-----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, GB1dbLkjGV9roIRJwEovlwmEwaFnN8jSuBIoHEjMb3UhkOdSdeSL+XPZkIKDVSvA sWts5UAQRnGd4vhv4q3dIw== 0000351145-02-000011.txt : 20020415 0000351145-02-000011.hdr.sgml : 20020415 ACCESSION NUMBER: 0000351145-02-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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: 1934 Act SEC FILE NUMBER: 000-09722 FILM NUMBER: 02591594 BUSINESS ADDRESS: STREET 1: 1 MADISON INDUSTRIAL PARK IW2000 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2567302000 MAIL ADDRESS: STREET 1: 290 DUNLOP BLVD CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 10-K 1 tenk.txt 10-K 2001 ================================================================== 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, 2001 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 incorporation or organization) Identification No.) 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, 2002, there were 49,919,242 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 $706,614,000 based on the closing sale price of such stock as reported by The Nasdaq Stock Market on January 31, 2002, 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, 2001 Part I, Part II, Part IV PART I ITEM 1. BUSINESS Overview Intergraph Corporation (the "Company"), founded in 1969, is a worldwide provider of end-to-end technical solutions and systems integration services. The Company's industry-focused business segments develop, market, and support software and services for local and national governments, and for global industries, including process, power, and offshore; utilities and communications; mapping and geographic information systems ("GIS"); earth imaging; and public safety. The Company's business segments offer software solutions based on Microsoft Corporation's Windows operating systems. This open technology foundation enables the Company's software products to interoperate with thousands of third-party Windows-based technical and business applications. The Company's business segments also offer related professional services to satisfy engineering, design, modeling, analysis, mapping, and information technology needs. Products and services are sold through industry-focused direct and indirect channels worldwide, with United States and European revenues representing approximately 81% of total revenues for 2001. Background Until the mid-1990s, high-end technical computing required tremendous processing and graphics capabilities that were available only from mainframes, minicomputers, and reduced instruction set computing ("RISC")-based workstations, running the UNIX operating system, including Intergraph's Clipper workstations. However, in 1992, the Company began evaluating a transition from its Clipper RISC microprocessor to Intel Corporation ("Intel") microprocessors, and from UNIX to Microsoft's Windows NT operating system. In late 1992, based on commitments from Intel, the Company concluded that systems with Intel microprocessors and Windows operating systems would become capable of supporting high-end computing and other enterprise- wide computing environments. The Company, therefore, chose to migrate products from its own Clipper microprocessor to Intel microprocessors, and from the UNIX operating system to Microsoft Windows NT. The Company ceased development of the Clipper RISC microprocessor at the end of 1993 and made a substantial investment in the redesign of its hardware platform for utilization of Intel's microprocessors. The Company chose to use only Intel microprocessors and to focus its efforts and branding on its core capabilities, specifically very high-performance computational and 3D graphics capabilities. The Company's transition from its proprietary hardware to Intel-based systems was substantially completed during 1994. From then until the Company exited the high-end workstation market in 2000, substantially all of the Company's hardware sales were of Intel- based systems. In the mid-1990s, the Company also completed the development effort to port its technical software applications to the Windows NT operating system, and made Windows NT available on all its workstations. In 1996, a dispute disrupted relations between the Company and Intel, causing significant delays in the Company's hardware development and manufacturing cycles. Unable to acquire technical information crucial to its product development, the Company could not introduce new hardware lines on a timetable competitive with other hardware vendors. As a consequence, the Company was unable to compete favorably in the high-performance Intel processor-powered workstation markets. In November 1997, the Company filed suit against Intel for illegal coercive actions, patent infringement, and antitrust violations. The antitrust portion of the case was dismissed, and a trial date of January 2003 has been set in the U.S. District Court, Birmingham, Alabama, for the patent infringement and state tort claims. On July 30, 2001, the Company filed a separate lawsuit in U.S. District Court, the Eastern District of Texas, charging Intel with infringement of two Intergraph patents pertaining to parallel instruction computing ("PIC"). The complaint alleges that Intel's IA-64 EPIC(TM) (explicitly parallel instruction computing) architecture, infringes the Company's two PIC patents. This lawsuit is scheduled to go to trial in July 2002. See Item 3, Legal Proceedings, following, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2001 Annual Report, portions of which are incorporated by reference in this Form 10-K Annual Report ("MD&A"), for further discussion of the Company's dispute with Intel and its effects on the Company's business and consolidated operating results. Over the past four years, the Company has taken significant measures to reduce its losses and return to profitability, including extensive reductions in its workforce and the sale of several non-core business units and assets. In October 1999, having suffered irreparable damage as a result of the dispute with Intel, the Company exited the personal computer and generic server businesses, and in the third quarter 2000 it exited the development and design of most of its hardware products. The Company returned to profitability in 2001. Each of the five core businesses, and the Company as a whole, were profitable in every quarter of 2001. For further information regarding these actions, see MD&A. The Company believes that its software applications strategy is the best available choice for its customers; however, other software applications are available in the market, and the Company competes with companies with greater financial resources in each of the markets it serves. Further improvement in the Company's operating results depends on further market penetration through its ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability. Success will also depend on the Company's ability to successfully implement its strategic direction, which includes the operation of independent vertical business segments. In addition, the Company continues to face high legal expenses of unknown duration because of its dispute with Intel. Discontinued Operation On October 31, 1999, the Company sold its VeriBest, Inc. operating segment. For further information regarding the sale of VeriBest, see MD&A. Business Segments Effective for 2001, the Company's operations are divided into five separate business segments. These business segments are focused on specific vertical markets in which the Company considers itself to be a leader or sees the potential to lead. The Company's 2001 business segments are Intergraph Government Solutions; Intergraph Mapping and GIS Solutions; Intergraph Process, Power & Offshore; Intergraph Public Safety (which includes Public Safety and Utilities and Communications); and Z/I Imaging. Each is discussed in further detail below. For additional information regarding the Company's business segments, including financial information for 2001, see MD&A and Note 12 of Notes to Consolidated Financial Statements contained in the Company's 2001 Annual Report, which are incorporated herein by reference ("Notes to Consolidated Financial Statements"). Intergraph Government Solutions ("IGS") - --------------------------------------- Intergraph Government Solutions is a professional services and solutions company that provides management consulting, technology, and integrated solutions in the commercial and government sectors. IGS partners with clients to achieve their vision, mission, and goals through intelligent deployment of best practices and information technology ("IT"). IGS combines experience in dozens of technical fields with offerings covering the gamut of services capabilities and products: IT integration, systems and networking, installation management, management consulting, help desk services, multi-vendor maintenance/field support, ruggedized hardware solutions, video analysis systems and services, and Integrated Ship Design and Production software. IGS operates two divisions, the Government Solutions Division ("GSD") and the Federal Hardware Solutions Division ("FHS"). These divisions encompass four business units that serve focused markets or industries. Three of the four business units are organized under GSD. The Department of Defense ("DOD") business unit serves the U.S. Air Force, Joint Operations, U.S. Naval Air Systems Command, the U.S. Army, and NASA. With long-term contract vehicles such as CAD-2 and GSA, the DOD business unit remains the largest within IGS. The Marine and Life Cycle Solutions business unit provides integrated data environments for the U.S. Naval Sea Systems Command, the U.S. Coast Guard, and commercial shipyards in the United States and around the world. The Commercial/State and Local Government business unit serves three distinct markets. First, the unit delivers integrated information management systems to federal and state departments of transportation, state and local government agencies, and transportation organizations. Second, the unit supplies product data management and collaborative product commerce services to consumer product, medical device, and discrete manufacturing industries. Third, the unit provides local and wide area network planning and implementation, electronic-business, IT outsourcing, and help desk solutions to commercial markets. The fourth business unit, organized under FHS, develops, implements, and supports ruggedized hardware for use in harsh operating environments, and video analysis products and services for the DOD and federal, state, and local law enforcement agencies. Intergraph Mapping and GIS Solutions ("IMGS") - --------------------------------------------- Intergraph Mapping and GIS Solutions has been a leading provider of mapping, GIS, and cartographic software and solutions for more than twenty-five years. IMGS, an acknowledged pioneer in the industry, provides products and services, open technology and data integration, and partners and people to help customers implement successful solutions. IMGS serves government agencies and commercial enterprises with end-to-end geospatial solutions for cartography and map production and enterprise-wide mapping and GIS. IMGS products and industry-specific solutions support government agencies and commercial enterprises worldwide, including local, state, federal, and national governments; transportation agencies; mapping agencies; the military; civil aviation authorities; and educational institutions. IMGS solutions include the GeoMedia(R), Modula(R) GIS Environment ("MGE"), and Digital Cartographic Studio ("DCS") platforms. The GeoMedia product suite integrates geospatial information throughout the enterprise, while providing the necessary tools to develop business-to-business and custom client applications. MGE provides production-ready capabilities for automating, managing, analyzing, and presenting GIS data, and is interoperable with GeoMedia. DCS provides a suite of cartographic tools to produce aesthetically pleasing, clear, and concise maps and charts. DCS tools may also be used to support production and revision of topologically clean databases for mapping. The IMGS professional services team provides clients with quality consulting services to implement state-of-the-art mapping and GIS technologies and tools. The team offers a broad range of services from consulting and project management to Web development and training. IntelliWhere(TM), a division of IMGS, addresses the emerging technologies of wireless Internet and location-based services ("LBS"). This division's products leverage GeoMedia technology to provide LBS solutions that are device and data independent. IntelliWhere focuses on enterprises with mobile workforces in markets such as transportation, state and local government, telecommunications, utilities, the military, and emergency response. Intergraph Process, Power & Offshore ("PP&O") - --------------------------------------------- Intergraph Process, Power & Offshore supplies software and services to the process, power, and offshore petroleum industries. The segment focuses on integrated life cycle engineering solutions for design and information management, with emphasis on engineering information as well as materials and procurement management, and on the linkage of engineering and business systems. For more than 23 years, engineering, procurement, and construction ("EPC") contractors and facility owner/operators have used the segment's software and services to design, construct, operate, and maintain facilities for petrochemical, chemical, pharmaceutical, food and beverage, oil and gas, power generation, pulp and paper, and mining industries. The segment's engineering and information management solutions increase the value of plant data by facilitating capture and re-use of information throughout the life cycle of a plant, resulting in significant productivity gains and operational efficiencies. The segment's most prominent brands include PDS(TM) (Plant Design System), SmartPlant(R), MARIAN(TM), and INtools(TM). PDS is a comprehensive, intelligent engineering and design application that consists of integrated 2D and 3D modules which correspond to tasks in the plant and rig design workflow. SmartPlant software includes SmartPlant Foundation (formerly Notia) for engineering information management, SmartPlant P&ID for intelligent piping and instrumentation diagrams, SmartPlant Review for 3D visualization, SmartPlant Explorer for enterprise information access and reports, and SmartSketch for 2D CAD. MARIAN and the Web-enabled eMARIAN comprise an integrated materials, procurement, and supply chain management system. INtools is an integrated instrumentation engineering package. The segment continues its development of The Engineering Framework (a collaborative engineering workflow management and standards-based integration architecture for design engineering tools) and an advanced, next-generation shipbuilding software product for the design of commercial and military vessels. To better reflect the industries it serves, the segment changed its name from Intergraph Process & Building Solutions to Intergraph Process, Power & Offshore in January 2002. Intergraph Public Safety ("IPS") - -------------------------------- In January 1997, Intergraph Public Safety, Inc. was established as a wholly owned subsidiary of the Company. Intergraph Utilities & Communications was combined with the Public Safety business in January 1999. The Public Safety division provides total public safety solutions and is recognized worldwide as a leading supplier of public safety systems. Public Safety develops, markets, implements, and supports software solutions for law enforcement organizations, fire and emergency medical services, airports, military and commercial security forces, and automobile clubs for roadside assistance. Public Safety products provide a complete solution for public safety agencies. IPS was the first vendor to offer map-based computer-aided dispatching, and it expanded the product offering to include records and jail management systems, mobile solutions, and Web-enabled products that help disseminate information from the central communications server. Together, these products represent an integrated solution for dealing with the life cycle of public safety information. IPS' dispatch technology is a complementary application to the mainstream geospatial products, such as FRAMME and the new G/Solutions products. Intergraph Utilities & Communications solutions assist electric, gas, pipeline, water/wastewater, and communications companies in the automated management of their facility network. For utilities, these solutions contain all the information necessary for distributing energy services to customers, tracking distribution, and managing service disruptions. For communications companies, these solutions automate network facility mapping, planning, design, and maintenance activities. Geospatial Resource Management solutions spatially enable this information by integrating GIS with operational support systems (such as outage analysis and mobile workforce/work management). They also provide real-time information for customer service, thereby increasing operational efficiency enterprise-wide. Dedicated to streamlining the entire workflow, the InService suite of products addresses outage management, workforce management, crew dispatch, and mobile data needs. Z/I Imaging, Inc. ("Z/I Imaging") - ---------------------------------- Z/I Imaging, a 60%-owned subsidiary of the Company, was formed in October 1999 to develop, market, and sell Windows-based imaging solutions for earth imaging. Z/I Imaging's solutions include aerial cameras; photogrammetric scanners; stereo workstations; and image management, processing, and distribution software. The imaging software includes enterprise solutions that combine the power of a client/server image management and distribution system with a high-performance imaging engine to quickly provide the information needed. Using TerraShare(TM) as the foundation of the enterprise system, Z/I Imaging provides a modular client/server system that manages geoimaging data (images, digital terrain models, and digitized raster graphics) from acquisition to exploitation to storage to distribution. TerraShare is a family of products that offers individual modules for photogrammetric production, managing orthophotos on the users' GIS and CAD desktops, collaborative production, Internet distribution and more. TerraShare addresses the image management and distribution needs of geoimaging producers and distributors. Because it is fully integrated in Microsoft Windows Explorer, users can immediately use familiar tools. The modular approach makes it easy to customize systems to meet specific workflows leading to a more productive environment and positive return on investment. Z/I Imaging offers nonproprietary solutions, enabling industry and government professionals to use them as a front-end to mapping, GIS, and civil engineering software from a variety of leading vendors. The segment is investing in the earth-imaging industry with extensive research and development efforts to create new digital products for photogrammetry, airborne reconnaissance, aerial mapping, and image distribution. Product Development The Company believes a strong commitment to ongoing product development is critical to success in the markets in which it competes. Product development expenditures include all costs related to designing new or improving existing products. During the year ended December 31, 2001, the Company expensed $53.9 million (10.1% of revenues) for the product development activities of its continuing operations compared to $56.3 million (8.2% of revenues) in 2000, and $62.6 million (6.8% of revenues) in 1999. See MD&A for further discussion of product development expenses, including portions capitalized and their recoverability. The markets in which the Company's business units compete continue to be characterized by rapid technological change, resulting 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 operating results of the Company and its competitors will continue to depend on the ability to accurately anticipate customer requirements and technological trends, and to rapidly and continuously develop and deliver new products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability. Manufacturing and Sources of Supply In fourth quarter 1998, the Company sold substantially all of its U.S. manufacturing inventory and assets to SCI Technology Inc. ("SCI"), a wholly owned subsidiary of SCI Systems, Inc., and outsourced to SCI the responsibility for manufacturing substantially all of the Company's hardware products. In November 2001, the Company's three-year manufacturing agreement with SCI expired, completing its manufacturing obligations associated with the closure of the Intergraph Computer Systems business unit. For a complete description of these transactions and their impact on the Company's operating results and cash flows, including exposures associated with the SCI contract, see Note 15 of Notes to Consolidated Financial Statements. The Company maintains inventories to meet its hardware warranty and service obligations, and two of the Company's business segments continue light manufacturing and assembly operations. All other business segments purchase hardware from third parties for resale to customers. The Company is not required to carry extraordinary amounts of inventory to meet customer demands. Sales and Support Sales. The Company's products are sold through a combination of direct and indirect channels in approximately 56 countries worldwide. Direct channel sales, which provide most of the Company's revenues, are generated by the Company's direct sales force through sales offices in approximately 43 countries worldwide. The efforts of the direct sales force are augmented by sales through indirect channels, including dealers, value- added resellers, distributors, and systems integrators. Each of the Company's business units maintains its own sales force. Selling efforts are organized along key industry lines for their 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 its technical solutions and integration services. Customer support includes pre-installation guidance, customer training, on-site installation, project management, hardware preventive maintenance, repair services, 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 Company believes that its hardware maintenance revenue will continue to decline as a result of its exit from the hardware business; however, the decline in maintenance revenues may be partially offset by growth in the Company's professional services business. The Company is endeavoring to grow its services business, but revenues from these services typically fluctuate significantly from quarter to quarter and produce lower gross margins than systems or software maintenance revenues. International Operations International markets, particularly Europe and Asia, continue in importance to each of the Company's operating segments. Sales outside the United State represented approximately 47% and 52% of total revenues in 2001 and 2000, respectively. European and Asia Pacific revenues represented approximately 28% and 9%, respectively, of total revenues in 2001, compared to 27% and 12%, respectively, in 2000. 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 across Europe. European subsidiaries are supported by service and technical assistance operations located in The Netherlands. Outside of Europe, the Company's products are sold and supported through a combination of subsidiaries and distributorships. At December 31, 2001, the Company had approximately 780 employees in Europe, 580 employees in the Asia Pacific region, and 480 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 United States, but the most significant of these operations with respect to currency risk are located in Europe and Asia. During 2001, local currencies were the functional currencies for the Company's European subsidiaries. The U.S. dollar was the functional currency for all other international subsidiaries in 2001; however, the Company's Canadian subsidiary changed its functional currency from the U.S. dollar to its local currency in January 2002. See Note 1 of Notes to Consolidated Financial Statements for a description of the Company's policy for managing the currency risks associated with its international operations. 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 continues to experience slow collections throughout the Middle East region, particularly in Saudi Arabia, which was sold effective July 2001. Total accounts receivable from Middle Eastern customers was approximately $13 million at December 31, 2001, and $18 million at December 31, 2000. This number will continue to decrease as a result of the 2001 conversion of several of the Company's Middle East subsidiaries into distributorships. For further discussion of the Company's international operations, see MD&A and Notes 1, 5, and 12 of Notes to Consolidated Financial Statements. U.S. Government Business Total revenue from the U.S. government was approximately $143 million in 2001, $132 million in 2000, and $149 million in 1999, representing approximately 27% of total revenue in 2001, and 19% and 16% of revenue in 2000 and 1999, respectively. The majority of these revenues are attributed to the IGS business segment. The Company sells to the U.S. government under long-term contractual arrangements, primarily indefinite delivery, indefinite quantity, and cost-based contracts, and through sales of commercial products not covered by long-term contracts. Approximately 69% of the Company's 2001 federal government revenues was 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 IGS 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, 2001, and 2000, accounts receivable from the U.S. government totaled approximately $27.7 million and $28 million, respectively. Backlog An order is entered into backlog only when the Company receives a purchase order or a signed contract from a customer. The Company's backlog of unfilled orders at December 31, 2001, and 2000, was $231 million and $268 million, respectively. Substantially all of the December 2001 backlog of orders is expected to be earned and recognized as revenue in 2002. 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 markets in which the Company competes continue to be characterized by intense price and performance competition. To compete successfully, the Company and others serving these markets 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 and its competitors engage in the practice of price discounting to meet competitive industry conditions. Other important competitive factors include quality, reliability, customer service and support, and training. Management of the Company believes that competition will remain intense, particularly in product pricing. The Company's competition varies among its business segments. IGS offers a wide range of service-oriented solutions to government and commercial entities. The primary competitors in this diverse market are considered to be Computer Sciences Corporation ("CSC"), Science Applications International Corporation ("SAIC"), International Business Machines Corporation ("IBM"), Electronic Data Systems ("EDS"), CACI International, and Perot Systems. The primary competitors of IMGS are ESRI, Autodesk Inc., and MapInfo Corporation. Process, Power & Offshore competes with the software products and services of Aveva (including Cadcentre), Bentley Systems, Inc. ("BSI") (an approximately 31%-owned affiliate of the Company), Rebis Industrial Workgroup Software, Dassault, Systemes, and several smaller companies. IPS considers its primary competitors to be Motorola/Printrak International, Inc., Litton PRC, CompuDyne, and TriTech Software Systems in the Public Safety market, and ESRI and GE/Smallworld in the Utilities and Communications GIS markets. In the Outage and Workforce Management market, key competitors are CES, M3i, GE/Smallworld, and MDSI. The primary competitor of Z/I Imaging is LH Systems, LLC, a wholly owned subsidiary of Leica Geosystems GIS and Mapping Division. Other competitors in the reconnaissance and photogrammetry businesses include Recon/Optical, Inc., DAT/EM Systems International, ISM, INPHO, Autometric Incorporated (a subsidiary of The Boeing Company), and ERDAS, a wholly owned subsidiary of Leica Geosystems. Several companies with greater financial resources than the Company are active in the markets it serves, particularly those served by its IGS business segment. The Company believes that its experience and ability to provide total solutions and services gives it an advantage over vendors who provide only software, hardware, or services. Environmental Affairs The Company's facilities are subject to numerous laws and regulations designed to protect the environment. In the opinion of the Company, compliance with these laws and regulations has not had, and should not have, a material effect on the capital expenditures, earnings, or competitive position of the Company. Licenses, Copyrights, Trademarks, Patents, and Proprietary Information The Company 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 products. Similarly, trademark rights held by the Company are used to preserve and protect the reputation of the Company's registered and unregistered trademarks. As industry standards proliferate, there is a possibility that the patents of others may become a significant factor in the Company's business. Personal computer technology, which was used in the Company's workstation and server products, is widely available, and many companies, including Intergraph, have developed and continue to develop patent positions concerning technological improvements related to personal computers, workstations, and servers. It does not appear that the Company will be prevented from using the technology necessary to support existing products, 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. In addition, computer software technology is increasingly being protected by patents, and many companies, including Intergraph, are developing patent positions for software innovations. It is unknown at the present time whether various patented software technology will be made generally available under license, or whether specific innovations will be held by their inventors and not made available to others. In many cases, it may be possible to employ software techniques that avoid the patents of others, but the possibility exists that some features needed to compete successfully in a particular segment of the software market may be unavailable or may require an unacceptably high cost via royalty arrangements. Patented software techniques that become de facto industry standards are among those that may raise costs or may prevent the Company from competing successfully in particular markets. An inability 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 markets in which the Company competes, could significantly reduce the Company's revenues and adversely affect its results of operations. Risks and Uncertainties In addition to those described above and in Item 3, Legal Proceedings, the Company has risks and uncertainties related to its business and operating environment. See MD&A and Note 2 of Notes to Consolidated Financial Statements for further discussion of these risks and uncertainties. Employees At December 31, 2001, the Company had approximately 4,300 employees. Of these, approximately 1,840 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 development centers are located in Huntsville, Alabama. All of the Company's business segments have headquarters located within the Huntsville facilities. The business segments also maintain sales and support facilities throughout the world. The Company owns approximately 1,400,000 square feet of space in Huntsville, of which approximately 1,000,000 square feet is utilized for product development, sales, and administration. The remaining 400,000 square feet is leased or available for lease. The Company also owns approximately 600 acres of unoccupied land adjacent to its Huntsville facilities. The Company maintains sales and support locations in major U.S. cities outside of Huntsville through operating leases. Outside the United States, the Company owns 90,000 square feet of office space, primarily in the United Kingdom. Sales and support facilities are leased in the Company's other international locations. The Company considers its facilities to be in excess of its requirements, and efforts are underway to lease or sell excess facilities. ITEM 3. LEGAL PROCEEDINGS The Company filed a legal action on November 17, 1997, in U.S. District Court for the Northern District of Alabama, Northeastern Division (the "Alabama Court"), charging Intel Corporation with unlawful anti-competitive business practices. Intergraph alleges that Intel attempted to coerce the Company into relinquishing certain computer hardware patents to Intel 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 infringed upon the Company's patents. The Company's patents (the "Clipper Patents") define the architecture of the cache memory of Intergraph's Clipper microprocessor. The Company believes this architecture is at the core of Intel's Pentium line of microprocessors and systems. Intel's Pentium 4 processor was not commercially available at the time of the filing of the lawsuit; however, the Company has reason to believe that Intel's Pentium 4 processor infringes the Company's Clipper patents. On December 3, 1997, the Company amended its complaint to include a count alleging violations of federal antitrust laws. Intergraph asserted 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 enjoined Intel from 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. On April 16, 1998, Intel appealed to the United States Court of Appeals for the Federal Circuit (the "Appeals Court"), and on November 5, 1999, the Appeals Court vacated the preliminary injunction that had been entered by the Alabama Court. This ruling by the Appeals Court did not impact the Company's operations due to an Agreement and Consent Order which Intel entered into with the Federal Trade Commission ("FTC") on March 17, 1999, not to restrict sales or take coercive actions such as those alleged by the Company in its lawsuit against Intel. On June 17, 1998, Intel filed its answer in the Alabama case, which included counterclaims against Intergraph, including claims that Intergraph had 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 patents asserted by Intel. On January 11, 2002, Intel stipulated to the dismissal of one of the alleged counterclaim patents. The Company continues to vigorously defend the remaining counterclaims. The Company does not believe that Intel's remaining counter-claims, including Intel patent counterclaims, will result in a material adverse consequence for the Company. On June 17, 1998, Intel filed a motion before the Alabama Court requesting a determination that Intel is licensed to use the Clipper Patents. This "license defense" was based on Intel's interpretation of the Company's acquisition of the Advanced Processor Division of Fairchild Semiconductor Corporation in 1987. On September 15, 1998, the Company filed a cross motion with the Alabama Court requesting summary adjudication of the "license defense" in favor of the Company. On November 13, 1998, the Company amended its complaint to include two additional counts of patent infringement against Intel. The Company requested the court to issue a permanent injunction enjoining Intel from further infringement and to order that the financial impact of the infringement be calculated and awarded in treble to Intergraph. On December 6, 1999, in order to obtain protection under the aforementioned FTC Consent Order, the Company withdrew its request for a patent injunction against Intel's P5 and P6 families of microprocessors. (Intel's P5 and P6 processor families include the Pentium, Pentium Pro, Pentium II, and Pentium III microprocessors, but specifically exclude Intel's Pentium 4, Pentium 4 Xeon, and Itanium families of microprocessors.) On June 4, 1999, the Alabama Court granted the Company's September 15, 1998, motion and ruled that Intel had no license to use the Company's Clipper Patents; however, on October 12, 1999, the Alabama Court reversed its June 4, 1999, order and dismissed the Company's patent claims against Intel based upon Intel's "license defense." The Company appealed the Alabama Court's October 12, 1999, order to the United States Court of Appeals for the Federal Circuit. On March 1, 2001, the Appeals Court reversed the October 12, 1999, decision of the Alabama Court, specifically holding that Intel was never licensed under the Company's Clipper patents. On March 15, 2001, Intel filed a petition for rehearing with the Appeals Court, requesting that it reconsider its March 1, 2001, decision. The Appeals Court subsequently denied Intel's motion for reconsideration on April 9, 2001. Intel has no further recourse with regard to the assertion of the "license defense." The Company believes that the Federal Circuit's March 1, 2001, patent license decision is well supported by law and fact, and the Company will continue to aggressively pursue its patent case for the payment of royalties by Intel for their use of the Company's Clipper technology in Intel's Pentium line of products. On March 10, 2000, the Alabama Court entered an order dismissing the antitrust claims of the Company. This dismissal was based in part upon a February 17, 2000, decision by the Appeals Court in another case (CSU v. Xerox). On April 26, 2000, the Company appealed this dismissal to the United States Court of Appeals for the Federal Circuit. The oral argument for this appeal was heard on March 5, 2001. The Appeals Court subsequently denied the Company's appeal on June 8, 2001. The Company does not believe that the dismissal of the antitrust appeal will materially affect the Company's remaining claims or the value of the overall lawsuit. On March 17, 2000, Intel filed a series of motions in the Alabama Court to dismiss certain Alabama state law claims of the Company. The Company filed its responses to Intel's motions on July 17, 2000, together with its own motions to dismiss certain Intel counterclaims. Intel's responses were filed on November 3, 2000. The Alabama Court has taken the motions under submission. No oral argument has been scheduled, and no decision has been entered by the Alabama Court. The trial date for this case, previously scheduled for June 2000, has been continued until on or after January 1, 2003. Even though the parties have not been required by the Alabama Court to participate in any court-ordered dispute resolution procedures, the parties have agreed to include the Alabama claims in the court-ordered mediation in the Texas case (see the discussion on court-ordered mediation in the following section on the Texas litigation). On July 30, 2001, the Company filed a patent infringement lawsuit against Intel in the United States District Court, in the Eastern District of Texas. The Company has asserted allegations that two patents relating to PIC are infringed by Intel's IA-64 EPIC (explicitly parallel instruction computing) processors, including but not limited to Intel's Itanium and McKinley processors. The Company is seeking to prohibit Intel's use of the Company's patented PIC technology through the enforcement of a patent injunction. The case is set for trial on July 1, 2002. Pursuant to local court rules, and the scheduling order of the Texas Court, the case is set for court-ordered mediation, with a court-appointed mediator on April 3, 2002. The parties have agreed that the mediation will address all pending litigation matters between the parties, which currently include the Company's Alabama Clipper claims and Alabama state law claims, the Texas PIC claims and a patent inference action pending in the U.S. Patent & Trademark Office. During the course of the Intel litigation, the Company has employed a variety of experts to prepare estimates of the damages suffered by the Company under various claims of injury brought by the Company. The following supplemental damage estimates were provided to Intel in August 2001 in due course of the litigation process: estimated damages for injury covered under non-patent claims of $194 million in lost profits, and estimated additional damages for injury covered under non-patent claims for the loss of the Company's hardware operations of $160 million, and/or approximately $150 million in direct out-of-pocket expenses. Patent claims damages are calculated on a percentage of infringing sales, together with a possible multiplier for willful infringement damages. The Company's supplemental patent royalty damage reports provided to Intel in August 2001 in due course of the litigation process estimate that a reasonable royalty rate for infringed patents could range between 1.75 and 4.75 percent. Intel disputes the Company's damage conclusions, and in the September/October 2001 time frame submitted its own damage reports in the due course of the litigation which differ from the Company's damage reports. The Company's damage reports are estimates only and any recovery of damages in this litigation could be substantially less than these estimates or substantially greater than these estimates depending on a variety of factors that cannot be determined at this time. Factors that could lead to recovery of substantially less than these estimates include, but are not limited to, the failure of the Alabama Court or the Appeals Court to sustain the legal basis for one or more of the Company's claims, the failure of the jury to award amounts consistent with these estimates, the failure of the Alabama Court or the Appeals Court to sustain any jury award in amounts consistent with these estimates, the settlement by the Company of the Intel litigation in an amount inconsistent with these estimates, and the failure of the Company to successfully defend itself against Intel's patent counterclaims in the Alabama Court and in the Appeals Court and a consequential recovery by Intel for damages and/or a permanent injunction against the Company. Factors that could lead to recovery of substantially greater than these estimates include, but are not limited to, success by the Company in recovering punitive damages on one or more of its patent and/or non-patent claims. The Company believes that current and potential legal proceedings relating to the Company's Clipper and PIC patents may have a significant impact on current litigants as well as others in the computer industry. As a result, the Company is mindful that Intel or other potential litigants of the Company may, without intending to obtain control of the corporation, use the threat of an unfriendly takeover bid as a means to force the Company to settle to avert the threat of a takeover. The Company believes it was necessary to take legal action against Intel in order to defend its former 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 it will continue to incur substantial legal and administrative expenses in connection with the lawsuit. The Company has other ongoing litigation, none of which is considered to represent a material contingency for the Company at this time; however, any unanticipated unfavorable ruling in any of these proceedings could have an adverse impact on the Company's results of operations and cash flow. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS None. EXECUTIVE OFFICERS OF THE COMPANY Certain information with respect to the executive officers of the Company is set forth below. Officers serve at the discretion of the Board of Directors. Name Age Position Officer Since - ----- --- -------- ------------- James F. Taylor Jr. 57 Chief Executive Officer and Chairman of the Board 1977 Larry J. Laster 50 Executive Vice President, Chief Financial Officer and Director 1987* Roger O. Coupland 55 President, Intergraph Public Safety, Inc. 1991 Preetha R. Pulusani 41 President, Mapping and GIS Solutions 1997 Gerhard Sallinger 49 President, Process, Power & Offshore 2001 William E. Salter 60 President, Intergraph Government Solutions 1984 Graeme J. Farrell 59 Executive Vice President, Asia Pacific Operations 1994 Edward A. Wilkinson 68 Executive Vice President 1987 Jack C. Ickes 42 Vice President of Corporate Services 2000 David Vance Lucas 40 Vice President and General Counsel 2000 Larry T. Miles 41 Vice President of Finance 2001 Eugene H. Wrobel 59 Vice President and Treasurer 1998 * Except for the period from February 1998 through August 2001 James F. Taylor Jr. joined the Company in July 1969, shortly after its formation, and is considered a founder. He has served as a Director since 1973. Mr. Taylor was responsible for the design and development of the Company's first commercial computer-aided design products and for many application specific products. He was elected Vice President in 1977 and Executive Vice President in 1982. He assumed management responsibility for the Company's Public Safety division in 1995. Effective March 2, 2000, he was elected Chief Executive Officer of Intergraph Corporation. Mr. Taylor was elected Chairman of the Board of Directors effective May 17, 2001. Mr. Taylor holds degrees in mathematics and physics. Mr. Laster joined the Company in 1981 and served as Executive Vice President and Chief Financial Officer from February 1987 through February 1998, at which time he resigned from the Company to serve as Chief Operating Officer of a privately owned company specializing in the development, sale and support of business systems for the petroleum distribution and convenience store industries. He rejoined the Company in June 1998 as Chief Financial Officer of Intergraph Public Safety, Inc., a wholly owned subsidiary of the Company. Effective September 10, 2001, Mr. Laster accepted the position of Executive Vice President and Chief Financial Officer of Intergraph Corporation. Mr. Laster holds a bachelor's degree in accounting and is a certified public accountant. Dr. Roger O. Coupland joined the Company in 1983 as project manager for the Australian Army AUTOMAP 2 project. Since that time, he has served as manager of the Company's Mapping and Utilities division and subsequently, as the Company's Federal Sales Director. Dr. Coupland was elected Vice President of Intergraph Corporation in 1991, with responsibility for the Company's Dispatch Management division. In January 2001, he was elected Executive Vice President of Intergraph Corporation. He currently serves as President of the Company's Intergraph Public Safety business segment. Dr. Coupland holds a First Class Honors degree in Physics and a Ph.D. in Theoretical Physics from The University of Nottingham, England. Preetha R. Pulusani joined the Company in 1980 as a software engineer, and since that time has held several positions in the areas of marketing and development of mapping technology for the Company. She was elected Vice President in 1997 and has served as Executive Vice President, with responsibility for the Mapping and Geographic Information Systems business of Intergraph, since August 1998. Ms. Pulusani was appointed President of Mapping and Geographic Information Systems in November 2001. Ms. Pulusani holds a master's degree in computer science. Gerhard Sallinger joined the Company in 1985 as a district sales manager in Germany and since then held several positions in the area of sales management. He was elected Vice President Europe of Process, Power & Offshore ("PPO") in 1999 and Executive Vice President Sales and Marketing of PPO worldwide in 2001. Mr. Sallinger was appointed as President of PPO in October 2001. Mr. Sallinger holds a degree in chemical engineering. Dr. William E. Salter joined the Company in April 1973. Since that time, he has served in several managerial positions in the Company's Federal Systems business and as Director of Marketing Communications. Dr. Salter was elected Vice President in August 1984 and is currently an Executive Vice President of the Company and President of Intergraph Government Solutions. He holds a doctorate in electrical engineering. Graeme J. Farrell joined the Company in February 1986 as the Financial Controller for Intergraph's subsidiaries in Australia and New Zealand. In 1987, the Company appointed him Finance Director for its Asia Pacific region. He was elected Vice President of Business Operations for Asia Pacific in 1994, and in August 1999, he was elected Executive Vice President. Prior to joining the Company, Mr. Farrell was involved in accounting software development for five years, and prior to that he was Finance Director of Dennison Manufacturing's (USA) Australian operations for five years. Mr. Farrell is a Chartered Secretary and qualified accountant holding a public practice certificate. 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. Jack C. Ickes joined the Company in January 1991. Since that time, he has held several managerial positions in the Company's hardware business. He was elected a Vice President of Intergraph Computer Systems in July 1999 and a Vice President of the Company in December 2000. Mr. Ickes currently serves as the Vice President of Corporate Services. He holds a Bachelor of Science degree in electrical engineering. David Vance Lucas joined the Company in 1994 as a staff attorney responsible for corporate, commercial, and intellectual property representation. He was promoted to Senior Counsel in 1997 and elected Vice President and General Counsel in 2000. Mr. Lucas continues to represent the Company in the areas noted above, as well as managing the Company's litigation. Prior to joining the Company, Mr. Lucas was a partner with the law firm of Johnson, Johnson & Moore. He is admitted to practice before the United States Supreme Court, United States Court of Appeals for the Federal Circuit and the Eleventh Circuit, as well as the Federal and State Courts within Alabama. Mr. Lucas holds a bachelor's degree in corporate finance and economics and a juris doctor in law. Larry T. Miles joined the Company in 1988 as a tax accountant, and since that time has held several positions in the finance and accounting areas. He has served as the Company's Management Reporting Manager since 1998 and was elected Vice President of Finance in March 2001. Before joining Intergraph, Mr. Miles worked in public accounting for six years. He holds a bachelor's degree in accounting and is a certified public accountant. Eugene H. Wrobel joined the Company in 1982 as Finance Director for Europe. He returned to the U.S. in August 1985 as Director of International Finance, and in January 1990 was appointed Director of Business Operations for the Americas (the United States, Canada, and Latin America). He transferred into the Treasury Department in April 1998 and was elected Vice President and Treasurer in November 1998. Before joining Intergraph, Mr. Wrobel was the Vice President and Controller for DYATRON, a public computer services company, and prior to that he worked in public accounting for six years. He holds a bachelor's degree in accounting and is a certified public accountant. 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 60 of the Intergraph Corporation 2001 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, 2001, appearing under "Five-Year Financial Summary" on the inside front page of the Intergraph Corporation 2001 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 14 to 32 of the Intergraph Corporation 2001 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 26 to 30 of the Intergraph Corporation 2001 Annual Report to shareholders is incorporated by reference in this Form 10-K Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and report of independent auditors appearing on pages 33 to 60 of the Intergraph Corporation 2001 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 ELECTION OF DIRECTORS The Board of Directors has fixed the number of members of the Board at seven by resolution pursuant to the authority granted by the Bylaws of the Company. There are seven directors at present. The directors of the Company are currently elected at each annual meeting of shareholders and serve for a term of one year. The Board of Directors proposes that the seven nominees listed below be elected as directors to serve for a term of one year and until their respective successors are duly elected and qualified, subject to their prior death, resignation, retirement, disqualification, or removal from office. Proxies may not be voted for more than seven persons. In accordance with the Company's Bylaws, Mr. Taylor was elected as Chairman of the Board of Directors on May 17, 2001, at the meeting of the Board. It is the intention of the persons named in the proxy to vote the proxies for the election of the nominees listed below, all of whom are presently directors of the Company. If any nominee should become unavailable to serve as a director for any reason (which is not anticipated), the persons named as proxies reserve full discretion to vote for such other person or persons as may be nominated. The nominees for director, together with certain information regarding them, are as follows: Positions/Offices Director of the Name and Age with the Company Company Since - ------------ ----------------- --------------- James F. Taylor Jr. (57) Chairman of the Board, 1973 Chief Executive Officer, and Director Larry J. Laster (50) Executive Vice President, 1987 Chief Financial Officer, and Director Sidney L. McDonald (63) Director 1997 Thomas J. Lee (66) Director 1997 Lawrence R. Greenwood (62) Director 2000 Joseph C. Moquin (77) Director 2000 Linda L. Green (50) Director 2001 Mr. Taylor joined the Company in July 1969, shortly after its formation, and is considered a founder. Mr. Taylor was elected Chief Executive Officer March 2, 2000. He served most recently as Chief Executive Officer of Intergraph Public Safety, Inc., a wholly owned subsidiary of the Company. Mr. Taylor was elected Chairman of the Board of Directors on May 17, 2001. Mr. Laster joined the Company in 1981 and served as Executive Vice President and Chief Financial Officer from February 1987 through February 1998, at which time he resigned from the Company to serve as Chief Operating Officer of a privately owned company specializing in the development, sale, and support of business systems for the petroleum distribution and convenience store industries. He rejoined the Company in June 1998 as Chief Financial Officer of Intergraph Public Safety, Inc., a wholly owned subsidiary of the Company. In September 2001, Mr. Laster was elected Executive Vice President and Chief Financial Officer of Intergraph Corporation. Mr. McDonald served as President of Brindlee Mountain Telephone Company, a provider of local telephone services in north Alabama, from 1961 until his retirement in July 2000. Mr. McDonald is a founder of Deltacom Long Distance Services, Inc. and served as its Chief Executive Officer from 1984 through 1996. He also served as Chief Executive Officer of Marshall Cellular, a cellular telephone service company, from 1988 through 1996, and of Southern Interexchange Services, a fiber optic telecommunications network, from 1990 through 1996. Mr. McDonald has served in the Alabama Legislature and as Finance Director for the State of Alabama. Mr. Lee is a founder of Lee and Associates, an engineering services firm specializing in guided missile systems, and has served as its President since January 1997. He was employed for thirty-six years by NASA, and was the Director of the George C. Marshall Space Flight Center from June 1989 through January 1994. Mr. Lee served as Special Assistant to the NASA Administrator for Access to Space from January 1994 through March 1995. Mr. Lee is a registered professional engineer and is a member of numerous advisory boards and committees within his field. Dr. Greenwood serves as Vice President of Research at the University of Alabama in Huntsville and has served in that capacity since August 1998. He spent fifteen years with NASA, serving as Director of the Earth Observations Division in NASA Headquarters and, most recently, as Manager of the Global Hydrology and Climate Center in Huntsville from September 1994 through August 1998. He served as President of Nichols Research Corporation, an information technology company specializing in information solutions and services, from 1991 to 1994. He also served as Vice President and General Manager of the General Electric Astro Space Division from 1988 to 1991. Dr. Greenwood is a member of the Alabama Aerospace Commission and is a registered professional engineer and a certified financial planner. Mr. Moquin retired from Teledyne Brown Engineering, an aerospace corporation specializing in ballistic missile defense and space systems, in 1989 after thirty years of service. At the time of his retirement, he was serving as Chairman and Chief Executive Officer. He served as Interim President of the University of Alabama in Huntsville from September 1990 through July 1991. He served on the Board of Directors of SCI Systems, Inc. ("SCI"), an international electronics manufacturing services provider, from 1992 through 1997, and served as a Director Emeritus, non-voting director, for SCI from 1997 to 2000. Mr. Moquin is a registered professional engineer and has served on numerous advisory boards and committees within his field. Mrs. Green serves as Chief Executive Officer of the Northern Region of Colonial Bank, the fiftieth largest bank in the United States, and has served in that capacity since June 2000. From July 1993 to June 2000, Mrs. Green served as President and Chief Executive Officer of the Huntsville/Tennessee Region of Colonial Bank. In January 2002, she was confirmed by the Alabama Senate to serve on the State of Alabama's Ethics Commission. She also serves on the University of Alabama in Huntsville Foundation. Her past service includes Vice Chair and Chair of the Alabama Space Science Commission, the Von Braun Center Board of Control, the Alabama State Banking Board, 1998 Chair for the Huntsville Madison County Chamber of Commerce, the Board of United Way and numerous other civic and charitable organizations. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers, directors, and persons who own more than ten percent of a registered class of the Company's equity securities, if any, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC") and, in the case of the Company, with The Nasdaq Stock Market. Officers, directors, and greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. Based solely on review of the copies of such forms and any amendments thereto furnished to the Company, or on written representations that no forms were required, the Company believes that during the year ended December 31, 2001, all Section 16(a) filing requirements applicable to its officers, directors, and greater than ten percent beneficial owners were met, except that Preetha Pulusani, an Executive Vice President of the Company and President of Intergraph Mapping and GIS Solutions, filed one late report covering one transaction. Information relating to the executive officers of the Company appearing under "Executive Officers of the Company" on pages 12 to 13 in this Form 10-K Annual Report is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to compensation of certain executive officers of the Company, the policies and practices of the Company relative to executive compensation, and the performance of the Company's stock are presented in this section. This information consists of a summary compensation table, information on stock option grants, exercises, and year-end values, director compensation, information on employment contracts, the Report of the Compensation Committee, and a graph depicting the five-year performance of the Company's stock against the performance of peer companies and the Standard & Poor's 500 Stock Index. Summary Compensation Table The following table summarizes the compensation of James F. Taylor Jr., Chairman of the Board and Chief Executive Officer of the Company, and the four most highly compensated executive officers of the Company who were serving as such at December 31, 2001.
Long-Term Compensation Annual Compensation Awards ----------------------------------- ------------ Other Securities Name and Annual Underlying All Other Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($) - ------------------ ---- --------- -------- -------------- ---------- --------------- (1) James F. Taylor Jr., (2) 2001 300,000 --- --- --- 7,422 Chairman of the Board and Chief Executive Officer 2000 284,302 --- --- --- 8,189 William E. Salter, (3) 2001 260,000 195,000 --- 40,000 7,625 President, Intergraph 2000 196,800 --- --- --- 6,174 Government Solutions 1999 145,600 --- --- --- 5,346 Gerhard Sallinger, President, Process, (4) 2001 194,166 72,078 --- 25,000 15,686 Power & Offshore Graeme J. Farrell, (5) 2001 225,000 35,631 20,318 --- 38,432 Executive Vice President, Asia 2000 204,789 --- 29,622 20,000 29,686 Pacific Operations 1999 190,000 --- 29,825 --- 28,964 Roger O. Coupland, (6) 2001 250,000 --- --- --- 7,572 President, Intergraph 2000 220,191 --- --- 30,000 6,694 Public Safety, Inc.
(1) "Other Annual Compensation" for each of the named executives does not include the value of certain personal benefits, if any, furnished by the Company or for which it reimburses the named executives, unless the value of such benefits in total exceeds the lesser of $50,000 or 10% of the total annual salary and bonus reported in the above table for the named executive. (2) Mr. Taylor was elected Chief Executive Officer of the Company on March 2, 2000. Effective on that date, Mr. Taylor's annual salary was set at $300,000. Mr. Taylor was elected Chairman of the Board of Directors effective May 17, 2001. "All Other Compensation" for Mr. Taylor consists of the following: 2001 2000 ------ ------ Retirement plan contribution $5,100 $6,464 Term life insurance * 2,322 1,725 ------ ------ Total $7,422 $8,189 ====== ====== (3) Dr. Salter first became an executive officer of the Company in 1989. "All Other Compensation" for Dr. Salter consists of the following: 2001 2000 1999 ------ ------ ------ Retirement plan contribution $4,250 $4,920 $3,640 Term life insurance * 3,375 1,254 1,706 ------ ------ ------ Total $7,625 $6,174 $5,346 ====== ====== ====== (4) Mr. Sallinger first became an executive officer of the Company in 2001. "All Other Compensation" for Mr. Sallinger consists of the following: 2001 ------- Retirement plan contribution $ 7,767 Social security contribution 7,919 ------- Total $15,686 ======= Mr. Sallinger's compensation is paid in European currencies that fluctuate in value against the U.S. dollar. (5) Mr. Farrell first became an executive officer of the Company in 1999. "Other Annual Compensation" for Mr. Farrell consists of the following: 2001 2000 1999 ------- ------- ------- Car allowance $10,575 $14,159 $15,093 Education assistance for dependant 1,275 8,015 8,183 Supplemental health insurance 8,205 7,448 6,549 Other 263 --- --- ======= ======= ======= Total $20,318 $29,622 $29,825 "All Other Compensation" for Mr. Farrell consists of the following: 2001 2000 1999 ------- ------- ------- Retirement plan contribution $22,818 $19,670 $19,463 Income protection insurance 3,147 2,552 2,518 Term life insurance * 12,467 7,464 6,983 ------- ------- ------- Total $38,432 $29,686 $28,964 ======= ======= ======= (6) Dr. Coupland first became an executive officer of the Company in 2000. "All Other Compensation" for Dr. Coupland consists of the following: 2001 2000 ------ ------ Retirement plan contribution $5,250 $5,452 Term life insurance * 2,322 1,242 ------ ------ Total $7,572 $6,694 ====== ====== * Premium payments for term life insurance were not made to split-dollar insurance arrangements. Stock Option Grants, Exercises and Year-End Values Grants. The Company from time to time awards stock options to key employees, including executive officers and directors, pursuant to stock option plans approved by the shareholders of the Company. The following table sets forth information concerning options granted under these plans to the Named Executive Officers during the year ended December 31, 2001.
OPTION GRANTS (1) - -------------------------------------------------------------------------------------- Number of Percent of Securities Total Options Underlying Granted to Grant Date Options Employees Exercise Expiration Present Name Granted (#) in 2001 Price per Share Date Value (2) - ------------ ----------- ------------ --------------- ---------- ---------- William E. Salter, 40,000 17% $11.88 8/13/2011 $280,185 President, Intergraph Government Solutions Gerhard Sallinger, 25,000 11% $10.89 10/30/2011 $158,754 President, Process, Power & Offshore
(1) Options were granted at fair market value on the date of grant. Fair market value is the closing sale price of the Company's stock as reported on The Nasdaq Stock Market. Options first become exercisable two years from the date of grant and vest at a rate of 25% per year from that point, with full vesting on the fifth anniversary of the grant date. Options are granted for a term of ten years from the date of grant. (2) The grant date present value of the options was determined using the Black-Scholes option-pricing model. Estimated values determined using this model are based on the market value of the stock on the date of grant, the exercise price of the option, and on assumptions as to the risk-free rate of return, volatility of the Company's stock price, and expected term of the option. Dividend yield is excluded from the calculation since it is the present policy of the Company to retain all earnings to finance operations. Assumptions used in valuing the grants included an expected volatility of 73% and an expected option life of 1.09 years after vest date. Risk- free rates of return were determined separately for each of the serial vesting periods of the options and ranged from 3.32% to 4.57%. The actual value, if any, an executive may realize from the exercise of a stock option will equal the excess of the stock price over the exercise price on the date the option is exercised. There is no assurance that the value realized by an executive will be at or near the value estimated using the Black-Scholes model, or that any value will be realized. Exercises. There were no options exercised by any of the Named Executive Officers during the year ended December 31, 2001. Year-End Values. The following table sets forth the number of securities underlying unexercised stock options held by the Named Executive Officers at December 31, 2001. Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at Year End (#) Options at Year End ($) --------------------------- --------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---------------- ----------- ------------- ----------- ------------- James F. Taylor Jr., Chairman of the Board and Chief Executive Officer 10,000 10,000 83,650 83,650 William E. Salter, President, Intergraph Government Solutions --- 40,000 --- 74,400 Gerhard Sallinger, President, Process, Power & Offshore 6,250 53,750 42,825 305,255 Graeme J. Farrell, Executive Vice President, Asia Pacific Operations 16,250 23,750 68,820 191,715 Roger O. Coupland, President, Intergraph Public Safety, Inc. 20,000 40,000 109,800 328,975 The value of unexercised in-the-money options is determined as the excess of the closing sale price of the Company's Common Stock as reported on The Nasdaq Stock Market on December 31, 2001, over the exercise prices of the options held by the Named Executive Officers. Compensation of Directors Directors who are also employees of the Company do not receive additional compensation for their service as directors. Non- employee directors receive an annual retainer of $20,000, paid in quarterly installments, plus $500 for each Board and committee meeting attended. Other compensation includes mileage paid at $.30 per mile for each member whose home is more than 25 miles from Intergraph headquarters and $50 for each hour traveled, computed round trip. In addition, any commercial travel expenses are fully reimbursed. All directors received the full annual retainer in 2001, except for Mrs. Green who received $10,000 for her period of service after election to the Board of Directors in May 2001. The Intergraph Corporation Nonemployee Director Stock Option Plan was approved at the 1998 Annual Shareholders' Meeting. Under this plan, any new non-employee director is granted an option to purchase 3,000 shares of the Company's Common Stock upon his or her first election to the Board. At each annual meeting of shareholders, each non-employee director re-elected to the Board is granted an option to purchase an additional 1,500 shares of the Company's Common Stock. The exercise price of each option granted is the fair market value of the Company's stock on the date of grant. Options are granted for a term of ten years from the date of grant. Options first become exercisable one year from the date of grant and vest at a rate of 33% per year from that point, with full vesting on the third anniversary of the date of grant. Employment Contracts Mr. Farrell holds an employment agreement with the Company and one of its Australian business entities that provides him a fixed base salary, supplemental health insurance, supplemental defined contribution pension and life insurance benefits, and expense allowances for a vehicle and other personal expense items. The contract is open-ended, but may be terminated by either party with three months' written notification. The termination provisions of his contract provide for severance benefits calculated as a function of his length of service under the agreement up to a maximum of two years' base salary. Mr. Sallinger holds an employment agreement with one of the Company's European business entities. The employment agreement provides him a fixed base salary, a permanent advance for travel expenses, and a vehicle. The contract is open-ended, but may be terminated by either party giving a notice of six weeks prior to the end of a quarter. A contract penalty equal to the last gross monthly salary may apply if the employment relationship is terminated prematurely. Report of the Compensation Committee The Compensation Committee of the Board of Directors is composed of all non-employee directors. The following Committee report reflects the Committee's activities in 2001 with regard to executive compensation. The Committee held two meetings wherein it made compensation decisions based upon recommendations by the Company's Chief Executive Officer ("CEO"), as well as based upon its own subjective evaluations. This report also describes the basis for compensation recommendations for 2001, and the objectives that the Committee followed in reviewing and determining executive compensation for 2001, as well as for future years. Committee Charter and Objectives In accordance with its Charter, the responsibilities of the Committee include the oversight of the Company's executive officer compensation policies and practices. In fulfilling these responsibilities, the committee conducts an annual review of the Company's executive compensation programs and policies in order to attain the following objectives: o offer fair and competitive base salaries consistent with the Company's position in the markets in which it competes, o reward executive officers for corporate and individual performance through incentive bonus programs, o encourage future performance through the use of long-term incentives such as stock options, and o encourage executive officers to acquire and retain ownership of the Company's Common Stock. The Company's executive compensation programs and policies are intended to enable the Company to attract, retain, and motivate the highest quality of management talent. To achieve this objective, the Committee utilizes annual base salaries together with annual and long-term incentives tied to corporate performance and increases in shareholder value. As a result, the Committee works closely with the Administrative Committee of the Company's Employee Stock Option Plan ("the Administrative Committee") in the provision of incentive stock options and non- qualified stock options to executive officers and other key employees of the Company. The Administrative Committee reviews and determines the award of individual employee stock option grants under the Company's Employee Stock Option Plan. See "Compensation Committee Interlocks and Insider Participation" following for a summary of the options granted to the Company's executive officers and directors during 2001. Executive Officer Compensation for 2001 For 2001, the CEO was responsible for formulating a recommendation for the compensation of all other executive officers of the Company based on the authority and discretion granted the CEO by the Board of Directors. The CEO and the Committee also reviewed and considered independent industry survey results concerning the compensation practices of similarly situated companies, including, where available, specific regional, industry, and competitor compensation data (including that of the peer companies in the performance graph following this report). Based upon a review of the information received, their own business experience, and the recommendations of the CEO, the Committee approved the compensation recommendations of the CEO. Each of the Business Segment Presidents participates in a formal bonus plan that is tied to the financial performance of the segment. There is no bonus until the Executive reaches the income from operations targets established in the segment's Annual Operating Plan. As the Executive exceeds the planned performance, bonuses are earned. The bonus is capped at twice the Executives' annual salary. There is no formal cash bonus plan for executive officers that are not responsible for a segment or a geographic region, but exceptional individual performance is occasionally rewarded by a cash bonus. Overall corporate performance neither guarantees nor precludes the award of bonuses, but may influence the amount of such bonuses. Sales executives are paid a base salary that approximates 70% of the executives' total potential annual compensation. The base salary amount may be supplemented in amounts up to an additional 30% of total potential compensation if certain order and revenue objectives are met. The granting of stock options to purchase shares of the Company's stock over a ten-year period at a specified price is the primary means of providing long-term incentive to executive officers to perform in a manner that benefits themselves, the Company, and the Company's shareholders. There were no standard performance factors, applicable to either the individual and his or her job performance or the financial performance of the Company, considered by the Administrative Committee. Decisions to award stock options were based upon subjective evaluations of job performance and expected contribution to the Company. Stock options have also been used to attract new employees. Previous option awards are considered when awarding new options. With respect to incentive stock options, such options may not exceed the amounts permitted under applicable Internal Revenue Code provisions. The Committee reviewed and approved the recommendations of the CEO with regard to the award of stock options, for both existing executive officers' compensation plans as well as new executive officers retained during 2001. In the past, the Company has on occasion entered into employment agreements with key executives. Such agreements specified the terms of employment, including duration, separation benefits, and compensation. Under most circumstances, separation amounts do not exceed the balance of compensation due for the remaining unfulfilled term of the agreement. Executives without employment agreements who are terminated through a workforce reduction or job elimination receive severance pay based on standard Company policy applicable to all employees. During 2001, the Committee assimilated all employment agreements existing between the Company and individual employees. The Committee obtained copies of all such employment agreements, in order to determine which agreements remained in effect with Company executive officers. At the end of 2001, only three such employment agreements remained in existence between the Company and executive officers. During 2001, one such agreement expired in accordance with its terms, and a second was exercised when the executive terminated employment with the Company. Additionally, during 2001, an employee of Intergraph (Deutschland) GmbH was promoted to President of the Company's PP&O segment, thereby becoming an executive officer of the Company. Said employee had a preexisting employment agreement with Intergraph (Deutschland) GmbH at the time of his promotion, which will remain effective in his present capacity. The agreement does not address the executive officer's current employment with the Company as President of PP&O. The CEO did not recommend, nor did the Committee approve, any new employment agreements during 2001. CEO Compensation There was no change in the compensation of the CEO for 2001. The Committee did not utilize any standard corporate or individual performance factors in its determination of CEO compensation for 2001. The Committee establishes the compensation for the CEO solely on the subjective evaluation of the performance of the CEO and the level of compensation paid to similar executives. Members of the Compensation Committee: Sidney L. McDonald, Chair Linda L. Green Lawrence R. Greenwood Thomas J. Lee Joseph C. Moquin Compensation Committee Interlocks and Insider Participation The Administrative Committee of the Company's stock option plan, which is appointed by and comprised of all current members of the Board of Directors, may award both incentive stock options and non-qualified stock options to executive officers and other key employees. Members of the Administrative Committee who are also employees of the Company, including James F. Taylor Jr., Chairman of the Board and Chief Executive Officer, and Larry J. Laster, Chief Financial Officer, are eligible to receive options under the Plan. During the year ended December 31, 2001, the Administrative Committee awarded options for a total of 239,000 shares of the Company's Common Stock. Of this total, options for 174,000 shares were awarded to directors and executive officers of the Company, including 9,000 options granted under the Nonemployee Director Stock Option Plan, 65,000 granted to the Named Executive Officers, and 20,000 granted to Mr. Laster. During the year ended December 31, 2001, no executive officer of the Company served as a director or as a member of the compensation committee, or committee performing equivalent functions, of another business entity. Performance Graph The following graph sets forth, for the five-year period ended December 31, 2001, a comparison of the cumulative total shareholder return to the Company's shareholders with that of the Software and Services Index, and that of the Standard & Poor's 500 Stock Index. The Company uses the Media General Computer Software and Services Index as the best representation of the companies with which its business segments compete. The cumulative total return for this index was provided to the Company by Media General Financial Services. Total shareholder return for each was determined by adding a) the cumulative amount of dividends for a given year, assuming dividend reinvestment, and b) the difference between the share price at the beginning and at the end of the year, the sum of which was then divided by the share price at the beginning of such year. The graph assumes $100 was invested on December 31, 1996. Comparative Five-Year Total Returns Software and Services Index, Standard & Poor's 500 Stock Index, and Intergraph Corporation 1996 1997 1998 1999 2000 2001 Software and ---- ---- ---- ---- ---- ---- Services Index $100 $121 $180 $309 $186 $164 S&P 500 $100 $133 $171 $208 $189 $166 Intergraph $100 $ 98 $ 56 $ 46 $ 59 $134 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of January 31, 2002, there were outstanding 49,919,242 shares of the Company's common stock, $.10 par value (the "Common Stock"). Holders of Common Stock are entitled to one vote per share on all matters to be voted upon by shareholders. The following table sets forth information as of January 31, 2002, as to: (a) the only persons who were known by the Company to own beneficially more than 5% of the outstanding Common Stock of the Company, (b) the shares of Common Stock beneficially owned by the directors and nominees of the Company, (c) the