee owes by becoming a participator will be deducted from his salary each month by the company and paid into the pension fund. The bylaws of the pension plan contain detailed information on the rights and obligations of the parties concerned. Any further details concerning the pension plan will be provided separately. Health and Disability - --------------------- If the employee is unable to perform his duties because of illness or other reasons, he is obliged to inform the company of any such disability on the first day of this disability by 9.30 hrs., in accordance with the procedure stated in the Personnel Policy Manual. In case of illness the company shall supplement the sickness benefit the employee receives according to the social security system so that the employee will receive an amount which is the equivalent of his net monthly salary. Supplementary payments will be made during the first twelve months of the employee's illness, but in no case shall such payments be made after the employee has become eligible for a pension. Furthermore, no such payments will be made if the employee is not eligible for sickness benefit according to the social security system. Health Insurance - ---------------- The employee is obliged to contribute to the collective health insurance effected by the company, provided the employee meets the requirements made or the employee may elect to remain on the benefit plan in the US The company will reimburse 50 percent gross of the premiums the employee owes for health insurance (maximum class 2 B). The employee authorizes the company, through signing this agreement, to deduct from his salary each month 1/12 of the premium. Stock Purchase Plan - ------------------- The company offers the employee the opportunity to participate in the Intergraph Stock Purchase Plan. Further details can be obtained form the Human Resources department. Secrecy - ------- Both company and employee are obliged to do or refrain from doing everything employers and employees are expected to do or refrain from doing in accordance with the demands which can reasonably be made in the case of a company-employee relationship. Both during the time of employment and after termination of this agreement the employee is obliged to maintain the strictest secrecy concerning any information he has obtained in the course of his duties which pertains to the business and interests of the company and which the employee knows or may reasonably be expected to infer to be of a confidential nature. The employee is obliged to refrain from supplying any information to third parties concerning names, addresses and other details concerning the company's clients without prior approval from the company. All information, drawings, specifications and other documents which the company has supplied to the employee, or which the employee has drawn up or helped to draw up in the course of his duties remain the property of the company and shall be returned to the company forthwith, should the company request the employee to do so. Any such documents, or copies of documents, drawings and specifications which the employee has in his care, shall be returned in any case when this agreement is terminated. This agreement shall be governed by and construed in accordance with the law of The Netherlands. While employed by the company the employee shall not undertake any activities on behalf of other companies or on behalf of himself pertaining to the carrying out of a profession or the execution of a business, without prior written permission from the company. Any stipulations made here or in the Personnel Policy Manual, which forms an integral part of this agreement, are subject to change. /s/ Wade Patterson __________________________ Wade Patterson Date: 12/11/97 Executive Vice President Intergraph Corporation I herewith declare to accept the terms of this agreement and I confirm that the information given by me to the company during the procedure which preceded this agreement and on the basis of which this agreement was made, faithfully reflects the true state of affairs and that no information has been withheld by me which could reasonably be expected to have had an influence on this agreement. Herewith I declare furthermore to be in good health and to be willing and prepared to undertake business trips should the company require me to do so. /s/ Klaas Borgers _________________________ Klaas Borgers Date: 30-10-97 Vice President European Support EX-10.K 7 INTERGRAPH COMPUTER SYSTEMS HOLDING, INC. 1998 STOCK OPTION PLAN ARTICLE I: Purpose The purposes of the Intergraph Computer Systems Holding, Inc. Stock Option Plan are (i) to align the interests of the Company's shareholders and recipients of Options under the Plan by increasing the proprietary interest of such recipients in the Company's growth and success and (ii) to advance the interests of the Company by attracting and retaining well- qualified persons by providing such persons with performance- related incentives. ARTICLE II: Definitions For purposes of the Plan, the following terms shall have the following meanings: "Affiliate" shall mean any corporation, partnership or any other entity in which the Company owns, directly or indirectly, at least a ten percent (10%) beneficial interest or any individual, corporation, partnership or any other entity which owns, directly or indirectly, at least a five percent (5%) beneficial interest in the Company. "Board" shall mean the Board of Directors of the Company or a Committee appointed by the Board of Directors of the Company. "Cause" shall mean (i) dishonesty, (ii) theft, (iii) fraud, (iv) embezzlement, (v) commission of a felony or a crime involving moral turpitude, (vi) substantial dependence or addiction to alcohol or any drug, (vii) conduct disloyal to the Company or its affiliates, or (viii) willful dereliction of duties or disregard of lawful instructions or directions of the officers or directors of the Company or its affiliates relating to a material matter. "Change in Control" shall mean (a) the acquisition of the power to direct, or cause the direction of, the management and policies of the Company by a person (not previously possessing such power), acting alone or in conjunction with others, whether through the ownership of Common Stock, by contract or otherwise, or (b) the acquisition, directly or indirectly, of the power to vote more than 50% of the outstanding Common Stock by any person or by two or more persons acting together. For purposes of this definition, (1) the term "person" means a natural person, corporation, partnership, joint venture, trust, government or instrumentality of a government, and (2) customary agreements with or between underwriters and selling group members with respect to a bona fide public offering of Common Stock shall be disregarded. "Code" shall mean the Internal Revenue Code of 1986, as amended, or any successor legislation. "Committee" shall mean the members of the Board, or a committee appointed by the Board to administer this Plan, such committee to at all times shall consist of two or more members of the Board. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee shall be filled by the Board. The Committee shall select one of its members as Chairman and shall hold meetings at such times and places as it may determine. "Common Stock" shall mean the common stock, $.10 par value per share, of the Company. "Company" shall mean Intergraph Computer Systems Holding, Inc., a Delaware corporation, and its wholly owned subsidiaries. "Disability" shall mean the permanent and total inability, by reason of physical or mental infirmity, or both, of a Participant to perform the work customarily assigned to him by the Company. The determination of the existence or nonexistence of Disability shall be made by the Board pursuant to a medical examination by a medical doctor selected or approved by the Board. "Eligible Person" shall mean any Person eligible to participate in the Plan pursuant to Article III of the Plan. "Exchange Act" shall mean the Securities Exchange Act of 1934. "Fair Market Value" shall mean the fair market value of a share of Common Stock as determined in good faith by the Board, using such methodology as it in its sole discretion may deem appropriate, or, if at any time the Common Stock is publicly traded on any exchange or any over-the-counter market, the average of the bid and asked price on the date of determination for a share of Common Stock as reported by the Wall Street Journal, or, if the Wall Street Journal does not report such closing price, such price as reported by a newspaper or trade journal selected by the Board, shall be the fair market value of a share of Common Stock. "ISO" shall mean an Option granted under this Plan to purchase Common Stock which is intended by the Company to satisfy the requirements of Code Section 422. "Non-ISO" shall mean an Option granted under this Plan to purchase Common Stock which is not intended by the Company to satisfy the requirements of Code Section 422. "Option" shall mean an ISO or a Non-ISO granted pursuant to Article VII hereof. "Participant" shall mean any Person to whom an Option has been granted pursuant to this plan. "Person" shall mean any individual, corporation, general or limited partnership, limited liability company or other entity. "Plan" shall mean this Intergraph Computer Systems Holding, Inc. Stock Option Plan, as amended from time to time. "Retirement" shall mean termination of employment under the terms of the Company's then current retirement program. "Rule 16b-3" shall mean Rule 16b-3 promulgated under Section 16(b) of the Exchange Act or any successor to such rule. "Ten Percent Shareholder" shall mean any Person who, immediately prior to the time an Option is granted to such Person pursuant to the Plan, directly or indirectly owns Common Stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company. For purposes of this Plan, an individual shall be treated as owning any Common Stock which is owned by such individual's brothers and sisters (whether by the whole or half blood), spouse, ancestors and lineal descendants, and stock owned directly or indirectly by or for a corporation, partnership, trust or estate shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. Stock available for purchase pursuant to an Option, however, shall not be treated as owned for purposes of this paragraph. ARTICLE III: Eligibility and Participation Employees of the Company who, in the judgment of the Board, are responsible for or contribute to the management, growth and/or profitability of the business of the Company are eligible to be granted Options under the Plan. Participants shall be selected from time to time by the Board, in its sole discretion, from among those eligible, and the Board shall determine, in its sole discretion, the number of shares of Common Stock subject to an Option. ARTICLE IV: Shares Available Section 4.1 Number; Limitations. The total number of shares of Common Stock subject to issuance under the Plan may not exceed 5,000,000, subject to adjustment as provided by Section 4.3. The shares to be delivered under the Plan may consist, in whole or in part, of authorized but unissued shares of Common Stock or treasury Common Stock not reserved for any other purpose. Section 4.2 Unused Stock. In the event any shares of Common Stock are subject to an Option which, for any reason, expires, terminates or, with the consent of the Participant, is canceled as to such shares, such Common Stock may again be made available for issuance under the Plan. Section 4.3 Adjustment Provisions. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization, or any distribution to holders of Common Stock other than a cash dividend, the number and class of shares available under the Plan, the number and class of shares subject to each outstanding Option and the purchase price per share, and the number and class of shares subject to each other outstanding Option shall be appropriately adjusted by the Committee, such adjustments to be made without a change in the aggregate purchase price or reference price set forth in the agreements or other documents describing such Options. ARTICLE V: Effective Date The effective date of this Plan shall be the date it is adopted by the Board, provided that the shareholders of the Company shall approve this Plan in accordance with Rule 16b- 3 and, to the extent this Plan provides for the issuance of ISOs, the shareholders of the Company shall approve those portions of this Plan related to the granting of ISOs within twelve (12) months after the date of adoption. If any Options are granted under the Plan before the date of such shareholder approval, such Options automatically shall be granted subject to such approval. ARTICLE VI: Administration Section 6.1 Administration and Interpretation. This Plan shall be administered by the Board. The Board acting in its absolute discretion shall exercise such powers and take such action as expressly called for under this Plan and, further, the Board shall have the power to interpret this Plan and (in the event that the Company becomes subject to the reporting requirements of Section 16(b) of the Exchange Act, subject to Rule 16b-3) to take such other action in the administration and operation of this Plan as the Board deems equitable under the circumstances, which action shall be binding on the Company, on each affected Participant, and on each other person directly or indirectly affected by such action. Each member of the Committee and each member of the Board shall be fully justified in relying or acting in good faith upon any report made by the independent public accountants of the Company and upon any other information furnished in connection with the Plan by any person or persons other than such member. In no event shall any person who is or has been a member of the Committee or of the Board be liable for any determination made or other action taken by him or any failure by him to act in reliance upon any such report or information, if in good faith. Neither the Board nor any member thereof shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Board may be entitled to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorney's fees) arising therefrom to the full extent permitted by law and under any directors' and officers' liability insurance that may be in effect from time to time, in all events as a majority of the Board then in office may determine from time to time, as evidenced by a written resolution thereof. In addition, no member of the Board and no employee of the Company shall be liable for any act or failure to act, by any other member or other employee, or by any agent, to whom duties in connection with the administration of this Plan have been delegated, or for any act or failure to act by such member or employee, except in circumstances involving such member's or employee's bad faith, gross negligence, intentional fraud or violation of a statute. Section 6.2 Options. The Board shall have full authority, consistent with the terms of the Plan, to grant Options, and other stock-based awards to Eligible Persons. In particular, and without limitation, the Board shall have the authority: (a) to select the Participants to whom Options may from time to time be granted hereunder; (b) to determine the types of Options, and combinations thereof, to be granted hereunder to Eligible Persons; (c) to determine the number of shares of Common Stock to be covered by each Option granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Option granted hereunder (including, but not limited to, any restriction or limitation on exercise or transfer, any vesting schedule or acceleration thereof, or any forfeiture provisions or waiver thereof, regarding any Option and the shares of Common Stock relating thereto, based on such factors as the Board shall determine in its sole discretion); (e) to determine whether Common Stock and other amounts payable with respect to an Option under the Plan shall be deferred either automatically or at the election of the Participant; and (f) to modify or waive any restrictions or limitations contained in, and grant extensions to or accelerate the vesting of, any outstanding Options as long as such modifications, waivers, extensions or accelerations are consistent with the terms of this Plan; but no such changes shall impair the rights of any Participant without his or her consent. An Option shall be evidenced by written agreements between the Company and the Participant to whom the Option is granted and no such Option shall be valid until so evidenced. ARTICLE VII: Stock Options Section 7.1 Grants. Options shall be either ISOs or Non-ISOs. The Board shall have the authority to grant to any Eligible Person one or more ISOs or Non-ISOs. With respect to Options granted under this Plan, if the Fair Market Value (determined at the date of grant) of Common Stock with respect to which ISOs may become exercisable for the first time in any calendar year by any Participant is greater than $100,000, then any such Options in excess of such amount, if any, shall constitute Non-ISOs and shall not be ISOs. Section 7.2 Terms of Options. Options granted under this Plan shall be subject to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Board shall deem desirable: (a) Exercise Price. The exercise price per share of Common Stock purchasable under an Option shall be determined by the Committee at the time of grant, provided that no ISO shall have an exercise price less than 100% of the Fair Market Value of the Common Stock on the date such Option is granted, and, provided further, that no ISO which is granted to a Ten Percent Shareholder shall have an exercise price that is less than 110% of the Fair Market Value of the Common Stock on the date such ISO is granted. (b) Option Term. The term of each Option shall be fixed by the Board, but no Option shall be exercisable more than ten (10) years after the date the Option is granted, and no ISO which is granted to a Ten Percent Shareholder shall be exercisable more than five (5) years after the date the Option is granted. (c) Vesting and Exercisability. Except as provided in Article VI and X hereof, all Options granted under this Plan shall vest over a five (5) year period, with twenty-five percent (25%) of the shares subject to each such Option grant to become first exercisable on the second anniversary of the date the Option is granted, and an additional twenty- five percent (25%) of the shares subject to each such Option to become exercisable on each anniversary date thereafter. (d) Exercisability Upon Termination. In the event of the termination of a Participant's employment with the Company, the rights under any then outstanding Option granted pursuant to the Plan shall terminate upon the earlier of the expiration date of the Option and (i) in the event of death, Disability or Retirement, sixty (60) days after such date of termination, or (ii), in the event of termination for any reason other than death, Disability or Retirement, sixty (60) days after such date of termination. (e) Method of Exercise. An Option may be exercised (i) by giving written notice to the Company specifying the number of whole shares of Common Stock to be purchased with the purchase price therefor to be payable in full either (A) in cash (B) in previously owned whole shares of Common Stock (for which the holder of the Option has good title free and clear of all liens and encumbrances) with their Fair Market Value determined as of the date of exercise, (C) with respect to Non-ISOs, by authorizing the Company to retain whole shares of Common Stock which would otherwise be issuable upon exercise of the Option with their Fair Market Value determined as of the date of exercise, or (D) a combination of (A), (B) and (C), in each case to the extent determined by the Board at the time of grant of the Option, and (ii) by executing such documents as the Company may reasonably request. No shares of Common Stock shall be issued until the full purchase price has been paid. Section 7.3 Option Agreement. As determined by the Board on the date of grant, each Option shall be evidenced by a written option agreement, substantially in the form attached hereto as Exhibit A, that shall specify, among