shares of Common Stock beneficially owned by James F. Taylor Jr., Chairman of the Board and Chief Executive Officer of the Company, who is also a director and nominee; and the four most highly compensated executive officers of the Company who were serving as such at December 31, 2001, (collectively, Mr. Taylor and the four most highly compensated executive officers are the "Named Executive Officers"), and (d) the shares of Common Stock beneficially owned by all directors, nominees, Named Executive Officers, and all other executive officers of the Company as a single group. Number of Percentage of Total Shares Beneficially Common Stock Name (1) Owned (2) Outstanding (3) - -------------------------------- ------------------- ------------------- Intergraph Corporation Stock Bonus Plan Trust 4,584,095 (4) 9.2% Dimensional Fund Advisors, Inc. 2,628,600 (5) 5.3% Gardner Lewis Asset Management, L.P. 2,563,556 (6) 5.1% Director Nominees - ------------------- James F. Taylor Jr. 134,964 (7) * Sidney L. McDonald 94,500 (8) * Larry J. Laster 35,947 (9) * Thomas J. Lee 7,500 (10) * Joseph C. Moquin 2,000 (11) * Lawrence R. Greenwood 1,200 (12) * Linda L. Green 6,151 (13) * Highest Compensated Executive Officers - -------------------- William E. Salter 265,135 (14) * Gerhard Sallinger 16,250 (15) * Graeme J. Farrell 17,587 (16) * Roger O. Coupland 32,847 (17) * All directors, nominees, and executive officers as a group (18 persons), including the foregoing directors, nominees, and Named Executive Officers 682,056 (18) 1.4% - ------------------------------- * Less than 1% (1) The address of the Stock Bonus Plan Trust is Mellon Bank, c/o The Boston Company, 1 Boston Place, Boston, MA 02108. The address of Dimensional Fund Advisors, Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401. The address of Gardner Lewis Asset Management, L.P. is 285 Wilmington-West Chester Pike, Chadds Ford, PA 19317. (2) Unless otherwise noted, the indicated owner has sole voting power and sole investment power. (3) Shares issuable upon exercise of stock options that are exercisable within 60 days of January 31, 2002, are considered outstanding for the purpose of calculating the percentage of total outstanding Common Stock owned by directors, executive officers, and by directors, nominees, and executive officers as a group. Such shares are not considered outstanding for the purpose of calculating the percentage of total outstanding Common Stock owned by any other person or group. (4) Voting rights of the Common Stock held by the Stock Bonus Plan Trust are passed through to participants in the Stock Bonus Plan, which is a Company-sponsored retirement plan covering substantially all U.S. employees of the Company. However, if Plan participants do not properly complete, sign, and return their voting instructions to the Trustee of the Plan, the Trustee votes their shares in accordance with the instructions of a majority of the participants exercising such voting rights. On December 5, 2000, the Company's Board of Directors resolved to terminate the Stock Bonus Plan effective December 31, 2000. The Plan was submitted to the Internal Revenue Service ("IRS") and the SEC in April 2001, for determination of the Plan's tax qualified status on termination and for confirmation that the special stock buy- back provisions comply with federal securities laws. In November 2001, the Company was contacted by the IRS and the SEC requesting additional information in order to complete their reviews. The Company has responded to those requests. As of January 31, 2002, the IRS examiner has reviewed and approved the request. The Plan has now moved to senior level review. Upon receipt of a favorable determination letter from the IRS that the Plan is qualified at termination, each Plan participant will be entitled to receive a lump sum distribution of his or her account balance or to rollover the account balance into an Individual Retirement Account or other qualified plan, and the trust will be dissolved. (5) As set forth on Schedule 13G/A filed with the Securities and Exchange Commission on February 12, 2002. (6) As set forth on Schedule 13G filed with the Securities and Exchange Commission on February 14, 2002. Gardner Lewis Asset Management, L.P. has sole voting power over 2,486,256 of these shares. (7) This figure includes 74,964 shares allocated to Mr. Taylor under the Stock Bonus Plan and 10,000 shares over which Mr. Taylor holds immediately exercisable stock options. This figure excludes 100,000 shares owned by his wife as to which Mr. Taylor expressly disclaims beneficial ownership. (8) This figure includes 4,500 shares issuable upon the exercise of stock options held by Mr. McDonald. (9) This figure consists of 19,900 shares owned jointly by Mr. Laster and his wife as to which voting and investment powers are shared, 3,047 shares allocated to Mr. Laster under the Stock Bonus Plan, and 13,000 shares issuable upon the exercise of stock options held by Mr. Laster. (10) This figure includes 4,500 shares issuable upon the exercise of stock options held by Mr. Lee. (11) This figure includes 1,000 shares issuable upon the exercise of stock options held by Mr. Moquin and excludes 200 shares owned by Mr. Moquin's wife as to which Mr. Moquin expressly disclaims beneficial ownership. (12) This figure includes 1,000 shares issuable upon the exercise of stock options held by Dr. Greenwood. (13) This figure excludes 2,051 shares owned by Mrs. Green's husband as to which Mrs. Green expressly disclaims beneficial ownership. (14) This figure consists of 147,200 shares owned jointly by Dr. Salter and his wife as to which voting and investment powers are shared and 117,935 shares allocated to Dr. Salter under the Stock Bonus Plan. (15) This figure includes 8,750 shares issuable upon the exercise of stock options held by Mr. Sallinger. (16) This figure includes 581 shares owned jointly by Mr. Farrell and his wife as to which voting and investment powers are shared and 16,250 shares issuable upon the exercise of stock options held by Mr. Farrell. (17) This figure includes 2,345 shares allocated to Dr. Coupland under the Stock Bonus Plan and 20,000 shares issuable upon the exercise of stock options held by Dr. Coupland. (18) This figure includes 204,891 shares allocated to such persons under the Stock Bonus Plan and 105,875 shares issuable upon the exercise of stock options. 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 2001 Annual Report to shareholders: Consolidated Balance Sheets at December 31, 2001, and 2000 33 Consolidated Statements of Operations for the three years ended December 31, 2001 34 Consolidated Statements of Cash Flows for the three years ended December 31, 2001 35 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2001 36 Notes to Consolidated Financial Statements 37-59 Report of Independent Auditors 60 * Incorporated by reference from the indicated pages of the 2001 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, 2001 30 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 income before income taxes, and the investments in and advances to the companies are less than 20% of consolidated total assets. 3) Exhibits Page in Number Description Form 10-K ------ --------------------------------------------------- --------- 3(a) Certificate of Incorporation, Bylaws, and Certificate of Merger (1) 3(b) Amendment to Certificate of Incorporation (2) 3(c) Restatement of Bylaws (3) 4 Shareholder Rights Plan, dated August 25, 1993 (4), and amendments dated March 16, 1999 (10) and March 5, 2002 (5) 10(b) Amended and Restated Loan and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated November 30, 1999 (12) and amendment dated August 1, 2001 10(c)* Intergraph Corporation 1997 Stock Option Plan (6) and amendment dated January 11, 1999 (11) 10(d) Indemnification Agreement between Intergraph Corporation and each member of the Board of Directors of the Company dated June 3, 1997 (7) 10(e)* Intergraph Corporation Nonemployee Director Stock Option Plan (8) 10(f) Asset Purchase Agreement by and among SCI Technology Inc. as Buyer and Intergraph Corporation as Seller dated November 13, 1998, with Exhibits and Schedule 1 (9) 10(h)* Employment Contract of Graeme J. Farrell dated March 26, 1997 (13) 10(i)* Employment Contract of Lewis N. Graham, Jr. dated February 6, 2001 (13) 10(j)* Z/I Imaging Corporation 1999 Stock Option Plan (13) 10(k)* Z/I Imaging Corporation 2000 Stock Option Plan (13) 10(l)* Intergraph Corporation 2002 Stock Option Plan 10(m)* Employment Contract dated October 24, 1985, of Gerhard Sallinger 13 Portions of the Intergraph Corporation 2001 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report 21 Subsidiaries of the Company 31 23 Consent of Ernst & Young LLP, Independent Auditors 32 * 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 8-K dated March 8, 2002, under the Securities Exchange Act of 1934, File No. 0-9722. (6) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1996, under the Securities Exchange Act of 1934, File No. 0-9722. (7) Incorporated by reference to exhibits filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, under the Securities Exchange Act of 1934, File No. 0-9722. (8) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1997, under the Securities Exchange Act of 1934, File No. 0-9722. (9) Incorporated by reference to exhibits filed with the Company's Current Report on Form 8-K dated November 13, 1998, under the Securities Exchange Act of 1934, File No. 0-9722. (10) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1998, under the Securities Exchange Act of 1934, File No. 0-9722. (11) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-8 dated May 24, 1999, under the Securities Exchange Act of 1933, File No. 333-79137. (12) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1999, under the Securities Exchange Act of 1934, File No. 0-9722. (13) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 2000, under the Securities Exchange Act of 1934, File No. 0-9722. (b) Reports on Form 8-K - on March 8, 2002, the Company filed a Current Report on Form 8-K, reporting a resolution by the Company's Board of Directors to amend the Rights Agreement. (c) Exhibits - the response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial statement schedules - the response to this portion of Item 14 is submitted as a separate section of this report. Information contained in this Form 10-K Annual Report includes statements that are forward looking as defined in Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's 2001 Annual Report, portions of which are incorporated by reference in this Form 10-K Annual Report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERGRAPH CORPORATION By /s/ James F. Taylor Jr. Date: March 14, 2002 ----------------------- James F. Taylor Jr. Chairman of the Board, Chief Executive Officer and Director 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 F. Taylor Jr. Chairman of the Board, March 14, 2002 - ----------------------- Chief Executive Officer James F. Taylor Jr. and Director /s/ Larry J. Laster Executive Vice President, March 14, 2002 - ----------------------- Chief Financial Officer, Larry J. Laster and Director (Principal Financial and Accounting Officer) /s/ Lawrence R. Greenwood Director March 14, 2002 - ------------------------- Lawrence R. Greenwood /s/ Thomas J. Lee Director March 14, 2002 - -------------------- Thomas J. Lee /s/ Sidney L. McDonald Director March 14, 2002 - ----------------------- Sidney L. McDonald /s/ Joseph C. Moquin Director March 14, 2002 - --------------------- Joseph C. Moquin /s/ Linda L. Green Director March 14, 2002 - -------------------- Linda L. Green INTERGRAPH CORPORATION AND SUBSIDIARIES SCHEDULE II ---- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES 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 2001 $18,169,000 1,348,000 6,541,000(1) $12,976,000 2000 $16,066,000 5,507,000 3,404,000(1) $18,169,000 1999 $13,814,000 6,900,000 4,648,000(1) $16,066,000 Allowance for obsolete inventory deducted from inventories in the balance sheet 2001 $28,556,000 2,375,000 12,425,000(2) $18,506,000 2000 $33,896,000 16,089,000(3) 21,429,000(2) $28,556,000 1999 $31,249,000 23,187,000(4) 20,540,000(2) $33,896,000 (1) Uncollectible accounts written off, net of recoveries. (2) Obsolete inventory reduced to net realizable value. (3) Includes a $4.7 million inventory write-down resulting from the Company's exit of the hardware development and design business in third quarter 2000. (4) Includes a $7 million inventory write-down resulting from the Company's exit from the personal computer and generic server businesses in third quarter 1999. EX-21 3 sublisting.txt SUBSIDIARY LISTING INTERGRAPH CORPORATION AND SUBSIDIARIES EXHIBIT 21 ---- SUBSIDIARIES OF REGISTRANT Percentage of State or Other Voting Jurisdiction Securities Name of Incorporation Owned by Parent - -------------------------- ---------------- --------------- Intergraph Asia Pacific, 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 20 Intergraph Public Safety, Inc. Delaware 100 Intergraph Benelux B.V. The Netherlands 100 Intergraph Danmark A/S Denmark 100 Intergraph CR spol. s r.o. Czech Republic 100 Intergraph (Deutschland) GmbH Germany 100 Intergraph Espana, S.A. Spain 100 Intergraph Europe (Polska) Sp. zo.o Poland 100 Intergraph Finland Oy Finland 100 Intergraph (France) SA France 100 Intergraph GmbH (Osterreich) Austria 100 Intergraph (Hellas) S.A. Greece 100 Intergraph Norge A/S Norway 100 Intergraph (Portugal) Sistemas de Computacao Grafica, S.A. Portugal 100 Intergraph (Sverige) AB Sweden 100 Intergraph (Switzerland) A.G. Switzerland 100 Intergraph (UK), Ltd. United Kingdom 100 Intergraph Public Safety Belgium S.A. Belgium 100 Intergraph Public Safety Deutschland, GmbH Germany 100 Public Safety France, SA France 100 Intergraph Public Safety U.K., Ltd. United Kingdom 100 Z/I Imaging Corporation Delaware 60 Intergraph Greater China, Ltd. Hong Kong 100 Intergraph BEST (Vic) Pty. Ltd. Australia 100 Intergraph Computer (Shenzhen) Co. Ltd. China 100 Intergraph Corporation (N.Z.) Limited New Zealand 100 Intergraph Corporation Pty. Ltd. Australia 100 Intergraph Corporation Taiwan Taiwan, R.O.C. 100 Intergraph Hong Kong Limited Hong Kong 100 Intergraph Industry Solutions K.K. Japan 100 Intergraph Japan K.K. Japan 100 Intergraph Korea, Ltd. Korea 100 Intergraph Process and Building Solutions Pte Ltd. Singapore 100 Intergraph Public Safety (New Zealand) Limited New Zealand 100 Intergraph Public Safety Pty. Ltd. Australia 100 Intergraph Canada, Ltd. Canada 100 Intergraph Public Safety Canada Ltd. Canada 100 Intergraph de Mexico, S.A. de C.V. Mexico 100 Intergraph Israel Software Development Center, Ltd. Israel 100 Intergraph Servicios de Venezuela C.A. Venezuela 100 Intergraph Saudi Arabia Ltd. Saudi Arabia 20 EX-23 4 eyletter.txt CONSENT OF E&Y Exhibit 23 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Intergraph Corporation and subsidiaries of our report dated January 30, 2002, except for Note 14 and the eighth paragraph of Note 15, as to which the date is March 11, 2002, included in the 2001 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 therein. We also consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-25880) pertaining to the Stock Bonus Plan dated December 22, 1988; in the Registration Statement (Form S-8 No. 33-53849) pertaining to the Intergraph Corporation 1992 Stock Option Plan dated May 27, 1994; in the Registration Statement (Form S-8 No. 33-57211) pertaining to the Assumption of Options under the InterCAP Graphics Systems, Inc. 1989 Stock Option Plan and 1994 Nonqualified Stock Option Program dated January 10, 1995; in the Registration Statement (Form S-8 No. 33-59621) pertaining to the 1995 Intergraph Corporation Employee Stock Purchase Plan dated May 26, 1995; in the Registration Statement (Form S-8 No. 333-79129) pertaining to the Intergraph Corporation Nonemployee Director Stock Option Plan dated May 24, 1999; in the Registration Statement (Form S-8 No. 333-79137) pertaining to the Intergraph Corporation 1997 Stock Option Plan dated May 24, 1999; and in the related Prospectuses, of our report dated January 30, 2002, except for Note 14 and the eighth paragraph of Note 15, as to which the date is March 11, 2002, with respect to the consolidated financial statements incorporated herein by reference and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Intergraph Corporation and subsidiaries for the year ended December 31, 2001. /s/ Ernst & Young LLP Birmingham, Alabama March 26, 2002 EX-10.B 5 foothillamendment.txt FOOTHILL AMENDMENT AMENDMENT NUMBER ONE TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT This AMENDMENT NUMBER ONE TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of August 1, 2001, by and between Foothill Capital Corporation, a California corporation ("Foothill") and Intergraph Corporation, a Delaware corporation ("Borrower"), with reference to the following facts: A. Foothill and Borrower heretofore have entered into that certain Amended and Restated Loan and Security Agreement, dated as of November 30, 1999 (as heretofore amended, restated, supplemented, or otherwise modified, the "Loan Agreement"); B. Borrower has requested Foothill to amend the Loan Agreement as set forth in this Amendment; C. Foothill is willing to so amend the Loan Agreement in accordance with the terms and conditions hereof; and D. All capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Loan Agreement, as amended hereby. NOW, THEREFORE, in consideration of the above recitals and the mutual premises contained herein, Foothill and Borrower hereby agree as follows: 1. Amendments to the Loan Agreement. a. Section 1.1 of the Loan Agreement is hereby amended by deleting the definition of "Supplemental Reserve" in its entirety. b. Section 1.1 of the Loan Agreement is hereby amended by amending and restating the following defined terms in their entirety: "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "Maximum Amount" means $50,000,000. "Reserve" means, as of any date of determination, an amount equal to the product of (i) $214,286 times (ii) the number of months (or any portion thereof) separating such date from August 1, 2001; provided, however that such amount shall be reduced by the amount of any payment or prepayment of the unpaid principal balance of the Term Loan made in cash by Borrower to Foothill on or after August 1, 2001; provided, further that in no event shall the amount of the Reserve be less than zero (-0-). Without limiting the generality of the foregoing and solely by way of example, if no payments or prepayments of the unpaid principal balance of the Term Loan are made on or after August 1, 2001, the amount of the Reserve would equal: (x) zero (-0-) as of August 1, 2001; (y) $214,286 as of September 1, 2001; and (z) $428,572 as of October 1, 2001. c. Section 1.1 of the Loan Agreement is hereby amended by adding the following defined terms in proper alphabeti- cal order: "Base LIBOR Rate" means the rate per annum, determined by Foothill in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), on the basis of the rates at which Dollar deposits are offered to major banks in the London interbank market on or about 11:00 a.m. (California time) 2 Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Loan requested by Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "Base Rate" means, the rate of interest announced within Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Base Rate Loan" means each portion of an Advance or the Term Loan that bears interest at a rate determined by reference to the Base Rate. "Base Rate Margin" means 0.125 percentage points; provided, however, that effective on the date that Foothill receives Borrower's audited financial statements for Borrower's fiscal year ending on December 31, 2001, if Borrower's net income for such fiscal year determined in accordance with GAAP, as evidenced by such audited financial statements, shall have been greater than $15,000,000, the Base Rate Margin shall be 0 percentage points; provided, further that if Borrower's net income for Borrower's fiscal year ending on December 31, 2001 is not greater than $15,000,000, Foothill will consider a potential reduction in the Base Rate Margin, in Foothill's sole and absolute discretion, based on Borrower's financial performance during Borrower's fiscal year ending on December 31, 2002. "Base Rate Term Loan Margin" means 0.125 percentage points; provided, however, that effective on the date that Foothill receives Borrower's audited financial statements for Borrower's fiscal year ending on December 31, 2001, if Borrower's net income for such fiscal year determined in accordance with GAAP, as evidenced by such audited financial statements, shall have been greater than $15,000,000, the Base Rate Term Loan Margin shall be 0 percentage points; provided, further that if Borrower's net income for Borrower's fiscal year ending on December 31, 2001 is not greater than $15,000,000, Foothill will consider a potential reduction in the Base Rate Term Loan Margin, in Foothill's sole and absolute discretion, based on Borrower's financial performance during Borrower's fiscal year ending on December 31, 2002. "Funding Losses" has the meaning set forth in Section 2.12(b)(ii). "Interest Period" means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrower may not elect an Interest Period which will end after the Maturity Date. "LIBOR Deadline" has the meaning set forth in Section 2.12(b)(i). "LIBOR Notice" means a written notice in the form of Exhibit L-1. "LIBOR Rate" means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Foothill (rounded upwards, if necessary, to the next 1/16%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. "LIBOR Rate Loan" means each portion of an Advance or the Term Loan that bears interest at a rate determined by reference to the LIBOR Rate. "LIBOR Rate Margin" means 2.50 percentage points. "LIBOR Rate Term Loan Margin" means 2.50 percentage points. "Reserve Percentage" means, on any day, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") of Foothill, but so long as Foothill is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "Revolver Letter of Credit Reserve" means, as of any date of determination, the Letter of Credit Usage minus the Term Loan Letter of Credit Reserve. "Term Loan Letter of Credit Reserve" means $8,000,000, as such amount may be increased from time to time pursuant to Section 2.3(b). "Wells Fargo" means Wells Fargo Bank, National Association, a national banking association. d. Section 2.1(a) of the Loan Agreement is hereby amended and restated in its entirety as follows: 2.1 Revolving Advances. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrower in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Revolving Amount less the Revolver Letter of Credit Reserve, or (ii) the Borrowing Base less the Revolver Letter of Credit Reserve. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (x) the lesser of (i) the result of (A) 85% of Eligible Domestic Accounts, plus (B) the lowest of (1) 85% of Eligible Unbilled Accounts, (2) 40% of the amount of credit availability created by the foregoing clause (A), and (3) $20,000,000, plus (C) the lesser of (1) 85% of Eligible Foreign Accounts, and (2) $3,000,000, minus (D) the amount, if any, of the Dilution Reserve, and (ii) an amount equal to the Collections with respect to the Accounts of Borrower for the immediately preceding 60 day period, minus (y) the Reserve. e. Section 2.2(a) of the Loan Agreement is hereby amended and restated in its entirety as follows: 2.2 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to issue letters of credit for the account of Borrower (each, an "L/C") or to issue guarantees of payment (each such guaranty, an "L/C Guaranty") with respect to letters of credit issued by an issuing bank for the account of Borrower. Foothill shall have no obligation to issue a Letter of Credit if any of the following would result: (i) the Revolver Letter of Credit Reserve would exceed the Borrowing Base less the sum of the amount of outstanding Advances, or (ii) the Revolver Letter of Credit Reserve would exceed the Maximum Revolving Amount less the amount of outstanding Advances, or (iii) the Letter of Credit Usage would exceed $25,000,000, or (iv) the outstanding Obligations (other than under the Term Loan) would exceed the Maximum Revolving Amount. Borrower and Foothill acknowledge and agree that certain of the letters of credit that are to be the subject of L/C Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall have an expiry date no later than 60 days prior to the date on which this Agreement is scheduled to terminate under Section 3.4 and all such Letters of Credit shall be in form and substance acceptable to Foothill in its sole discretion. If Foothill is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such amount to Foothill and, in the absence of such reimbursement, the amount so advanced immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances under Section 2.6. f. Section 2.3 of the Loan Agreement is hereby amended and restated in its entirety as follows: 2.3 Term Loan. (a) Subject to the terms and conditions of this Agreement, Foothill: (i) made a term loan to Borrower on the Original Closing Date (in the original principal amount of $20,000,000 (the "Initial Term Loan"); and (ii) made an additional term loan to Borrower on the Old Second Amendment Closing Date in the original principal amount of $5,000,000 (the "Additional Term Loan"; the Initial Term Loan and the Additional Term Loan are referred to, collectively, as the "Term Loan"). All amounts outstanding under the Term Loan shall constitute Obligations. The Term Loan shall be repaid in monthly installments of $214,286, which shall be payable in arrears, on the first day of each month during the term hereof. The outstanding unpaid principal balance and all accrued and unpaid interest under the Term Loan shall be due and payable on the date of termination of this Agreement, whether by its terms, by prepayment, or by acceleration. Borrower may prepay the unpaid principal balance of the Term Loan in whole or in part without penalty. (b) If at any time, (i) the sum of (A) the then outstanding principal balance of the Term Loan, and (B) the Term Loan Letter of Credit Reserve, is less than $18,000,000, and (ii) an Event of Default has not occurred and is not occurring, Borrower may make a written request to Foothill that the Term Loan Letter of Credit Reserve be increased to an amount which does not exceed the lesser of (x) $15,000,000 and (y) the difference between (I) $18,000,000 and (II) the then outstanding principal balance of the Term Loan. Upon the receipt by Foothill of such written notice, the Term Loan Letter of Credit Reserve may be increased by Foothill to the amount set forth in such notice or such lesser amount as Foothill shall determine in its discretion; provided, however that in no event shall the Term Loan Letter of Credit Reserve be increased to an amount (1) which exceeds $15,000,000, or (2) which would cause the sum of (X) the then outstanding principal balance of the Term Loan, and (Y) the resulting Term Loan Letter of Credit Reserve, to be greater than $18,000,000. g. Section 2.4 of the Loan Agreement is hereby amended and restated in its entirety as follows: 2.4 [Intentionally Deleted] h. Sections 2.6(a), (b), (c) and (d) of the Loan Agreement are hereby amended and restated in their entirety as follows: 2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations. (a) Interest Rate. Except as provided in clause (b) below, all Obligations (except for undrawn Letters of Credit) shall bear interest as follows (i) if the relevant Obligation is an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, (ii) if the relevant Obligation is a portion of the Term Loan that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Term Loan Margin, (iii) if the relevant Obligation is a portion of the Term Loan that is a Base Rate Loan, at a per annum rate equal to the Base Rate plus the Base Rate Term Loan Margin, and (iv) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin. (b) Letter of Credit Fee. Borrower shall pay Foothill a fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.2(d)) equal to 0.75% per annum times the aggregate undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit) shall bear interest at a per annum rate equal to 3.125 percentage points above the per annum rate otherwise applicable thereto, and (ii) the Letter of Credit fee provided in Section 2.6(b) shall be increased to 3.75% per annum times the amount of the undrawn Letters of Credit that were outstanding during the immediately preceding month. (d) Minimum Interest. In no event shall the rate of interest chargeable hereunder for any day be less than 6.5% per annum. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate. i. The following sentence is hereby added to Section 2.8 at the end thereof: Notwithstanding the above, no such 'clearance' or 'float' charge shall be imposed upon any Collections constituting the direct proceeds of any of the following: (i) any litigation between Borrower and Intel Corporation; (ii) the sale of Borrower's "South Campus" real property or any portion thereof and any raw land which is owned by the Borrower; or (iii) any Accounts, General Intangibles, or Negotiable Collateral with respect to which an Affiliate of the Borrower is the Account Debtor. j. Sections 2.11(c) and (f) of the Loan Agreement are hereby amended and restated in their entirety as follows: (c) Unused Line Fee. On the first day of each month after the Closing Date during the term of this Agreement, an unused line fee in an amount equal to 0.20% per annum times the Average Unused Portion of the then extant Maximum Revolving Amount, which fee shall be fully earned when due; (f) Monthly Agency Fee. On the first day of each month after the Closing Date during the term of this Agreement, a monthly agency fee in an amount equal to $5,000, which fee shall be fully earned when due. k. Section 2.12 of the Loan Agreement is hereby amended and restated in its entirety as follows: 2.12 LIBOR Option. (a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Base Rate, Borrower shall have the option (the "LIBOR Option") to have interest on all or a portion of the Advances or the Term Loan be charged at a rate of interest based upon the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which Foothill has elected to accelerate the maturity of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrower no longer shall have the option to request that Advances or the Term Loan bear interest at the LIBOR Rate and Foothill shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder. (b) LIBOR Election. (i) Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Foothill prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Borrower's election of the LIBOR Option for a permitted portion of the Advances or the Term Loan and an Interest Period pursuant to this Section shall be made by delivery to Foothill of a LIBOR Notice received by Foothill before the LIBOR Deadline, or by telephonic notice received by Foothill before the LIBOR Deadline (to be confirmed by delivery to Foothill of a LIBOR Notice received by Foothill prior to 5:00 p.m. (California time) on the same day. (ii) Each LIBOR Notice shall be irrevocable and binding on Borrower. In connection with each LIBOR Rate Loan, Borrower shall indemnify, defend, and hold Foothill harmless against any loss, cost, or expense incurred by Foothill as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "Funding Losses"). Funding Losses shall be deemed to equal the amount determined by Foothill to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert, or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Foothill would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Foothill delivered to Borrower setting forth any amount or amounts that Foothill is entitled to receive pursuant to this Section shall be conclusive absent manifest error. (iii) Borrower shall have not more than 5 LIBOR Rate Loans in effect at any given time. Borrower only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof. (c) Prepayments. Borrower may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Foothill of proceeds of Collections in accordance with Section 2.4(b) or for any other reason, including early termination of the term of this Agreement or acceleration of the Obligations pursuant to the terms hereof, Borrower shall indemnify, defend, and hold Foothill and its Participants harmless against any and all Funding Losses in accordance with clause (b)(ii) above. (d) Special Provisions Applicable to LIBOR Rate. (i) The LIBOR Rate may be adjusted by Foothill on a prospective basis to take into account any additional or increased costs to Foothill of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, Foothill shall give Borrower notice of such a determination and adjustment and, upon its receipt of the notice from Foothill, Borrower may, by notice to Foothill (y) require Foothill to furnish to Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation or application thereof, shall at any time after the date hereof, in the reasonable opinion of Foothill, make it unlawful or impractical for Foothill to fund or maintain LIBOR Advances or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, Foothill shall give notice of such changed circumstances to Borrower and (y) in the case of any LIBOR Rate Loans that are outstanding, the date specified in Foothill's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrower shall not be entitled to elect the LIBOR Option until Foothill determines that it would no longer be unlawful or impractical to do so. (e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Foothill, nor any of its Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if Foothill or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. l. Section 3.4 of the Loan Agreement is hereby amended and restated in its entirety as follows: 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending on January 7, 2004 (the "Maturity Date"). The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. m. Section 3.6 of the Loan Agreement is hereby amended and restated in its entirety as follows: 3.6 Early Termination by Borrower. Borrower has the option, at any time prior to the Maturity Date and upon 60 days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in full, in cash, the Obligations (including either (i) providing cash collateral to be held by Foothill in an amount equal to 102% of the undrawn amount of the Letters of Credit plus the Foreign Currency Reserve (which cash collateral shall be held by Foothill so long as any one of the Letters of Credit are outstanding, and shall be returned to Borrower in direct proportion to the amount equal to 102% of the undrawn amounts of such Letters of Credit as each of such Letters of Credit are no longer outstanding, solely to the extent that (A) all of Foothill's obligations under this Agreement and the other Loan Documents have been terminated, and (B) such cash collateral remains after the indefeasible payment in full, in cash of all Obligations, including, without limitation, all Obligations with respect to Letters of Credit), (ii) causing the original Letters of Credit to be returned to Foothill, or (iii) providing to Foothill an irrevocable letter of credit, in form and substance acceptable to Foothill in its discretion, from another financial institution satisfactory to Foothill in its discretion, in an amount equal to 102% of the undrawn amount of the Letters of Credit plus the Foreign Currency Reserve, which amount shall be reduced to the extent that the Letters of Credit are no longer outstanding), together with a premium (the "Early Termination Premium") equal to $1,000,000; provided, however, that no such Early Termination Premium shall be due if Borrower terminates this Agreement pursuant to this Section 3.6 on or after January 8, 2003. The Early Termination Premium provided for in this section shall be deemed included in the Obligations. n. Section 6.10(a) of the Loan Agreement is hereby amended and restated in its entirety as follows: (a) At its expense, keep the Personal Property Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrower also shall maintain public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Personal Property Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. o. Section 7.20(b) of the Loan Agreement is hereby amended and restated in its entirety as follows: (b) Net Worth. Net Worth, as of the end of each fiscal quarter of the Borrower of at least $250,000,000. 2. Representations and Warranties; Covenants. Borrower hereby represents and warrants to Foothill that: (a) the execution, delivery, and performance of this Amendment and of the Loan Agreement, as amended by this Amendment, are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; and (b) this Amendment and the Loan Agreement, as amended by this Amendment, constitute Borrower's legal, valid, and binding obligation, enforceable against Borrower in accordance with its terms. 3. Conditions Precedent to Amendment. The satisfaction of each of the following, shall constitute conditions precedent to the effectiveness of this Amendment: a. Foothill shall have received the reaffir- mation and consent of each of the Obligors (other than Borrower) attached hereto as Exhibit A, duly executed and delivered by the respective authorized officials thereof; b. Foothill shall have received all required consents of Foothill's participants in the Obligations to Foothill's execution, delivery, and performance of this Amendment and each such consent shall be in form and substance satisfactory to Foothill, duly executed, and in full force and effect; c. The representations and warranties in this Amendment, the Loan Agreement as amended by this Amendment, and the other Loan Documents shall be true and correct in all respects on and as of the date hereof, as though made on such date (except to the extent that such representations and warranties relate solely to an earlier date); d. No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transactions contemplated herein; e. No injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the consummation of the transactions contemplated herein shall have been issued and remain in force by any governmental authority against Borrower, Foothill, or any of their Affiliates; f. The Collateral shall not have declined materially in value from the values set forth in the most recent appraisals or field examinations previously done by Foothill; and g. All other documents and legal matters in connection with the transactions contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Foothill and its counsel. 4. Effect on Loan Agreement. The Loan Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. The execution, delivery, and performance of this Amendment shall not operate as a waiver of or, except as expressly set forth herein, as an amendment, of any right, power, or remedy of Foothill under the Loan Agreement, as in effect prior to the date hereof. 5. Further Assurances. Borrower shall execute and deliver all agreements, documents, and instruments, in form and substance satisfactory to Foothill, and take all actions as Foothill may reasonably request from time to time, to perfect and maintain the perfection and priority of Foothill's security interests in the Collateral and the Real Property, and to fully consummate the transactions contemplated under this Amendment and the Loan Agreement, as amended by this Amendment. 6. Miscellaneous. a. Upon the effectiveness of this Amendment, each reference in the Loan Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. b. Upon the effectiveness of this Amendment, each reference in the Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or words of like import referring to the Loan Agreement shall mean and refer to the Loan Agreement as amended by this Amendment. c. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Amendment by signing any such counterpart. Delivery of an executed counterpart of this Amendment by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Amendment. Any party delivering an executed counterpart of this Amendment by telefacsimile also shall deliver an original executed counterpart of this Amendment but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Amendment. [Remainder of page left intentionally blank.] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. FOOTHILL CAPITAL CORPORATION, a California corporation By: /s/ Robert Bernier ------------------------ Title: Vice President ---------------- INTERGRAPH CORPORATION, a Delaware corporation By: /s/ Eugene H. Wrobel ------------------------ Title: Vice President ---------------- and Treasurer ---------------- EXHIBIT A ---------- REAFFIRMATION AND CONSENT ------------------------- Reference is made to that certain Amendment Number One to Amended and Restated Loan and Security Agreement, dated as of August 1, 2001 (the "Amendment") by and between Foothill Capital Corporation, a California corporation ("Foothill") and Intergraph Corporation, a Delaware corporation ("Borrower"). All capitalized terms used herein but not otherwise defined herein shall have the meanings ascribed to them in that certain Amended and Restated Loan and Security Agreement, dated as of November 30, 1999 (the "Loan Agreement"), by and between Foothill and Borrower. Each of the undersigned hereby (a) represents and warrants to Foothill that the execution, delivery, and performance of this Reaffirmation and Consent are within its corporate powers, have been duly authorized by all necessary corporate action, and are not in contravention of any law, rule, or regulation, or any order, judgment, decree, writ, injunction, or award of any arbitrator, court, or governmental authority, or of the terms of its charter or bylaws, or of any contract or undertaking to which it is a party or by which any of its properties may be bound or affected; (b) consents to the amendment of the Loan Agreement by the Amendment; (c) acknowledges and reaffirms its obligations owing to Foothill under the Pledge Agreement and any other Loan Documents to which it is party; and (d) agrees that each of the Pledge Agreement and any other Loan Documents to which it is a party is and shall remain in full force and effect. Although each of the undersigned has been informed of the matters set forth herein and has acknowledged and agreed to same, it understands that Foothill has no obligation to inform it of such matters in the future or to seek its acknowledgement or agreement to future amendments, and nothing herein shall create such a duty. M&S COMPUTING INVESTMENTS, INC., a Delaware corporation By: /s/ James F. Taylor ----------------------------- Title: Director -------------------- INTERGRAPH PUBLIC SAFETY, INC., a Delaware corporation By: /s/ James F. Taylor ----------------------------- Title: Director ------------------- EX-10.L 6 optionplan.txt 2002 STOCK OPTION PLAN APPENDIX C INTERGRAPH CORPORATION 2002 STOCK OPTION PLAN 1. PURPOSE This 2002 Stock Option Plan of Intergraph Corporation (the "Plan") is intended as an incentive for key employees (including officers) which will foster increased productivity, encourage them to remain in the employ of Intergraph Corporation (the "Corporation"), and enable them to acquire or increase their proprietary interest in the Corporation. At the discretion of the Committee (as defined below), options issued pursuant to this Plan may be either incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Options"), or options which are not Incentive Options ("Non-Statutory Options") (Incentive Options and Non-Statutory Options are collectively referred to as "Options"). The Committee shall also be entitled to make awards of restricted stock ("Restricted Stock") in accordance with the terms of the Plan. For the purposes of the Plan, Incentive Options, Non- Statutory Options and awards of Restricted Stock, whether singly or in combination, shall sometimes be referred to as "Awards." 2. ADMINISTRATION The Plan shall be administered by a committee (the "Committee") composed of the entire Board of Directors or a committee of the Board of Directors that is composed solely of two or more "Non-Employee Directors." For this purpose, the term "Non-Employee Director" shall mean a person who is a member of the Corporation's Board of Directors who (a) is not currently an employee and is not, nor has ever been, an officer of the Corporation or any parent or subsidiary of the Corporation, (b) does not directly or indirectly receive compensation for serving as a consultant or in any other non-director capacity from the Corporation or any parent or subsidiary of the Corporation that exceeds the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended ("Regulation S-K"), (c) does not possess any interest in any other transaction with the Corporation or any parent or subsidiary of the Corporation for which disclosure would be required pursuant to Item 404(a) of Regulation S-K, and (d) is not engaged in a business relationship with the Corporation or any parent or subsidiary of the Corporation which would be disclosable under Item 404 (b) of Regulation S-K. In the event the Committee is a committee composed of two or more Non-Employee Directors, the Board of Directors may from time to time remove members from, add members to, and fill vacancies on, the Committee. A member of the Committee shall be eligible to participate in the Plan and receive Awards under the Plan. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Action taken by a majority of the Committee at which a quorum is present, or action reduced to writing or approved in writing by a majority of the members of the Committee, shall be valid acts of the Committee. The Committee may from time to time and at its discretion, grant Awards to eligible employees. Subject to the terms of this Plan, the Committee shall exercise its sole discretion in determining which eligible employees shall receive Awards, and the number of shares subject to each Award granted; provided that not more than 200,000 Options shall be granted to any 162(m) Employee in any calendar year. For the purposes of this Plan, a "162(m) Employee" shall mean the Chief Executive Officer of the Corporation and the other four (4) most highly compensated officers, within the meaning of U.S. Treasury Regulation Section 1.162-27(c)(2). The Committee's interpretation and construction of any provision of the Plan, or any Award granted under it, shall be final. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under the Plan. 3. ELIGIBILITY Persons eligible to receive Awards shall be such key employees (including officers) of the Corporation and its subsidiaries as the Committee shall from time to time select. The determination of whether a company is a subsidiary of the Corporation shall be made in accordance with Section 425(f) of the Internal Revenue Code, as amended. An Award recipient may, subject to the terms and restrictions set forth in the Plan, hold more than one type of Award. No person shall be eligible to receive an Award for a larger number of shares than is granted to him or her by the Committee. In selecting the individuals to whom Awards shall be granted, as well as determining the number of shares subject to each Award, the Committee shall weigh the position and responsibility of the individual being considered, the nature of his or her services, his or her present and potential contributions to the Corporation, and such other factors as the Committee deems relevant to accomplish the purposes of the Plan. 4. STOCK The stock subject to Awards issued under the Plan shall be shares of the Corporation's authorized but unissued, or reacquired, ten cent ($.10) par value common stock (hereafter sometimes called "Capital Stock" or "Common Stock"). The aggregate number of shares which may be issued pursuant to Awards under the Plan shall not exceed 2,000,000 shares of Capital Stock, of which no more than 400,000 shall be shares of Capital Stock with respect to which Restricted Stock awards may be granted. The limitations established by each of the preceding sentences shall be subject to adjustment as provided in Article 6(g) of the Plan. Notwithstanding the foregoing and subject to Article 6(g) of the Plan, no Award recipient may receive Awards under the Plan in any calendar year that relate to more than 200,000 shares of Capital Stock. In the event that any outstanding Award under the Plan for any reason expires or is terminated, the shares of Capital Stock allocable to the unexercised portion of such Award may again be subjected to an Award under the Plan. 5. RESTRICTED SHARES (a) Grant (i) Subject to the provisions of the Plan, the Committee shall have sole and complete authority to determine the participants to whom Restricted Shares shall be granted, the number of Restricted Shares to each participant, the duration of the period during which, and the conditions under which, the Restricted Shares may be forfeited to the Corporation, and the other terms and conditions of such Restricted Share awards. The Restricted Share awards shall be evidenced by agreements in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the terms and conditions provided hereunder and any additional terms and conditions established by the Committee that are consistent with the terms of the Plan. (ii) Subject to Section 4, each Restricted Share award made under the Plan shall be for such number of shares of Capital Stock as shall be determined by the Committee and set forth in the award agreement containing the terms of such Restricted Share award. Such agreement shall set forth a period of time during which the grantee must remain in the continuous employment of the Corporation in order for the forfeiture and transfer restrictions to lapse. If the Committee so determines, the restrictions may lapse during such restricted period in installments with respect to specified portions of the shares of Capital Stock covered by the Restricted Share award. The award agreement may also, in the discretion of the Committee, set forth performance or other conditions that will subject the shares of Capital Stock to forfeiture and transfer restrictions. The Committee may, at its discretion, waive all or any part of the restrictions applicable to any or all outstanding Restricted Share awards. (b) Delivery of Shares and Transfer Restrictions At the time of a Restricted Share award, a certificate representing the number of shares of Capital Stock awarded thereunder shall be registered in the name of the grantee. Such certificate shall be held by the Corporation or any custodian appointed by the Corporation for the account of the grantee subject to the terms and conditions of the Plan, and shall bear such a legend setting forth the restrictions imposed thereon as the Committee, in its discretion, may determine. The grantee shall have all rights of a stockholder with respect to the Restricted Shares, including the right to receive dividends and the right to vote such shares of Capital Stock, subject to the following restrictions: (i) the grantee shall not be entitled to delivery of the stock certificate until the expiration of the restricted period and the fulfillment of any other restrictive conditions set forth in the award agreement with respect to such shares of Capital Stock; (ii) none of the shares of Capital Stock may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of during such restricted period or until after the fulfillment of any such other restrictive conditions; and (iii) except as otherwise determined by the Committee at or after grant, all of the shares of Capital Stock shall be forfeited and all rights of the grantee to such shares of Capital Stock shall terminate, without further obligation on the part of the Corporation, unless the grantee remains in the continuous employment of the Corporation for the entire restricted period in relation to which such shares of Capital Stock were granted and unless any other restrictive conditions relating to the Restricted Share award are met. Any shares of Capital Stock, any other securities of the Corporation and any other property (except for cash dividends) distributed with respect to the shares of Capital Stock subject to Restricted Share awards shall be subject to the same restrictions, terms and conditions as such Restricted Shares. (c) Termination of Restrictions At the end of the restricted period and provided that any other restrictive conditions of the Restricted Share award are met, or at such earlier time as otherwise determined by the Committee, all restrictions set forth in the award agreement relating to the Restricted Share award or in the Plan shall lapse as to the restricted shares of Capital Stock subject thereto, and a stock certificate for the appropriate number of shares of Capital Stock, free of the restrictions and restricted stock legend, shall be delivered to the grantee or the grantee's beneficiary or estate, as the case may be. 6. TERMS AND CONDITIONS OF THE PLAN No obligation to retain an Award recipient as an employee of the Corporation or its subsidiaries, or to provide or continue providing the Award recipient with, or to permit the Award recipient to retain, any incident associated with or arising out of employment with the Corporation or its subsidiaries, including, but not limited to, tenure, salary, benefits, title or position, shall be imposed on the Corporation or its subsidiaries by virtue of the adoption of the Plan, the grant or acceptance of an Award granted pursuant to the Plan, or the exercise of an Option under the Plan. Awards granted under the Plan shall be authorized by the Committee and shall be evidenced by agreements in such form as the Committee shall from time to time approve. Such agreements shall conform with, and be subject to, the following terms and conditions: (a) Number of Shares and Form of Award Each Award agreement shall state the number of shares to which it pertains, whether the Award granted is an Incentive Option, a Non-Statutory Option (and, in the case of Non-Statutory Options, the vesting period relating to such Options) or an award of Restricted Stock. (b) Option Price Each Option agreement shall state the Option exercise price. The per share exercise price for shares obtainable pursuant to any Option, including any Option granted to a 162(m) Employee, shall not be less than 100% of the Fair Market Value, as defined below, of the shares of Capital Stock of the Corporation on the date the Option is granted. For all purposes under the Plan, "Fair Market Value" shall mean, unless otherwise determined by the Committee in good faith, the closing sale price of the Common Stock as reported on the Nasdaq National Market (or the mean between the highest and lowest per share sales price should the Common Stock be listed on an exchange) on a given day, or if the Common Stock is not traded on that day, then on the next preceding day on which such stock was traded (the "Fair Market Value"). Subject to the foregoing, the Committee shall have full authority and discretion, and shall be fully protected, with respect to the price fixed for shares obtainable pursuant to the exercise of Options. The aggregate Fair Market Value (determined at the time the Incentive Option is granted) of the Common Stock with respect to which Incentive Options are exercisable for the first time by the Option recipient during any calendar year (under all such plans of the Corporation and its subsidiary corporations) shall not exceed $100,000. If an Option recipient is granted Incentive Options which exceed this limitation, the Incentive Options shall be considered a Non-Statutory Option to the extent such limitation is exceeded. Notwithstanding the foregoing, no Incentive Option shall be granted to an employee who, immediately after such Option is granted, owns or has rights to stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation, unless such Option is granted at a price which is at least 10% greater than the Fair Market Value of the stock subject to the Incentive Option and such Option by its terms is not exercisable after the expiration of five (5) years from the date such Option is granted. (c) Medium and Time of Payment Subject to any other exercise restrictions contained in the Plan, the Option recipient may pay the Option exercise price in cash, by means of unrestricted shares of the Corporation's Common Stock (subject to the provisions of this Section 6(c)), or in any combination thereof. As determined by the Committee, in its sole discretion, at or (except in the case of an Incentive Option) after grant, payment in full or in part may be made in the form of shares of Common Stock already owned by the optionee and held by the Option recipient for at least six months (in each case valued at the Fair Market Value of the Common Stock on the date the Option is exercised). The Option recipient must pay for shares received pursuant to an Option exercise on or before the date of delivery of the shares to the Option recipient. Subject to the requirements of rules promulgated by the Securities and Exchange Commission and Regulation T promulgated by the Federal Reserve Board, the Committee, in its sole discretion, may establish procedures whereby an Option recipient may exercise an Option or a portion thereof without making a direct payment of the Option price to the Corporation. If the Committee so elects to establish a cashless exercise program, the Committee shall determine, in its sole discretion, and from time to time, such administrative procedures and policies as it deems appropriate and such procedures and policies shall be binding on any Option recipient utilizing the cashless exercise program. Payment in currency or by check, bank draft, cashier's check, or postal money order shall be considered payment in cash. In the event of payment in the Corporation's Common Stock, the shares used in payment of the purchase price shall be taken at the Fair Market Value of such shares on the date they are tendered to the Corporation. (d) Term and Exercise of Options The vesting period for all Non-Statutory Options shall be determined by the Committee in its sole discretion. No Incentive Options shall be exercisable either in whole or in part prior to twelve (12) months from the date that they are granted. Subject to the right of accretion provided in the next to last sentence of this Article 6(d), each Incentive Option shall be exercisable in four (4) installments, as follows: (1) up to one-fourth of the total shares covered by the Option may be purchased after twelve (12) months from the date the Option is granted; (2) one-fourth of the total shares covered by the Option may be purchased after twenty-four (24) months from the date the Option is granted; (3) up to one-fourth of the total shares covered by the Option may be purchased after thirty-six (36) months from the date the Option is granted; and (4) up to one-fourth of the total shares covered by the Option may be purchased after forty-eight (48) months from the date the Option is granted. The Committee may provide, however, for the exercise of an Option after the initial twelve (12) month period, either as an increased percentage of shares per year or as to all remaining shares, if the Option recipient dies, is or becomes disabled or retires. During the Option recipient's lifetime, the Option shall be exercisable only by the Option recipient, or the Option recipient's guardian or legal representative if one has been appointed, and shall not be assignable or transferable other than by will or the laws of descent and distribution. To the extent not exercised, Option installments shall accumulate and be exercisable, in whole or in part, in any subsequent period but not later than ten (10) years from the date the Option is granted. No Option is exercisable after the expiration of ten (10) years from the date it is granted. (e) Termination of Employment Except Death If an Option recipient's employment with the Corporation or its subsidiaries ceases for any reason other than the Option recipient's death, all Options held by him pursuant to the Plan and not previously exercised as of the date of such termination shall terminate and become void and of no effect three (3) months from the date the Option recipient's employment is terminated, provided that no Option shall be exercisable after the expiration of ten (10) years from the date it is granted. Authorized leaves of absence or absence for military service shall not constitute termination of employment for the purposes of the Plan. (f) Death of Option Recipient and Transfer of Option If an Option recipient dies while employed by the Corporation or its subsidiaries and has not fully exercised all of his or her exercisable Options, such Options may be exercised, at any time within one (1) year after death, by the Option recipient's executors or administrators, or by any person or persons who shall have acquired the Option directly from the Option recipient by bequest or inheritance. In no event, however, shall the Option be exercisable more than ten (10) years after the date such Option is granted. An Option transferred to an Option recipient's estate or to a person to whom such right devolves by reason of the Option recipient's death shall be nontransferable by the Option recipient's executor or administrator or by such person, except that the Option may be distributed by the Option recipient's executors or administrators to the distributees of the Option recipient's estate entitled thereto. (g) Recapitalization Subject to any required action by the shareholders, the aggregate number of shares which may be issued pursuant to Awards, the number of shares of Capital Stock covered by each outstanding Award, and the price per share applicable to shares under such Awards, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Capital Stock of the Corporation resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Capital Stock), or any other increase or decrease in the number of such shares effected without receipt of consideration by the Corporation. If the Corporation is merged with or consolidated into any other corporation, or if all or substantially all of the business or property of the Corporation is sold, or if the Corporation is liquidated or dissolved, or if a tender or exchange offer is made for all or any part of the Corporation's voting securities, or if any other actual or threatened change in control of the Corporation occurs, the Committee, with or without the consent of the Option recipient, may (but shall not be obligated to), either at the time of or in anticipation of any such transaction, take any of the following actions that the Committee may deem appropriate in its sole and absolute discretion: (i) cancel any Option by providing for the payment to the Award recipient of the excess of the Fair Market Value of the shares subject to the Award over the exercise price of the Option, (ii) substitute a new Option of substantially equivalent value for any Option, (iii) accelerate the exercise terms of any Award, or (iv) make such other adjustments in the terms and conditions of any Option as it deems appropriate. In the event of a change in Capital Stock of the Corporation as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any change shall be deemed to be the Capital Stock within the meaning of the Plan. To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final. Except as otherwise expressly provided in this Article 6(g), the Option recipient shall have no rights by reason of any subdivision or consolidation of shares of stock of any class, or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class, or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation. Any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Capital Stock subject to the Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part of its business or assets. (h) Rights as a Stockholder An Option recipient or a transferee of an Option shall have no rights as a stockholder with respect to any shares subject to his Option until a stock certificate is issued to him for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities, or other property), distributions, or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Article 6(g) of the Plan. (i) Modification, Extension, and Renewal of Awards Subject to the terms of the Plan, the Committee may modify, extend, or renew outstanding Options granted under the Plan, or accept the surrender of outstanding Options (to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). The Committee shall not, however, modify any outstanding Incentive Options so as to specify a lower price, or accept the surrender of outstanding Incentive Options and authorize the granting of new Options in substitution therefor specifying a lower price. Notwithstanding the foregoing, however, no modification of an Option shall, without the consent of the Option recipient, alter or impair any rights or obligations under any Option theretofore granted under the Plan. (j) Withholding Whenever the Corporation proposes or is required to issue or transfer shares of Capital Stock under the Plan, the Corporation shall have the right to require the Option recipient, prior to the issuance or delivery of any certificates for such shares, to remit to the Corporation, or provide indemnification satisfactory to the Corporation for, an amount sufficient to satisfy any federal, state, local, and foreign withholding tax requirements incurred as a result of an Award under the Plan by such Award recipient. The Corporation shall have the right to withhold such amounts from any other source owed to the recipient, including regular wages or salary. (k) Other Provisions The Award agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of the Award, as the Committee shall deem advisable. Limitations and restrictions shall be placed upon the exercise of Incentive Options, in the Incentive Option agreement, so that such Options will be "incentive stock options" as defined in Section 422 of the Internal Revenue Code of 1986. 7. TERM OF PLAN Awards may be granted pursuant to the Plan from time to time within a period of ten (10) years commencing on June 1, 2002, and continuing through May 31, 2012. 8. INDEMNIFICATION OF COMMITTEE In addition to such other rights of indemnification as they may have as directors or as members of the Committee, the members of the Committee shall be indemnified by the Corporation against the reasonable expenses, including, attorney's fees, actually and necessarily incurred in connection with the defense of any action, suit, or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Corporation) or paid by them in satisfaction of a judgment in any such action, suit, or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit, or proceeding, that such Committee member is liable for willful misconduct in the performance of his duties; provided, that within sixty (60) days after institution of any such action, suit, or proceeding a Committee member shall in writing offer the Corporation the opportunity, at its own expense, to handle and defend the same. 9. AMENDMENT OF THE PLAN The Board of Directors, insofar as permitted by law, shall have the right from time to time with respect to any shares at the time not subject to Awards, to suspend or discontinue the Plan or revise or amend it in any respect whatsoever, except that without approval of the shareholders of the Company, no such revision or amendment shall: (a) change the number of shares for which Awards may be granted under the Plan either in the aggregate or to any individual employee, (b) change the provisions relating to the determination of employees to whom Awards shall be granted, (c) remove the administration of the Plan from the Committee, or (d) decrease the price at which Incentive Options may be granted. 10. APPLICATION OF FUNDS The proceeds received by the Corporation from the sale of Capital Stock pursuant to the exercise of Options will be used for general corporate purposes. 11. NO OBLIGATION TO EXERCISE OPTION The granting of an Option shall impose no obligation upon the Option recipient to exercise such Option. 12. APPROVAL OF STOCKHOLDERS This Plan shall take effect on June 1, 2002, subject to approval by the affirmative vote of the holders of the majority of the outstanding shares of Capital Stock of the Corporation present, or represented, and entitled to vote at a meeting of the shareholders, which approval must occur within the period beginning twelve (12) months before and ending twelve (12) months after the date the Plan is adopted by the Board of Directors. EX-10.M 7 employeecontract.txt EMPLOYEE CONTRACT CONTRACT OF EMPLOYMENT INTERGRAPH (Deutschland) GmbH Hans-Pinsel-Straae 9b 8013 Haar - INTERGRAPH - and Mr. Gerhard Sallinger Am Rebstock 35 6057 Dietzenbach - Employee - hereby agree the following Contract of Employment: 1. Field of Work, Duty Station a) The Employee shall be hired as a sales representative b) Following familiarisation, the Employee shall work from the Frankfurt office. c) The Employee shall be obliged to also perform other suitable work within the bounds of reasonableness if required and if necessary to perform this work from another duty station for a limited period of time. 2. Start of the Contract, Term, Termination a) The contractual relationship shall commence on 1st January 1986 or, at the request of the Employee, earlier if he terminates his current employment relationship prematurely. (Contract started on November 1st, 1985) b) The contractual relationship shall run for an undefined time. It can be terminated by either partner after expiry of the probationary period, giving a period of notice of six weeks to the end of a quarter. c) Any extension of the period of notice in favour of the Employee under the law or a collective bargaining agreement shall also apply in favour of INTERGRAPH in the same way. d) Termination of the employment relationship before it commences shall be excluded. 3. Probationary Period a) A probationary period of six months shall be agreed. b) During the probationary period, the employment relationship can be terminated by either party, giving a period of notice of one month to the end of a month, but at the latest before expiry of the sixth month to the end of the seventh month. 4. Ability to Work a) The Employee declares that he is not aware of any deficiencies or illnesses that may impair his performance at work. b) If he falls ill, the Employee shall be obliged to give notice thereof immediately and to submit a medical certificate by the expiry of the third day after the occurrence of the incapacity to work. c) The Employee shall also report any other incapacity to work and its anticipated duration. He shall furnish reasons therefore upon request. 5. Working Time, Vacation a) The regular working time shall be 40 hours a week, Mondays to Fridays from 8.30 a.m. to 5. 15 p.m. The lunch break of 45 minutes can be taken between 12 a.m. and 2 p.m. as agreed. b) The Employee shall be entitled to vacation of 29 working days for each calendar year. Vacation shall be granted on a pro rata temporis basis in the first year and in the year in which the Employee leaves. c) The vacation can be taken for the first time after a waiting period of four months. It shall be agreed in good time with INTERGRAPH and in observance of company interests. 6. Remuneration a) The Employee shall receive a gross monthly salary of DM 7,000.00 payable per the end of a month. It shall be paid by cashless transfer. b) There shall be no entitlement to a Christmas bonus, etc. If such benefits are nevertheless granted, they shall be at the absolute discretion of INTERGRAPH and shall not establish any legal entitlement, even if they are made repeatedly and without the express proviso that they are voluntary. c) In each case before the expiry of a period of employment of 12 months, the parties shall hold a meeting to assess the Employee's performance and discuss his future salary. 7. Company Car INTERGRAPH shall provide the Employee with a mid-range company car. The Employee shall be authorised to use the car privately as well. The running costs incurred through its private use with the Federal Republic of Germany and the Federal State of Berlin shall be borne by INTERGRAPH. The cost contribution to be made by the Employee is governed by company policies (vehicle regulations). 8. Secrecy, Business Documents a) The Employee shall maintain secrecy on all confidential business and company events, operations and establishments, including after the end of the employment relationship. This shall apply regardless of how he has gained knowledge thereof. This obligation shall also extend to affairs of other companies with which INTERGRAPH is economically or organisationally affiliated or co-operates. b) The obligation to maintain secrecy shall also include the details of this contract. c) All business documents, either in the original or as a copy, may only be removed from the company's premises in agreement with management and shall be returned to INTERGRAPH without special request when the employment relationship ends. Rights of retention shall be excluded. 9. Reimbursement of Travel Expenses The rights of the Employee to reimbursement of subsistence expenses, accommodation expenses, etc. incurred during business trips are governed in the "Travel Policy" of INTERGRAPH. The Employee shall receive a permanent advance for travel expenses of DM 1,500.00. 10. Side-line Employment The Employee shall not pursue any side-line activity without the written consent of INTERGRAPH. 11. Contract Penalty a) If the Employee does not commence his work contrary to the law or terminates the employment relationship prematurely contrary to the contract, he shall incur a contract penalty to the amount of his last gross monthly salary. b) INTERGRAPH reserves the right to claim further damages. 12. General a) The statutory provisions shall apply to inventions made by the Employee. b) Any amendments to or modifications of this contract shall only be valid when given in writing. c) If individual provisions of this contract are invalid, this shall not affect the remaining provisions of the contract. d) The precise task area and entitlements to commission of the sales representative are governed in a supplementary agreement. Haar, dated 22.10.85 Dietzenbach, dated 24.10.85 - ----------------------------- --------------------------- (INTERGRAPH) Deutschland GmbH (Employee) EX-13 8 annualreport.txt ANNUAL REPORT Five-Year Financial Summary - ------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------- (In thousands except per share amounts) Revenues $532,061 $690,454 $914,880 $1,005,007 $1,095,625 Reorganization charges (credit) (384) 8,498 15,596 15,343 1,095 Income (loss) from operations 8,087 (23,641) (67,440) (100,998) (38,242) Gains on sales of assets 11,243 49,546 13,223 112,533 4,858 Income (loss) from 19,942 10,095 (78,561) (6,728) (53,490) continuing operations Discontinued operation (1) --- --- 6,984 (12,906) (16,747) Net income (loss) 19,942 10,095 (71,577) (19,634) (70,237) Net income (loss) from continuing operations per share, basic .40 .20 (1.60) (.14) (1.11) diluted .39 .20 (1.60) (.14) (1.11) Net income (loss) per share, basic .40 .20 (1.46) (.41) (1.46) diluted .39 .20 (1.46) (.41) (1.46) Working capital 177,638 184,051 168,307 216,520 204,534 Total assets 458,010 514,908 584,944 695,974 720,989 Total debt 3,733 31,030 62,926 83,213 104,665 Shareholders' equity 295,213 278,000 276,700 355,332 368,783 (1) See Note 4 of Notes to Consolidated Financial Statements contained in this annual report for a complete discussion of this transaction and its impact on the Company's results of operations and financial position. Information contained in this report may include statements that are forward-looking as defined in Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward- looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not limited to, projected revenue and operating income levels, market conditions and their anticipated impact on the Company and its vertical business segments, expectations regarding future results and cash flows, information regarding the development, timing of introduction, and performance of new products, and expectations regarding the Company's various ongoing litigation proceedings, including those with Intel Corporation ("Intel"). These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, worldwide economic conditions, increased competition, rapid technological change, unanticipated changes in customer requirements, uncertainties with respect to the Company's installed customer base for discontinued hardware products, inability to protect the Company's intellectual property rights, inability to access the technology necessary to compete in the markets served, inability to complete certain sales and lease transactions as planned, risks associated with doing business internationally, risks associated with various ongoing litigation proceedings, and other risks detailed in our annual and quarterly filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS Summary The following summarized financial data sets forth the results of operations of the Company for each year in the three-year period ended December 31, 2001. The complete consolidated financial statements of the Company, including footnote disclosures, are presented on pages 33 to 59 of this Annual Report. - ------------------------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------- (In millions except per share amounts) Revenues $532 $690 $ 915 Cost of revenues 299 438 625 - ------------------------------------------------------------- Gross profit 233 252 290 Operating expenses 225 267 342 Reorganization charges --- 9 15 - ------------------------------------------------------------- Income (loss) from operations 8 (24) (67) Gains on sales of assets 11 50 13 Arbitration settlement --- --- (8) Interest expense (2) (4) (6) Other income (expense), net 12 (3) (4) - ------------------------------------------------------------- Income (loss) from continuing operations before income taxes and minority interest 29 19 (72) Income tax expense (9) (6) (6) - ------------------------------------------------------------- Income (loss) from continuing operations before minority interest 20 13 (78) Minority interest --- (3) (1) - ------------------------------------------------------------- Income (loss) from continuing operations 20 10 (79) Discontinued operation (VeriBest) --- --- 7 - ------------------------------------------------------------- Net income (loss) $ 20 $ 10 $ (72) ============================================================= Income (loss) per share, basic: From continuing operations $.40 $.20 $(1.60) Net income (loss) per share .40 .20 (1.46) Income (loss) per share, diluted: From continuing operations .39 .20 (1.60) Net income (loss) per share .39 .20 (1.46) ============================================================= In 2001, the Company had net income of $19.9 million on revenues of $532.1 million compared to net income of $10.1 million on revenues of $690.5 million in 2000 and a net loss of $71.6 million on revenues of $914.9 million in 1999. Operating income in 2001 was $8.1 million compared to operating losses of $23.6 million and $67.4 million in 2000 and 1999, respectively. This return to profitability resulted from the Company's reorganization in 2000 into five core business segments and its exit from the hardware business. The improvement in operating income resulted primarily from the continuing decline in the Company's operating expenses and higher gross margins due to the increasing software content in its product mix. In 2000, the Company focused on organizing into five business segments, aligned according to markets in which Intergraph believes it is a leader. The Company substantially completed the U.S. portion of this process in the third quarter of 2000, and in the fourth quarter, began efforts to align its international operations with the new vertical businesses and bring the cost of its international operations in line with current revenue levels. As part of this process, the Company converted its Singapore subsidiary and related territories into a distributorship via a sale transaction and began to reorganize its European and Asia Pacific operations to align them with the new vertical business structure (see "Reorganization Charges"). In 2001, the Company continued to convert several other international subsidiaries into distributorships, primarily in the Middle East and Asia. The international portion of the Company's verticalization process was completed in 2001, though some of the subsidiary sales transactions are expected to be completed in 2002. The Company completed its exit of the hardware development and design business in third quarter 2000 with the sales of its Intense3D graphics accelerator division and its high-end workstation and server business (see Note 15 of Notes to Consolidated Financial Statements). The Company continues to sell hardware products from other vendors through its business segments and performs hardware maintenance services for its installed customer base. The Intergraph Government Solutions ("IGS") and Z/I Imaging Corporation ("Z/I Imaging") business segments continue to develop and assemble specialized hardware products. Revenues and operating results in 1999 were negatively impacted by increasingly weak demand for the Company's hardware product offerings related to the dispute with Intel (see "Litigation and Other Risks and Uncertainties"). As a result, in third quarter 1999, the Company was forced to exit the personal computer ("PC") and generic server businesses and narrow the focus of its Intergraph Computer Systems ("ICS") business segment to workstations, specialty servers, digital video products, and 3D graphics cards. The Company also implemented several cost-cutting measures, primarily in the form of direct reductions in workforce, during 1999 in an effort to align its expenses with the lower revenue levels being generated (see "Reorganization Charges"). In fourth quarter 1999, the Company sold its VeriBest business segment. Accordingly, the Company's consolidated statement of operations reflect VeriBest's business as a discontinued operation for 1999. As such, except where noted otherwise, the following discussion of the Company's results of operations addresses only results of continuing operations. VeriBest's results of operations are discussed separately in "Discontinued Operation." Orders Systems and services orders for 2001 were $369.8 million, down 36% from the prior year after declining by 18% in 2000 and 20% in 1999. The decline in orders in 2001 was due primarily to the Company's exit of the hardware business in 2000 and to the sale of its Middle East operations in 2001. In 2000, orders for the Company's hardware products declined as the result of the Company's exit from this market; however, the hardware market decline was partially offset by a significant improvement in orders of the Company's Intergraph Public Safety ("IPS") business segment. IPS' orders increased by 42% from the 1999 level as the result of several large orders received in third quarter 2000. Orders in 1999 included $12.3 million in orders of the Company's discontinued VeriBest operation. In 1999, order volumes declined worldwide, primarily in the Company's hardware business as demand continued to weaken from the prior year. U.S. systems and services orders, including federal government orders, totaled $217 million for 2001, down 27% from the prior year. Excluding the impact of the VeriBest sale, U.S. orders declined by 9% in 2000 and by 29% in 1999. In 2001, U.S. orders continued to decline due to the exit from the hardware business. In 2000, the negative impact of the hardware exit on orders was partially offset by increased orders in the Company's IPS and Z/I Imaging business segments. 