other things, the type of Option granted, the Option price, the duration of the Option, and the number of shares of Common Stock to which the Option pertains. The Option Agreement shall set forth the schedule on which such Options become exercisable. ARTICLE VIII: Buy-Sell Provisions; Restrictions on Transfer of Common Stock Section 8.1 Buy-Sell Provisions. In the event that a Participant's employment with the Company is terminated, the Company shall have the right and option to repurchase all of the shares of Common Stock then held by the Participant which were acquired pursuant to Options granted under this Plan in accordance with the terms and conditions set forth below. (a) Termination Due to Death, Disability, or Retirement. (i) In the event the employment of a Participant is terminated by reason of death, Disability or Retirement, the Participant or his or her estate or legatee, as the case may be, shall have the right and option, but not the obligation, to demand that the Company repurchase all, but not less than all, of the shares of Common Stock then held by the Participant which were acquired pursuant to Options granted under this Plan; provided, however, that in the event that the Common Stock becomes publicly traded, any Common Stock then held by such Participant shall not be subject to the provisions of this Section 8.1. Such right and option shall be exercisable for a period of sixty (60) days from the date the Option expires as set forth in Section 7.2(d) hereof. (ii) The purchase price to be paid by the Company for each of the shares of Common Stock subject to this Section 8.1 shall be the Fair Market Value of such shares of Common Stock on the date of termination, or, in the case of Options which are exercised following the date of termination the date of exercise of the Option by the Participant or his or her estate or legatee, as the case may be. (iii)The closing of the purchase by the Company, if any, shall take place at the principal office of the Company on a date designated by the Company. The designated date shall not be more than sixty (60) days after the date on which the Participant or his or her estate or legatee, as the case may be, exercises its option to sell the shares of Common Stock owned by the Participant pursuant to Section 8.1(a)(i) above, unless the purchase price for the Common Stock has not yet been determined, in which case the closing shall occur not more than sixty (60) days following the determination of such purchase price. At closing, the Participant or the Participant's legal representative shall relinquish all further right, title, and interest in the Common Stock owned by the Participant and shall surrender and deliver to the Company all of the certificates representing the Common Stock owned by the Participant, with appropriate endorsement thereon or duly executed stock powers. All Common Stock sold to the Company shall be free from liens, options, or encumbrances of any kind. (iv) The full amount of the purchase price shall be paid, by Company check, at the closing. (b) Termination Other Than for Death, Disability, or Retirement. (i) If the employment of the Participant shall terminate for any reason other than death, Disability, or Retirement, the Company shall have the right and option to repurchase all, but not less than all, of the shares of Common Stock then held by the Participant that were acquired pursuant to Options granted under this Plan; provided, however, that in the event that the Common Stock becomes publicly traded, any Common Stock then held by such Participant shall not be subject to the provisions of this Section 8.1. Such right and option shall be exercisable for a period of one hundred and eighty (180) days following the date of termination, except, in the case of shares subject to the exercise of Options, such one hundred and eighty (180) day period shall commence after the expiration of the Option as set forth in Section 7.2(d) hereof. (ii) In the event of Participant's voluntary termination or in the event Participant's employment is terminated by the Company for Cause, the purchase price to be paid by the Company for each of the shares of Common Stock of the Participant subject to this Section 8.1 shall be the purchase price actually paid by such Participant for such shares of Common Stock. In the event Participant's employment is terminated by the Company without Cause, the purchase price to be paid by the Company for each of the shares of Common Stock of the Participant subject to this Section 8.1 shall be the Fair Market Value of such shares of Common Stock on the date of termination. (iii)The closing of the purchase by the Company, if any, shall take place at the principal office of the Company on a date designated by the Company. The designated date shall not be more than thirty (30) days after the date on which the Company exercises its option described in Section 8.1(b)(ii) above, unless the purchase price for the Common Stock has not yet been determined, in which case the closing shall occur not more than thirty (30) days following the determination of such purchase price. At closing, the Participant or the Participant's legal representative shall relinquish all further right, title and interest in and to the Common Stock and shall surrender and deliver to the Company all of his certificates representing Common Stock, with appropriate endorsement thereon or daily executed stock powers. All Common Stock sold to the Company shall be free from liens, options, or encumbrances of any kind. (iv) Payment of the purchase price shall be made by check in the amount of twenty-five percent (25%) of the purchase price, and a promissory note of the Company in the amount of the remainder of the purchase price. Such note shall be payable in four (4) equal annual installments of principal, commencing on the first anniversary of the event causing the repurchase, and such note shall bear interest payable annually at a fixed rate equal to seventy-five percent (75%) of the prime lending rate as reported in the Money Rates section of The Wall Street Journal on the date of closing. Such note shall give the Company the right, at any time and from time to time, to prepay any or all of the outstanding balance, without penalty. (c) Buyout and Settlement Provisions. In addition to the provisions discussed above, the Board may at any time offer to buy out an Option previously granted, based on such terms and conditions as the Board shall establish and communicate to the Participant at the time such offer is made. Section 8.2 Restrictions on Transfer. In addition to the provisions set forth in Section 8.1 above, the Board shall impose such restrictions on any shares of Common Stock acquired pursuant to Options under the Plan as it may deem advisable, including, without limitation, the right of first refusal described below, restrictions under applicable federal securities law, restrictions imposed by any stock exchange upon which such shares of Common Stock are then listed, and restrictions under any blue sky or state securities laws applicable to such shares. For so long as the Common Stock is not publicly traded on any exchange or any over-the-counter market, if at any time during a Participant's lifetime, following the acquisition of Common Stock pursuant to an Option granted under this Plan, the Participant shall desire to sell all or any part of the shares acquired by Participant pursuant to such Option, the Participant may sell the same only after offering it to the Company in the following manner: (a) The Participant shall serve notice upon the Company stating that the Participant has received a bona fide offer for the sale of shares of the Common Stock and setting forth the following information: (i) the number of shares of the Participant's Common Stock proposed to be sold; (ii) the name and address of the person offering to purchase such Common Stock; and (iii) the sale price and terms of payment of such sale. Such notice shall also contain an offer by the Participant to sell such shares of the Common Stock to the Company at the price offered by such bona fide offeror. (b) For a period of thirty (30) days after receipt of such notice, the Company shall have the right and option to purchase all or a portion of the shares of Common Stock so offered. If the Company fails to exercise such option with respect to all or a portion of such shares of Common Stock, subject to applicable legal restrictions (including restrictions affecting the resale of such shares), the Participant shall be free to sell such remaining shares of Common Stock to the person named in the aforesaid notice at a price and upon the terms and conditions set forth in such notice; provided, however, that such disposition shall be made within thirty (30) days following the termination of the option of the Company to purchase such shares of Common Stock. ARTICLE IX: Termination or Amendment This Plan may be amended by the Board from time to time to the extent that the Board deems necessary or appropriate; provided, however, that no amendment shall be made which would impair the rights of a Participant with respect to Options theretofore granted or which would impair the value of such Options, without such Participant's consent; and, provided further, that (a) no such amendment shall be made absent the approval of the shareholders of the Company as required under Section 422 of the Code, as may be amended from time to time, (1) to increase the number of shares of Common Stock reserved under Section 4.1, or (2) to change the class of employees eligible for Options under Article III hereof, (b) at such time as the Company becomes subject to the reporting requirements of the Exchange Act, if and to the extent of any restriction relating thereto in Rule 16b-3 or any other provision of the Exchange Act, the Board shall not amend this Plan absent the approval of the shareholders of the Company (1) to increase materially the benefits accruing to a Participant under the Plan, (2) to increase materially the number of securities which may be issued under the Plan, or (3) otherwise modify materially the requirements as to eligibility for participation in the Plan, and (c) no provision of this Plan shall be amended more than once every six months if amending such provision would result in the loss of an exemption under Rule 16b-3. Any amendment which specifically applies to Non-ISOs shall not require shareholder approval unless such approval is necessary to comply with Section 16 of the Exchange Act. The Board also may suspend the granting of Options under this Plan at any time and may terminate this Plan at any time; provided, however, the Board shall not have the right unilaterally to modify, amend or cancel any Option granted before such suspension or termination unless (1) the Participant consents in writing to such modification, amendment or cancellation or (2) there is a dissolution or liquidation of the Company or a transaction described in Section 4.3 or Article X of this Plan. ARTICLE X: Sale or Merger or Change in Control Section 10.1 Sale or Merger. If the Company agrees to sell all or substantially all of its assets for cash or property or for a combination of cash and property or agrees to any merger, consolidation, reorganization, division or other corporate transaction in which Common Stock is converted into another security or into the right to receive securities or property and such agreement does not provide for the assumption or substitution of Options, each Option may, at the direction and discretion of the Board, be (a) canceled unilaterally by the Company (subject to such conditions, if any, as the Board deems appropriate under the circumstances) in exchange for whole shares of Common Stock (and cash in lieu of a fractional share), the number of which, if any, shall be determined by the Board on a date set by the Board for this purpose based upon the value of such Options as determined in good faith by the Board using such methodology as it in its sole discretion may deem appropriate, or (b) canceled unilaterally by the Company if the Option Price equals or exceeds the Fair market Value of a share of Common Stock on such date. Section 10.2 Change in Control. If there is a Change in Control of the Company or a tender or exchange offer is made for Common Stock other than by the Company, the Board thereafter shall have the right to take such action with respect to any outstanding Options as the Board deems appropriate under the circumstances to protect the interest of the Company in maintaining the integrity of such Options under this Plan, including following the procedures set forth in Section 10.1 for a sale or merger of the Company. The Board shall have the right to take different action under this Section 10.2 with respect to different Participants or different groups of Participants, as the Board deems appropriate under the circumstances. In no event, however, shall the Board take any action under this Section 10.2 which would impair the value of such Options, without the affected Participant's consent. ARTICLE XI: Duration of the Plan No Option shall be granted under this Plan on or after the earlier of: (a) the tenth anniversary of the effective date of this Plan (as determined under Article V of this Plan), in which event this Plan thereafter shall continue in effect until all outstanding Options have been exercised in full and/or became fully vested or no longer are exercisable; or (b) the date on which all of the Common Stock reserved under Section 4.1 of this Plan has (as a result of the exercise and/or vesting of Options granted under this Plan) been issued or no longer is available for use under this Plan, in which event this Plan also shall terminate on such date. ARTICLE XII: General Provisions Section 12.1 Unfunded Status of Plan. This Plan is intended to be unfunded. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. Section 12.2 No Right to Employment. Neither this Plan nor the grant of any Option hereunder shall give any employee of the Company any right with respect to continuance of employment by the Company, nor shall this Plan or the grant of an Option hereunder be a limitation in any way on the right of the Company by which an employee is employed to terminate his or her employment at any time. Section 12.3 Use of Proceeds. The proceeds received by the Company from the sale of Common Stock pursuant to the exercise of Options under the Plan shall be added to the Company's general funds and used for general corporate purposes. Section 12.4 Other Plans. In no event shall the value of, or income arising from, any Options under this Plan be treated as compensation for purposes of any pension, profit sharing, life insurance, disability or any other retirement or welfare benefit plan now maintained or hereafter adopted by the Company, unless such plan specifically provides to the contrary. Section 12.5 Section 16. It is intended that the Plan and any Options granted to a person subject to Section 16 of the Exchange Act meet all of the requirements of Rule 16b-3. If any provision of the Plan or any Option grant would disqualify the Plan or such Option, or would otherwise not comply with Rule 16b-3, such provision or Option shall be construed or deemed amended to conform to Rule 16b-3. Section 12.6 No Restriction on Right of Company to Effect Corporate Changes. Nothing in the Plan shall affect the right or power of the Company or its shareholders to make or authorize any adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or which are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. Section 12.7 Withholding of Taxes. As a condition to the grant of an Option, the vesting of any Option or the lapse of any restrictions pertaining thereto, the Company may, in the discretion of the Board, require the Participant to pay such sum to the Company as may be necessary to discharge the Company's obligations with respect to any taxes, assessments or other governmental charges imposed on property or income received by a Participant pursuant to the Plan. In the discretion of the Board, such payment may be in the form of cash or other property. In the discretion of the Board, the Company may (i) make available for delivery a lesser number of shares, in satisfaction of such taxes, assessments or other governmental charges, or (ii) deduct or withhold from any payment or distribution to a Participant whether or not pursuant to the Plan; provided, however, that notwithstanding any of the above, the Participant ultimately shall be responsible for the payment of taxes with respect to Options granted under this Plan. Section 12.8 Shareholder Rights. A Participant shall have no rights as a shareholder with respect to any shares issued or issuable with respect to an Option until a certificate or certificates evidencing such shares shall have been issued to or for the benefit of such Participant, and no adjustment shall be made for dividends or distributions or other rights in respect of any share for which the record date is prior to the date upon which the Participant shall become the holder of record thereof. Section 12.9 No Assignment of Benefits. No Option or other benefit payable under this Plan shall, except as otherwise specifically provided by this Plan or by law, be transferable in any manner other than by will or the laws of descent and distribution, and any attempt to transfer any such benefit shall be void. Options may only be exercised or settled during the Participant's lifetime by the Participant or his or her guardian, conservator or other legal representative. Options or other benefits payable under this Plan shall not in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such benefit, nor shall it be subject to attachment or legal process for or against such person. Section 12.10 Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Delaware (without regard to applicable Delaware principles of conflict of laws). Section 12.11 Construction. Wherever any words are used in this Plan in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply. Section 12.12 Exceptions. Exception to the aforementioned rules and condition may only be granted by vote of the Board of Director. EX-13 8 Five Year Financial Summary - -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- (In thousands except per share amounts) Revenues $1,032,790 $1,124,305 $1,095,333 $1,097,978 $1,041,403 Nonrecurring operating charges (credit) 15,843 1,095 10,545 6,040 ( 4,826) Loss from operations (114,206) (54,916) (68,724) (54,145) (72,642) Gains on sales of assets 112,533 4,858 11,173 6,493 5,815 Net loss ( 19,634) (70,237) (69,112) (45,348) (70,220) Net loss per share, basic and diluted ( .41) ( 1.46) ( 1.46) ( .98) ( 1.56) Working capital 216,520 204,534 230,804 261,140 282,893 Total assets 695,974 720,989 756,347 826,045 839,618 Total debt 83,213 104,665 65,644 69,541 61,114 Shareholders' equity 355,332 368,783 447,263 504,064 522,337 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 years in the period ended December 31, 1998. The complete consolidated financial statements of the Company, including footnote disclosures, are presented on pages 34 to 54 of this annual report. - ---------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------- (In millions except per share amounts) Revenues $1,033 $1,124 $1,095 Cost of revenues 708 724 692 - ---------------------------------------------------------------------- Gross profit 325 400 403 Operating expenses 423 454 461 Nonrecurring operating charges 16 1 11 - ---------------------------------------------------------------------- Loss from operations (114) ( 55) ( 69) Interest expense ( 8) ( 7) ( 5) Arbitration award --- ( 6) --- Gains on sales of assets 113 5 11 All other income (expense) - net ( 5) ( 3) ( 3) - ---------------------------------------------------------------------- Loss before income taxes ( 14) ( 66) ( 66) Income tax expense ( 6) ( 4) ( 3) - ---------------------------------------------------------------------- Net loss $ ( 20) $( 70) $( 69) ====================================================================== Net loss per share, basic and diluted $ (.41) $(1.46) $(1.46) ====================================================================== In 1993, the