2000 was the first full year of operations for Z/I Imaging. In 1999, demand for the Company's hardware product offerings weakened significantly, accounting for the majority of the decline in U.S. orders for the year. International orders for 2001 totaled $152.8 million, down 46% from the prior year after declines of 23% and 9% in 2000 and 1999, respectively. The decline in 1999 excludes the impact of the Company's former VeriBest business segment. The Company's most significant declines in orders have occurred in its European and Asian regions. European orders totaled $96.5 million in 2001, down 25% from the prior year level, after declining by 43% in 2000 and 7% in 1999. Strengthening of the U.S. dollar resulted in successive declines in reported European order levels of approximately 4%, 8%, and 3% in 2001, 2000, and 1999, respectively. The remaining decline in 2001 and 2000 for the European region was related to the Company's exit of the hardware business and to the region's focus on verticalization of the organization in fourth quarter 2000. Asia Pacific orders totaled $33.2 million in 2001, down 52% from the 2000 level after declines of 14% in 2000 and 4% in 1999. The 2001 and 2000 declines can be attributed primarily to the hardware exit and to reductions from currency fluctuations in the region of 9% and 2%, respectively. 2001 international orders declined further compared to 2000 due to strong 2000 orders in Canada and the Middle East as a result of several large orders received by IPS Canada in the first quarter 2000 and strong fourth quarter 2000 services orders in the Middle East region. In 1999, weakening of the dollar against Asian currencies improved reported order levels in that region by approximately 3%; however, this positive impact was more than offset by weakened demand for the Company's hardware products. Revenues Total revenues from continuing operations for 2001 were $532.1 million, down 23% from the prior year level after declining by 25% and 9% in 2000 and 1999, respectively, all due primarily to the Company's exit from the hardware business. In third quarter 2000, the Company substantially completed the organization of its operations into five business segments which provide software, systems integration, and services. Revenues in 2001 and 2000 for each of these segments, as well as a comparative presentation of 2000 and 1999 revenues based on the Company's previous segmentation policy, are presented in Note 12 of Notes to Consolidated Financial Statements. Systems. Systems revenue from continuing operations was $301.5 million in 2001, down 29% from the previous year after declining by 32% in 2000 and 13% in 1999. Factors cited previously as contributing to the decline in orders have adversely affected systems revenues over the three-year period, and competitive conditions resulting in declining sales prices continue to adversely affect the Company's systems revenues. The significant revenue declines in 2001 and 2000 can also be attributed to continuing order weakness in the Company's vertical software businesses. Systems revenues have declined in all geographic markets served by the Company due primarily to the factors noted above. U.S. systems sales from continuing operations, including sales to the federal government, totaled $183.3 million in 2001, down 19% from the prior year level, after decreasing by 31% in 2000 and 14% in 1999. The revenue declines in 2000 and 1999 were primarily attributable to declining hardware revenues as well as to successive declines in sales of the Company's IGS business segment. IGS revenues have been negatively impacted by the exit from the hardware business, and in fourth quarter 2000, revenues were further reduced as the result of delayed funding on several large government contracts. The funding was received on the contracts in first quarter 2001. International systems sales totaled $118.2 million in 2001, down 41% from the prior year level after declines of 32% in 2000 and 11% in 1999. Strengthening of the U.S. dollar with respect to the currencies of the Company's international markets, primarily Europe, reduced the Company's international systems revenues by 2%, 4%, and 1%, respectively, in 2001, 2000, and 1999. European sales were down 28% in 2001, after declines of 43% and 9% in 2000 and 1999, respectively. Asia Pacific systems sales were down 62%, after declines of 17% and 8% in 2000 and 1999, respectively. Systems revenues for Canada and Latin America declined by 32% in 2001, while systems revenues for the Middle East region declined by 71% in 2001. The decrease in the Middle East revenues is due primarily to the exit of the hardware business and the conversion of subsidiaries into distributorships in 2001. Hardware revenues in 2001 totaled approximately $60.7 million, down 59% from the prior year level, after declining by 50% and 27%, respectively, in 2000 and 1999. The Company exited the hardware business in third quarter 2000. Total revenue from the U.S. government was approximately $143 million in 2001, $132 million in 2000, and $149 million in 1999, representing 27%, 19%, and 16% of total revenue in 2001, 2000, and 1999, respectively. During the three-year period ended December 31, 2001, U.S. government orders and revenues have been characterized by weakened demand for the Company's hardware product offerings, due partially to increasing price competition within the industry, and in 2000, to the Company's exit from this market. Federal government sales in 2000 were additionally impacted by delayed funding on several large contracts. The Company sells to the U.S. government under long-term contractual arrangements, primarily indefinite delivery, indefinite quantity, and cost-based contracts, and through sales of commercial products not covered by long-term contracts. Approximately 69% of the Company's 2001 federal government revenues were earned under long-term contracts. The Company believes its relationship with the federal government to be good. While it is fully anticipated that these contracts will remain in effect through their expiration, the contracts are subject to termination at the election of the government. Any loss of a significant government contract would have an adverse impact on the results of operations of the Company. Maintenance. Maintenance revenue from continuing operations declined by 22% in 2001, after declines of 14% and 8% in 2000 and 1999, respectively. The Company's hardware maintenance business has declined as a result of the trend in the industry toward lower-priced products and longer warranty periods, the Company's exit from the hardware business, and the sale of certain non-core products to Bentley Systems, Inc. ("BSI"). Services. Services revenue from continuing operations, consisting primarily of revenues from Company-provided implementation services and consulting, increased by 2% in 2001, after increasing by 1% and 17% in 2000 and 1999, respectively. The increase in 1999 was due primarily to revenues earned by the Company's IPS business segment. Services are becoming increasingly significant to the Company's business, representing 20% of total revenue for 2001, compared to 15% and 11% in 2000 and 1999, respectively. The Company is endeavoring to grow its services business; however, revenues from these services typically fluctuate significantly from quarter to quarter and produce lower gross margins than systems or maintenance revenues. Gross Margin The Company's total gross margin percentage on revenues from continuing operations was 44% in 2001, compared to 37% in 2000 and 32% in 1999. Margin on systems revenues from continuing operations was 49% in 2001, increasing from 38% in 2000 and 30% in 1999. This upward trend in the Company's systems gross margin is primarily the result of increased software content in the product mix. Also, the Company's systems margins continue to be negatively impacted by the strengthening of the U.S. dollar in its international markets, primarily Europe. In 2000, a $4.5 million inventory write-down resulted from the shutdown of the Company's hardware business. Systems margins in 2000 were further reduced by costs incurred in fourth quarter 2000 on IGS contracts awaiting funding from the U.S. government; however, these negative impacts were more than offset by increasing software content in the product mix as the Company's hardware revenues continued to decline. In 1999, margins were negatively impacted by a $7 million inventory write-off incurred in connection with the Company's decision to exit the PC and generic server business. This was offset by increased software content in the product mix and a decline in unfavorable manufacturing variances as the result of the outsourcing of hardware product manufacturing to SCI. In general, the Company's systems margin may be improved by higher software content in the product mix, a weaker dollar in international markets, and a higher mix of international systems sales to total systems sales when the dollar is weaker in international markets. Systems margins may be lowered by price competition, a higher hardware content in the product mix, a stronger U.S. dollar in international markets, and a higher mix of federal government sales, which generally produce lower margins than commercial sales. While unable to predict the effects that many of these factors may have on its systems margin, the Company expects to maintain the improvements resulting from the Company's exit of the hardware business. Margin on maintenance revenues from continuing operations was 47% in 2001, 45% in 2000, and 46% in 1999. Although maintenance revenues have declined over the past three years, the Company has been able to maintain maintenance margin levels by increasing the software content of maintenance revenue and reducing the associated cost of revenues, due in part to improved inventory management resulting in less inventory obsolescence costs. The Company monitors its maintenance costs closely and has taken measures, including reductions in headcount, to align these costs with the declining levels of revenue. Margin on services revenues from continuing operations was 25% in 2001, improving from 18% and 16% in 2000 and 1999, respectively. Margins in 2001 were positively impacted by a slight increase in revenue, coupled with a larger decrease in costs. Margins in 2000 were positively impacted by several large high-margin consulting contracts acquired by IGS. Services revenues in 1999 increased by 17% from the 1998 level without a proportional increase in costs. Significant fluctuations in services revenues and margins from period to period are not unusual as the costs incurred on certain types of service contracts may not coincide with the recognition of revenue. For contracts other than those accounted for under the percentage-of-completion method, costs are expensed as incurred, with revenues recognized either at the end of the performance period or based on milestones specified in the contract. In third quarter 2000, the Company exited the hardware business but continues to service its installed hardware base under warranty and maintenance contractual obligations. All hardware currently sold by the Company is purchased from third-party vendors. Any unanticipated change in technology or an inability of the Company to accurately forecast its inventory needs could significantly and adversely affect gross margins and reported results of operations. Operating Expenses (exclusive of reorganization charges) Operating expenses for continuing operations declined by 16% in 2001, 22% in 2000, and 14% in 1999. In response to the level of its previous operating losses, the Company took various actions, including employee terminations and the closure and sale of certain unprofitable and non-core business operations, which reduced the number of its employees by approximately 35% during the three-year period ended December 31, 2001. Product development expense declined by 4% in 2001, after declines of 10% and 18% in the two preceding years. The 2001 decrease is mainly the result of the exit from the hardware business and a decline in software development costs. In 2000, an increase in software development expense due to net realizable value concerns partially offset the positive impact of the headcount decline. 1999 expenses were lowered due to additional software development projects whose cost qualified for capitalization, primarily related to the Company's shipbuilding software development efforts. The Company capitalizes certain costs incurred after the technological feasibility of new software products has been established and amortizes those costs against the revenues later generated by those products. Though the Company regularly reviews its capitalized development costs to ensure recognition of any decline in value, it is possible that, for any given product, revenues will not materialize in amounts anticipated due to industry conditions that include intense price and performance competition, or that product lives will be reduced due to shorter product cycles. Should these events occur, the carrying amount of capitalized development costs would be reduced, producing adverse effects on the Company's systems margin and results of operations (see Note 1 of Notes to Consolidated Financial Statements). Sales and marketing expense declined 19% in 2001, after decreasing by 30% in 2000 and 22% in 1999. Expenses in all three years were reduced by the strengthening of the U.S. dollar against international currencies. Additional headcount reductions throughout 2001, 2000, and 1999 have resulted in significant expense declines worldwide. The Company's sales and marketing expenses are inherently activity-based and can be expected to fluctuate with activity levels. General and administrative expense declined by 19% in 2001 after decreasing by 15% in 2000 and increasing by 8% in 1999. Expenses decreased in 2001 due primarily to reductions in corporate and international headcount and worldwide bad debt expenses. Legal expenses in 2001 were flat with those in 2000; however, the Company expects that its legal expenses will fluctuate with the level of activity associated with the Intel litigation. The decline in 2000 was due primarily to a decline in legal fees as the result of reduced activity related to the Intel litigation and a decline in compensation expenses as a result of reduced headcount. The expense increase in 1999 resulted from increased bad debt expenses in the U.S. and continued growth in the Company's legal fees, partially offset by across-the- board declines in all other expense categories. Product Development The Company currently has many ongoing projects relating to development of new products. These projects include software for engineering information management, intelligent piping and instrumentation diagrams, 3D visualization, enterprise information access and reports, and 2D CAD; and new technology for the earth-imaging industry which includes new digital products for photogrammetry, airborne reconnaissance, aerial mapping, and image distribution. For these projects, the Company incurred research and development expenditures of $11.3 million, $6.1 million, and $515,000 for the periods ended December 31, 2001, 2000, and 1999, respectively. These expenses are included in the consolidated statements of operations as a component of "Product development." Capitalized research and development expenses totaling approximately $9.8 million and $9.7 million are included as a component of "Capitalized software development costs" in the consolidated balance sheets at December 31, 2001, and 2000, respectively. Reorganization Charges During the three years ended December 31, 2001, the Company implemented various reorganization actions in an effort to align costs with the level of revenues generated. In 2001, European severance liabilities totaling approximately $400,000 were reversed as the Company's new business segments, in response to unanticipated attrition, hired or are rehiring some of the employees whose positions had been eliminated by the 2000 reorganization plan. In addition, a few of the terminated employees left the Company voluntarily, which also contributed to the reduction of the Company's severance requirements. This expense reversal is reflected in "Reorganization charges (credit)" in the 2001 consolidated statement of operations. Cash outlays in 2001 for severance that related to the 2000 and prior reorganization plans approximated $3.6 million. At December 31, 2001, the Company had no accrued liability related to the prior years' restructuring efforts. In the first quarter of 2000, the Company announced its intention to exit the hardware business. The Company completed this exit in the third quarter of 2000 with the sales of its Intense3D graphics accelerator division and its high-end workstation and server business (see Note 15 of Notes to Consolidated Financial Statements). Upon completion of these transactions, the Company incurred a charge to operations of approximately $8.5 million, including amounts reflected in "Cost of revenues - Systems" and "Cost of revenues - Maintenance" of $4.5 million and $200,000, respectively. The amounts reflected in cost of revenues represent the costs of inventory write-offs incurred as a result of the closure. With the exception of these costs, all expenses associated with the closure are reflected in "Reorganization charges (credit)" in the 2000 consolidated statement of operations. Severance costs associated with the closure totaled approximately $1.7 million. Approximately 50 positions were eliminated worldwide, primarily in the sales and marketing area, with the majority of the related expense incurred in Europe. The remaining exit costs consisted primarily of related fixed asset write-offs of $1.5 million and accruals for lease cancellations and idle building space. In the fourth quarter of 2000, the Company began efforts to align its international operations with its new vertical business segments and bring the cost of those operations in line with the current level of revenue. As part of these efforts, the Company eliminated approximately 145 positions worldwide in its sales and marketing, general and administrative, and customer service and support areas, with the majority of the related expense incurred in Europe and Asia. The cost of the reorganization totaled approximately $5.3 million, primarily for employee severance pay and related expenses. The Company estimates that this reduction in force will result in annual savings of approximately $10 million. Cash outlays in 2000 for severance that related to the Company's restructuring efforts were $7.3 million. Additionally, during third and fourth quarter 2000, European severance liabilities totaling approximately $600,000 were reversed as some of the employees affected by the 1999 actions left the Company voluntarily. This expense reversal is reflected in "Reorganization charges (credit)" in the 2000 consolidated statement of operations. At December 31, 2000, the total remaining accrued liability for severance relating to the 2000 reductions in force was approximately $4 million. In 2001, $3.6 million was paid and $400,000 was reversed. In the second quarter of 1999, most of the Company's ICS subsidiaries in Europe were closed in response to continued operating losses in its ICS business segment. The associated cost of $2.5 million, primarily for employee severance pay, is included in "Reorganization charges (credit)" in the 1999 consolidated statement of operations. Approximately 46 European positions were eliminated, all in the sales and marketing area. The Company estimates that this resizing has resulted in annual savings of approximately $3 million. In the third quarter of 1999, the Company took further actions to reduce expenses in its unprofitable business segments and restructure the Company to support the vertical markets in which it operates. These actions included elimination of approximately 400 positions worldwide, completion of the worldwide vertical market alignment of the sales force, and narrowing of the focus of the Company's ICS business segment to high-end workstations, specialty servers, digital video products, and 3D graphics cards. As a result of these actions, the Company recorded a charge to operations of $20.1 million, of which $7 million is included as a component of "Cost of revenues - Systems" in the 1999 consolidated statement of operations. This $7 million charge represents the cost of inventory write-offs incurred as a result of ICS' exit from the PC and generic server business. Severance costs associated with the third quarter of 1999 reorganization totaled approximately $8.7 million, of which $7.8 million is included in "Reorganization charges (credit)" in the 1999 consolidated statement of operations. The remaining severance costs related to headcount reductions in the Company's VeriBest business segment and, accordingly, they are reflected in "Loss from discontinued operation, net of income taxes" in the 1999 consolidated statement of operations. The Company estimates that the annual savings resulting from this reduction in force approximated $22 million. The remainder of the third quarter 1999 reorganization charge consisted of write-offs of capitalized business system software no longer required as a result of verticalization of the Company's business segments and resulting decentralization of portions of the corporate financial and administrative functions. Cash outlays in 1999 for severance that related to the Company's restructuring actions approximated $9.7 million. At December 31, 1999, the Company had a liability of approximately $5 million related to the 1999 reductions in force, all of which was paid or reversed in 2000. Non-operating Income and Expense Interest expense for continuing operations was $1.8 million in 2001, $4 million in 2000, and $5.7 million in 1999. The Company's average outstanding debt has declined due primarily to repayment of borrowings utilizing existing cash balances and the proceeds from sales of various non-core businesses and assets. See Note 8 of Notes to Consolidated Financial Statements for details of the Company's current financing arrangements. "Other income (expense), net" in the consolidated statements of operations consists primarily of interest income, foreign exchange gains and losses, and other miscellaneous items of non-operating income and expense. In 2001, this amount included a $3.8 million payment received from Micrografx for a convertible debenture held by the Company, $1.7 million for a Mentor Graphics warrant, interest income of $7.4 million (resulting primarily from the BSI note and the Company's higher level of cash), and a net foreign exchange loss of $1.5 million. See "Impact of Currency Fluctuations and Currency Risk Management" and Notes 5 and 13 of Notes to Consolidated Financial Statements. Income Taxes The Company earned pretax income before minority interest of $28.9 million in 2001, compared to $19.2 million in 2000 and to a pretax loss of $72.5 million in 1999. Income tax expense in each of these years resulted primarily from taxes on individually profitable majority-owned subsidiaries, including the Company's 60% ownership interest in Z/I Imaging in 2001, 2000, and 1999. There was no material income tax expense or benefit related to the Company's discontinued VeriBest operation in 1999. Note 9 of Notes to Consolidated Financial Statements contains a reconciliation of statutory income tax expense or benefit to actual income tax expense for each year in the three-year period ended December 31, 2001, and includes further details of the Company's tax position, including net operating income (loss), and tax credit carryforwards. Discontinued Operation On October 31, 1999, the Company sold its VeriBest, Inc. business segment to Mentor Graphics Corporation, a global provider of electronic hardware and software design solutions and consulting services, for approximately $11 million, primarily in the form of cash received at closing. The resulting gain on this transaction of $14.4 million is reflected in "Gain on sale of discontinued operation, net of income taxes" in the 1999 consolidated statement of operations and in "Gains on sales of assets" in the 1999 consolidated statement of cash flows. The VeriBest business segment served the electronic design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. For the period in 1999 prior to its sale, VeriBest incurred an operating loss of $7.3 million on revenues from unaffiliated customers of $23.7 million. VeriBest's operating loss for 1999 included reorganization charges of $900,000 incurred for employee terminations as part of various company-wide restructurings (see "Reorganization Charges"). Summarized financial information for the VeriBest business segment for 1999 is presented in Note 4 of Notes to Consolidated Financial Statements. Results by Business Segment The year 2000 was a transitional year for the Company during which much effort was focused on organizing the Company into five business segments. In third quarter 2000, the Company substantially completed the U.S. portion of this process, and the international portion was completed during the first quarter of 2001. The following discussion provides a comparative analysis of results of operations based on the Company's current business structure for 2001 and 2000, as well as a discussion of the prior business structure for 2000 and 1999. The Company is unable to restate current year data into the previous segment structure and 1999 data into the current segment structure to provide comparability, as this would be impracticable, and would involve excessive cost and require extensive estimations. One segment, Z/I Imaging, did not change as a result of the new structure. Information reported for previous years is comparable to the new presentation, though 1999 includes only three months of activity for Z/I Imaging as the subsidiary was formed on October 1, 1999. In the Company's new reporting structure, its 2000 loss from operations is attributed primarily to its ICS business segment, whose operations ceased in fourth quarter 2000, and to the Corporate operation, mainly due to general corporate expenses. See Note 12 of Notes to Consolidated Financial Statements for further explanation and details of the Company's segment reporting, including a presentation of the Company's new vertical operating structure for 2000 and beyond. Current Segment Structure IGS. IGS earned operating income of $10 million on revenues of $134.1 million, compared to 2000 operating income of $13.8 million on revenues of $159.5 million. IGS' systems revenues were adversely impacted by weakened demand for the Company's hardware product offerings due to the Company's exit from the hardware business in the third quarter of 2000. Additionally, in fourth quarter 2000, its revenues declined as the result of delayed funding on several large government contracts which were funded in first quarter 2001. In 2001, maintenance revenues declined due to the sale of certain non-core products to BSI. The segment's total gross margin decreased from 28% in 2000 to 25% in 2001 due to a decline in hardware and maintenance business as noted above. The decline in revenue is partially offset by a 13% decline in cost of revenues associated with the revenue reduction. Operating expenses declined 22% from reductions in headcount and bad debt expenses. IMGS. Intergraph Mapping and GIS Solutions ("IMGS") earned operating income of $5.1 million on revenues of $136.8 million, compared to 2000 operating income of $4.5 million on revenues of $160.9 million. IMGS' systems revenues were adversely impacted by weakened demand for the Company's hardware product offerings due to the Company's exit from the hardware business in the third quarter of 2000. Maintenance revenues declined due to the sale of certain non- core products to BSI. Services revenue increased 27% to partially offset these declines. The segment's total gross margin was approximately 42% in 2001 compared to approximately 36% in 2000. The systems revenue decline was more than offset by a reduction in systems cost of revenues. In addition, total gross margin increased due to an increase in the services margin. Operating expenses were flat with the 2000 level. PP&O. Intergraph Process, Power & Offshore ("PP&O") earned operating income of $6.8 million and $9.9 million in 2001 and 2000, respectively, on revenues of $116.5 million and $123.7 million. The 6% decline in revenue is due to a reduction in hardware sales and associated maintenance revenue due to the Company's exit from the hardware business in the third quarter of 2000, and the reduction of maintenance revenues resulting from the sale of certain non- core products to BSI. The segment's total gross margin improved from 52% in 2000 to 61% in 2001 as a result of a reduction of sales of lower-margin products. Operating expenses for the segment increased 20%, mainly in research and development. To better reflect the industries it serves, the division changed its name from Intergraph Process & Building Solutions to Intergraph Process, Power & Offshore in January 2002. IPS. IPS earned operating income of $5.3 million and $1.4 million in 2001 and 2000, respectively, on revenues of $115.8 million and $127.9 million. The improvement in IPS' 2001 results of operations was due primarily to an increase in gross margin from 38% in 2000 to 43% in 2001, largely due to a higher software content in revenues and improved margins on maintenance. This margin improvement was coupled with a 4% decrease in operating expenses. IPS' general and administrative expenses have decreased by 14% from the 2000 level, as 2000 included legal expenses incurred in Australia for an inquiry related to a large contract award. It is unknown at present whether this inquiry will result in a legal proceeding of any significance with respect to the IPS business segment and the Company. Z/I Imaging. In 2001, Z/I Imaging earned operating income of $4.5 million on revenues of $38.6 million, after earning operating income of $9.2 million on revenues of $43.4 million in 2000. 2000 was the segment's first full calendar year of operations since its inception October 1, 1999. The decrease in revenue in 2001 resulted from higher than expected systems revenues in 2000 due to strong sales of photogrammetric processing systems. Total gross margin for 2001 and 2000 approximated 57%, reflecting high margins earned on software and photogrammetric systems. Z/I Imaging's operating expenses for 2001 were approximately 12% above the 2000 level due to increased staffing as a result of Z/I Imaging's continued infrastructure building. ICS. In third quarter 2000, ICS exited the development, design, and sale of hardware products and closed its operations. Before the exit, ICS incurred operating losses of $17.1 million on revenues of $116.4 million. Effective with the shutdown of ICS, the Company's hardware maintenance and network services operations were combined with the IGS business segment. See the ICS discussion below for comparative data for 2000 and 1999. Mid World. The Company's Middle East operations ("Mid World") incurred operating losses of $3.3 million and $1.4 million in 2001 and 2000, respectively, on revenues of $11.8 million and $21.9 million. Revenues declined in 2001 as Mid World primarily focused on selling the existing business rather than on developing new business. Portions of Mid World were sold in April 2001 and July 2001. The sale of the remaining portion of the Mid World operations, Intergraph Middle East, Ltd. ("IMEL"), is expected to close during the first quarter of 2002. Upon completion of this sale, the Company will no longer have subsidiaries in the region and will do business solely through distributors. For 2001 and 2000 comparative data, Mid World is included as a segment on a temporary basis (see Note 15 of Notes to Consolidated Financial Statements). Corporate. For 2001 and 2000 comparative data, Corporate includes revenues and associated costs for Teranetix (a provider of computing support and hardware integration services) and international hardware maintenance. Corporate incurred operating losses of $20.1 million and $35.4 million in 2001 and 2000, respectively, on revenues of $22 million and $46.7 million. The operating losses are mainly due to general corporate expenses of $22.6 million in 2001 and $35.7 million in 2000. For 2001, operating expenses declined by 37% as a result of the Company's ongoing efforts to reduce its corporate overhead, primarily through reductions in headcount. Approximately $2.5 million of the fourth quarter 2000 reorganization charges related to terminations of administrative personnel, primarily in Europe. Previous Segment Structure ICS. ICS incurred operating losses of $18.9 million and $44.8 million in 2000 and 1999, respectively, on revenues of $155 million and $332.1 million. ICS' 1999 results of operations were significantly adversely impacted by factors associated with the Company's dispute with Intel, the effects of which included lost momentum, lost revenue and margin, and increased operating expenses, primarily for marketing and public relations. (See "Litigation and Other Risks and Uncertainties" for a complete discussion of the Company's dispute with Intel and its effects on the operations of ICS and the Company.) In response to its continued operating losses, in third quarter 1999, ICS exited the PC and generic server business and narrowed its focus to workstations, specialty servers, digital video products and 3D graphics cards. In third quarter 2000, ICS exited the development and design of hardware products and closed its operations. ICS' revenue declines over the two- year period ended December 31, 2000, resulted primarily from the aforementioned factors associated with the Intel dispute and from its closure in 2000. ICS' total gross margin in 2000 was approximately 9% compared to approximately 11% in 1999. In 2000, a $4.5 million inventory write-down was recorded in connection with the shutdown of ICS' hardware development business. 2000 margins were also negatively impacted by significant discounting on sales of ICS' remaining inventory, primarily in the fourth quarter. In 1999, margins improved as a result of outsourcing to SCI, but were offset by a $7 million inventory write-off incurred as the result of the exit from the PC and generic server business. ICS' operating loss improvement in 2000 was due primarily to successive operating expense declines of 60% resulting from headcount reductions achieved over the two- year period prior to its shutdown in 2000. Effective with the shutdown of ICS, the Company's hardware maintenance and network services operations were combined with the IGS business segment. IPS. IPS earned operating income of $5.3 million and $10.8 million, in 2000 and 1999, respectively, on revenues of $90.6 million and $96.3 million. As a general rule, the IPS business is characterized by large orders that are difficult to forecast and cause orders to fluctuate significantly from quarter to quarter. In 2000, IPS' systems and services orders increased by 42%; however, a correlating revenue increase did not materialize in 2000 as most of these orders were received late in the third quarter. In 2000, improvements in IPS' systems and maintenance margins from the 1999 level were offset by a 23% increase in operating expenses. In anticipation of increasing orders, the Utilities division of IPS increased its headcount by approximately 7% from the 1999 level, primarily in the product development and sales and marketing areas. Additionally, IPS' 2000 general and administrative expenses increased by 29% from the 1999 level due to legal expenses incurred in Australia for an inquiry related to a large contract award. It is unknown at present whether this inquiry will result in a legal proceeding of any significance with respect to the IPS business segment and the Company. Intergraph Software. The Software business earned operating income of $8.6 million and $7.3 million in 2000 and 1999, respectively, on revenues of $338.6 million and $469.4 million. The revenue decline in 2000 was due primarily to declining systems revenues, partially the result of weakened demand for the Company's hardware products, and to the continued downward trend in maintenance revenues. The segment's total margin increased from approximately 37% in 1999 to 42% in 2000, primarily due to increased software content in the product mix. Though total gross margin increased in 2000, the 28% decline in revenues resulted in a significant reduction in operating income for the Software segment; however, the impact of the revenue decline was more than offset by declines in the segment's sales and marketing and general and administrative expenses of 27% and 11%, respectively, as the result of the Company's reorganization efforts. Segment information formerly reported in Intergraph Software is now reported in IGS, IMGS, PP&O, and IPS (see Note 12 of Notes to Consolidated Financial Statements). IGS. In 2000, IGS earned operating income of $3.6 million on revenues of $144 million, compared to a 1999 operating income of $12.4 million on revenues of $159.8 million. IGS' revenues were adversely impacted by weakened demand for the Company's hardware product offerings in both years, and in fourth quarter 2000, its revenues were further reduced as the result of delayed funding on several large government contracts which were funded in first quarter 2001. The segment's total gross margin stabilized at approximately 24% for 2000 and 1999. In 2000, IGS' operating expenses increased by 21%, primarily due to expenses incurred in connection with the verticalization of the business, including the implementation of a new accounting system and an increase in bad debt expenses from the 1999 level. Z/I Imaging. In 2000, Z/I Imaging earned operating income of $9.2 million on revenues of $43.4 million, after earning operating income of $1.9 million on revenues of $9.8 million in fourth quarter 1999. 