Company began the process of transformation of its proprietary, closed-system product offerings to the open computing environment of products based on Intel Corporation hardware and Microsoft Corporation software. The dedication of significant Company resources to hardware, software, and system implementation for this new environment contributed substantially to the Company's operating losses for the years 1993 through 1996. For hardware implementation, the Company chose to use only Intel processors and to focus its efforts and image creation on its core capabilities, specifically very high performance computational and graphics capabilities. This high-end market in the Windows NT operating system environment is supported only by Intel-based hardware products. The Company expected that its four year hardware development effort and investment in the high-end graphics market would result in substantially increased revenues and profits in 1997, but these benefits were not realized due primarily to actions of Intel described separately in the "Intel Litigation" section of this report. In addition, demand for the Company's software products did not meet expectations and gross margin on product sales continued to decline due primarily to price competition in the industry. In 1998, the Company's revenues and operating results continued to be impacted by its dispute with Intel, as resulting delays in new product releases eliminated the potential for revenue growth and increased the Company's inventory obsolescence charges. Price competition in the industry has also continued to adversely affect the Company's margins. Operating expenses have been reduced in reaction to lower sales volumes and through various restructuring actions, but have been offset to a degree by increased legal expenses related to Intel and other matters. The Company expects that the industry will continue to be characterized by higher performance and lower priced products, intense competition, rapidly changing technologies, shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers. The Company believes that its operating system and hardware architecture strategies are the correct choices. However, 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, and will further depend on its ability to successfully implement its strategic direction. In addition, the Company faces significant operational and financial uncertainty of unknown duration due to its dispute with Intel. To achieve and maintain profitability, the Company must substantially increase sales volume and/or continue to align its operating expenses with the level of revenue and gross margin being generated. Nonrecurring Operating Charges. In first quarter 1998, the Company reorganized its European operations to reflect the organization of the Company into four distinct business units and to align operating expenses more closely with revenue levels in that region. The cost of this reorganization was originally estimated and recorded at $5.4 million, primarily for employee severance pay and related costs. During the remainder of 1998, approximately $2.2 million of the costs accrued in the first quarter were reversed as the result of incurrence of lower severance costs than originally anticipated. In the fourth quarter, additional European reorganization costs of $2 million were recorded for further headcount reductions. The net year to date charge of $5.2 million is included in "Nonrecurring operating charges" in the 1998 consolidated statement of operations. Approximately 80 European positions have been eliminated in the sales and marketing, general and administrative, and pre- and post- sales support areas. Cash outlays related to this charge approximated $3.1 million in 1998, with the remaining costs to be paid during 1999. The Company estimates the European reorganization will result in annual savings of approximately $7 million. In fourth quarter 1998, the Company took further actions, principally in the form of direct workforce reductions, to align the operating expenses of its unprofitable businesses with their current revenue levels. Approximately 100 positions were eliminated, primarily in the Company's VeriBest and Intergraph Computer Systems business units. The costs of this reduction in force (approximately $1.3 million) are included in "Nonrecurring operating charges" in the 1998 consolidated statement of operations. Related cash outlays approximated $.8 million in 1998, with the remainder to be paid in 1999. The Company estimates that these headcount reductions will result in annual savings of approximately $7 million. The remainder of the 1998 nonrecurring operating charges consists primarily of write-offs of a) certain intangible assets, primarily capitalized business system software no longer in use, b) goodwill recorded on a prior acquisition of a domestic subsidiary and determined to be of no value, and c) a noncompete agreement with a former third party consultant. Prior to the write-off, amortization of these intangibles accounted for approximately $3.4 million of the Company's annual operating expenses. In fourth quarter 1996, the Company recorded a nonrecurring operating charge of $10.5 million, consisting of a $7.2 million revaluation of the assets of two unprofitable 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 unprofitable business units that were the subject of the 1996 charge. The total loss on these sales was $8.3 million, of which $7.2 million had been included in the 1996 asset revaluation. The remaining loss of $1.1 million is included in "Nonrecurring operating charges" in the 1997 consolidated statement of operations. Revenues and losses of these two business units totaled $24 million and $16 million, respectively, for the full year 1996. Assets of the business 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. Gains on Sales of Assets. As part of the efforts of the Company to focus on its core competencies, in 1998 the Company sold its Solid Edge and Engineering Modeling system product lines at a gain of $102.8 million and its printed circuit board manufacturing facility at a gain of $8.3 million. See "Nonoperating Income and Expense" following for further detail. SCI. Reflecting the trend toward outsourcing in the industry, on November 13, 1998, the Company completed a transaction with SCI Technology Inc. (SCI), a wholly owned subsidiary of SCI Systems, Inc., pursuant to which the Company sold substantially all of its U.S. manufacturing inventory and assets to SCI, and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. In addition, the Company licensed certain related intellectual property to SCI, and SCI employed approximately 300 of the Company's manufacturing employees. The total purchase price for the assets was approximately $62.4 million, $42.5 million of which was received during the fourth quarter of 1998. The final purchase price installment of $19.9 million was received on January 12, 1999. Proceeds from the sale have been utilized primarily to retire the Company's existing debt. The Company's gain on this transaction of $1.5 million is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. Significant contingencies related to the transaction include the right of SCI to return to the Company any inventory included in the initial sale that proves unusable in the manufacturing of current products, the ability of the Company to obtain most favorable pricing for products purchased from SCI through higher volumes, and the ability of the Company to accurately forecast its requirements of SCI. The Company expects to benefit from lower employee headcount and lower per unit costs for materials and overhead expenses, both of which should improve earnings and cash flow. The Company retains the risk associated with inventory excess and obsolescence, defined in the agreement as any component or material in SCI's inventory for more than 60 days and which is in excess of demand as reflected in the Company's six month forecast, if not mitigated by SCI with the vendor. The Company has the option to either purchase this inventory from SCI or authorize SCI to obtain liquidation offers from third parties. In connection with this transaction, the Company's term loan and security agreement was amended to incorporate the sale of the Company's manufacturing inventory and assets to SCI and to modify the borrowing base accordingly. See "Liquidity and Capital Resources" for a further discussion of the impact of this transaction on the Company's cash flow. Litigation and Other Risks and Uncertainties. The Company has extensive ongoing litigation, and its business is subject to certain other risks and uncertainties, including those described below. Intel Litigation. The Company filed a legal action on November 17, 1997, in U.S. District Court, the Northern District of Alabama, Northeastern Division (the "Alabama Court"), charging Intel Corporation, the supplier of all of the Company's microprocessor supply, with anticompetitive business practices. In the lawsuit, Intergraph alleges that Intel 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 requested that Intel be enjoined from continuing the alleged wrongful conduct which is anticompetitive and/or violates federal antitrust laws, so as to permit Intergraph uninterrupted development and sale of Intel-based products. On November 21, 1997, the Company filed a motion in the Alabama Court to enjoin Intel from disrupting or delaying its supply of products and product information pending resolution of Intergraph's legal action. On April 10, 1998, the Alabama Court ruled in favor of Intergraph and ordered that Intel be preliminarily enjoined from terminating Intergraph's rights as a strategic customer in current and future Intel programs, and from otherwise taking any action adversely affecting Intel's business relationship with Intergraph or Intergraph's ability to design, develop, produce, manufacture, market or sell products incorporating, or based upon, Intel products or information. The Court's ruling requires that Intel carry out business with Intergraph under the same terms and conditions, with the same rights, privileges, and opportunities as Intel makes available to Intergraph's competitors who are also strategic customers of Intel. In response to the Alabama Court's decision, on April 16, 1998, Intel appealed to the United States Court of Appeals for the Federal Circuit (the "Appeals Court"). Intel and the Company have each filed briefs with the Appeals Court, and oral arguments were presented on December 9, 1998. No decision has been entered. Intel filed a retaliatory legal action on November 17, 1997, in the U.S. District Court, the Northern District of California (the "California Court"), 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 asserted claims for damages and awards and requested 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. On May 18, 1998, the Alabama Court denied this motion, and Intel subsequently dropped the two retaliatory lawsuits which Intel had brought against the Company in California. On June 17, 1998, Intel filed its answer in the Alabama case, which included counterclaims against Intergraph, including claims that Intergraph has infringed seven patents of Intel. On July 8, 1998, the Company filed its answer to the Intel counterclaims, among other things denying any liability under the patent infringement asserted by Intel. On June 17, 1998, Intel filed a motion before the Alabama Court seeking a summary judgment holding that Intel is licensed to use the patents that the Company asserted against Intel in the Company's original complaint. This "license defense" is based on Intel's interpretation of the facts surrounding the acquisition by the Company of the Advanced Processor Division of Fairchild Semiconductor Corporation in 1987. The Company is vigorously contesting Intel's motion for summary judgment on the license defense, and filed a cross motion with the Alabama Court September 15, 1998 requesting summary adjudication in favor of the Company. No decision has been entered. On November 13, 1998, the Company amended its complaint to include two additional counts of patent infringement against Intel. The Company requested the court to issue a permanent injunction enjoining Intel from further infringement, and to order that the financial impact of the infringement be calculated and awarded in treble to Intergraph. No decision has been entered. On January 29, 1999, Intergraph filed a motion requesting the Alabama Court to require Intel to show cause why it should not be held in contempt for its failure to comply with the Court's automated discovery order and for improperly designating discovery materials as protected by the attorney client privilege. In its motion, Intergraph requested the Court to set a status conference on discovery and a hearing on its motion. No decision has been entered. In a scheduling order entered June 25, 1998, the Alabama Court set a trial date of February 14, 2000. 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. During 1997, Intergraph's product design and release cycle was severely impacted by Intel's refusal to provide Intergraph with advance technology and product information and immediate information on Intel defects and corrections. Intel continues to provide that information to the Company's competitors. Intel's refusal to provide this vital information has delayed the Company's new product releases by one to six months. These delays have resulted in lost sales for the Company as well as increased discounting on available products, severely impacting the Company's revenues and margins. While the April 1998 ruling of the Alabama Court requires Intel to provide Intergraph with advance product samples and technical information, the Company lost considerable sales momentum and continued to feel residual effects from the dispute through the end of 1998, including shipment problems resulting from a non-Intel chipset used in certain of the Company's workstations. In late 1997, when the dispute looked as if it might jeopardize the Company's supply of Intel components, an alternate chipset supplier was selected for some designs. In the third quarter of 1998, that vendor had difficulty delivering enough parts to the Company, resulting in a significant backlog that could not be shipped until the fourth quarter. Additionally, the Company believes that while Intel is supplying it with advance product samples and technical information, Intel's responsiveness is not at the same level as prior to the dispute. It was not until October 1998 that all of the Company's hardware product offerings contained the latest Intel technology and were technologically back in line with industry competition. The Company believes it was necessary to take legal action against Intel in order to defend its workstation business, its intellectual property, and the investments of its shareholders. The Company is vigorously prosecuting its positions and defending against Intel's claims and believes it will prevail in these matters, but at present is unable to predict an outcome. The Company does expect, however, that adverse effects on its operations will continue in the near term including, but not limited to, increased legal and administrative expenses associated with the lawsuit. Additionally, if the Company were to lose the Intel appeal (which is not anticipated by the Company), it would be forced to significantly alter its business plans, and its computer hardware business would be placed at significant risk. The Company is actively considering alternative strategies for its hardware business but has reached no conclusions on those alternatives. The costs of pursuit of any such strategies would likely be prohibitive. 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. In a second proceeding brought in March 1996, Bentley commenced arbitration against the Company, 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 are scheduled to conclude with a decision from the arbitration panel in second quarter of 1999. 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. A decision by the arbitration panel in favor of Bentley could immediately and significantly impact the results of operations and cash position of the Company. 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. Prior to the April 1998 ruling of the Alabama Court, Intel was withholding such information, attempting to cancel existing agreements and refusing to enter into new nondisclosure agreements with the Company. Intel's actions are the subject matter of current litigation, and Intel has appealed the April 1998 court ruling. Intel's actions have damaged the Company by slowing the introduction of new products using Intel components and preventing proper maintenance and support of Company products using Intel components. The Company expects the Appeals Court to uphold the April 1998 ruling. However, if the ruling is overturned, 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. Until recently, most computer programs were written to store only two digits of date-related information. Such programs may be unable to distinguish between the year 1900 and the year 2000. Unless corrected or replaced, programs with this inability could cause data processing malfunctions and computer system failures. The Company has initiated a program to mitigate and/or prevent possible adverse effects on operations of Year 2000 problems in its software and hardware products sold to customers and in its internally used software and hardware. The Company's efforts to identify and resolve Year 2000 issues related to its hardware and software product offerings are nearing completion. All products currently offered in the Company's standard price list are Year 2000 compliant or will be so certified as new versions and utilities are released. In addition, the Company has completed a significant effort to contact its customers and business partners to ensure that customers are aware of how to acquire detailed Year 2000 information regarding any Intergraph-produced product. The Company's Web site allows customers to request specific product information related to the Year 2000 issue, and provides a mechanism for requesting specific product upgrade paths. Customers under maintenance contract with the Company are being upgraded to compliant versions of the Company's software, and selected hardware remedies have been completed where appropriate. Accordingly, the Company does not believe that any Year 2000 problems in its installed base of products or in its current product offerings present a material exposure for the Company. However, the Company could suffer a loss of maintenance revenue should its customers discontinue any noncompliant products and not replace them with other products of the Company, and product sales could be lost should customers replace any noncompliant products with products of other companies. In addition, any liability claims by customers would increase the Company's legal expenses and, if successful, could have an adverse impact on the results of operations and financial position of the Company. The Company's product compliance costs have not had and are not anticipated to have a material impact on its results of operations or financial condition. Year 2000 readiness of the Company's business critical internal systems has been made a top priority by the Company's Year 2000 Program Team. These efforts were primarily concentrated in the third and fourth quarters of 1998, with significant efforts continuing through the first half of 1999. All business critical internal systems upgrades and programming changes are scheduled to be tested and implemented by the end of second quarter 1999. The Company is currently on target to meet this deadline. In the fourth quarter of 1998, the Company selected several new financial and administrative systems, in part a response to Year 2000 issues, which will be implemented over the next two years. Certain of these new systems form a part of the Company's Year 2000 internal solution and will be implemented in 1999. The Company estimates that costs related to new systems implementations, the majority of which will be capitalized as internal use software and amortized to operations over the estimated useful lives of the systems, will approximate $6 - 10 million in 1999 and 2000, a portion of which relates directly to Year 2000 issues. If certain system replacements and changes are not completed timely, the Year 2000 issue could have an adverse impact on the administrative systems of the Company. The Company believes that it will successfully implement all internal systems changes and replacements necessary to ensure the Year 2000 compliance of all business critical internal systems, but has contingency plans to further upgrade existing systems if implementation falls behind schedule. The Company is conducting a program of investigation with its critical suppliers to ensure continuous and uninterrupted supply, and includes Year 2000 provisions in its new supplier agreements. This program consists primarily of a major survey campaign and aggressive follow-up with significant suppliers to monitor compliance. The Company has also initiated discussions with other entities with which it interacts electronically, including customers and financial institutions, to ensure those parties have appropriate plans to remediate any Year 2000 issues. To date, responses to third party Year 2000 surveys do not provide assurance that these third parties will achieve Year 2000 compliance, as most companies are reluctant to make such representations. However, most of these parties have Year 2000 programs in place and, to date, no significant risks have been identified. There cannot be complete assurance that the systems of other companies on which the Company relies will be converted timely, and the Company could be adversely impacted by any suppliers, customers, and other businesses who do not successfully address this issue. The Company continues to assess these risks in order to reduce any potential adverse impact. The Company will develop contingency plans by the end of second quarter 1999 to address potential third party noncompliance issues, should any be present. The costs of the Year 2000 project and the dates on which significant phases will be completed are based on management's best estimates, which have been derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans, and other factors. There can be no assurance that these estimates of costs and completion dates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and implement new systems in a timely manner, and similar uncertainties. The Company believes it has an effective program in place to resolve the Year 2000 issue with respect to its internal systems in a timely manner; however, it has not yet completed all necessary phases of this program. In the event that the Company does not complete any additional phases, which is not anticipated, the Company could experience significant delays in sales order processing, shipping, invoicing, and collections, among other areas. In addition, the Company's operations could be materially adversely affected if Year 2000 compliance is not achieved by significant vendors. See Notes 1, 4, 6, 7, and 11 to Consolidated Financial Statements for further discussion of risks and uncertainties related to the Company. Orders. Systems orders for 1998 were $794 million, a 3% increase over the prior year after increases of 7% and 1% in 1997 and 1996, respectively. Order levels in 1996 and 1997 were adversely affected by slower than anticipated customer and market acceptance of the Windows NT/Intel strategy and, in 1997 and 1998, by the previously described actions of Intel. Orders in 1996 and 1997 were characterized by less than anticipated demand for the Company's hardware product offerings and by weakened 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. Releases of the Company's software products based on its Jupiter technology were delayed until late 1996 and initially 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 TDZ 2000 line of workstations resulting from Intel's wrongful conduct and delays. Order levels in 1998 were further reduced by the March sale of the Company's Solid Edge and Engineering Modeling System product lines and by the continuing effects of the dispute with Intel. By the end of fourth quarter 1998, all of the Company's hardware product offerings contained the latest Intel technology and were technologically back in line with industry competition. Fourth quarter 1998 orders improved to $242 million, leaving the Company with a year-end backlog of $237 million, the highest level since 1992. Geographic Regions. U.S. orders, including federal government orders, totaled $450 million for the year, up 11% after an increase of 24% in 1997 and a decline of 7% in 1996. The 1996 orders decline resulted primarily from a decrease in orders in one of the Company's unprofitable business units sold in early 1997. Excluding this business unit, U.S. orders for 1997 were up 29% and flat for 1996. The increases in both 1997 and 1998 are attributable to growth in the Company's hardware business and in orders received from the federal government. Federal orders were up 25% and 5%, respectively, in 1997 and 1998. The 1998 orders growth, both federal and commercial, was concentrated primarily in the fourth quarter as the U.S. hardware business began to recover slightly from the effects of the Intel dispute. International orders for 1998 totaled $344 million for the year, a 6% decline from the prior year after a decline of 7% in 1997 and an increase of 9% in 1996. Asia Pacific orders totaled $65 million in 1998, a decrease of 11% from 1997, after declining 35% in 1997 and increasing 45% in 1996. 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 or 1998. Additionally, devaluation of Asian currencies, most notably the Korean won, had a negative impact on orders for the region during the fourth quarter of 1997 and throughout 1998. European orders totaled $210 million, down 5% from the prior year level, after remaining flat in 1997 and declining 5% in 1996. European and Asian order levels in terms of U.S. dollars were reduced by approximately 2% and 9%, respectively, in 1998 (10% and 5%, respectively, in 1997) due to strengthening of the U.S. dollar against the currencies of those regions. New Products. 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. 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 1997 but, as previously described, the Company suffered delays in new product development and shipping due to actions of Intel that placed the Company at a competitive disadvantage. Also 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 1998 the Company introduced its new Wildcat 3D graphics technology, which increases the performance of Windows NT-based workstations beyond current 3D graphics technology. This technology enables creative and technical professionals to work interactively in real time with more realistic full-sized, fully textured 3D models. The technology, which was originally scheduled to ship in December 1998, began delivering in late October in the Company's TDZ workstations. New products that are under development by the Company leverage the existing Wildcat technology to deliver up to four times more performance. This new Wildcat series of 3D graphics accelerators will be available in the Company's TDZ workstations as well as in workstations of other computer vendors. The success of new product introductions is dependent on a number of factors, including market acceptance, the Company's management of risk associated with product transition, the effective management of inventory levels in line with anticipated demand, and the industry- wide risk that new products may have defects in the introductory stage. Because of these uncertainties, the Company cannot determine the ultimate effect that new products will have on its sales or operating results. Revenues. Total revenues for 1998 were $1 billion, down 8% from the prior year level after a 3% increase in 1997 and flat revenues in 1996. Systems. Sales of Intergraph systems in 1998 were $726 million, down 8% after increases of 8% and 2% in 1997 and 1996, respectively. Factors previously cited as affecting systems orders in total and on a geographic basis, including the actions of Intel in 1997 and 1998, also affected systems revenues over the three-year period. Competitive conditions manifested in declining per unit sales prices continue to adversely affect the Company's systems revenues and margin. Geographic Regions. In total, the 1998 revenue decline was primarily due to factors associated with the Intel lawsuit and the sale of the Company's Solid Edge and Engineering Modeling System product lines and, in Asia, to currency and economic problems affecting the region. U.S. systems sales, including sales to the federal government, decreased by 1% in 1998 after increasing by 17% and 2% in 1997 and 1996, respectively. Growth in U.S. systems sales was depressed in 1996 by a revenue decline in one of the Company's unprofitable business units sold in early 1997. Excluding this business unit, U.S. sales growth was 22% in 1997 and 7% in 1996. The revenue decline in 1998 was due primarily to a 7% decrease in sales to the federal government, partially offset by growth in the Company's public safety business. During the second half of 1997 and the first quarter of 1998, Intergraph Public Safety secured several large U.S. installations, significantly increasing the subsidiary's revenue base. International sales totaled $339 million for the year, down 12% from the prior year after a slight increase in 1997 and a 3% increase in 1996. European sales were down 13%, after an increase of 3% in 1997 and a 6% decline in 1996 as the result of weak demand for the Company's software products. Asia Pacific systems sales were down 25% after a 12% decline in 1997 and a 25% increase in 1996. Software. Sales of the Company's software applications declined by 16% in 1998 after a 1% decline in 1997 and a 9% decline in 1996. Sales of MicroStation declined by 46%, 34% and 39% in 1998, 1997 and 1996, respectively (see "MicroStation" below for further discussion). Additionally, 1996 revenues were adversely affected by the previously discussed delays in new software releases. In 1997 and 1998, sales of the Company's plant design software applications increased by 21% and 19%, respectively, partially offsetting the effect of the loss in MicroStation sales. However, 1998 revenues were further reduced by an 82% decline in sales of mechanical software applications as a result of the sale of the Company's Solid Edge and Engineering Modeling System product lines. (See "Nonoperating Income and Expense" below for further discussion.) In terms of broad market segments, the Company's mapping/geographic information systems and architecture/engineering/construction product applications continue to dominate the Company's product mix at approximately 47% and 19% of total systems sales in 1998, respectively, (57% and 27%, respectively, in 1997). Due to the sale of the Company's Solid Edge and Engineering Modeling System product lines in March 1998, mechanical design, engineering and manufacturing applications no longer represent a significant portion of the Company's product mix. These applications represented 14% of total systems sales in 1997. Sales of Windows-based software represented approximately 90% of total software sales in 1998, up from approximately 87% in 1997 and 80% in 1996. UNIX-based software comprised approximately 10% of total 1998 software sales, down from approximately 13% in 1997 and 20% in 1996. Hardware. Total hardware revenue decreased by 10% in 1998, after increasing by 22% and 12% in 1997 and 1996, respectively. Workstation and server unit volume increased 6% in 1998, 67% in 1997 and 42% in 1996, while workstation and server revenue declined by 9% in 1998 after increasing by 6% and 18% in 1997 and 1996, respectively. Price competition continues to erode per unit selling prices, and volumes in 1998 were suppressed by the aforementioned factors associated with the Intel lawsuit. Revenue from other hardware products decreased by 11% in 1998, after increasing by 64% in 1997 and decreasing by 1% in 1996. Both the 1997 increase and the 1998 decline relate primarily to sales of graphics cards and storage devices. Sales of the Company's first add-in 3D graphics cards, which began shipping during the third quarter of 1996, were initially strong and grew throughout 1997. However, 1998 sales were below the Company's expectations as the products approached the end of their life cycle. The Company expects the demand for graphics cards to increase throughout 1999 with the availability of new products based upon its Wildcat 3D graphics technology. Intel-based systems represented approximately 100% of hardware unit sales for the three years ended December 31, 1998. Federal Government Sales. Total revenue from the United States government was approximately $166 million in 1998, $177 million in 1997 and $161 million in 1996, representing approximately 16% of total revenues in 1998 and 1997 and 15% in 1996. In 1998, U.S. government orders and revenues were characterized by weakened demand for the Company's hardware product offerings, due partially to increasing price competition within the industry. The Company sells to the U.S. government under long-term contractual arrangements, primarily indefinite delivery, indefinite quantity and cost-plus award fee contracts, and through commercial sales of products not covered by long-term contracts. Approximately 44% 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. 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 39% in 1996, 34% in 1997, and 46% in 1998. The Company estimates this revenue decline, along with a per copy royalty increase in 1996, adversely affected its results of operations by approximately $7 million or $.14 per share in 1997 and by approximately $26 million or $.52 per share in 1996. In 1998, MicroStation sales represented 8% of total software revenue. 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 $307 million in 1998, down 9% after declines of 9% and 5% in 1997 and 1996, respectively. Maintenance revenues totaled $213 million in 1998, down 13% after declines of 13% and 12% in 1997 and 1996, 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 9% of total revenues in 1998, an increase of one percentage point from the previous year. Growth in services revenue has partially offset the decline in maintenance revenue. The Company is endeavoring to grow its services business and has redirected the efforts of its hardware maintenance organization to focus increasingly on systems integration. Revenues on these services, however, typically produce lower gross margins than maintenance revenues. Gross Margin. The Company's total gross margin was 31.5% in 1998, down 4.1 points after declines of 1.2 points and 2.3 points in 1997 and 1996, respectively. Margin on systems sales declined 5.4 points in 1998, 1.2 points in 1997 and 2.3 points in 1996. Competitive pricing conditions in the industry and an increasing hardware content in the product mix reduced systems margin in all three years. Margin was adversely impacted in 1996 by the increase in MicroStation product cost and further affected in 1997 by a decrease in the mix of international systems revenues to total Company systems revenues, due in part to strengthening of the U.S. dollar in international markets, primarily Europe and Asia. In 1998, margin was negatively impacted by unfavorable volume related manufacturing variances and inventory revaluations incurred prior to the outsourcing of the Company's manufacturing to SCI in November. Systems margins continue to be negatively impacted by strengthening of the U.S. dollar in international markets and by the previously discussed factors associated with the Intel dispute. In 1999, the Company expects to realize slight improvement in its systems margin as a result of its outsourcing agreement with SCI and associated reductions in headcount and materials costs. 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 on its systems margins. While the Company expects to achieve cost savings through its outsourcing agreement with SCI, it also continues to expect pressure on its systems margin as a result of increasing industry price competition. Margin on maintenance and services revenue declined by 1.1 points in 1998 after declines of .8 points in 1997 and 2.2 points in 1996. The margin declines over the past three years have resulted primarily from declining maintenance revenues. The Company closely monitors its maintenance and services costs and has taken certain measures, including reductions in headcount, to align these costs with current revenue levels. The Company believes that the trend in the industry toward lower priced products and longer warranty periods will continue to 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 manufacturing and inventory management program, in which the Company endeavors to purchase only parts and systems utilizable with the technology of its current product offerings and as spares for the customer contracted maintenance of systems in its installed customer base. In November 1998 the Company sold substantially all of its U.S. manufacturing assets, including inventories with a book value of approximately $60 million, to SCI, and SCI assumed responsibility for the manufacturing of substantially all of the Company's hardware products. (See "SCI" preceding for a complete description of this transaction.) Effective inventory and purchasing management remains necessary in order for the Company to provide SCI with accurate and timely information regarding its needs. Any unanticipated change in technology or an inability of the Company to accurately forecast its manufacturing needs could significantly and adversely affect gross margins and reported results of operations. Operating Expenses (exclusive of nonrecurring operating charges). Operating expenses declined by 7% in 1998, 2% in 1997 and 3% in 1996. In response to the level of its operating losses, the Company has reduced the total number of its employees by 21% during the three- year period ended December 31, 1998. Product development expense declined by 15% in 1998 after declines of 5% and 7% in the two preceding years. Employee headcount in the development areas has been significantly reduced over the last three years through reductions in force, attrition, and the sale of two unprofitable business units in early 1997. Additionally, 1996 and 1998 expenses were reduced due to additional software development projects qualifying for capitalization, in 1996 for the Company's Jupiter technology and in 1998 for its Geomedia product line. 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 would produce adverse effects on systems margin and results of operations. Sales and marketing expense decreased 6% in 1998, after declines of 2% in 1997 and 5% in 1996. Expenses in all three years were reduced by the strengthening of the U.S. dollar against international currencies, primarily in Europe and Asia. The expense decline in 1996 reflected the benefits of restructuring actions taken in 1995. In 1997, expenses were significantly reduced due to the sale of two unprofitable business units, but the resulting benefits were partially offset by increased trade show activity and advertising expenses for the Company's new products. The 1998 decline is primarily due to across the board expense reductions in Europe resulting from restructuring actions taken in the first quarter (See "Nonrecurring Operating Charges"). General and administrative expense for 1998 was flat with the prior year level after increases of 3% and 4% in 1997 and 1996, respectively. In 1996, installation of new internal business systems, increased legal expenses, and amortization of deferred financing costs related to the Company's line of credit increased general and administrative expense. The 1997 expense increase resulted primarily from increased legal expenses (see "Litigation and Other Risks and Uncertainties"), partially offset by strengthening of the U.S. dollar. In 1998, legal expenses continued to increase, but their impact was offset by benefits resulting from European headcount reductions and the continued strengthening of the U.S. dollar. Nonoperating Income and Expense. Interest expense was $7.5 million in 1998, $6.6 million in 1997 and $5.1 million in 1996. The Company's average outstanding debt has increased over the three-year period due to operating losses and resultant borrowings under the Company's revolving credit facility and term loan. However, the average rate of interest paid on the debt has declined approximately 2 points from the 1996 level due to generally declining rates and 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 March 1998, the Company sold its Solid Edge and Engineering Modeling System product lines to Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary for $105 million in cash. The Company recorded a gain on this transaction of $102.8 million. This gain is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. Full year 1997 revenues and operating loss for these product lines were $35.2 million and $4.1 million, respectively. Based on 1997 performance, the Company estimates that the sale of this business resulted in an improvement in its 1998 operating results of approximately $5 million, excluding the impact of the gain on the sale. In April 1998, the Company sold the assets of its printed circuit board manufacturing facility for $16 million in cash. The Company recorded a gain on this transaction of $8.3 million. This gain is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. The Company is now outsourcing its printed circuit board needs. This operational change did not materially impact the Company's results of operations in 1998. In 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. During 1996, the Company sold stock investments in affiliated companies for a total gain of $11.2 million or $.23 per share. These gains are included in "Gains on sales of assets" in the consolidated statements of operations. "Other income (expense) - net" in the consolidated statements of operations consists primarily of interest income, foreign exchange gains (losses), equity in the earnings of investee companies, and other miscellaneous items of nonoperating income and expense. Significant items included in these amounts are foreign exchange losses of $2.7 million in 1997 and $4.6 million in 1996. Income Taxes. The Company incurred losses before income taxes of $13.6 million in 1998, $66.2 million in 1997 and $66.1 million in 1996. Income tax expense for the three years ended December 31, 1998 resulted primarily from taxes on individually profitable subsidiaries and from alternative minimum tax on gains from the sale of assets in 1998. 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 and tax credit carryforwards. Results by Operating Segment. Effective January 1, 1998, the Company divided its business into four reporting segments for operational and management purposes: Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc. (IPS), VeriBest, Inc. and the Software and Federal Systems (Federal) business (Intergraph). ICS supplies high performance Windows NT-based graphics workstations and PCs, 3D graphic subsystems, servers, and other hardware products. IPS develops, markets, and implements systems for public safety agencies. VeriBest serves the electronic design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. Intergraph supplies software and solutions, including hardware purchased from ICS, consulting, and services to the federal government and to the process and building and infrastructure industries. The Company evaluates performance of its operating segments based on revenue and income from operations. Sales among the operating segments, the most significant of which are sales of hardware products from ICS to the other segments, are accounted for under a transfer pricing policy. Transfer prices approximate prices that would be charged for the same or similar property to similarly situated unrelated buyers. In the U.S., intersegment sales of products and services to be used for internal purposes are charged at cost. For international subsidiaries, transfer price is charged on intersegment sales of products and services to be used for either internal purposes or sale to customers. Certain expenses, primarily general and administrative expenses, not directly attributable to an operating segment are considered corporate in nature and not charged to any operating segment. In addition, gains on sales of assets and nonrecurring charges to operations (see "Summary" section above), which were significant in 1998, are not credited or charged to the operating segments. The Company's current model for evaluation of the performance of its operating segments was adopted in 1998 for that and future years. In prior years the Company utilized several variations of the current model, depending on the Company's structure and its business environment at the time. Segment financial information for years prior to 1998 has not been restated to conform to the 1998 model because it is impractical to do so. Since VeriBest and IPS have been operating as separate subsidiaries since 1996 and 1997, respectively, and since by nature of their businesses they are less affected by changes from the model utilized before 1998, comparable information is available. See Note 11 of Notes to Consolidated Financial Statements. In 1998, ICS incurred an operating loss of $68.1 million on revenues of $453.7 million. This loss excludes the impact of certain nonrecurring income and operating expense items associated with ICS's operations, including gains totaling $9.8 million on the sales of its printed circuit board and manufacturing inventory and assets, and nonrecurring operating expenses of $.8 million, primarily for employee terminations. ICS's operating loss for the year resulted primarily from a systems gross margin of 9%, which is insufficient to cover the current level of operating expenses. ICS was significantly adversely impacted in 1998 by factors associated with the Company's dispute with Intel, the effects of which included lost momentum, lost revenue and margin as well as increased operating expenses, primarily for marketing and public relations expenses. Margins were severely impacted by volume and inventory value related manufacturing variances incurred prior to the outsourcing of its manufacturing to SCI. For 1999, ICS estimates that this outsourcing will slightly improve its systems margins. In addition, ICS expects its operating results to improve due to headcount reductions taken during 1998. During the year, ICS's headcount was reduced by approximately 33% due to employee terminations, the outsourcing of manufacturing, and normal attrition. See "Litigation and Other Risks and Uncertainties" for further discussion of significant uncertainties that may adversely affect the results of operations of ICS and the Company. In 1998, Intergraph Public Safety earned operating income of $3.5 million on revenues of $51.1 million, compared to an operating loss in 1997 of $2.2 million on revenues of $50.4 million. Systems margin increased by 6.4 points from the 1997 level, due primarily to growth in the subsidiary's U.S. revenue base. In addition, sales and marketing and general and administrative expenses declined by 29% and 26%, respectively, from the prior year level, primarily the result of reduced compensation costs incurred by the IPS international locations. VeriBest incurred operating losses of $12.4 million, $16.4 million, and $15.5 million in 1998, 1997, and 1996, respectively, on revenues of $28.2 million, $29.3 million, and $31 million. Systems revenues declined by 13% and 19%, respectively, in 1997 and 1998, reflecting weakening demand for the subsidiary's software products. In 1998, the decline in systems revenues was partially offset by a 25% increase in maintenance revenues as the result of sales force focus on increasing the subsidiary's maintenance revenue base. Results for 1997 were negatively impacted by a 5 point decline in gross margin, primarily the result of declining systems revenues, partially offset by a 5% decline in operating expenses. Losses for 1998 were reduced by a 5 point improvement in gross margin as the result of declining royalty costs, and by an additional 10% reduction in operating expenses. VeriBest's headcount has declined by approximately 28% since the subsidiary's inception in January 1996. In 1999, VeriBest expects to realize improvements in its revenues, margins and operating expenses as it directs its selling efforts toward a newly developed line of proprietary products and realizes benefits of its reduced headcount and revised selling strategy toward indirect methods. In 1998, the Software business earned operating income of $14.1 million on revenues of $534.2 million. This income excludes the impact of certain nonrecurring income and operating expense items associated with Software operations, including the gain of $102.8 million on the sale of the business unit's Solid Edge and Engineering Modeling System product lines and nonrecurring operating charges of $14.6 million, primarily for asset write-offs and employee terminations. In 1998, Federal incurred an operating loss of $3.6 million on revenues of $158.6 million. Revenues in 1998 were adversely impacted by weakened demand for the Company's hardware product offerings, due partially to increasing price competition within the industry. See Note 11 of Notes to Consolidated Financial Statements for further details of results by operating segment. 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 1998, approximately 51% 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 1998, 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 1998 and 1997 in its international markets, primarily Europe and Asia, adversely impacted 1998 and 1997 results of operations by approximately $.10 and $.30 per share, respectively. Such currency effects did not materially affect the Company's results of operations in 1996. To illustrate the sensitivity of the Company's results of operations to changes in international currency exchange rates, the Company estimates that the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would result in a decrease in earnings of approximately $9 million for the year ended December 31, 1999. Likewise a uniform 10% weakening in the value of the dollar would result in increased earnings of approximately $13 million for the year ended December 31, 1999. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, exchange rate fluctuations may also affect the volume of sales and foreign currency sales prices. The Company's estimation of the effects of changes in foreign currency exchange rates does not consider potential changes in sales levels or local currency prices. The Company conducts business in all major markets outside the U.S., but the most significant of these operations with respect to currency risk are located in Europe and Asia. Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. With respect to the currency exposures in these regions, the objective of the Company is to protect against financial statement volatility arising from changes in exchange rates with respect to amounts denominated for balance sheet purposes in a currency other than the functional currency of the local entity. The Company will therefore enter into forward exchange contracts related to certain balance sheet items, primarily intercompany receivables, payables, and formalized intercompany debt, when a specific risk has been identified. Periodic changes in the value of these contracts offset exchange rate related changes in the financial statement value of these balance sheet items. Forward exchange contracts, generally less than three months in duration, are purchased with maturities reflecting the expected settlement dates of the balance sheet items being hedged, and only in amounts sufficient to offset 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. At December 31, 1998, the Company had net outstanding forward exchange contracts of approximately $7.6 million ($37.4 million at December 31, 1997), maturing at various dates through March 31, 1999. 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, 1998. 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, 1998. Deferred gains and losses as of December 31, 1998 and 1997 were not significant. At December 31, 1998, the Company's only outstanding forward contracts related to formalized intercompany loans between the Company's European subsidiaries. Contracts outstanding at December 31, 1997 included hedges relating to intercompany loans made between the U.S. and Europe. As of first quarter 1998, the Company is no longer hedging its U.S. exposures related to foreign currency denominated intercompany loans. To illustrate the sensitivity of the Company's result of operations to changes in exchange rates for international currencies underlying its intercompany loans, the Company estimates that a uniform 10% strengthening in the value of the dollar relative to the currencies in which such intercompany loans are denominated at December 31, 1998 would result in a loss in earnings of an insignificant amount. Conversely, assuming a 10% weakening in the value of the dollar relative to these currencies, the Company would recognize an insignificant exchange gain. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. The Company is exposed to foreign currency risks related to certain of its financial instruments, primarily debt securities held by its European subsidiaries, long-term mortgages on certain of its European facilities, and an Australian term loan. The effect of a uniform 10% change in exchange rates relative to the currencies in which these financial instruments are denominated would not have a material impact on the Company's results of operations. Euro Conversion. On January 1, 1999, eleven member countries of the European Monetary Union (EMU) fixed the conversion rates of their national currencies to a single common currency, the "Euro". The national currencies of the participating countries will continue to exist through July 1, 2002. Euro currency will begin to circulate on January 1, 2002. With respect to the Company, U.S. and European business systems are being upgraded to accommodate the Euro. Conversion of all financial systems will be completed at various times through the remainder of 1999. The Company is prepared to conduct business in Euros during 1999 with those customers and vendors who choose to do so. The Company is continuing to evaluate business implications resulting from full Euro conversion by 2002, including the impact of cross-border price transparency within the EMU and exposure to market risk with respect to financial instruments. While the Company has not yet completed its assessment of these business implications on its results of operations or financial condition, it does not anticipate this impact will be material. 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, 1998, cash totaled $95.5 million, up $48.8 million from year-end 1997. Net cash consumed by operations in 1998 and 1997 was $31.1 million and $20.9 million, respectively, versus a net generation of cash of $26 million in 1996. The net consumption of cash in 1998 reflects the negative cash flow effects of increased operating losses. In 1997, an inventory build-up consumed approximately $16 million as a result of an anticipated increase in hardware unit sales volume and customer demand for faster delivery of products. The net increase in cash of $48.8 million in 1998 is the result of various sales of assets, as further described below. Net cash provided by investing activities in 1998 was $99.6 million, compared to net cash consumption of $30.7 million in 1997 and $31.7 million in 1996. Investing activities in 1998 included $160.5 million in proceeds from sales of various assets, including the Company's Solid Edge and Engineering Modeling System product lines, its manufacturing inventory and assets, and its printed circuit board manufacturing facility, and an investment of $26.3 million for the purchase of Zydex software rights. Other significant investing activities included capital expenditures of $17.3 million in 1998 ($24.8 million in 1997 and $30.6 million in 1996), primarily for Intergraph products used in hardware and software development and sales and marketing activities, expenditures for capitalizable software development of $15.7 million in 1998 ($10.6 million in 1997 and $15.5 million in 1996), and proceeds of $5.7 million in 1997 and $11.6 million in 1996 from sales of business units and investments in affiliated companies. Net cash used for financing activities totaled $19.3 million for 1998, versus a net cash generation of $48.4 million in 1997, including net debt repayments of $22.3 million in 1998 and net borrowings of $44.9 million in 1997. The Company's collection period for accounts receivable was approximately 81 days as of December 31, 1998, representing a slight decline from the prior year. Approximately 67% of the Company's 1998 revenues were derived from international customers and the U.S. government, both of which traditionally carry longer collection periods. The Company is experiencing slow collections throughout the Middle East region, particularly in Saudi Arabia. Total accounts receivable from Middle Eastern customers was approximately $23 million at December 31, 1998 and $21 million at December 31, 1997. Total U.S. government accounts receivable was $55 million at December 31, 1998 ($53 million at December 31, 1997). 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 $20 million to $25 million in 1999, primarily for Intergraph products used in product development and sales and marketing activities. The Company's revolving credit agreement, among other restrictions, limits the level of the Company's capital expenditures. Under the Company's January 1997 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 and inventory, 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 (7.75% at December 31, 1998) plus .625%. The average effective rate of interest was 9.1% for the period of time in 1998 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, 1998, the Company had outstanding borrowings of $39.5 million, the $25 million term-loan portion of which was classified as long-term debt in the consolidated balance sheet, and an additional $31.6 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 approximately $90 million ($78 million at February 26, 1999). In October 1998, the term loan and security agreement was amended to incorporate the sale of the Company's manufacturing assets to SCI and to modify the borrowing base accordingly. This transaction has resulted in an approximate $15 million borrowing base reduction, primarily for eligible inventories that were sold to SCI. The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures. In addition, the agreement includes restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes. At December 31, 1998, the Company had approximately $73 million in debt on which interest is charged under various floating rate arrangements, primarily 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. To illustrate the sensitivity of the Company's results of operations to changes in interest rates on its debt, the Company estimates that its results of operations would not be materially affected by a two point increase or decrease in the average interest rates related to its floating rate debt. This hypothetical change in rates was determined based on the trend of the Company's actual rates over the past three years. The Company's estimation assumes a level of debt consistent with the December 31, 1998 level and does not consider the effects that further operating losses, if any, will have on the balance of debt outstanding. In 1997 and 1998, the Company did not generate adequate cash to fund its operations and build cash reserves. The Company expects improvement in its operating cash flows in 1999 as a result of improved earnings, the outsourcing of its manufacturing operations, and other management actions, described further above, undertaken to reduce operating costs. The Company believes that the combination of improved cash flow from operations, its existing cash balances, and cash available under its revolving credit agreement will be adequate to meet cash requirements for 1999. In the near term, the Company must increase sales volume and continue to align its operating expenses with the level of revenue being generated if it is to fund its operations and build cash reserves without reliance on funds generated from asset sales and from external financing. FOURTH QUARTER 1998 Revenues for the fourth quarter were $286.7 million, down 5% from fourth quarter 1997. The Company incurred a net loss of $20.9 million ($.43 per share) for the quarter, flat with the fourth quarter 1997 loss. Operating expenses declined by 11% from fourth quarter 1997, due primarily to reductions in headcount and an increase in software development costs qualifying for capitalization. However, the positive impact of this operating expense decline was offset by expenses of approximately $7 million ($.14 per share) incurred in fourth quarter 1998 relating to the Company's transition to outsourcing of its manufacturing operations, and by a $2.1 million ($.04 per share) nonrecurring operating charge for employee terminations. Exchange rate fluctuations did not have a significant impact on fourth quarter 1998 results of operations. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------- December 31, 1998 1997 - --------------------------------------------------------------------------- (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 95,473 $ 46,645 Accounts receivable, net 312,123 324,654 Inventories 38,001 105,032 Other current assets 48,928 25,693 - --------------------------------------------------------------------------- Total current assets 494,525 502,024 Investments in affiliates 12,841 14,776 Other assets 61,240 53,566 Property, plant, and equipment, net 127,368 150,623 - --------------------------------------------------------------------------- Total Assets $695,974 $720,989 =========================================================================== Liabilities and Shareholders' Equity Trade accounts payable $ 64,545 $ 60,945 Accrued compensation 42,445 48,330 Other accrued expenses 79,160 71,126 Billings in excess of sales 68,137 66,680 Short-term debt and current maturities of long-term debt 23,718 50,409 - --------------------------------------------------------------------------- Total current liabilities 278,005 297,490 Deferred income taxes 3,142 460 Long-term debt 59,495 54,256 - --------------------------------------------------------------------------- Total liabilities 340,642 352,206 - --------------------------------------------------------------------------- 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 222,705 226,362 Retained earnings 249,808 269,442 Accumulated other comprehensive income - cumulative translation adjustment 4,161 1,090 - --------------------------------------------------------------------------- 482,410 502,630 Less -- cost of 8,719,612 treasury shares at December 31, 1998, and 9,183,845 treasury shares at December 31, 1997 (127,078) (133,847) - --------------------------------------------------------------------------- Total shareholders' equity 355,332 368,783 - --------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $695,974 $720,989 =========================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------ Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ (In thousands except per share amounts) Revenues Systems $ 726,135 $ 786,278 $ 725,828 Maintenance and services 306,655 338,027 369,505 - ------------------------------------------------------------------------------ Total revenues 1,032,790 1,124,305 1,095,333 - ------------------------------------------------------------------------------ Cost of revenues Systems 513,822 514,416 465,645 Maintenance and services 193,616 209,550 226,263 - ------------------------------------------------------------------------------ Total cost of revenues 707,438 723,966 691,908 - ------------------------------------------------------------------------------ Gross profit 325,352 400,339 403,425 Product development 83,786 98,073 103,397 Sales and marketing 235,985 251,833 256,482 General and administrative 103,944 104,254 101,725 Nonrecurring operating charges 15,843 1,095 10,545 - ------------------------------------------------------------------------------ Loss from operations (114,206) (54,916) (68,724) Interest expense ( 7,460) ( 6,614) ( 5,137) Arbitration award --- ( 6,126) --- Gains on sales of assets 112,533 4,858 11,173 Other income (expense) -- net ( 4,501) ( 3,439) ( 3,424) - ------------------------------------------------------------------------------ Loss before income taxes ( 13,634) (66,237) (66,112) Income tax expense ( 6,000) ( 4,000) ( 3,000) - ------------------------------------------------------------------------------ Net loss $ ( 19,634) $ (70,237) $ (69,112) ============================================================================== Net loss per share -basic and diluted $ ( .41) $ ( 1.46) $ ( 1.46) ============================================================================== Weighted average shares outstanding -basic and diluted 48,376 47,945 47,195 ============================================================================== 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, 1998 1997 1996 - -------------------------------------------------------------------------------- (In thousands) Cash Provided By (Used For): Operating Activities: Net loss $( 19,634) $(70,237) $(69,112) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 54,720 60,332 75,820 Noncash portion of arbitration award --- 5,835 --- Noncash portion of nonrecurring operating charges 11,506 --- 10,545 Deferred income tax expense 95 1,555 2,496 Gains on sales of assets (112,533) ( 4,858) (11,173) Net changes in current assets and liabilities 34,738 (13,573) 17,437 - -------------------------------------------------------------------------------- Net cash provided by (used for) operating activities ( 31,108) (20,946) 26,013 - -------------------------------------------------------------------------------- Investing Activities: Proceeds from sales of assets 160,487 5,749 11,561 Purchases of property, plant, and equipment ( 17,264) (24,785) (30,563) Capitalized software development costs ( 15,738) (10,592) (15,492) Purchase of software rights ( 26,292) --- --- Other ( 1,559) ( 1,038) 2,816 - -------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 99,634 (30,666) (31,678) - -------------------------------------------------------------------------------- Financing Activities: Gross borrowings 10,689 75,896 18,366 Debt repayment ( 32,949) (30,950) (22,764) Proceeds of employee stock purchases and exercises of stock options 2,940 3,483 3,834 - -------------------------------------------------------------------------------- Net cash provided by (used for) financing activities ( 19,320) 48,429 ( 564) - -------------------------------------------------------------------------------- Effect of exchange rate changes on cash ( 378) ( 846) 496 - -------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 48,828 ( 4,029) ( 5,733) Cash and cash equivalents at beginning of year 46,645 50,674 56,407 - -------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 95,473 $ 46,645 $ 50,674 ================================================================================ The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------- Accumulated Additional Other Total Common Paid-in Retained Comprehensive Treasury Shareholders' Stock Capital Earnings Income (loss) Stock Equity - -------------------------------------------------------------------------------------------------------------------- (In thousands except share amounts) Balance at January 1, 1996 $5,736 $233,940 $408,791 $8,650 $(153,053) $504,064 Comprehensive income (loss): Net loss --- --- (69,112) --- --- (69,112) Other comprehensive income (loss): Unrealized holding gain on securities of affiliate --- --- --- 6,858 --- 6,858 Foreign currency translation adjustments --- --- --- ( 2,601) --- ( 2,601) -------- Comprehensive loss --- --- --- --- --- (64,855) ======== 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 Other --- 220 --- --- --- 220 - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 5,736 229,675 339,679 12,907 (140,734) 447,263 Comprehensive income (loss): Net loss --- --- (70,237) --- --- (70,237) Other comprehensive income (loss): Net unrealized holding loss on securities of affiliate --- --- --- ( 6,858) --- ( 6,858) Foreign currency translation adjustments --- --- --- ( 4,959) --- ( 4,959) -------- Comprehensive loss --- --- --- --- --- (82,054) ======== Issuance of 432,263 shares under employee stock purchase plan --- (3,149) --- --- 6,301 3,152 Issuance of 40,187 shares upon exercise of stock options --- ( 255) --- --- 586 331 Other --- 91 --- --- --- 91 - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 5,736 226,362 269,442 1,090 (133,847) 368,783 Comprehensive income (loss): Net loss --- --- (19,634) --- --- (19,634) Other comprehensive income - foreign currency translation adjustments --- --- --- 3,071 --- 3,071 -------- Comprehensive loss --- --- --- --- --- (16,563) ======== Issuance of 464,230 shares under employee stock purchase plan --- (3,829) --- --- 6,769 2,940 Other --- 172 --- --- --- 172 - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $5,736 $222,705 $249,808 $4,161 $(127,078) $355,332 ===============================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES. Basis of Presentation: The consolidated financial statements include the accounts of Intergraph Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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. Effective January 1, 1998, the Company divided its business into four separate units for operational and management purposes: Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc. (IPS), VeriBest, Inc., and the Software and Federal Systems business (Intergraph). ICS supplies high performance Windows NT- based graphics workstations and PCs, 3D graphics subsystems, servers, and other hardware products. IPS 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. Intergraph supplies software and solutions, including hardware, consulting, and services to the federal government and to the process and building and infrastructure industries. The Company's products are sold worldwide, with United States and European revenues representing approximately 80% of total revenues for 1998. See Note 11 for further information regarding the Company's operating segments and the geographic markets it serves. 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, 1998 and 1997, the Company held various debt securities, all within three months of maturity at those dates, with fair market values of $54,000,000 and $10,000,000, respectively. Gross realized gains and losses on debt securities sold during the years ended December 31, 1998 and 1997 were not significant, and there were no unrealized holding gains or losses on debt securities at December 31, 1998 or 1997. Inventories: Inventories are stated at the lower of average cost or market and are summarized as follows: - -------------------------------------------------------- December 31, 1998 1997 - -------------------------------------------------------- (In thousands) Raw materials $ 2,739 $ 35,799 Work-in-process 3,594 37,357 Finished goods 15,597 11,760 Service spares 16,071 20,116 - -------------------------------------------------------- Totals $38,001 $105,032 ======================================================== On November 13, 1998, the Company sold substantially all of its U.S. manufacturing assets (including inventories with a book value of approximately $60,000,000) to SCI Technology Inc. (SCI), a wholly owned subsidiary of SCI Systems, Inc., and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. For a complete description of this transaction, see "SCI" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 20 of this annual report. The industry in which the Company competes is characterized by rapid technological change. This technological change is an important consideration in the Company's overall inventory management program, in which the Company endeavors to carry only parts and systems utilizable with the technology of its current product offerings and as spares for the contracted maintenance of systems in its installed customer base. The Company regularly estimates the degree of technological obsolescence in its inventories and provides inventory reserves on that basis. Though the Company believes it has adequately provided for any such declines in inventory value to date, any unanticipated change in technology could significantly affect the value of the Company's inventories and thereby adversely affect gross margins and results of operations. In addition, an inability by the Company to accurately forecast its manufacturing requirements of SCI could adversely affect gross margin and results of operations. Investments in Affiliates: Investments in companies in which the Company believes it has the ability to influence operations or finances are accounted for by the equity method. Investments in companies in which the Company does not exert such influence are accounted for at fair value if such values are readily determinable, and at cost if such values are not readily determinable. Effective January 1, 1998, the Company ceased accounting for its investment in Bentley Systems, Inc., an approximately 50%-owned affiliate of the Company, under the equity method due to a lack of significant influence. See Note 12 and "Litigation and Other Risks and Uncertainties" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 20 to 24 of this annual report for further discussion of the Company's arbitration proceedings and business relationship with Bentley. The book value of the Company's investment in Bentley was approximately $12,700,000 at December 31, 1998. The Company is unable to determine the fair value of that investment. 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 was included in "Investments in affiliates" and "Unrealized holding gain on securities of affiliate" in the consolidated balance sheet at that date. During 1996, the Company sold stock investments in affiliated companies for a total gain of $11,173,000. These gains are included in "Gains on sales of assets" in the consolidated statements of operations. Internal Use Software: In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, which defines computer software costs to be capitalized or expensed to operations. The Statement is effective for fiscal year 1999 for the Company. Implementation of this new accounting standard is not expected to have a material impact on the Company's consolidated operating results or financial position as the Company has historically been in substantial compliance with the practice required by the Statement. 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, 1998 1997 - -------------------------------------------------------------------------- (In thousands) Land and improvements (15-30 years) $ 13,948 $ 13,664 Buildings and improvements (30 years) 132,759 136,517 Equipment, furniture, and fixtures (3-8 years) 239,735 290,217 - -------------------------------------------------------------------------- 386,442 440,398 Allowances for depreciation (259,074) (289,775) - -------------------------------------------------------------------------- Totals $127,368 $150,623 ========================================================================== 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, 1998, the Company had purchased approximately 18,800,000 shares for the treasury with the last purchase occurring in 1994. Further purchases of stock for the treasury are restricted by terms of the Company's term loan and revolving credit agreement. See Note 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, including the production, modification, or customization of software, are recognized by the percentage-of- completion method, with progress to completion measured on the basis of completion of milestones, labor costs incurred currently versus the total estimated cost of performing the contract over its term, or other factors appropriate to the individual contract of sale. The total amount of revenues to be earned under 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. Effective January 1, 1998, the Company adopted American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition. The Statement requires each element of a software sale arrangement to be separately identified and accounted for based on the relative fair value of each element. Revenue cannot be recognized on any element of the sale arrangement if undelivered elements are essential to functionality of the delivered elements. Adoption of this new accounting standard did not significantly affect the Company's 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 on a straight-line basis over a period of two to five years. Amortization of these capitalized costs, included in "Cost of revenues - Systems" in the consolidated statements of operations, amounted to $15,500,000 in 1998, $13,600,000 in 1997, and $16,100,000 in 1996. The unamortized balance of these capitalized costs, included in "Other assets" in the consolidated balance sheets, totaled $23,000,000 and $23,300,000 at December 31, 1998 and 1997, respectively. Although the Company regularly reviews its capitalized development costs to ensure recognition of any decline in value, it is possible that, for any given product, revenues will not materialize in amounts anticipated due to industry conditions that include intense price and performance competition, or that product lives will be reduced due to shorter product cycles. Should either of these events occur, the carrying amount of capitalized development costs would be reduced, producing adverse effects on systems cost of revenues and results of operations. Foreign Currency Exchange and Translation: Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. Foreign currency gains and losses resulting from remeasurement or settlement of receivables and payables denominated in a currency other than the functional currency, together with gains and losses and fees paid in connection with the Company's forward exchange contracts, are included in "Other income (expense) - net" in the consolidated statements of operations. Net exchange gains (losses) totaled $800,000 in 1998, ($2,700,000) in 1997, and ($4,600,000) in 1996. Translation gains and losses resulting from translation of subsidiaries' financial statements from the functional currency into dollars for U.S. reporting purposes and foreign currency gains and losses resulting from remeasurement of intercompany advances of a long-term investment nature are included in the "Accumulated other comprehensive income - cumulative translation adjustment" component of shareholders' equity. Derivative Financial Instruments: Derivatives utilized by the Company consist of forward exchange contracts and interest rate swap agreements. The Company is prohibited by policy from taking derivative positions exceeding its known balance sheet exposures and from otherwise trading in derivative financial instruments. The Company conducts business in all major markets outside the U.S., but the most significant of these operations with respect to currency risk are located in Europe and Asia. With respect to the currency exposures in these regions, the objective of the Company is to protect against financial statement volatility arising from changes in exchange rates with respect to amounts denominated for balance sheet purposes in a currency other than the functional currency of the local entity. The Company will therefore enter into forward exchange contracts related to certain balance sheet items, primarily intercompany receivables, payables, and formalized intercompany debt, when a significant risk has been identified. Periodic changes in the value of these contracts offset exchange rate related changes in the financial statement value of these balance sheet items. Forward exchange contracts are purchased with maturities reflecting the expected settlement dates of the balance sheet items being hedged, which are generally less than three months, and only in amounts sufficient to offset 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, 1998 or 1997. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, requiring companies to recognize all derivatives as either assets or liabilities on the balance sheet and to measure the instruments at fair value. This statement is effective for fiscal year 2000 for the Company. Implementation of this new accounting standard is not expected to have a material impact on the Company's consolidated operating results or financial position. See Note 4 for further details of the Company's derivative financial instruments. Stock-Based Compensation Plans: The Company maintains a stock purchase plan and two fixed stock option plans for the benefit of its employees. Under the stock purchase plan, employees purchase stock of the Company at 85% of the closing market price of the Company's stock as of the last pay date of each calendar month. No compensation expense is recognized for the difference in price paid by employees and the fair market value of the Company's stock at the date of purchase. Under the fixed stock option plans, stock options may be granted to directors and other employees at fair market value or at a price less than fair market value at the date of grant. No compensation expense is recognized for options granted at fair market value. Expense associated with grants at less than fair market value, equal to the difference in exercise price and fair market value at the date of grant, is recognized over the vesting period of the options. In accordance with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company has provided pro forma basis information to reflect results of operations and earnings per share had compensation expense been recognized for employee stock purchases and for stock options granted at market value at date of grant. See Note 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: Basic loss per share is computed using the weighted average number of common shares outstanding. Diluted loss per share is computed using the weighted average common and equivalent common shares outstanding. Employee stock options are the Company's only common stock equivalent and are included in the calculation only if dilutive (see Note 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, 1998, 1997, and 1996, were 48,376,000, 47,945,000, and 47,195,000, respectively. Comprehensive Income: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Under this Statement, all nonowner changes in equity during a period are reported as a component of comprehensive income (loss). With respect to the Company, such nonowner equity items include foreign currency translation adjustments and unrealized gains and losses on certain investments in debt and equity securities. The Company's comprehensive losses for the three years ended December 31, 1998 are displayed in the Consolidated Statements of Shareholders' Equity. Accumulated other comprehensive income at the end of each of these three years consisted of foreign currency translation adjustments, with the exception of the December 31, 1996 balance which also included a $6,858,000 unrealized holding gain on securities of an affiliate. There was no income tax effect related to any of the items included in other comprehensive income for any of the three years in the period ended December 31, 1998. See Note 8 for details of the Company's tax position, including net operating loss carryforwards, and its policy for reinvestment of subsidiary earnings. Reclassifications: Certain reclassifications have been made to the previously reported consolidated statements of operations and cash flows for the years ended December 31, 1997 and 1996 to provide comparability with the current year presentation. NOTE 2 -- LITIGATION AND OTHER RISKS AND UNCERTAINTIES. In addition to those described in Notes 1, 4, 6, 7, and 11, the Company has certain risks related to its business and economic environment, and has extensive ongoing litigation as described in "Litigation and Other Risks and Uncertainties" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 20 to 24 of this annual report. NOTE 3 -- NONRECURRING OPERATING CHARGES. The Company recorded nonrecurring operating charges totaling $15,843,000 in 1998, $1,095,000 in 1997, and $10,545,000 in 1996. For a complete description of these charges, see "Nonrecurring Operating Charges" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 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 50%-owned companies, is summarized below. Short- and Long-Term Debt: The balance sheet carrying amounts of the Company's floating rate debt (approximately $73,000,000 at December 31, 1998), 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 $7,586,000 and $37,357,000 at December 31, 1998 and 1997, 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, 1998 1997 ---------------------------- --------------------------- Net Forward Net Forward Contract Contract Sell Buy Position Sell Buy Position - ------------------------------------------------------------------------------- (In thousands) German mark $--- $ --- $ --- $22,536 $ 5,217 $17,319 Italian lira --- --- --- 12,271 814 11,457 British pound --- 2,690 (2,690) 7,573 8,827 (1,254) French franc --- --- --- 4,362 1,836 2,526 Swiss franc --- 3,986 (3,986) 1,564 5,386 (3,822) Spanish peseta --- --- --- 1,407 1,296 111 Belgian franc 362 --- 362 1,254 230 1,024 Other currencies --- 1,272 (1,272) 14,354 4,358 9,996 - ------------------------------------------------------------------------------- Totals $362 $7,948 $(7,586) $65,321 $27,964 $37,357 =============================================================================== 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/payables to counterparties related to forward exchange contracts were not significant at December 31, 1998 or 1997. These carrying amounts approximated fair value at those dates due to the short duration (generally three months or less) of the contracts. Forward exchange contracts outstanding at December 31, 1998 relate solely to formalized intercompany loans between the Company's European subsidiaries. Contracts outstanding at December 31, 1997 included hedges relating to intercompany loans between the U.S. and Europe. As of first quarter 1998, the Company is no longer hedging its U.S. exposures related to foreign currency denominated intercompany loans. Based on the terms of outstanding forward exchange contracts and the amount of the related balance sheet exposures at December 31, 1998 and 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 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, 1998. 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 $10,000,000 at December 31, 1998). 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, 1998 and 1997 was 6.54% and 6.49%, respectively. The fair market value of this interest rate swap agreement at December 31, 1998 was approximately $600,000. 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 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, 1998 1997 1996 - ------------------------------------------------------------------------------- (In thousands) (Increase) decrease in: Accounts receivable $16,939 $(25,624) $(8,547) Inventories 7,580 (21,296) 21,299 Other current assets 8,706 9,905 11,810 Increase (decrease) in: Trade accounts payable 2,600 11,449 (1,513) Accrued compensation and other accrued expenses (1,649) 4,123 (5,344) Billings in excess of sales 562 7,870 ( 268) - ------------------------------------------------------------------------------- Net changes in current assets and liabilities $34,738 $(13,573) $17,437 =============================================================================== Cash payments for income taxes totaled $5,200,000, $6,100,000, and $4,900,000 in 1998, 1997, and 1996, respectively. Cash payments for interest in those years totaled $7,700,000, $6,400,000, and $5,000,000, respectively. Significant noncash investing and financing transactions in 1998 included the sale of assets in part for a deferred installment payment of approximately $20,000,000. (See Note 14.) 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. 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 $22,900,000 at December 31, 1998, and $20,700,000 at December 31, 1997. Revenues from the U.S. government were $166,100,000 in 1998, $177,100,000 in 1997, and $160,800,000 in 1996, representing approximately 16% of total revenue in 1998 and 1997, and 15% in 1996. Accounts receivable from the U.S. government was approximately $55,200,000 and $52,500,000 at December 31, 1998 and 1997, 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 44% 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 $77,400,000 and $80,900,000 at December 31, 1998 and 1997, respectively. These amounts include amounts due under long-term contracts of approximately $25,000,000 and $35,000,000, at December 31, 1998 and 1997, respectively. The Company maintained reserves for uncollectible accounts, included in "Accounts receivable" in the consolidated balance sheets at December 31, 1998 and 1997, of $13,800,000 and $14,500,000, respectively. NOTE 7 -- DEBT AND LEASES. Short- and long-term debt is summarized as follows: - ---------------------------------------------------------------------- December 31, 1998 1997 - ---------------------------------------------------------------------- (In thousands) Revolving credit agreement and term loan $39,461 $ 64,640 Australian term loan 9,963 13,237 Long-term mortgages 20,712 10,323 Other secured debt 9,210 10,187 Short-term credit facilities 3,312 5,153 Other 555 1,125 - ---------------------------------------------------------------------- Total debt 83,213 104,665 Less amounts payable within one year 23,718 50,409 - ---------------------------------------------------------------------- Total long-term debt $59,495 $ 54,256 ====================================================================== 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 and inventory, 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 (7.75% at December 31, 1998) plus .625%. The average effective rate of interest was 9.1% for the period of time in 1998 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, 1998, the Company had outstanding borrowings of $39,461,000, the $25,000,000 term loan portion of which was classified as long-term debt in the consolidated balance sheet, and an additional $31,600,000 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 $90,000,000 ($78,000,000 at February 26, 1999). 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 October 1998, the term loan and security agreement was amended to incorporate the sale of the Company's manufacturing assets to SCI and to modify the borrowing base accordingly. This transaction has resulted in an approximate $15,000,000 borrowing base reduction, primarily for eligible inventories that were sold to SCI. 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 4.9% to 5.36% in 1998 (5.8% to 7.1% in 1997). Letters of credit totaling approximately $10,000,000 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 three long-term mortgages on certain of its European facilities, payable in varying installments through the year 2010. Two of the mortgages bear interest at the floating Amsterdam Interbank Offering Rate, which ranged from 3.3% to 3.7% in 1998 (3.1% to 3.8% in 1997), plus 1%. The third mortgage, which was entered into in December 1998, bears interest at the United Kingdom base rate (6.25% at December 31, 1998) plus 1%. The amount borrowed under this mortgage totals approximately $10,500,000. 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 11.0% for 1998 and 11.2% for 1997. 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 $26,600,000 in 1998, $30,400,000 in 1997, and $34,200,000 in 1996. 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) 1999 $20,600 2000 14,600 2001 8,900 2002 5,500 2003 3,600 Thereafter 23,100 - ------------------------------------------------------ Total future minimum lease payments $76,300 ====================================================== NOTE 8 -- INCOME TAXES. The components of loss before income taxes are as follows: - ------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------- (In thousands) U.S. $( 4,008) $(57,527) $(42,381) International ( 9,626) ( 8,710) (23,731) - ------------------------------------------------------------------- Total loss before income taxes $(13,634) $(66,237) $(66,112) =================================================================== Income tax expense consists of the following: - ------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------- (In thousands) Current benefit (expense): Federal $(3,353) $ 1,400 $ 3,351 International (2,552) (3,845) (3,855) - ------------------------------------------------------------------- Total current (5,905) (2,445) ( 504) - ------------------------------------------------------------------- Deferred benefit (expense): Federal --- (1,726) (2,447) International ( 95) 171 ( 49) - ------------------------------------------------------------------- Total deferred ( 95) (1,555) (2,496) - ------------------------------------------------------------------- Total income tax expense $(6,000) $(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, 1998 1997 - ------------------------------------------------------------------------------ (In thousands) Current Deferred Tax Assets (Liabilities): Inventory reserves $13,348 $ 15,235 Vacation pay and other employee benefit accruals 5,705 5,617 Other financial statement reserves, primarily allowances for doubtful accounts and warranty 10,333 9,226 Profit on uncompleted sales contracts 3,074 ( 1,759) Other current tax assets and liabilities, net ( 1,298) ( 5,916) - ----------------------------------------------------------------------------- 31,162 22,403 Less asset valuation allowance (28,344) (22,275) - ----------------------------------------------------------------------------- Total net current asset (1) 2,818 128 - ----------------------------------------------------------------------------- Noncurrent Deferred Tax Assets (Liabilities): Net operating loss and tax credit carryforwards: U.S. federal and state 56,636 78,559 International operations 43,555 40,316 Depreciation ( 8,116) ( 9,907) Capitalized software development costs ( 7,281) ( 7,604) Other noncurrent tax assets and liabilities, net 3,194 ( 7,051) - ----------------------------------------------------------------------------- 87,988 94,313 Less asset valuation allowance (91,130) (94,773) - ----------------------------------------------------------------------------- Total net noncurrent liability ( 3,142) ( 460) - ----------------------------------------------------------------------------- Net deferred tax liability $( 324) $( 332) ============================================================================= (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 $2,426,000 in 1998 due to increases in deferred tax assets of $21,118,000 arising from changes in deductible temporary differences, offset by related reductions in the benefit from net operating loss carryforwards of $18,684,000. If realized these reserved tax benefits will be applied to reduce income tax expense in the year of realization. Net operating loss carryforwards are available to offset future earnings within the time periods specified by law. At December 31, 1998, the Company had a U.S. federal net operating loss carryforward of approximately $119,000,000 expiring from the year 2010 through 2012. International net operating loss carryforwards total approximately $113,000,000 and expire as follows: - ------------------------------------------------------- International Net Operating Loss December 31, 1998 Carryforwards - ------------------------------------------------------- (In thousands) Expiration: 3 years or less $ 20,000 4 to 5 years 18,000 6 to 10 years 5,000 Unlimited carryforward 70,000 - ------------------------------------------------------- Total $113,000 ======================================================= Additionally, the Company has $4,100,000 of U.S. alternative minimum tax credit carryforward which has no expiration date. U.S. research and development tax credit carryforwards of $7,800,000 are available to offset regular tax liability through 2012. A reconciliation from income tax benefit at the U.S. federal statutory tax rate of 35% to the Company's income tax expense is as follows: - ------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- (In thousands) Income tax benefit at federal statutory rate $ 4,772 $ 23,183 $ 23,139 Benefit from Foreign Sales Corp. (FSC) 44 150 1,963 Alternative minimum tax ( 453) --- --- Tax effects of international operations, net (7,672) ( 5,617) ( 8,657) Tax effect of U.S. tax loss carried forward 1,670 (23,205) (23,752) Prior year taxes (2,482) 1,165 4,712 Other - net (1,879) 324 ( 405) - ------------------------------------------------------------------------------- Income tax expense $(6,000) $( 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, 1998, 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, 1998, 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 this plan, the Company reserved a total of 3,000,000 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, 1998, 741,250 shares were available for future grants. The Intergraph Corporation Nonemployee Director Stock Option Plan was approved by shareholders in May 1998. The Company has reserved a total of 250,000 shares of common stock to grant as options under this plan. The exercise price of each option granted is the fair market value on the date of grant. Options are not exercisable prior to one year from the date of grant or later than ten years after the date of grant. Upon approval of this plan, members of the Company's Board of Directors who were not otherwise employed by the Company were granted options to purchase 3,000 shares of the Company's common stock. Any new nonemployee director will be granted an option to purchase 3,000 shares of common stock upon his or her first election to the Board. At each annual meeting of shareholders thereafter, each nonemployee director elected to the Board will also be granted an option to purchase 1,500 shares of the Company's common stock. At December 31, 1998, 238,000 shares were available for future grants. Under the 1995 Employee Stock Purchase Plan, 3,200,000 shares of common stock were made available for purchase through a series of five consecutive annual offerings each June beginning June 1, 1995. In order to purchase stock, each participant may have up to 10% of his or her pay, not to exceed $25,000 in any offering period, withheld through payroll deductions. All full time employees, except members of the Administrative Committee of the Plan, are eligible to participate. The purchase price of each share is 85% of the closing market price of the Company's common stock on the last pay date of each calendar month. Employees purchased 464,230, 432,263, and 352,759, shares of stock in 1998, 1997, and 1996, respectively, under the 1995 and predecessor Plans. At December 31, 1998, 1,759,234 shares were available for future purchases. As allowed under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to apply Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock-based plans. Accordingly, the Company has recognized no compensation expense for these plans. Had the Company accounted for its stock-based compensation plans based on fair value of awards at grant date consistent with the methodology of SFAS 123, the Company's net loss and loss per share would have been increased as indicated below. The effects of applying SFAS 123 on a pro forma basis for the three years in the period ended December 31, 1998 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, 1998 1997 1996 - -------------------------------------------------------------------------------- (In thousands except per share amounts) Net loss As reported $(19,634) $(70,237) $(69,112) Pro forma $(21,496) $(72,497) $(71,447) Basic and diluted loss per share As reported $( .41) $( 1.46) $( 1.46) Pro forma $( .44) $( 1.51) $( 1.51) ================================================================================ Under the methodology of SFAS 123, the fair value of the Company's fixed stock options was estimated at the date of grant using the Black Scholes option pricing model. The multiple option approach was used, with assumptions for expected option life of 1.38 years after vest date in 1998 (1.38 years in 1997 and 1.39 years in 1996) and 45% expected volatility for the market price of the Company's stock in 1998 (43% in 1997 and 40% in 1996). 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: - -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------- -------------------------- -------------------------- 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 4.19% 3.38 6.28% 3.39 6.55% 4.38 4.28% 4.38 6.38% 4.39 6.67% 5.38 4.40% 5.38 6.34% 5.39 6.74% 6.38 4.53% 6.38 6.46% 6.39 6.79% ================================================================================ 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 1998, 1997, and 1996 were $2.37, $3.66, and $3.92, respectively, under the 1997 and Nonemployee Director stock option plans and $1.12, $1.29, and $1.78, respectively, under the 1995 stock purchase plan. Activity in the Company's fixed stock option plans for the years ended December 31, 1998, 1997, and 1996 is summarized as follows: - -------------------------------------------------------------------------------- 1998 1997 1996 ------------------ ----------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - -------------------------------------------------------------------------------- Outstanding at beginning of year 2,259,923 $ 9.61 1,831,417 $10.38 1,778,304 $10.42 Granted at fair value 1,733,000 5.41 672,250 7.99 290,018 9.47 Exercised --- --- ( 40,187) 8.23 ( 53,898) 5.28 Expired --- --- ( 30,000) 16.00 ( 14,982) 9.23 Forfeited (405,750) 9.21 (173,557) 10.65 (168,025) 11.02 - -------------------------------------------------------------------------------- Outstanding at end of year 3,587,173 $ 7.63 2,259,923 $ 9.61 1,831,417 $10.38 ================================================================================ Exercisable at end of year 728,171 $10.22 540,922 $ 9.62 247,874 $ 9.12 ================================================================================ Further information relating to stock options outstanding at December 31, 1998 is as follows: - -------------------------------------------------------------------------------- Options Outstanding Options Exercisable ----------------------------------- ---------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Number Life Price Number Price - -------------------------------------------------------------------------------- $ .90 to $ 3.75 17,690 5.88 years $ 1.30 17,690 $ 1.30 $5.375 to $ 7.938 2,231,750 9.50 5.96 --- --- $8.875 to $12.25 1,337,733 6.48 10.49 710,481 10.44 - -------------------------------------------------------------------------------- 3,587,173 8.36 $ 7.63 728,171 $10.22 ================================================================================ Options shown above with a weighted average exercise price of $1.30 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, 1998 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 made contributions to the Plan in amounts determined at the discretion of the Board of Directors, and the contributions were funded with Company stock. Amounts were allocated to the accounts of participants based on compensation. Benefits are payable to participants subject to the vesting provisions of the Plan. The Company has not made a contribution to the Plan since 1991. In 1990, the Company established the Intergraph Corporation SavingsPlus Plan, an employee savings plan qualified under Section 401(k) of the Internal Revenue Code, covering substantially all U.S. employees. Employees can elect to contribute up to 15% of their compensation to the Plan. The Company matches 50% of employee contributions up to 6% of each employee's compensation. Cash contributions by the Company to the Plan were $5,082,000, $5,148,000, and $5,687,000, in 1998, 1997, and 1996, 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 $3,110,000, $3,244,000, and $3,678,000, in 1998, 1997, and 1996, respectively. NOTE 11 -- SEGMENT INFORMATION. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information. This Statement replaces previous requirements that segment information be reported along industry lines with a new operating segment approach. Operating segments are defined as components of a business for which separate financial information is regularly evaluated in determining resource allocation and operating performance. The Company's operating segments are Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc. (IPS), VeriBest, Inc. (VeriBest) and the Software and Federal Systems (Federal) business (the Software and Federal businesses form what is termed Intergraph), none of which were considered to be reportable segments under previous external reporting standards. The Company's reportable segments are strategic business units which are organized by the types of products sold and the specific markets served. They are managed separately due to unique technology and marketing strategy resident in each of the Company's markets. ICS supplies high performance Windows NT-based graphics workstations and PCs, 3D graphics subsystems, servers, and other hardware products. IPS develops, markets, and implements systems for public safety agencies. VeriBest serves the electronic design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. Intergraph supplies software and solutions, including hardware purchased from ICS, consulting, and services to the process and building and infrastructure industries and provides services and specialized engineering and information technology to support Federal government programs. The Company evaluates performance of the operating segments based on revenue and income from operations. The accounting policies of the reportable segments are the same as those described in Note 1. Sales among the operating segments, the most significant of which are sales of hardware products from ICS to the other segments, are accounted for under a transfer pricing policy. Transfer prices approximate prices that would be charged for the same or similar property to similarly situated unrelated buyers. In the U.S., intersegment sales of products and services to be used for internal purposes are charged at cost. For international subsidiaries, transfer price is charged on intersegment sales of products and services to be used for either internal purposes or sale to customers. The following table sets forth revenues and operating income (loss) by operating segment for the year ended December 31, 1998, together with supplementary information related to depreciation and amortization expense attributable to the operating segments.
- ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 (In thousands) Intergraph ----------------- Total ICS IPS VeriBest Software Federal Corporate Eliminations Company - ------------------------------------------------------------------------------------------------------------------------ Revenues Unaffiliated customers $268,447 $50,412 $ 27,783 $532,394 $153,754 --- --- $1,032,790 Intersegment revenues 185,234 712 460 1,815 4,863 --- $(193,084) --- - ------------------------------------------------------------------------------------------------------------------------ Total Revenues $453,681 $51,124 $ 28,243 $534,209 $158,617 --- $(193,084) $1,032,790 - ------------------------------------------------------------------------------------------------------------------------ Operating income (loss) before nonrecurring operating charges $(68,144) $ 3,486 $(12,433) $ 14,126 $( 3,559) $(30,944) $( 895) $( 98,363) - ------------------------------------------------------------------------------------------------------------------------ Depreciation and amortization expense $ 10,314 $ 5,099 $ 3,839 $ 30,171 $ 3,003 $ 2,294 --- $ 54,720 - ------------------------------------------------------------------------------------------------------------------------
Amounts included in the "Corporate" column consist of general corporate expenses, primarily general and administrative expenses (including legal fees of $10,650,000) remaining after charges to the operating segments based on segment usage of those services. Significant profit and loss items for 1998 that are not allocated to the segments and not included in the analysis above include gains on sales of assets of $112,533,000 (see Note 14) and nonrecurring operating charges of $15,843,000 (see Note 3). The Company does not evaluate performance or allocate resources based on assets and, as such, it does not prepare balance sheets for its operating segments, other than those of its wholly-owned subsidiaries. The operating segment information presented above represents the internal evaluation model adopted by the Company for 1998 and future years. The Company has in prior years utilized several variations of this model depending on the Company's structure and its business environment at the particular time, but believes the 1998 model best reflects the operations and business structure of the various segments and the Company for 1998 and the future. The 1998 model differs significantly from those utilized in prior years, specifically in the institution of a transfer pricing system in 1998 and in the attribution of revenues to its ICS and Software operating segments in sales transactions where both hardware and software, and perhaps attendant services, are sold to a single customer. The Company has found it impractical to restate prior years' segment information to reflect the current reporting model, since such a restatement would involve a transaction-by-transaction analysis. Since VeriBest and IPS have been operating as separate subsidiaries since 1996 and 1997, respectively, and since by nature of their businesses they are less affected by changes from the model utilized before 1998, comparable information is available. VeriBest incurred operating losses of $16,381,000 in 1997 and $15,463,000 in 1996 on revenues of $29,290,000 and $31,031,000, respectively. IPS incurred an operating loss of $2,165,000 in 1997 on revenues of $50,418,000. Revenues from the U.S. government were $166,100,000 in 1998, $177,100,000 in 1997, and $160,800,000 in 1996, representing approximately 16% of total revenue in 1998 and 1997, and 15% in 1996. The majority of these revenues are attributed to the Federal unit of the Intergraph operating segment. The U.S. government was the only customer accounting for more than 10% of consolidated revenue in each of the three years in the period ended December 31, 1998. 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. Following is a summary of external revenues and long-lived assets by principal geographic area. For purposes of this presentation, revenues are attributed to geographic areas based on customer location. Long-lived assets include property, plant and equipment, investments in affiliates and other noncurrent assets. Assets have been allocated to geographic areas based on their physical location. - -------------------------------------------------------------------------------- Revenues Long-lived Assets - -------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 - -------------------------------------------------------------------------------- (In thousands) United States $ 505,317 $ 528,411 $ 488,759 $139,128 $152,184 $174,842 Europe 317,840 355,179 365,349 40,878 41,467 50,346 Asia Pacific 107,512 133,864 146,240 17,975 21,304 23,069 Other International 102,121 106,851 94,985 3,468 4,010 4,170 - -------------------------------------------------------------------------------- Total $1,032,790 $1,124,305 $1,095,333 $201,449 $218,965 $252,427 - -------------------------------------------------------------------------------- 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 Company's purchases from Bentley totaled $1,339,000 in 1998, $5,656,000 in 1997, and $14,244,000 in 1996. Amounts due from Bentley or for which the Company holds the right to delivery of Bentley products totaled $1,224,000 and $1,076,000 at December 31, 1998 and 1997, 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 20 to 24 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 could borrow from the Company, on an unsecured basis, an amount not exceeding (1) the market value of the common stock of the Company owned by any such executive officer, and/or (2) the net value (market price less exercise price) of exercisable stock options owned by any such executive officer. Interest was charged on these loans at the prevailing prime rate. Prior to the April 30, 1998 expiration of the loan program, James W. Meadlock, Chief Executive Officer and Chairman of the Board of the Company, was indebted to the Company in the maximum amount of $6,129,000 under the program. Mr. Meadlock repaid his loan in full on November 21, 1997. NOTE 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 -- ACQUISITIONS AND DIVESTITURES. The Company filed a legal action in August 1995 seeking to dissolve and wind up its business arrangement with Zydex, Inc., a company with which it jointly developed its plant design software application (PDS), and seeking an order allowing the Company to continue the business of that arrangement without further responsibility or obligation to Zydex. In November 1995, Zydex filed a counterclaim against the Company alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. In September 1997, the Court issued an order resolving all disputed issues and requiring the parties to settle, and dismissed the case. A closing of the final settlement agreement occurred on January 15, 1998. The final settlement included the purchase by Intergraph of 100% of the common stock of Zydex for $26,300,000, with $16,000,000 paid at closing of the agreement and the remaining amount payable in 15 equal monthly installments, including interest. In March 1998, the Company prepaid in full the remaining amount payable to Zydex. The former owner of Zydex retains certain rights to use, but not sell or sublicense, PDS products for a period of 15 years following the date of closing. In addition to the purchase price of the common stock, the Company was required to pay additional royalties to Zydex in the amount of $1,000,000 at closing of the agreement. These royalties were included in the Company's 1997 results of operations. The first quarter 1998 cash payments to Zydex were funded by the Company's primary lender and by proceeds from the sale of the Company's Solid Edge and Engineering Modeling System product lines. The Company accounted for the acquisition as the purchase of PDS software rights and is amortizing those rights over an estimated useful life of seven years. The unamortized balance, approximately $22,500,000 at December 31, 1998, is included in "Other assets" in the consolidated balance sheet. PDS is currently the Company's highest volume software offering, representing approximately 28% of total software sales for 1998. In March 1998, the Company sold its Solid Edge and Engineering Modeling System product lines to Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary for $105,000,000 in cash. The Company's gain on this transaction of $102,767,000 is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. Full year 1997 revenues and operating losses for these product lines were $35,200,000 and $4,100,000, respectively. Based on 1997 performance, the Company estimates that the sale of this business resulted in an improvement in its 1998 operating results of approximately $5,000,000, excluding the impact of the gain on the sale. In April 1998, the Company sold its printed circuit board manufacturing facility for $16,002,000 in cash. The Company's gain on this transaction of $8,275,000 is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. The Company is now outsourcing its printed circuit board needs. This operational change did not materially impact the Company's results of operations in 1998. In November 1998, the Company sold substantially all of its U.S. manufacturing inventory and assets to SCI Technology Inc. (SCI), a wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. The total purchase price was $62,404,000, $42,485,000 of which was received during the fourth quarter of 1998. The final purchase price installment of $19,919,000 was received on January 12, 1999. The Company's gain on this transaction of $1,491,000 is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. For a complete description of the SCI transaction and its anticipated impact on future operating results and cash flows, see "SCI" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 20 of this annual report. NOTE 15 - 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, 1998: Revenues $245,818 $246,613 $253,624 $286,735 Gross profit 77,923 76,470 78,100 92,859 Net income (loss) 49,442 (20,988) (27,173) (20,915) Net income (loss) per share - basic 1.03 ( .43) ( .56) ( .43) - diluted 1.02 ( .43) ( .56) ( .43) Weighted average shares outstanding - basic 48,219 48,311 48,416 48,547 - diluted 48,335 48,311 48,416 48,547 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, basic and diluted 47,758 47,888 48,006 48,121 ================================================================================ First quarter 1998 earnings included a $2.13 per share gain on the sale of the Company's Solid Edge and Engineering Modeling System product lines and a $.31 per share charge for nonrecurring operating expenses, primarily for employee termination costs and write-off of certain intangible assets. Second quarter 1998 losses were reduced by a $.17 per share gain on the sale of the Company's printed circuit board manufacturing facility. Fourth quarter 1998 losses included expenses of approximately $.14 per share relating to the Company's transition to outsourcing of its manufacturing operation and a $.04 per share charge for nonrecurring operating expenses, primarily for employee terminations. 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 results of operations by approximately $.15 per share in comparison to fourth quarter 1996. 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Birmingham, Alabama February 1, 1999 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, 1999, there were 48,690,820 shares of common stock outstanding, held by 4,447 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. - ------------------------------------------------------------------- 1998 1997 Period High Low High Low - ------------------------------------------------------------------- First Quarter $10 3/16 $8 1/4 $11 1/4 $7 3/8 Second Quarter 10 9/16 7 3/16 8 13/16 6 1/4 Third Quarter 8 5/8 5 1/2 12 7 5/8 Fourth Quarter 7 4 11/16 14 3/16 8 15/16 =================================================================== 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 13, 1999, 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 and President, Intergraph Michael Bezzant Board Computer Systems Henry J. Dipietro James F. Taylor Jr. Lawrence F. Ayers Jr. Executive Vice President Thomas J. Doran Intergraph Corporation Klaas Borgers and Chief Executive George H. Dudley Officer, Intergraph Penman R. Gilliam Public Safety, Inc. Jeffrey H. Edson Lewis N. Graham Jr. Robert E. Thurber Graeme J. Farrell Executive Vice President Richard H. Lussier Milford B. French Keith H. Schonrock Jr. Nancy B. Meadlock Aggie L. Frizzell Larry J. Laster Stephen J. Phillips Jeffrey P. Heath Thomas J. Lee Preetha R. Pulusani Fred D. Heddens Sidney L. McDonald William E. Salter Rune Kahlbom K. David Stinson Jr. Robert L. Kuehlthau John W. Wilhoite Milton H. Legg Edward A. Wilkinson Winston P. Newton Allan B. Wilson John R. Owens Manfred Wittler Robert Patience Carl N. Reed Charles E. Robertson Jr. Chief Executive Officer and President, VeriBest, Inc. Stephen B. Rowles Gerhard Sallinger James H. Slate Richard L. Watson Eugene H.Wrobel 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, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1998 DEC-31-1998 95,473 0 325,937 13,814 38,001 494,525 386,442 259,074 695,974 278,005 59,495 0 0 5,736 349,596 695,974 726,135 1,032,790 513,822 707,438 439,558 3,168 7,460 (13,634) (6,000) (19,634) 0 0 0 (19,634) (0.41) (0.41) 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, 1998, 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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