2000 was the segment's first full calendar year of operations since its inception October 1, 1999. Z/I Imaging's systems revenues in 2000 were higher than expected due to strong sales of photogrammetric processing systems. Total gross margin for 2000 and fourth quarter 1999 approximated 57%, reflecting high margins earned on software and photogrammetric systems. Z/I Imaging's operating expenses increased approximately 6% above the fourth quarter 1999 annualized level due to additional personnel added throughout the year. Corporate Expenses. General corporate expenses declined by 41% in 2000 from the 1999 level. These variances are attributed primarily to fluctuations in the Company's legal fees. Expenses in 2000 were positively impacted by the Company's ongoing efforts to reduce its corporate overhead, primarily through reductions in headcount. Approximately $2.5 million of the fourth quarter 2000 reorganization charges related to terminations of administrative personnel, primarily in Europe. Outlook for 2002 The Company expects that the markets in which it competes will continue to be characterized by intense competition, rapidly changing technologies, and shorter product cycles. Further improvement in the Company's operating results will depend on further market penetration by accurately anticipating customer requirements and technological trends, and rapidly and continuously developing and delivering new products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability. Better operating results will also depend on worldwide economic improvement and the Company's ability to successfully implement its strategic direction, which includes the operation and growth of independent business segments. See "Cautionary Note Regarding Forward-Looking Statements." The Company continues to pursue additional real estate sales and facilities consolidation. If completed as planned, these sales may provide substantial cash to the Company in 2002. To increase profitability, the Company must achieve revenue growth and successfully complete its efforts to align operating expenses with the projected level of revenue. In addition, the Company continues to face legal expenses of unknown duration and amount due to its dispute with Intel. Litigation and Other Risks and Uncertainties The Company continues its litigation with Intel, 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 for the Northern District of Alabama, Northeastern Division (the "Alabama Court"), charging Intel with unlawful anti-competitive business practices. Intergraph alleges that Intel attempted to coerce the Company into relinquishing certain computer hardware patents to Intel 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, 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 infringed upon the Company's patents. The Company's patents (the "Clipper Patents") define the architecture of the cache memory of Intergraph's Clipper microprocessor. The Company believes this architecture is at the core of Intel's Pentium line of microprocessors and systems. Intel's Pentium 4 processor was not commercially available at the time of the filing of the lawsuit; however, the Company has reason to believe that Intel's Pentium 4 processor infringes the Company's Clipper patents. On December 3, 1997, the Company amended its complaint to include a count alleging violations of federal antitrust laws. Intergraph asserted 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 enjoined Intel from 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. On April 16, 1998, Intel appealed to the United States Court of Appeals for the Federal Circuit (the "Appeals Court"), and on November 5, 1999, the Appeals Court vacated the preliminary injunction that had been entered by the Alabama Court. This ruling by the Appeals Court did not impact the Company's operations due to an Agreement and Consent Order which Intel entered into with the Federal Trade Commission ("FTC") on March 17, 1999, not to restrict sales or take coercive actions such as those alleged by the Company in its lawsuit against Intel. On June 17, 1998, Intel filed its answer in the Alabama case, which included counterclaims against Intergraph, including claims that Intergraph had 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 patents asserted by Intel. On January 11, 2002, Intel stipulated to the dismissal of one of the alleged counterclaim patents. The Company continues to vigorously defend the remaining counterclaims. The Company does not believe that Intel's remaining counterclaims, including Intel patent counterclaims, will result in a material adverse consequence for the Company. On June 17, 1998, Intel filed a motion before the Alabama Court requesting a determination that Intel is licensed to use the Clipper Patents. This "license defense" was based on Intel's interpretation of the Company's acquisition of the Advanced Processor Division of Fairchild Semiconductor Corporation in 1987. On September 15, 1998, the Company filed a cross motion with the Alabama Court requesting summary adjudication of the "license defense" in favor of the Company. On November 13, 1998, the Company amended its complaint to include two additional counts of patent infringement against Intel. The Company requested the court to issue a permanent injunction enjoining Intel from further infringement and to order that the financial impact of the infringement be calculated and awarded in treble to Intergraph. On December 6, 1999, in order to obtain protection under the aforementioned FTC Consent Order, the Company withdrew its request for a patent injunction against Intel's P5 and P6 families of microprocessors. (Intel's P5 and P6 processor families include the Pentium, Pentium Pro, Pentium II, and Pentium III microprocessors, but specifically exclude Intel's Pentium 4, Pentium 4 Xeon, and Itanium families of microprocessors.) On June 4, 1999, the Alabama Court granted the Company's September 15, 1998, motion and ruled that Intel had no license to use the Company's Clipper Patents; however, on October 12, 1999, the Alabama Court reversed its June 4, 1999, order and dismissed the Company's patent claims against Intel based upon Intel's "license defense." The Company appealed the Alabama Court's October 12, 1999, order to the United States Court of Appeals for the Federal Circuit. On March 1, 2001, the Appeals Court reversed the October 12, 1999, decision of the Alabama Court, specifically holding that Intel was never licensed under the Company's Clipper patents. On March 15, 2001, Intel filed a petition for rehearing with the Appeals Court, requesting that it reconsider its March 1, 2001, decision. The Appeals Court subsequently denied Intel's motion for reconsideration on April 9, 2001. Intel has no further recourse with regard to the assertion of the "license defense." The Company believes that the Federal Circuit's March 1, 2001, patent license decision is well supported by law and fact, and the Company will continue to aggressively pursue its patent case for the payment of royalties by Intel for their use of the Company's Clipper technology in Intel's Pentium line of products. On March 10, 2000, the Alabama Court entered an order dismissing the antitrust claims of the Company. This dismissal was based in part upon a February 17, 2000, decision by the Appeals Court in another case (CSU v. Xerox). On April 26, 2000, the Company appealed this dismissal to the United States Court of Appeals for the Federal Circuit. The oral argument for this appeal was heard on March 5, 2001. The Appeals Court subsequently denied the Company's appeal on June 8, 2001. The Company does not believe that the dismissal of the antitrust appeal will materially affect the Company's remaining claims or the value of the overall lawsuit. On March 17, 2000, Intel filed a series of motions in the Alabama Court to dismiss certain Alabama state law claims of the Company. The Company filed its responses to Intel's motions on July 17, 2000, together with its own motions to dismiss certain Intel counterclaims. Intel's responses were filed on November 3, 2000. The Alabama Court has taken the motions under submission. No oral argument has been scheduled, and no decision has been entered by the Alabama Court. The trial date for this case, previously scheduled for June 2000, has been continued until on or after January 1, 2003. Even though the parties have not been required by the Alabama Court to participate in any court-ordered dispute resolution procedures, the parties have agreed to include the Alabama claims in the court-ordered mediation in the Texas case (see the discussion on court-ordered mediation in the following section on the Texas litigation). On July 30, 2001, the Company filed a patent infringement lawsuit against Intel in the United States District Court, in the Eastern District of Texas. The Company has asserted allegations that two patents relating to parallel instruction computing ("PIC") are infringed by Intel's IA-64 EPIC (explicitly parallel instruction computing) processors, including but not limited to Intel's Itanium and McKinley processors. The Company is seeking to prohibit Intel's use of the Company's patented PIC technology through the enforcement of a patent injunction. The case is set for trial on July 1, 2002. Pursuant to local court rules, and the scheduling order of the Texas Court, the case is set for court-ordered mediation, with a court-appointed mediator on April 3, 2002. The parties have agreed that the mediation will address all pending litigation matters between the parties, which currently include the Company's Alabama Clipper claims and Alabama state law claims, the Texas PIC claims and a patent inference action pending in the U.S. Patent & Trademark Office. Effects. The Company ceased further design of its Clipper microprocessor at the end of 1993, and made a substantial investment in the 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 was technologically and economically bound to the use of Intel's microprocessors. Successful participation in the high-end workstation market required involvement in Intel product development programs that provide advance information for the development of new products 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 product information and information on Intel defects and corrections. Yet, Intel continued to provide this information to the Company's competitors. Intel's refusal to provide this vital information, and its interference with the Company's ability to work around its withholding of such information, delayed the Company's new product releases by one to six months, resulting in lost sales and reduced margins for the Company, which severely impacted the Company's revenues and profitability. While the April 1998 ruling of the Alabama Court required Intel to provide Intergraph with advance product samples and technical information, the Company lost considerable sales momentum and continued to feel residual effects from the dispute through the end of 1999 and into 2000. While Intel was supplying the Company with advance product samples and technical information, the Company believes that their responsiveness was not at the same level as prior to the dispute. In 1999 and 2000, demand for the Company's hardware products continued to decline as the Company was unable to recover completely from the loss of momentum caused by Intel's actions. As a result, in the third quarter, the Company exited the personal computer and generic server businesses and narrowed the focus of its ICS business segment to workstations, specialty servers, digital video products, and 3D graphics cards. In third quarter 2000, due to an inability to stem hardware losses, the Company sold its Intense3D graphics accelerator division and its high-end workstation and server business and closed the remainder of its hardware development operation. Damages. During the course of the Intel litigation, the Company has employed a variety of experts to prepare estimates of the damages suffered by the Company under various claims of injury brought by the Company. The following supplemental damage estimates were provided to Intel in August 2001 in due course of the litigation process: estimated damages for injury covered under non- patent claims of $194 million in lost profits, and estimated additional damages for injury covered under non-patent claims for the loss of the Company's hardware operations of $160 million, and/or approximately $150 million in direct out-of-pocket expenses. Patent claims damages are calculated on a percentage of infringing sales, together with a possible multiplier for willful infringement damages. The Company's supplemental patent royalty damage reports provided to Intel in August 2001 in due course of the litigation process estimate that a reasonable royalty rate for infringed patents could range between .5 and 4.75 percent. Intel disputes the Company's damage conclusions, and in the September/October 2001 time frame submitted its own damage reports in the due course of the litigation which differ from the Company's damage reports. The Company's damage reports are estimates only and any recovery of damages in this litigation could be substantially less than these estimates or substantially greater than these estimates depending on a variety of factors that cannot be determined at this time. Factors that could lead to recovery of substantially less than these estimates include, but are not limited to, the failure of the Alabama Court or the Appeals Court to sustain the legal basis for one or more of the Company's claims, the failure of the jury to award amounts consistent with these estimates, the failure of the Alabama Court or the Appeals Court to sustain any jury award in amounts consistent with these estimates, and the settlement by the Company of the Intel litigation in an amount inconsistent with these estimates. Factors that could lead to recovery of substantially greater than these estimates include, but are not limited to, success by the Company in recovering punitive damages on one or more of its patent and/or non-patent claims. The Company believes that current and potential legal proceedings relating to the Company's Clipper and PIC patents may have a significant impact on current litigants as well as others in the computer industry. As a result, the Company is mindful that Intel or other potential litigants of the Company may, without intending to obtain control of the corporation, use the threat of an unfriendly takeover bid as a means to force the Company to settle to avert the threat of a takeover. The Company believes it was necessary to take legal action against Intel in order to defend its former 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 it will continue to incur substantial legal and administrative expenses in connection with the lawsuit. The Company has other ongoing litigation, none of which is considered to represent a material contingency for the Company at this time; however, any unanticipated unfavorable ruling in any of these proceedings could have an adverse impact on the Company's results of operations and cash flow. Arbitration Settlement. The Company maintains an equity ownership position in BSI, the developer and owner of MicroStation, a software product for which the Company serves as a nonexclusive distributor. In March 1996, BSI commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia, relating to the respective rights of the companies under their April 1987 Software License Agreement and other matters, including the Company's alleged failure to properly pay to BSI certain royalties on its sales of BSI software products, and seeking significant damages. On March 26, 1999, the Company and BSI executed a Settlement Agreement and Mutual General Release ("the Agreement") to settle this arbitration and mutually release all claims related to the arbitration or otherwise, except for certain litigation between the companies that was the subject of a separate settlement agreement and payment for products and services obtained or provided in the normal course of business since January 1, 1999. Both the Company and BSI expressly denied any fault, liability, or wrongdoing concerning the claims that were the subject matter of the arbitration and settled solely to avoid continuing litigation with each other. Under the terms of the Agreement, the Company on April 1, 1999, made payment to BSI of $12 million and transferred to BSI ownership of 3,000,000 of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3.5 million on the Company's books. As a result of the settlement, the Company's equity ownership in BSI was reduced from approximately 50% to approximately 31%. Additionally, the Company had a $1.2 million net receivable from BSI relating to business conducted prior to January 1, 1999, which was written off as part of the settlement. In first quarter 1999, the Company accrued a non-operating charge to earnings of approximately $8.6 million in connection with the settlement, representing the portion of settlement costs not previously accrued. This charge is shown as "Arbitration settlement" in the 1999 consolidated statement of operations. The $12 million payment to BSI was funded primarily from existing cash balances. For further discussion regarding the Company's liquidity, see "Liquidity and Capital Resources" following. Other Risks and Uncertainties. 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 products. Similarly, trademark rights held by the Company are used to preserve and protect the reputation of the Company's registered and unregistered trademarks. As industry standards proliferate, there is a possibility that the patents of others may become a significant factor in the Company's business. Personal computer technology, which was used in the Company's workstation and server products, is widely available, and many companies, including Intergraph, have developed and continue to develop patent positions concerning technological improvements related to personal computers, workstations, and servers. It does not appear that the Company will be prevented from using the technology necessary to support existing products, 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. In addition, computer software technology is increasingly being protected by patents, and many companies, including Intergraph, are developing patent positions for software innovations. It is unknown at the present time whether various patented software technology will be made generally available under license, or whether specific innovations will be held by their inventors and not made available to others. In many cases, it may be possible to employ software techniques that avoid the patents of others, but the possibility exists that some features needed to compete successfully in a particular segment of the software market may be unavailable or may require an unacceptably high cost via royalty arrangements. Patented software techniques that become de facto industry standards are among those that may raise costs or may prevent the Company from competing successfully in particular markets. An inability 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 markets in which the Company competes, could significantly reduce the Company's revenues and adversely affect its results of operations. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, cash and short-term investments totaled $110.8 million, down $9 million from December 31, 2000. Cash generated from operations totaled $24.5 million in 2001 and $41.2 million in 2000, compared to a use of cash of $9.7 million in 1999. Cash generation in 2001 and 2000 reflects the Company's improved results of operations. The use of cash in 1999 included a $12 million payment to BSI (see "Arbitration Settlement") and payments to SCI of $10.2 million to purchase unused inventory (see Notes 13 and 15 of Notes to Consolidated Financial Statements). Severance payments in 2001, 2000, and 1999 totaled $3.6 million, $7.3 million, and $9.7 million, respectively. Net cash provided by (used for) investing activities totaled ($17.5 million), $15.9 million, and $25.5 million in 2001, 2000, and 1999, respectively. Cash provided by investing activities in 2001 included $12.7 million in net proceeds from sales of assets (primarily receipts of $5.1 million from the additional earn-out provision of the 2000 sale of the Company's civil, plotting, and raster product lines to BSI, $3.8 million from the settlement of the Micrografx convertible subordinated debenture, $2 million from the sale of the Mentor Graphics warrant, and $1.1 million from the sale of Saudi Arabia). Cash used in investing activities during 2001 included $11 million for the purchase of short- term investments. Cash provided by investing activities in 2000 included $38.4 million in net proceeds from sales of assets, primarily receipts of $13.6 million from the sale of the Company's civil, plotting, and raster product lines to BSI, $12.9 million from sales of land and an office building in the Netherlands, $10.3 million from sales of buildings on the Company's Huntsville, Alabama, campus, $2 million from the sale of a non-core software product, and $1.5 million from the sale of an investment in an affiliate. Cash provided by investing activities in 1999 included $11.7 million contributed by the minority interest partner to the start-up of the Z/I Imaging business and $54.1 million in net proceeds from sales of assets, including $19.9 million from the fourth quarter 1998 sale of the Company's manufacturing assets to SCI, $13.7 million from the sale of an office building in the Netherlands, $11 million from the sale of VeriBest, $6.4 million from the sale of InterCAP, and $2.5 million from the sale of land. Other significant investing activities in 2001 included expenditures for capitalizable software development of $4.8 million ($10.8 million in 2000 and $20.7 million in 1999) and capital expenditures of $9.7 million ($7.2 million in 2000 and $10.2 million in 1999), primarily for computer equipment used in product development and sales and marketing activities. Net cash used for financing activities totaled $25 million, $21.7 million, and $21 million in 2001, 2000, and 1999, respectively, due primarily to net debt repayments of $28.5 million, $23.4 million, and $23.6 million, respectively. In 2001, the Company used approximately $17.8 million to pay down the term loan with its primary lender and $6.7 million to pay down a long-term mortgage on an office building in the United Kingdom. In 2000, the Company used approximately $7 million to repay its Australian term loan and $7.1 million to pay down the term loan with its primary lender. Additionally, in 2000 and 1999, the Company used approximately $3.8 million and $4.2 million, respectively, to pay off mortgages on disposed European office buildings. The remaining debt repayment activity in 1999 related primarily to the Company's term loan and revolving credit agreement. An additional reduction in the Company's long- term debt was achieved through termination of a long-term lease on one of the Company's facilities in first quarter 2000. The Company accounted for this lease as a financing and, upon termination, long-term debt of $8.3 million and property, plant, and equipment of $6.5 million were removed from the Company's books. See Note 8 of Notes to Consolidated Financial Statements for further details of these transactions and a summary of the Company's outstanding debt at December 31, 2001. The Company's average collection period for accounts receivable in 2001 was approximately 88 days, representing a slight decrease from the prior year. Approximately 74% of the Company's 2001 revenues were derived from international customers and the U.S. government, both of which traditionally carry longer collection periods. The Company continues to experience slow collections throughout the Middle East region, particularly in Saudi Arabia. Total accounts receivable from Middle East customers was approximately $13.3 million at December 31, 2001, and $17.9 million at December 31, 2000. Total U.S. government accounts receivable was $27.7 million at December 31, 2001 ($28.4 million at December 31, 2000). 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 $9 million to $12 million in 2002, primarily for computer equipment used in product development and sales and marketing activities. The Company's term loan and revolving credit agreement, among other restrictions, limits the level of the Company's capital expenditures. Under the Company's January 1997 seven-year fixed term loan and revolving credit agreement (as amended), available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, primarily accounts receivable, with maximum availability of $50 million. At December 31, 2001, the borrowing base, representing the maximum available credit under the line, was approximately $39 million, of which $10.9 million was allocated to support the Company's letters of credit. In 2001, the Company paid $17.8 million of the term loan with existing cash balances and proceeds received from the sales of assets. In September 2000, the Company paid $7.1 million of the term loan with proceeds received from the sale of several idle office buildings. At December 31, 2001, the Company had outstanding borrowings of $424,000 under this agreement, the $100,000 term loan portion of which was classified as long-term debt in the consolidated balance sheet. The term loan is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's U.S. assets and certain international receivables. The rate of interest on all borrowings under the agreement is the greater of 6.5% or the Wells Fargo base rate of interest (4.75% at December 31, 2001) plus .125%. There are provisions in the agreement which lower the interest rate upon achievement of sustained profitability by the Company, but only to the minimum interest rate of 6.5%. 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 .20% of the average unused portion of the revolving credit line, a letter of credit fee at an annual rate of .75% of the undrawn amount of all outstanding letters of credit, and a monthly agency fee. An amendment was executed on August 1, 2001, that extends the current agreement until January 2004 with no cancellation penalty to the Company after January 2003, allows pay-down of the term loan portion of the line, and lowers the facility to $50 million, which will provide for annual savings of approximately $650,000 to the Company. The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures, and restrictive covenants that limit or prevent various business transactions (including purchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes without approval. The Company's net worth covenant was increased to $250 million, effective August 1, 2001. At December 31, 2001, the Company had approximately $3.7 million in debt on which interest is charged under various floating rate arrangements (see Note 8 of Notes to Consolidated Financial Statements). The Company is exposed to market risk of future increases in interest rates on these loans. The Company estimates that its results of operations would not be materially affected by a two-point increase or decrease in the average interest rates related to its floating rate debt. This hypothetical change in rates was determined based on the trend of the Company's actual rates over the past four years and represents the maximum fluctuation experienced in any of those years. The Company's estimate assumes a level of debt consistent with the December 31, 2001, level. The Company's general financial condition improved in 2001, and it generated positive operating cash flow for the second consecutive year. The Company is managing its cash very closely and believes that the combination of improved cash flow from operations, existing cash balances, and cash available under the revolving credit agreement will be adequate to meet cash requirements for 2002. For the near term, the Company also anticipates that its cash position may benefit from further sales of excess real estate and facilities. However, for the longer term, the Company must continue to align its operating expenses with the levels of revenue being generated if it is to fund business growth without reliance on funds from sales of assets and external financing. The Company anticipates no significant non- operating events that will require the use of cash, with the possible exception of its stock purchase program (see Note 1 of Notes to Consolidated Financial Statements). Gains on Sales of Assets "Gains on sales of assets" in the consolidated statements of operations and cash flows consists of the net gains and losses recognized by the Company on sales of various non- core subsidiaries, divisions, and product lines, and gains recorded on real estate sales. In 2001, the Company reported an additional gain from the BSI transaction of approximately $10.1 million as part of the initial consideration for the sale, as well as consideration for transferred maintenance revenues for the products sold to BSI, as provided for in the original sale agreement. Also in 2001, the Company reported a $600,000 additional gain from the 3Dlabs transaction. This gain was the result of the final calculation and settlement of the earn-out provisions with 3Dlabs. In the third quarter of 2001, the Company sold its Saudi Arabian operation, reporting a $680,000 gain. This gain is offset by an impairment reserve of $150,000 for the expected loss on the completion of the sale of IMEL. In 2000, the Company recorded a gain of $23 million on the sale of its civil, plotting, and raster product lines to BSI and a gain of $15.7 million on the sale of its Intense3D graphics accelerator division to 3Dlabs. Also in 2000, the Company sold several real estate holdings including some of the buildings on its Huntsville, Alabama, campus at an aggregate gain of $1.9 million, and land and a building in the Netherlands at an aggregate gain of $5.2 million. Other significant transactions for 2000 include a $2 million gain recognized on the sale of a non-core software product line, a $1.5 million gain on the sale of an investment in an affiliate, a $1.5 million gain on the termination of a long- term capital lease, and a loss of $1.3 million on the sale of the Company's Singapore subsidiary. In 1999, the Company sold its InterCAP subsidiary at a gain of $11.5 million. 1999 also includes a $1.4 million gain on the sale of land. See the preceding section on "Discontinued Operation" for a discussion of the Company's October 1999 sale of its VeriBest business segment, for which a resulting gain of $14.4 million was recorded. This gain is reflected as "Gain on sale of discontinued operation, net of income taxes" in the 1999 consolidated statement of operations and in "Gains on sales of assets" in the 1999 consolidated statement of cash flows. See Notes 13 and 15 of Notes to Consolidated Financial Statements for complete details of the Company's acquisitions and divestitures during the three-year period ended December 31, 2001. Impact of Currency Fluctuations and Currency Risk Management 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 policy restrictions, currency exchange fluctuations, and other factors. Fluctuations in the value of the U.S. dollar in international markets can have a significant impact on the Company's results of operations. For 2001, approximately 47% 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 currencies. These local currency revenues and expenses are translated into U.S. dollars for reporting purposes. A stronger U.S. dollar will decrease the level of reported U.S. dollar orders and revenues, decrease the dollar gross margin, and decrease reported dollar operating expenses of the international subsidiaries. The strengthening of the U.S. dollar with respect to the currencies in Europe has had a negative impact on the Company's reported results of operation in all years in the three-year period ended December 31, 2001; however, in 1999, the associated negative impact was partially mitigated by weakening of the dollar in the Company's Asian markets. The Company estimates that the strengthening of the U.S. dollar in its international markets adversely impacted its results of operations by approximately $.03, $.08, and $.02 per share (basic and diluted) in 2001, 2000, and 1999, respectively. 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 $3 million for the year ended December 31, 2001. Likewise, a uniform 10% weakening in the value of the dollar would result in increased earnings of approximately $3 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, exchange rate fluctuations may also affect the volume of sales and foreign currency sales prices. The Company's estimation of the effects of changes in foreign currency exchange rates does not consider potential changes in sales levels or local currency prices. The Company's income statement exposure to currency fluctuations has declined successively over the past three years as the result of declining hardware sales in its international regions. See Note 12 of Notes to Consolidated Financial Statements for a summary of the Company's revenues by geographic area. The Company conducts business in all major markets outside the United States, 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; however, the Company's Canadian subsidiary changed its functional currency from the U.S. dollar to its local currency in January 2002. See Note 1 of Notes to Consolidated Financial Statements for a description of the Company's policy for managing the currency risks associated with its international operations. In 2001, 2000, and 1999, the Company incurred net foreign exchange losses from its continuing operations of $1.5 million, $3.9 million, and $1.3 million, respectively. The Company's exchange losses for the past three years have primarily resulted from the strengthening of the U.S. dollar against the Euro, particularly with respect to Euro- denominated intercompany receivables of the U.S. parent company. The 2001 exchange loss also included approximately $715,000 in loss incurred as the result of subsidiary recapitalization. At December 31, 1999, the Company's only outstanding forward exchange contracts related to formalized intercompany loans between the Company's European subsidiaries that were immaterial to the Company's financial position. Effective first quarter 2000, the Company ceased hedging any of its foreign currency risks. At December 31, 2001, the Company had no forward exchange contracts outstanding. The Company estimates that a uniform 10% strengthening or weakening in the value of the dollar relative to the currencies in which such intercompany receivables and loans are denominated at December 31, 2001, would not result in a significant loss or improvement in earnings. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. The Company's intercompany receivables have declined as the result of declining sales volumes, reducing the Company's currency exposure with respect to these items. The Company is exposed to foreign currency risks related to certain financial instruments, primarily foreign currency denominated debt securities held by its European subsidiaries and a long-term mortgage on one of its European facilities. The net effect of a uniform 10% change in exchange rates relative to the currencies in which these financial instruments are denominated would not have a material impact on the Company's results of operations. Euro Conversion. On January 1, 1999, eleven member countries of the European Monetary Union ("EMU") fixed the conversion rates of their national currencies to a single common currency, the "Euro." In September 2000, and with effect from January 1, 2001, Greece became the twelfth member of the EMU to adopt the Euro. Euro currency began to circulate on January 1, 2002, and the individual national currencies of the participating countries were withdrawn by February 28, 2002. All of the Company's financial systems currently accommodate the Euro and, during 2001, 2000, and 1999, the Company conducted business in Euros with its customers and vendors who chose to do so without encountering significant administrative problems. While the Company continues to evaluate the potential impacts of the common currency, at present it has not identified significant risks related to the Euro and does not anticipate that full Euro conversion in 2002 will have a material impact on its results of operations or financial condition. To date, the conversion to one common currency has not impacted the Company's pricing in European markets. See Notes 1 and 5 of Notes to Consolidated Financial Statements for further information related to management of currency risk. FOURTH QUARTER 2001 Revenues in fourth quarter were $133.1 million, down 8% from fourth quarter 2000. The Company earned net income of $11.9 million ($.23 per share diluted) for the quarter, compared to net income of $18 million ($.36 per share diluted) in fourth quarter 2000. The revenue decline from the prior- year period was due primarily to a decline in international maintenance revenue and U.S. and international professional services revenue. Despite the decline in revenues, the Company reported income from operations before reorganization charges of $.03 per share diluted, compared to a loss from operations of $.06 per share diluted for fourth quarter 2000. The impact of the revenue decline was offset by an increase of approximately $4.2 million in gross margin (from 39% of total revenues in 2000 to 46% in 2001) primarily from increased software content in the product mix and a 17% decline in cost of revenues. Operating expenses were basically flat with the fourth quarter 2000 level. Fourth quarter 2001 operating results were increased by gains on sales of assets of $5.9 million ($.11 per share diluted), primarily related to additional purchase price consideration on the sale of the Company's civil, plotting, and raster product lines to BSI, and other non-operating income of $3.9 million for settlement of the Micrografx convertible debenture and $1.7 million for the sale of the Mentor Graphics warrant. Fourth quarter 2000 operating results were reduced by reorganization charges of $5.1 million ($.10 per share diluted) and increased by gains on sales of assets of $30.4 million ($.61 per share diluted), primarily related to the sale of the Company's civil, plotting, and raster product lines to BSI and additional purchase price consideration earned in connection with the third quarter 2000 sale of the Company's graphics accelerator division to 3Dlabs. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," requiring companies to account for all business combinations using the purchase method. This statement became effective for the Company in the third quarter of 2001 and relates to all business combinations initiated after June 30, 2001, or acquisitions dated July 1, 2001, or later. This statement did not have an impact on the Company's consolidated operating results or financial position for 2001 as the Company did not engage in any business combinations or acquisitions after its effective date. In June 2001, FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," requiring companies to test goodwill and intangible assets with indefinite useful lives at least annually for impairment, and to continue amortization of intangible assets with finite useful lives over the useful lives, but without the restraint of an arbitrary ceiling. The statement also requires disclosure of carrying values of goodwill (by aggregate and reportable segment), carrying amounts of intangible assets by major intangible asset class for those subject to amortization and those not subject to amortization, and the estimated intangible asset amortization expense for the next five years. This statement will become effective for the Company in first quarter 2002, and will be applied to all goodwill and intangible assets recognized in the financial statements at that date. Any impairment losses arising due to the initial application of this statement will be reported as resulting from a change in accounting principle. The Company currently reviews all goodwill and intangible assets on a monthly basis and does not expect the adoption of this statement to have a significant impact on the Company's consolidated operating results or financial position. In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This statement provides guidance on the accounting for long-lived assets to be held and used, and those to be disposed of by sale and other than by sale. Goodwill has been removed from the scope of this statement and is now addressed in SFAS 142 (discussed above). This statement will become effective for the Company in the first quarter of 2002. The provisions of this statement are to be applied prospectively. At December 31, 2001, and 2000, the Company had no goodwill recorded. The Company currently reviews long-lived assets on a monthly basis and does not expect the adoption of this statement to have a significant impact on the Company's consolidated operating results or financial position. CRITICAL ACCOUNTING POLICIES The Company's significant accounting policies are disclosed in Note 1 of Notes to Consolidated Financial Statements. The preparation of financial statements in conformity with generally accepted accounting principles requires that management use judgments to make estimates and assumptions that affect the amounts reported in the financial statements. As a result, there is some risk that reported financial results could have been materially different had different methods, assumptions, and estimates been used. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity as used in the preparation of its consolidated financial statements. Revenue Recognition IGS, IMGS, and IPS derive a significant portion of their revenue from contracts accounted for by the percentage-of- completion method with contractual terms generally fixed. The Company regularly reviews its progress on these contracts and reviews the estimated costs of fulfilling its obligations. If the Company does not accurately estimate the resources required or the scope of the work to be performed, or does not manage these contracts properly within the planned periods of time or satisfy its obligations under the contracts, then future revenue and margins may be significantly and negatively affected, or losses on existing contracts may need to be recognized. Any resulting reductions in revenues, margins or contract losses could be material to the Company's results of operations. Capitalized Software The Company capitalizes certain costs incurred after the technological feasibility of new software products has been established and amortizes those costs against the revenues later generated by those products. Though the Company regularly reviews its capitalized development costs to ensure recognition of any decline in value, it is possible that, for any given product, revenues will not materialize in amounts anticipated due to industry conditions that include intense price and performance competition, or that product lives will be reduced due to shorter product cycles. Should these events occur, the carrying amount of capitalized development costs would be reduced, producing adverse effects on the Company's systems margin and results of operations. During 2001 and 2000, the Company assessed projects in process and associated costs capitalized for any net realizable value concerns. Based on this assessment, the Company decided to cease further capitalization and increase product development expense by $8.6 million and $3.9 million in 2001 and 2000, respectively, related to these projects such that current capitalized costs would be at net realizable value. Deferred Taxes The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Investment in Debt and Equity Securities The Company holds minority interests in companies having operations or technology in areas within its strategic focus, some of which are publicly traded and have highly volatile share prices, and some of which are in non-publicly traded companies whose value is difficult to determine. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. Bad Debt Reserves The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory 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 of the Company to accurately forecast its inventory needs related to its warranty and maintenance obligations could adversely affect gross margin and results of operations. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------- December 31, 2001 2000 - ------------------------------------------------------------------- (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 99,773 $119,848 Short-term investments 11,035 --- - ------------------------------------------------------------------- Total cash and short-term investments 110,808 119,848 Accounts receivable, net 158,873 178,862 Inventories, net 24,125 25,290 Other current assets 32,687 53,475 - ------------------------------------------------------------------- Total current assets 326,493 377,475 Investments in affiliates 20,654 14,262 Capitalized software development costs 24,209 23,871 Other assets 34,680 42,971 Property, plant, and equipment, net 51,974 56,329 - ------------------------------------------------------------------- Total Assets $458,010 $514,908 =================================================================== Liabilities and Shareholders' Equity Trade accounts payable $ 22,897 $ 35,224 Accrued compensation 31,693 33,257 Other accrued expenses 43,765 61,591 Billings in excess of sales 37,968 46,603 Income taxes payable 9,913 10,984 Short-term debt and current maturities of long-term debt 2,619 5,765 - ------------------------------------------------------------------- Total current liabilities 148,855 193,424 - ------------------------------------------------------------------- Deferred income taxes 2,573 6,604 Long-term debt 1,114 25,265 Other noncurrent liabilities 2,729 4,612 - ------------------------------------------------------------------- Total noncurrent liabilities 6,416 36,481 - ------------------------------------------------------------------- Minority interest in consolidated subsidiaries 7,526 7,003 - ------------------------------------------------------------------- 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 210,748 214,079 Retained earnings 208,268 188,326 Accumulated other comprehensive loss (20,603) (15,931) - ------------------------------------------------------------------- 404,149 392,210 Less - cost of 7,539,419 treasury shares at December 31, 2001, and 7,836,452 treasury shares at December 31, 2000 (108,936) (114,210) - ------------------------------------------------------------------- Total shareholders' equity 295,213 278,000 - ------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $458,010 $514,908 =================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - ------------------------------------------------------------------------------- (In thousands except per share amounts) Revenues Systems $301,483 $426,791 $623,451 Maintenance 125,305 160,456 186,766 Services 105,273 103,207 104,663 - ------------------------------------------------------------------------------- Total revenues 532,061 690,454 914,880 - ------------------------------------------------------------------------------- Cost of revenues Systems 153,790 266,147 436,254 Maintenance 66,367 87,793 100,823 Services 78,578 84,237 87,868 - ------------------------------------------------------------------------------- Total cost of revenues 298,735 438,177 624,945 - ------------------------------------------------------------------------------- Gross profit 233,326 252,277 289,935 Product development 53,892 56,319 62,638 Sales and marketing 96,258 118,402 169,805 General and administrative 75,473 92,699 109,336 Reorganization charges (credit) (384) 8,498 15,596 - ------------------------------------------------------------------------------- Income (loss) from operations 8,087 (23,641) (67,440) Gains on sales of assets 11,243 49,546 13,223 Arbitration settlement --- --- (8,562) Interest expense (1,793) (4,031) (5,663) Other income (expense), net 11,381 (2,648) (4,016) - ------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and minority interest 28,918 19,226 (72,458) Income tax expense (8,500) (6,600) (5,500) - ------------------------------------------------------------------------------- Income (loss) from continuing operations before minority interest 20,418 12,626 (77,958) Minority interest in earnings of consolidated subsidiaries (476) (2,531) (603) - ------------------------------------------------------------------------------- Income (loss) from continuing operations 19,942 10,095 (78,561) Gain on sale of discontinued operation, net of income taxes --- --- 14,384 Loss from discontinued operation, net of income taxes --- --- (7,400) - ------------------------------------------------------------------------------- Net income (loss) $ 19,942 $ 10,095 $(71,577) =============================================================================== Income (loss) per share - basic Continuing operations $ .40 $ .20 $ (1.60) Discontinued operation --- --- .14 - ------------------------------------------------------------------------------- Net income (loss) per share $ .40 $ .20 $ (1.46) - ------------------------------------------------------------------------------- Income (loss) per share - diluted Continuing operations $ .39 $ .20 $ (1.60) Discontinued operation --- --- .14 - ------------------------------------------------------------------------------- Net income (loss) per share $ .39 $ .20 $ (1.46) =============================================================================== Weighted average shares outstanding - basic 49,578 49,368 48,906 - diluted 51,620 49,855 48,906 =============================================================================== 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, 2001 2000 1999 - ------------------------------------------------------------------------------- (In thousands) Cash Provided By (Used For): Operating Activities Net income (loss) $ 19,942 $ 10,095 $(71,577) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation 11,917 14,980 21,228 Amortization 14,307 18,906 26,878 Non-cash portion of arbitration settlement --- --- 3,530 Non-cash portion of reorganization charges --- 5,696 9,614 Write-down of convertible debenture --- 5,000 --- Gains on sales of assets (11,243) (49,546) (27,607) Net changes in current assets and liabilities (10,454) 36,115 28,253 - ------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 24,469 41,246 (9,681) - ------------------------------------------------------------------------------- Investing Activities Net proceeds from sales of assets 12,734 38,362 54,056 Contributions from minority interest partner --- --- 11,732 Purchases of property, plant, and equipment (9,675) (7,244) (10,221) Purchases of short-term investments (11,035) --- --- Capitalized software development costs (4,827) (10,829) (20,656) Capitalized internal use software costs (1,973) (1,057) (5,875) Business acquisition, net of cash acquired (2,904) --- --- Other 148 (3,349) (3,579) - ------------------------------------------------------------------------------- Net cash provided by (used for) investing activities (17,532) 15,883 25,457 - ------------------------------------------------------------------------------- Financing Activities Gross borrowings 1,653 --- --- Debt repayment (28,518) (23,368) (23,605) Treasury stock repurchase (1,875) --- --- Proceeds of employee stock purchases and exercises of stock options 3,818 1,630 2,612 - ------------------------------------------------------------------------------- Net cash used for financing activities (24,922) (21,738) (20,993) - ------------------------------------------------------------------------------- Effect of exchange rate changes on cash (2,090) (4,056) (1,743) - ------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (20,075) 31,335 (6,960) Cash and cash equivalents at beginning of year 119,848 88,513 95,473 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 99,773 $119,848 $ 88,513 =============================================================================== 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, 1999 $5,736 $222,705 $249,808 $ 4,161 $(127,078) $355,332 Comprehensive loss: Net loss --- --- (71,577) --- --- (71,577) Other comprehensive loss: Foreign currency translation adjustments --- --- --- (9,340) --- --- Less: Net translation gain realized upon sales of subsidiaries --- --- --- (327) --- --- ----- Net foreign currency translation adjustments --- --- --- (9,667) --- (9,667) ------- ======= Comprehensive loss --- --- --- --- --- (81,244) ======== Issuance of 557,713 shares under employee stock purchase plan --- (5,539) --- --- 8,130 2,591 Issuance of 16,750 shares upon exercise of stock options --- (223) --- --- 244 21 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 5,736 216,943 178,231 (5,506) (118,704) 276,700 Comprehensive income (loss): Net income --- --- 10,095 --- --- 10,095 Other comprehensive loss: Foreign currency translation adjustments --- --- --- (2,738) --- --- Less: Net translation loss realized upon liquidation of subsidiary --- --- --- 252 --- --- ----- Net foreign currency translation adjustments --- --- --- (2,486) --- (2,486) Net unrealized holding losses on investments --- --- --- (7,939) --- (7,939) ------- Comprehensive loss --- --- --- --- --- (330) ===== Issuance of 305,447 shares under employee stock purchase plan --- (2,839) --- --- 4,452 1,613 Issuance of 3,250 shares upon exercise of stock options --- (25) --- --- 42 17 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 5,736 214,079 188,326 (15,931) (114,210) 278,000 Comprehensive income (loss): Net income --- --- 19,942 --- --- 19,942 Other comprehensive loss: Foreign currency translation adjustments --- --- --- (1,385) --- (1,385) Net unrealized holding losses on investments --- --- --- (3,287) --- (3,287) ------- Comprehensive income --- --- --- --- --- 15,270 ====== Repurchase of 195,000 shares of treasury stock --- --- --- --- (1,875) (1,875) Issuance of 147,478 shares under employee stock purchase plan --- (746) --- --- 2,143 1,397 Issuance of 344,555 shares upon exercise of stock options --- (2,585) --- --- 5,006 2,421 - ---------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $5,736 $210,748 $208,268 $(20,603) $(108,936) $295,213 ======================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of Intergraph Corporation and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. As discussed in Note 4, the Company sold its VeriBest, Inc. business segment on October 31, 1999, and accordingly its operating results have been removed from continuing operations and reported as discontinued operations for all periods presented through the date of sale. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from the resolution currently anticipated by management and on which the financial statements are based. The Company's continuing operations are divided into five separate business segments for operational and management purposes: Intergraph Government Solutions ("IGS"), Intergraph Mapping and GIS Solutions ("IMGS"), Intergraph Process, Power & Offshore ("PP&O"), Intergraph Public Safety, Inc. ("IPS"), and Z/I Imaging Corporation ("Z/I Imaging"). See Note 12 for a description of these business segments. The Company's products are sold worldwide, with United States and European revenues representing approximately 81% of total revenues for 2001. Cash Equivalents and Short-Term Investments: 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 generally limits the amount of credit exposure from any single issuer of securities. Cash equivalents and short-term investments are stated at fair market value based on quoted market prices. For purposes of financial statement presentation, investments with original maturities of three months or less are considered to be cash equivalents, and investments with original maturities of greater than three months but less than a year are considered to be short-term investments. The Company's investments in debt securities are valued at fair market value with any unrealized holding gains and losses reported as a component of "Accumulated other comprehensive loss" in the consolidated balance sheets. At December 31, 2001, and 2000, the Company held various debt securities maturing within three months or less with fair market values of approximately $37,300,000 and $63,000,000, respectively. Gross realized gains and losses on debt securities sold during the three-year period ended December 31, 2001, were not significant, and there were no unrealized holding gains or losses on debt securities at December 31, 2001, or 2000. The Company's December 31, 2001, consolidated cash balance includes approximately $10,638,000 held by Z/I Imaging, a 60%-owned consolidated subsidiary. Inventories: Inventories are stated at the lower of average cost or market and are summarized as follows: - ------------------------------------------------------------ December 31, 2001 2000 - ------------------------------------------------------------ (In thousands) Raw materials $ 7,076 $ 6,124 Work-in-process 1,952 3,850 Finished goods 9,245 6,077 Service spares 5,852 9,239 - ------------------------------------------------------------ Totals $24,125 $25,290 ============================================================ Inventories on hand at December 31, 2001, and 2000, relate primarily to continuing specialized hardware assembly activity in the Company's IGS and Z/I Imaging business segments, and to the Company's continuing warranty and maintenance obligations on computer hardware previously sold. The Company's December 31, 2001, and 2000, raw materials and work-in-process balances have been reclassified to reflect certain parts as raw materials rather than work-in-process. Amounts currently reflected as work-in-process relate primarily to sales contracts accounted for under the percentage-of-completion method. 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 of the Company to accurately forecast its inventory needs related to its warranty and maintenance obligations could adversely affect gross margin and results of operations. Other Current Assets: Other current assets reflected in the Company's consolidated balance sheets consist primarily of prepaid expenses, non-trade receivables, the current portion of notes receivable from sales of various non-core businesses and assets, refundable income taxes, and the Company's net current deferred tax asset. See Notes 9, 13, and 15 for a discussion of significant transactions affecting these components in 2001. 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. On April 1, 1999, as the result of an arbitration settlement with Bentley Systems, Inc. ("BSI"), the Company's equity ownership in BSI was reduced from approximately 50% to approximately 31%. The Company does not account for its investment in BSI under the equity method due to a lack of significant influence. See Note 13 and "Arbitration Settlement" included in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for further discussion of the Company's arbitration proceeding and business relationship with BSI. The book value of the Company's investment in BSI was approximately $9,190,000 at December 31, 2001, and 2000. The Company is unable to determine the fair value of this investment. On July 21, 2000, as initial proceeds from the sale of its Intense3D graphics accelerator division, the Company received approximately 3,600,000 of the common shares of 3Dlabs, constituting an equity ownership interest of approximately 19.7%. Approximately fifteen percent of these shares have been placed in escrow to cover any potential claims against the Company by 3Dlabs. On March 29, 2001, the Company received approximately 7,591,000 shares valued at $10 million, increasing its ownership to approximately 37%. These shares have a three-year irrevocable proxy that prevents the Company from having any voting rights; therefore, this investment is not accounted for using the equity method. The Company maintains its investment in 3Dlabs at market value, with any unrealized holding gains or losses recorded as a component of "Accumulated other comprehensive loss" in the consolidated balance sheets. The market value of the Company's investment in 3Dlabs, excluding the shares held in escrow, was approximately $10,641,000 at December 31, 2001. The Company has recorded an unrealized holding loss of approximately $10,607,000 for the decline in market value of this investment from the date of acquisition through December 31, 2001. See Notes 13 and 15 for further information regarding the 3Dlabs transaction. Capitalized Software Development Costs: Product development costs are charged to expense as incurred; however, the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility of the product has been established. Such capitalized costs are amortized on a straight-line basis over a period of two to three years. Amortization of these capitalized costs, included in "Cost of revenues - Systems" in the consolidated statements of operations, amounted to $4,200,000 in 2001, $9,200,000 in 2000, and $14,600,000 in 1999. Amortization included in discontinued operations amounted to $2,400,000 in 1999. 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. The Company increased product development expenses by $8,646,000 and $3,911,000 in 2001 and 2000, respectively, for costs normally eligible for capitalization due to net realizable value concerns. Accumulated amortization (net of fully amortized projects) in the consolidated balance sheets at December 31, 2001, and 2000, was $8,800,000 and $10,300,000, respectively. In October 2000, the Company entered into a research services agreement to develop an advanced, next-generation shipbuilding software product for the design of commercial and military vessels. The agreement allows for two years of cost funding by the customer to bring the software to commercial release. The terms include a 15% escrow of consulting work until release of product to the customer, sliding scale royalty payable to the customer on future sales of software by the Company, and customer commitment to purchase and pay maintenance on a minimum number of software seats. The Company will retain the intellectual property rights of the software. Services revenues and costs related to the agreement totaled approximately $2,848,000 and $1,906,000, respectively, for 2001, and $2,002,000 and $1,600,000, respectively, for 2000. Research and development expenses incurred prior to the agreement totaling approximately $9,726,000 were capitalized and are included as a component of "Capitalized software development costs" in the consolidated balance sheets at December 31, 2001, and 2000. Other Assets: Other assets reflected in the Company's consolidated balance sheets consist primarily of purchased software and the noncurrent portion of notes receivable from sales of various non-core businesses and assets (see Note 15). Property, Plant, and Equipment: Property, plant, and equipment, summarized below, are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives described below. - ----------------------------------------------------------- December 31, 2001 2000 - ----------------------------------------------------------- (In thousands) Land and improvements (15-30 years) $7,565 $7,464 Buildings and improvements (30 years) 76,010 77,548 Equipment, furniture, and fixtures (3-8 years) 98,870 136,754 - ----------------------------------------------------------- 182,445 221,766 Allowances for depreciation (130,471) (165,437) - ----------------------------------------------------------- Totals $51,974 $56,329 =========================================================== Other Noncurrent Liabilities: Other noncurrent liabilities reflected in the Company's consolidated balance sheets consist primarily of a deferred gain on the sale and leaseback of a European office building. Minority Interest: Effective October 1, 1999, the Company contributed operating and financial assets with a total net book value of approximately $5,000,000 (including cash of $1,800,000) to Z/I Imaging, a newly formed corporation which supplies end-to-end photogrammetry solutions for front-end data collection to mapping related and engineering markets, in exchange for a 60% ownership interest in the new company. Additionally, Carl Zeiss B.V. ("Zeiss") contributed assets and liabilities with a net book value of approximately $4,000,000 (including cash of $11,732,000) to the new company in exchange for a 40% ownership interest. During 2001, Zeiss made an additional contribution of approximately $119,000 in accordance with the formation agreement relating to Z/I GmbH. Z/I Imaging's assets, liabilities, and results of operations are included in the Company's consolidated financial statements. Zeiss' minority interest in the earnings and equity of this subsidiary are reflected as "Minority interest in earnings of consolidated subsidiaries" and "Minority interest in consolidated subsidiaries," respectively, in the Company's consolidated statements of operations and balance sheets for the periods subsequent to formation of Z/I Imaging. See Note 13 for a discussion of transactions between Z/I Imaging and Zeiss during 2001, 2000, and fourth quarter 1999. Treasury Stock: Treasury stock is accounted for by the cost method. Treasury stock activity for the three-year period ended December 31, 2001, (consisting of stock option exercises, purchases of stock by employees under the Company's stock purchase plan, and the purchase of shares for the treasury) is presented in the consolidated statements of shareholders' equity. On October 30, 2000, the Company's Board of Directors (the "Board") approved the purchase of up to $30,000,000 of its outstanding common stock in the open market. The Plan may be suspended at any time after its commencement and will terminate on December 31, 2002. The Company has no obligation to purchase any specific number of shares under the Plan. As of December 31, 2001, the Company had purchased approximately $1,875,000 of its outstanding common stock under this authorization, with the last purchase occurring in 2001. Treasury stock purchases are restricted by the Company's term loan and revolving credit agreement (see Note 8). The Company has received written consent from its primary lender for purchases of stock under the October 2000 Board authorization. Revenue Recognition: In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"), providing guidance on the recognition, presentation, and disclosure of revenue in financial statements. SAB 101 outlines basic criteria that must be met prior to the recognition of revenue, including persuasive evidence of a sales arrangement, delivery of products and performance of services, a fixed and determinable sales price, and reasonable assurance of collection. For revenue recognition purposes, the Company considers persuasive evidence of a sales arrangement to be receipt of a signed contract or purchase order. SAB 101 became effective in fourth quarter 2000 for the Company. Upon implementation of SAB 101, the Company changed its method of revenue recognition for certain of its product sales, specifically those for which transfer of title occurs upon delivery to the customer. Historically, the Company has recognized revenues for its systems sales with no significant post-shipment obligations upon shipment to the customer, with any post shipment costs accrued at that time. To comply with the provisions of SAB 101, the Company now recognizes revenues on such sales based upon estimated delivery times, generally less than five days after shipment, for the equipment and/or software shipped. This accounting change did not materially impact the Company's reported revenues and results of operations for the full year 2000. 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 labor cost of performing the contract over its term, or other factors appropriate to the individual contract of sale. The total amount of revenues to be earned under contracts accounted for by the percentage-of-completion method are generally fixed by contractual terms. The Company regularly reviews its progress on these contracts and revises the estimated costs of fulfilling its obligations. Due to uncertainties inherent in the estimation process, it is possible that completion costs will be further revised on some of these contracts, which could delay revenue recognition and decrease the gross margin to be earned. Any losses identified in the review process are recognized in full in the period in which determined. Multiple element software sale arrangements are identified by the Company's contracts personnel and accounted for based upon the relative fair value of each element. Revenue is not recognized on any element of a sale arrangement if undelivered elements are essential to the functionality of delivered elements. 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. Amounts billed to customers for shipping and handling costs are classified as revenues in the consolidated statements of operations with the associated costs included as a component of cost of revenues. 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. Foreign Currency Exchange and Translation: Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar was the functional currency for all other international subsidiaries in 2001; however, the Company's Canadian subsidiary changed its functional currency from the U.S. dollar to its local currency in January 2002. The Company's exit from the hardware business significantly changed the economic environment in which its Canadian subsidiary operates as most of its cost of sales is no longer primarily in U.S. dollars. The Company expects the effect of the change in functional currency on its financial statements to be insignificant. 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 forward exchange contracts, are included in "Other income (expense), net" in the consolidated statements of operations. Net exchange losses from continuing operations totaled $1,500,000 in 2001, $3,900,000 in 2000, and $1,300,000 in 1999. 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 as a component of "Accumulated other comprehensive loss" in the consolidated balance sheets. Derivative Financial Instruments: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as amended), 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 became effective for the Company in 2001. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and on the type of hedging relationship involved. The designations for such derivative instruments, based on the exposure being hedged, are fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Any net results of effective hedging relationships are presented in the income statement line item associated with the hedged item. At December 31, 2001, and 2000, the Company had no freestanding derivatives, and these amounts were not significant at December 31, 1999. See Note 5 for further details of the Company's derivative financial instruments. Stock-Based Compensation Plans: The Company maintains a stock purchase plan and two fixed stock option plans for the benefit of its employees and directors. The Company accounts for these plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to 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 employees and directors at exercise prices which are equal to, less than, or greater than the fair market value of the Company's stock on the date of grant. Compensation expense, equal to the difference in exercise price and fair market value on the date of grant, is recognized over the vesting period for options granted at less than fair market value. In accordance with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has provided pro forma information reflecting results of operations and earnings (loss) per share had compensation expense been recognized forx employee stock purchases and for stock options granted at or above market value on the date of grant (see Note 10). Income Taxes: The provision for income taxes includes federal, international, and state income taxes currently payable or refundable and income taxes deferred because of temporary differences between the financial statement and tax bases of assets and liabilities (see Note 9). Net Income (Loss) Per Share: Basic income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per share is computed using the weighted average number of common and equivalent common shares outstanding. Employee stock options are the Company's only common stock equivalent and are included in the calculation only if dilutive. For the years ended December 31, 2001, and 2000, these dilutive shares were 2,042,000 and 487,000, respectively (see Note 10). Comprehensive Income (Loss): Comprehensive income (loss) includes net income (loss) as well as all other non-owner changes in equity. With respect to the Company, such non- owner equity items include foreign currency translation adjustments and unrealized gains and losses on certain investments in debt and equity securities. The Company's comprehensive income or loss for each year in the three-year period ended December 31, 2001, is displayed in the consolidated statements of shareholders' equity. Accumulated other comprehensive loss at the end of each of these three years consisted of foreign currency translation adjustments, and for December 31, 2001, and 2000, included unrealized holding losses of $3,287,000 and $7,939,000, respectively, on investments primarily related to its common stock holdings of 3Dlabs (see Notes 13 and 15). There was no income tax effect related to the items included in other comprehensive income or loss for any year in the three-year period ended December 31, 2001. See Note 9 for details of the Company's tax position, including its net operating loss carryforwards and 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, 2000, and 1999 to provide comparability with the current year presentation. NOTE 2 - LITIGATION AND OTHER RISKS AND UNCERTAINTIES In addition to the items described in Notes 1, 5, 7, 8, 12, and 15, the Company has certain other risks related to its business and economic environment and continues its ongoing litigation with Intel Corporation, as further described in "Litigation and Other Risks and Uncertainties" included in MD&A. NOTE 3 - REORGANIZATION CHARGES In 2001, the Company reversed severance liabilities of $384,000 for the 2000 reorganization plan. The Company recorded reorganization charges to continuing results of operations totaling $13,239,000 in 2000 (including inventory write-downs reflected in "Cost of revenues - Systems" and "Cost of revenues - Maintenance" of $4,531,000 and $210,000, respectively) and $22,596,000 in 1999 (including a $7,000,000 inventory write-down recorded as a component of "Cost of revenues - Systems"). For a complete description of these charges, see "Reorganization Charges" included in MD&A. NOTE 4 - DISCONTINUED OPERATION On October 31, 1999, the Company sold its VeriBest, Inc. business segment to Mentor Graphics Corporation, a global provider of electronic hardware and software design solutions and consulting services, for approximately $11,000,000, primarily in the form of cash received at closing. The resulting gain on this transaction of $14,384,000 is reflected in "Gain on sale of discontinued operation, net of income taxes" in the consolidated statement of operations for the year ended December 31, 1999, and in "Gains on sales of assets" in the consolidated statement of cash flows for the same period. The Company's consolidated statement of operations reflects VeriBest's business as a discontinued operation for the period in 1999 prior to its sale. The discontinued operation has not been presented separately in the consolidated statement of cash flows. Other than its operating loss for the period presented, the discontinued operation did not have a significant impact on the Company's consolidated cash flow or financial position. Summarized VeriBest financial information for 1999 prior to its sale is presented below. For this presentation, VeriBest's operating and net losses have been adjusted to exclude the impact of intercompany revenue and expense items. - ------------------------------------------------------------ Year Ended December 31, 1999 - ------------------------------------------------------------ (In thousands) Revenues from unaffiliated customers $23,704 Operating loss before reorganization charges (6,460) Reorganization charges (871) Net loss (7,400) ============================================================ NOTE 5 - FINANCIAL INSTRUMENTS Information related to the Company's financial instruments, other than cash equivalents and stock investments in less than 50%-owned companies, is summarized below. Short- and Long-Term Debt: The balance sheet carrying amounts of the Company's floating rate debt (approximately $3,668,000 at December 31, 2001), primarily its seven-year term loan and revolving credit agreement, and a European mortgage (see Note 8), approximate fair market values since interest rates on the debt adjust periodically to reflect changes in market rates of interest. The Company is exposed to market risk of future increases in interest rates on these loans. The carrying amounts of fixed rate debt approximate fair market values based on current interest rates for debt of the same remaining maturities and character. Convertible Debenture: As part of the proceeds of the April 1999 sale of its InterCAP subsidiary to Micrografx, Inc. (see Note 15), the Company received a $5,797,000 convertible subordinated debenture due on March 31, 2002. In the fourth quarter of 2000, the Company recorded a $5,000,000 write- down of the value of this debenture due to financial and operational difficulties being experienced by Micrografx. The Company wrote off the remaining $797,000 of the debenture in the first quarter of 2001, to reflect the continuing financial and operational difficulties being experienced by Micrografx. The 2001 and 2000 write-offs are included in "Other income (expense), net" in the 2001 and 2000 consolidated statements of operations, respectively. On October 31, 2001, Corel Corporation ("Corel"), an Ottawa, Canada-based software company, purchased Micrografx. In order to facilitate this purchase, the Company agreed to accept $3,797,000, plus accrued interest of $485,000, for complete settlement of its convertible subordinated debenture. The $3,797,000, plus accrued interest, is recorded as a component of "Other income (expense), net" in the 2001 consolidated statement of operations. Stock Warrant: As part of the proceeds of the October 1999 sale of its VeriBest business segment (see Note 4), the Company received a warrant to purchase 500,000 shares of the common stock of Mentor Graphics at a price of $15 per share. The Company sold the warrant to Mentor Graphics for $2,000,000 in October 2001. A gain of $1,700,000 was recognized on the sale and is recorded as a component of "Other income (expense), net" in the 2001 consolidated statement of operations. At December 31, 2000, the Company's $300,000 estimated value of the warrant was included in "Investments in affiliates" in the consolidated balance sheet. This value was determined using the Black- Scholes option pricing model as of the date of sale of VeriBest. Forward Exchange Contracts: At December 31, 2001, and 2000, the Company had no forward exchange contracts outstanding. The Company currently is not hedging any of its foreign currency risks. Interest Rate Swap Agreement: In 1996, the Company entered into an interest rate swap agreement in the principal amount of its Australian term loan agreement. In June 2000, the Company repaid substantially the entire amount of its Australian term loan and terminated the related interest rate swap agreement. The agreement was for a period of approximately six years, and its expiration date coincided with that of the term loan. Under the agreement, the Company paid a 9.18% fixed rate of interest and received payment based on a variable rate of interest. The weighted average receive rate of the interest rate swap agreement at December 31, 1999, was 5.84% and the fair market value of the agreement on that date was approximately $300,000. This value was determined by obtaining a bank quote, and represented the amount the Company would have paid if it had transferred its obligation under the instrument to a third party on that date. The actual cost to terminate the swap in June 2000 was approximately $160,000. Cash requirements of the agreement were limited to the differential between the fixed rate of interest paid and the variable rate received. NOTE 6 - SUPPLEMENTARY CASH FLOW INFORMATION Changes in current assets and liabilities, net of the effects of business acquisitions, divestitures, and reorganization charges, in reconciling net income (loss) to net cash provided by (used for) operations are as follows: - --------------------------------------------------------------- Cash Provided By (Used For) Operations Year Ended December 31, 2001 2000 1999 - --------------------------------------------------------------- (In thousands) (Increase) decrease in: Accounts receivable $ 16,757 $67,134 $47,418 Inventories 352 9,837 3,994 Other current assets 8,287 (2,239) 7,189 Increase (decrease) in: Trade accounts payable (11,690) (14,470) (17,194) Accrued compensation and other accrued expenses (18,940) (10,770) (11,433) Income taxes payable 2,425 3,015 1,876 Billings in excess of sales (7,645) (16,392) (3,597) - --------------------------------------------------------------- Net changes in current assets and liabilities $(10,454) $36,115 $28,253 =============================================================== Cash payments for income taxes totaled approximately $8,300,000, $8,800,000, and $9,300,000 in 2001, 2000, and 1999, respectively. Cash payments for interest in those years totaled approximately $2,000,000, $4,100,000, and $5,700,000, respectively. Significant non-cash investing and financing transactions in 2001 included the receipt of common stock with a value of approximately $10,000,000 as additional consideration (and in satisfaction of the receivable included in the December 31, 2000, consolidated balance sheet) for the third quarter 2000 sale of the Company's Intense3D graphics accelerator division, offset by a $2,695,000 unfavorable mark-to-market adjustment. The mark-to-market adjustment is included in "Accumulated other comprehensive loss" in the December 31, 2001, consolidated balance sheet. Also included in 2001 is a $10,100,000 increase to a note receivable as additional consideration for the fourth quarter 2000 sale of its civil, plotting, and raster product lines. Significant non-cash investing and financing transactions in 2000 included the termination of a long-term lease on one of the Company's facilities. The Company accounted for this lease as a financing lease and, upon termination, long-term debt of $8,300,000 and property, plant, and equipment of $6,500,000 were removed from the Company's books. Also during 2000, the Company's Intense3D graphics accelerator division was sold for initial consideration of $11,248,000 paid in common stock of the acquirer and a receivable of $8,550,000 (included in "Other current assets" in the December 31, 2000, consolidated balance sheet) for additional consideration earned through the end of 2000. During the second half of 2000, a $7,911,000 unfavorable mark-to-market adjustment was recorded on the stock received in this transaction and is included in "Accumulated other comprehensive loss" in the December 31, 2000, consolidated balance sheet. Other significant non-cash investing and financing transactions in 2000 included the sales of product lines and a subsidiary in part for long-term notes receivable totaling approximately $13,700,000. Investing and financing transactions in 1999 that did not require cash included the acquisition of a business in part for future obligations totaling approximately $3,300,000 and the sale of a subsidiary company in part for a convertible subordinated debenture with an original value of $5,797,000. See Notes 13 and 15 for further details regarding the Company's acquisitions and divestitures during the three- year period ended December 31, 2001. NOTE 7 - ACCOUNTS RECEIVABLE Concentrations of credit risk with respect to accounts receivable are limited due to the diversity of the Company's customer base. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. During the three years ended December 31, 2001, the Company experienced no significant losses related to trade receivables from individual customers or from groups of customers in any geographic area. Revenues from the U.S. government were approximately $143,000,000, $132,400,000, and $149,300,000 in 2001, 2000, and 1999, respectively, representing approximately 27% of total revenue in 2001, and 19% and 16% of total revenue in 2000 and 1999, respectively. Accounts receivable from the U.S. government totaled approximately $27,700,000 and $28,400,000 at December 31, 2001, and 2000, respectively. The Company sells to the U.S. government under long-term contractual arrangements, primarily indefinite delivery, indefinite quantity, and cost-based contracts, and through sales of commercial products not covered by long-term contracts. Approximately 69% of the Company's 2001 federal government revenues was 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 include unbilled amounts of $50,700,000 and $48,300,000 at December 31, 2001, and 2000, respectively. These amounts include amounts due under long- term contracts of approximately $33,400,000 and $24,700,000 at December 31, 2001, and 2000, respectively. Accounts receivable also include retainages of approximately $5,075,000 and $4,861,000 at December 31, 2001, and 2000, respectively. The Company maintained reserves for uncollectible accounts, included in "Accounts receivable" in the consolidated balance sheets at December 31, 2001, and 2000, of $13,000,000 and $18,200,000, respectively. NOTE 8 - DEBT AND LEASES Short- and long-term debt is summarized as follows: - ------------------------------------------------------------ December 31, 2001 2000 - ------------------------------------------------------------ (In thousands) Revolving credit agreement and term loan $ 424 $19,344 Australian term loan 255 278 Long-term mortgages 826 7,800 Other secured debt 65 1,417 Short-term credit facilities 2,163 2,191 - ------------------------------------------------------------ Total debt 3,733 31,030 Less amounts payable within one year 2,619 5,765 - ------------------------------------------------------------ Total long-term debt $1,114 $25,265 ============================================================ In 2001, the Company reduced total debt by $27.3 million. Term debt outstanding at December 31, 2001, matures as follows: approximately $2,619,000 in 2002, $350,000 in 2003, $223,000 in 2004, $130,000 in 2005, $138,000 in 2006, and $273,000 thereafter. Under the Company's January 1997 seven-year fixed term loan and revolving credit agreement (as amended), available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, primarily accounts receivable, with maximum availability of $50 million. At December 31, 2001, the borrowing base, representing the maximum available credit under the line, was $50 million, of which $10.9 million was allocated to support the Company's letters of credit. In 2001, the Company paid $17.8 million of the term loan with existing cash balances and proceeds received from the sales of assets. In September 2000, the Company paid $7.1 million of the term loan with proceeds received from the sale of several idle office buildings. At December 31, 2001, the Company had outstanding borrowings of $424,000 under this agreement, the $100,000 term loan portion of which was classified as long-term debt in the consolidated balance sheet. The term loan is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's U.S. assets and certain international receivables. The rate of interest on all borrowings under the agreement is the greater of 6.5% or the Wells Fargo base rate of interest (4.75% at December 31, 2001) plus .125%. There are provisions in the agreement which lower the interest rate upon achievement of sustained profitability by the Company, but only to the minimum interest rate of 6.5%. The average effective rate of interest for 2001 was 7.6% (10% in 2000). 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 .20% of the average unused portion of the revolving credit line, a letter of credit fee at an annual rate of .75% of the undrawn amount of all outstanding letters of credit, and a monthly agency fee. An amendment was executed on August 1, 2001, that extends the current agreement until January 2004, allows pay-down of the term loan portion of the line, and lowers the facility to $50 million, which will provide for annual savings of approximately $650,000 to the Company. The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures, and restrictive covenants that limit or prevent various business transactions (including purchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes without approval. The Company's net worth covenant was increased to $250 million, effective August 1, 2001. The Company has a long-term mortgage on its office building in the United Kingdom, payable in monthly installments through December 2009. The outstanding principal on the mortgage was $826,000 at December 31, 2001 ($7,800,000 at December 31, 2000). The mortgage bears interest at the United Kingdom base rate plus 1%. Rates paid on this mortgage ranged from 5% to 7% in 2001 (6.5% to 7% in 2000). See Note 5 for discussion of the fair values of the Company's debt. The Company leases various property, plant, and equipment under operating leases as lessee. Rental expense for operating leases was approximately $18,298,000 in 2001, $21,600,000 in 2000, and $25,100,000 in 1999. 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) 2002 $12,197 2003 8,788 2004 5,758 2005 4,215 2006 3,640 Thereafter 23,822 - ------------------------------------------------------------ Total future minimum lease payments $58,420 ============================================================ NOTE 9 - INCOME TAXES The components of income (loss) from continuing operations before income taxes and minority interest are as follows: - ----------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------- (In thousands) U.S. $18,010 $14,138 $(67,733) International 10,908 5,088 (4,725) - ----------------------------------------------------------------- Income (loss) from continuing operations before income taxes and minority interest $28,918 $19,226 $(72,458) ================================================================= Income tax benefit (expense) from continuing operations consists of the following: - ----------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - ----------------------------------------------------------------- (In thousands) Current benefit (expense): Federal $(2,008) $(3,330) $(1,233) State (387) (597) (273) International (6,028) (3,430) (4,128) - ----------------------------------------------------------------- Total current (8,423) (7,357) (5,634) - ----------------------------------------------------------------- Deferred benefit (expense): Federal (103) 389 163 State (9) 38 16 International 35 330 (45) - ----------------------------------------------------------------- Total deferred (77) 757 134 - ----------------------------------------------------------------- Total income tax expense $(8,500) $(6,600) $(5,500) ================================================================= Deferred income taxes included in the Company's consolidated balance sheets 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, 2001 2000 - ----------------------------------------------------------------- (In thousands) Current Deferred Tax Assets (Liabilities): Inventory reserves $ 5,310 $ 17,218 Vacation pay and other employee benefit accruals 5,619 4,996 Other financial statement reserves, primarily allowances for doubtful accounts and warranty 9,801 15,790 Profit on uncompleted sales contracts (1,220) 754 Other current tax assets and liabilities, net 261 507 - ----------------------------------------------------------------- 19,771 39,265 Less asset valuation allowance (16,742) (32,127) - ----------------------------------------------------------------- Total net current asset(1) 3,029 7,138 - ----------------------------------------------------------------- Noncurrent Deferred Tax Assets (Liabilities): Net operating loss and tax credit carryforwards: U.S. federal and state 86,096 58,297 International operations 19,955 27,963 Depreciation (5,595) (5,530) Capitalized software development costs (8,173) (7,628) Other noncurrent tax assets and liabilities, net (191) (2,478) - ---------------------------------------------------------------- 92,092 70,624 Less asset valuation allowance (94,665) (77,228) - ---------------------------------------------------------------- Total net noncurrent liability (2,573) (6,604) - ---------------------------------------------------------------- Net deferred tax asset (liability) $ 456 $ 534 ================================================================ (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 $2,052,000 in 2001 due to decreases in deferred tax assets of $17,739,000 arising from changes in deductible temporary differences, and by increases of $19,791,000 in the benefit from net operating loss carryforwards. If realized, these reserved tax benefits will be applied to reduce income tax expense in the year of realization. Net operating loss carryforwards are available to offset future earnings within the time periods specified by law. At December 31, 2001, the Company had a U.S. federal net operating loss carryforward of approximately $205,596,000 expiring from 2009 through 2021. International net operating loss carryforwards total approximately $60,000,000 and expire as follows: - ------------------------------------------------------------ International Net Operating Loss December 31, 2001 Carryforwards - ------------------------------------------------------------ (In thousands) Expiration: 3 years or less $14,000 4 to 5 years 6,000 6 to 10 years 1,400 Unlimited carryforward 38,600 - ------------------------------------------------------------ Total $60,000 ============================================================ Additionally, the Company has $2,400,000 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 (expense) at the U.S. federal statutory tax rate of 35% to the Company's income tax expense from continuing operations is presented below. There was no material income tax benefit or expense related to the Company's discontinued operation. - --------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - --------------------------------------------------------------- (In thousands) Income tax benefit (expense) at federal statutory rate $(10,121) $(6,729) $25,360 Tax effects of international operations, net (1,844) (5,667) (10,417) Tax effect of U.S. tax loss carried forward 2,619 8,056 (20,607) Prior year taxes --- (311) (762) Other, net 846 (1,949) 926 - ---------------------------------------------------------------- Income tax expense $ (8,500) $(6,600) $(5,500) ================================================================ 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, 2001, the Company had not provided federal income taxes on earnings of individual international subsidiaries of approximately $33,500,000. 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 various international jurisdictions. Determination of the related amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. Withholding taxes of approximately $2,100,000 would be payable if all previously unremitted earnings as of December 31, 2001, were remitted to the U.S. company. NOTE 10 - STOCK-BASED COMPENSATION PLANS The Intergraph Corporation 1997 Stock Option Plan was approved by shareholders in May 1997. Under this plan, the Company reserved a total of 5,000,000 shares of common stock to grant as options to key employees. Options may be granted at exercise prices which are equal to, less than, or greater than the fair market value of the Company's stock on the date of grant. Options are granted for a term of ten years from the date of grant. Options first become exercisable two years from the date of grant and vest at a rate of 25% per year from that point, with full vesting on the fifth anniversary date of the grant. Options to purchase 245,000, 2,770,000, and 216,000 shares of the Company's common stock were granted in 2001, 2000, and 1999, respectively, under this plan. At December 31, 2001, 541,562 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 of the Company's stock on the date of grant. Options are granted for a term of ten years from the date of grant. Options first become exercisable one year from the date of grant and vest at a rate of 33% per year from that point, with full vesting on the third anniversary date of the grant. Upon approval of this plan, members of the Board who were not otherwise employed by the Company were granted options to purchase 3,000 shares of the Company's common stock. Any new non-employee director is similarly granted an option to purchase 3,000 shares of common stock upon his or her first election to the Board. At each annual meeting of shareholders, each non-employee director re-elected to the Board is granted an option to purchase an additional 1,500 shares of the Company's common stock. Options to purchase 9,000, 9,000, and 4,500 shares of the Company's common stock were granted in 2001, 2000, and 1999, respectively, under this plan. At December 31, 2001, 215,500 shares were available for future grants. Under the 2000 Intergraph Corporation Employee Stock Purchase Plan, 3,000,000 shares of common stock were made available for purchase through a series of five consecutive annual offerings each June beginning June 1, 2000. 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 of the Company 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 147,478, 305,447, and 557,713 shares of stock in 2001, 2000, and 1999, respectively, under the 2000 and predecessor plans. At December 31, 2001, 2,686,169 shares were available for future purchases. As allowed under the provisions of SFAS 123, the Company has elected to apply 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 during the three-year period ended December 31, 2001. Had the Company accounted for its stock-based compensation plans based on the fair value of awards at grant date consistent with the methodology of SFAS 123, the Company's reported net income (loss) and income (loss) per share for each of the three years would have been impacted as indicated below. The effects of applying SFAS 123 on a pro forma basis for the three-year period ended December 31, 2001, are not likely to be representative of the effects on reported pro forma net income (loss) for future years as options vest over several years and as it is anticipated that additional grants will be made in future years. - --------------------------------------------------------------- Year Ended December 31, 2001 2000 1999 - --------------------------------------------------------------- (In thousands except per share amounts) Net income (loss) As reported $19,942 $10,095 $(71,577) Pro forma 16,624 7,400 (74,018) Diluted income (loss) per share As reported .39 .20 (1.46) Pro forma .32 .15 (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 1.09 years after vest date in 2001 (1.38 years in 2000 and 1999) and 73% expected volatility for the market price of the Company's stock in 2001 (60% in 2000 and 48% in 1999). 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 rates of return were determined separately for each of the serial vesting periods of the options and ranged from 3.32% to 4.57% in 2001, 6.03% to 6.37% in 2000, and 5.64% to 6.07% in 1999. 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 under the 1997 and Nonemployee Director stock option plans during 2001, 2000, and 1999 were $6.92, $3.14, and $2.49, respectively. During 2001, options were granted under these plans at exercise prices equal to the market value of the Company's stock on the date of grant. Activity in the Company's fixed stock option plans for each year in the three-year period ended December 31, 2001, is summarized as follows: - ----------------------------------------------------------------------------- 2001 2000 1999 -------------- -------------- -------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------- Outstanding at beginning of year 5,453,510 $6.29 3,550,296 $7.46 3,587,173 $ 7.63 Granted: Price equal to market value 254,000 11.81 2,744,000 5.57 220,500 5.17 Price less than market value --- --- 25,000 5.56 --- --- Price greater than market value --- --- 10,000 5.56 --- --- Exercised (344,555) 6.85 (3,250) 5.38 (16,750) 1.27 Forfeited (727,562) 6.85 (872,536) 8.77 (240,627) 8.34 - ---------------------------------------------------------------------------- Outstanding at end of year 4,635,393 $6.44 5,453,510 $6.29 3,550,296 $ 7.46 ============================================================================ Exercisable at end of year 1,112,337 $7.88 1,223,023 $8.62 1,044,111 $10.22 ============================================================================ Further information relating to stock options outstanding at December 31, 2001, is as follows:
- ----------------------------------------------------------------------------------------- Options Outstanding Options Exercisable --------------------------------------- ----------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Prices Number Contractual Life Exercise Price Number Exercise Price - ----------------------------------------------------------------------------------------- $ 5.063 to $ 5.813 3,685,960 7.88 years $5.49 509,210 $ 5.37 5.875 to 9.000 314,183 5.54 years 7.77 208,127 8.06 9.250 to 14.000 635,250 5.87 years 11.31 395,000 11.00 - ----------------------------------------------------------------------------------------- 4,635,393 7.45 years $6.44 1,112,337 $ 7.88 =========================================================================================
Options exercised during 1999 with a weighted average exercise price of $1.27 per share were granted in 1995 as the result of a business acquisition in which the Company assumed the total shares and price obligations under the acquired company's stock option plans. As of December 31, 1999, all of the options assumed as a result of this business acquisition were either exercised or cancelled. NOTE 11 - EMPLOYEE BENEFIT PLANS The Intergraph Corporation Stock Bonus Plan was established in 1975 to provide retirement benefits to substantially all U.S. employees. Effective January 1, 1987, the Company amended the Plan to qualify it as an employee stock ownership plan (ESOP). The Company made contributions to the Plan in amounts determined at the discretion of the Board, 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 1992. On December 5, 2000, the Board resolved to terminate the Stock Bonus Plan effective for the plan year ending December 31, 2000, and to amend the SavingsPlus Plan to permit the Company to make discretionary profit sharing contributions to it. As part of the termination process, the Company applied to the Internal Revenue Service ("IRS") and the SEC in April 2001 for determination of the Stock Bonus Plan's tax qualified status on termination, and for confirmation that the special stock buy-back provisions comply with federal securities laws. In November 2001, the Company was contacted by the IRS and the SEC requesting additional information in order to complete their reviews, and the Company has responded to those requests. Upon receipt of favorable responses from the IRS and SEC, each Plan participant will be entitled to receive a lump sum distribution of his or her account balance (subject to income tax liability and withholdings), or to rollover the account balance into an Individual Retirement Account or other qualified plan. As of December 31, 2001, there were 9,471 participants with account balances in the Stock Bonus Plan, with ownership of approximately 4,593,000 shares of Intergraph common stock. 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. As of January 1, 2002, employees may elect to contribute up to 25% of their compensation to the Plan. In 2001, the limit was 15%. The Company matches 50% of employee contributions up to 6% of each employee's compensation. Cash contributions by the Company to the Plan were $2,584,000, $3,382,000, and $4,143,000 in 2001, 2000, and 1999, respectively. The Company maintains various retirement benefit plans for the 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. The Company's contributions to these plans totaled approximately $2,988,000, $2,400,000, and $2,900,000 in 2001, 2000, and 1999, respectively. NOTE 12 - SEGMENT INFORMATION The year 2000 was a transitional year for the Company, during which it focused its efforts on organizing the Company into five business segments. The Company substantially completed the U.S. portion of this process in third quarter 2000, and the international portion was completed in the first quarter of 2001. The segment presentation below provides business segment information based on the Company's new business structure for 2001 and 2000. Segment information is also presented based on the Company's previous segment structure for 2000 and 1999. The Company is unable to restate current year data into the previous segment structure and 1999 data into the current segment structure to provide comparability, as this would be impracticable, and would involve excessive cost and require extensive estimations. One segment, Z/I Imaging, did not change as a result of the new structure. Information reported for previous years is comparable to the new presentation, though 1999 includes only three months of activity for Z/I Imaging as the subsidiary was formed on October 1, 1999. The Company's reportable segments are strategic business units which are organized by the types of products sold and the specific markets served. The Company evaluates performance of the business segments based on revenue and income (loss) from operations. The accounting policies of the reportable segments are consistent across segments and are the same as those described for the Company as a whole in Note 1. Sales between the business segments, the most significant of which are associated with hardware maintenance services provided by IGS and Corporate to other business 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. Current Segments: The Company's 2001 business segments consist of IGS, IMGS, PP&O, IPS, and Z/I Imaging. The Company's Middle East operations ("Mid World"), portions of which were sold in April 2001 and July 2001 (with the anticipated sale of the remaining portion expected to close during the first quarter of 2002), are also included as a segment on a temporary basis (see Note 15). As noted above, the international portion of the process was completed during first quarter 2001. As a result, the International Distribution operation, presented as a temporary segment in 2000, was absorbed into the other business segments for 2001. Segment data for 2000 was restated to include the International Distribution operation in the appropriate segment. IGS provides specially developed software and hardware, commercial off-the-shelf products, and professional services to federal, state, and local governments worldwide, as well as to commercial customers. Amounts presented for 2001 and 2000 for the IGS business segment include the previously reported federal operations of IGS, as well as domestic operations for the transportation industry, previously included in the Intergraph Software business segment. The amounts for the new IGS exclude the mapping organization, previously included in the IGS business segment, which is now included in IMGS. Additionally, hardware maintenance and network services, previously included in the Intergraph Computer Systems ("ICS") business unit, are consolidated into IGS for 2001 and 2000 presentation. IMGS develops, markets, and supports geospatial solutions for business GIS, land records management, rail transportation, environmental management, utilities and communications companies, and commercial map production. Amounts presented for 2001 and 2000 below include the domestic and international operations for both the federal and commercial mapping organizations. The results for these organizations were included in prior years in the IGS and Intergraph Software business segments, respectively. PP&O supplies software and services to the process, power, and offshore petroleum industries. Amounts presented for PP&O below represent the Company's complete domestic and international operations for this business. These amounts were previously included in the Intergraph Software business segment. IPS develops, markets, and implements systems for the public safety, utilities, and communications markets. IPS includes the domestic and international public safety and utilities and communications operations. The new presentation differs from the previous presentation due to the inclusion of international utilities in the new presentation. These amounts were previously included in the Intergraph Software segment. Z/I Imaging, a 60%-owned subsidiary of the Company formed October 1, 1999, supplies end-to-end photogrammetry solutions for front-end data collection to mapping-related and engineering markets. Amounts presented include all domestic and international operations and are consistent between 2001, 2000, and 1999. ICS included the domestic and international operations of the Company's hardware division prior to its third quarter 2000 closure, although some residual activity occurred in the fourth quarter, primarily for sales of remaining inventories. Information presented for 2000 is not comparable to prior years' information as it excludes the Company's ongoing hardware maintenance and network services operations which are now a part of IGS. 2000 is the last year for presentation of ICS as a business segment. Going forward, the only hardware sold by the Company will be purchased by the business segments from third-party vendors, and such purchases and resales will be included in the results of operations of the applicable business segments. The International Distribution operation included international operations for information technology, mapping and GIS solutions, utilities and communications, transportation, and international corporate expenses. These operations were previously reflected in the Intergraph Software business segment and are now included in the appropriate business segments. Amounts included in the "Corporate" category in 2001 and 2000 include revenues and costs related to international hardware, previously included in the Intergraph Software segment, and Teranetix, previously included in the ICS segment. Operating expenses for both segment presentations consist of general corporate expenses, primarily general and administrative expenses remaining after charges to the business segments based on segment usage of administrative services. The following table sets forth revenues and operating income (loss) before reorganization charges for the Company's 2001 and 2000 reportable segments, together with supplementary information related to depreciation and amortization expense attributable to the business segments. - ------------------------------------------------------------- Year Ended December 31, 2001 2000 - ------------------------------------------------------------- (In thousands) Revenues: IGS: Unaffiliated customers $127,492 $143,587 Intersegment revenues 6,646 15,912 - ------------------------------------------------------------- 134,138 159,499 - ------------------------------------------------------------- IMGS: Unaffiliated customers 128,529 145,209 Intersegment revenues 8,253 15,719 - ------------------------------------------------------------- 136,782 160,928 - ------------------------------------------------------------- PP&O: Unaffiliated customers 110,915 114,663 Intersegment revenues 5,563 9,007 - ------------------------------------------------------------- 116,478 123,670 - ------------------------------------------------------------- IPS: Unaffiliated customers 115,624 127,517 Intersegment revenues 220 423 - ------------------------------------------------------------- 115,844 127,940 - ------------------------------------------------------------- Z/I Imaging: Unaffiliated customers 28,042 28,193 Intersegment revenues 10,594 15,219 - ------------------------------------------------------------- 38,636 43,412 - ------------------------------------------------------------- ICS: Unaffiliated customers --- 89,176 Intersegment revenues --- 27,206 - ------------------------------------------------------------- --- 116,382 - ------------------------------------------------------------- MidWorld: Unaffiliated customers 11,813 21,883 Intersegment revenues --- --- - ------------------------------------------------------------- 11,813 21,883 - ------------------------------------------------------------- Corporate: Unaffiliated customers 9,646 20,226 Intersegment revenues 12,342 26,459 - ------------------------------------------------------------- 21,988 46,685 - ------------------------------------------------------------- 575,679 800,399 - ------------------------------------------------------------- Eliminations (43,618) (109,945) - ------------------------------------------------------------- Total revenues $532,061 $690,454 ============================================================= - ------------------------------------------------------------- Year Ended December 31, 2001 2000 - ------------------------------------------------------------- (In thousands) Operating income (loss) before reorganization charges: IGS $ 10,004 $ 13,824 IMGS 5,090 4,492 PP&O 6,799 9,899 IPS 5,310 1,385 Z/I Imaging 4,492 9,217 ICS (1) --- (17,145) MidWorld (3,318) (1,410) Corporate (20,099) (35,405) Eliminations (575) --- - ------------------------------------------------------------- Total $ 7,703 $(15,143) ============================================================= (1) ICS' operating losses for 2000 include charges for an inventory write-down of $4,700,000, incurred in connection with the reorganization and eventual closure of the business segment (see Note 3). - ------------------------------------------------------------- Year Ended December 31, 2001 2000 - ------------------------------------------------------------- (In thousands) Depreciation and amortization expense: IGS $ 1,323 $ 2,690 IMGS 1,927 5,440 PP&O 8,179 9,607 IPS 5,288 5,661 Z/I Imaging 1,220 567 ICS --- 2,488 MidWorld 102 228 Corporate 8,185 7,205 - ------------------------------------------------------------- Total depreciation and amortization expense from continuing operations $26,224 $33,886 ============================================================= Previous Segments: Prior to third quarter 2000, the Company's business segments consisted of ICS, IPS, the Intergraph Software and IGS businesses (collectively, "Intergraph"), and Z/I Imaging. Effective October 31, 1999, the Company sold its VeriBest business segment, and accordingly its operating results are reflected in "Loss from discontinued operation, net of income taxes" in the Company's consolidated statements of operations for 1999. A complete description of this transaction and its impact on the Company's results of operations and financial position, including summarized financial information for the year ended December 31, 1999, is included in Note 4. ICS supplied high performance Windows NT-based graphics workstations, 3D graphics subsystems, and solutions, including hardware maintenance and network services. Intergraph supplied software and solutions, including hardware purchased from ICS, consulting, and services to the process and building and infrastructure industries, and provided services and specialized engineering and information technology to support federal government programs. Prior to the October 1999 formation of Z/I Imaging (see Note 1), the Intergraph portion of the Z/I Imaging business was included in the Intergraph Software business segment. The Company is unable to quantify the related revenues and operating income for the first nine months of 1999, but believes they were insignificant to the Software segment as a whole. Effective January 1, 1999, the domestic utilities business of Intergraph Software was merged into IPS. Additionally, in 1999, hardware maintenance revenues, previously attributed exclusively to ICS, were allocated to the selling segment entities with ICS receiving transfer price revenue for its indirect sales. The following table sets forth revenues and operating income (loss) before reorganization charges for the Company's previous business segments for the two-year period ended December 31, 2000, together with supplementary information related to depreciation and amortization expense attributable to the business segments. Differences between the information provided in this table and that provided for the current business segments are the result of the reorganization described under "Current Segments" above, and the Company considers the new segment information to be determinative. - ------------------------------------------------------------ Year Ended December 31, 2000 1999 - ------------------------------------------------------------ (In thousands) Revenues: ICS: Unaffiliated customers $109,099 $214,476 Intersegment revenues 45,890 117,631 - ----------------------------------------------------------- 154,989 332,107 - ----------------------------------------------------------- IPS: Unaffiliated customers 80,457 84,932 Intersegment revenues 10,151 11,333 - ----------------------------------------------------------- 90,608 96,265 - ----------------------------------------------------------- Intergraph Software: Unaffiliated customers 333,162 455,551 Intersegment revenues 5,414 13,860 - ----------------------------------------------------------- 338,576 469,411 - ----------------------------------------------------------- IGS: Unaffiliated customers 139,549 152,980 Intersegment revenues 4,457 6,817 - ----------------------------------------------------------- 144,006 159,797 - ----------------------------------------------------------- Z/I Imaging: Unaffiliated customers 28,187 6,941 Intersegment revenues 15,225 2,809 - ----------------------------------------------------------- 43,412 9,750 - ----------------------------------------------------------- 771,591 1,067,330 - ----------------------------------------------------------- Eliminations (81,137) (152,450) - ----------------------------------------------------------- Total revenues $690,454 $914,880 =========================================================== - ----------------------------------------------------------- Year Ended December 31, 2000 1999 - ----------------------------------------------------------- (In thousands) Operating income (loss) before reorganization charges: ICS (2) $(18,895) $(44,808) IPS 5,309 10,759 Intergraph Software 8,594 7,285 IGS 3,643 12,371 Z/I Imaging 9,217 1,872 Corporate (23,011) (39,323) - ----------------------------------------------------------- Total $(15,143) $(51,844) =========================================================== (2) ICS' operating losses for 2000 and 1999 include charges for inventory write-downs of $4,700,000 and $7,000,000, respectively, incurred in connection with the reorganization and eventual closure of the business segment. (See Note 3.) - ----------------------------------------------------------- Year Ended December 31, 2000 1999 - ----------------------------------------------------------- (In thousands) Depreciation and amortization expense: ICS $ 2,840 $ 5,239 IPS 5,661 5,915 Intergraph Software 20,571 28,818 IGS 2,814 2,886 Z/I Imaging 567 55 Corporate 1,433 2,180 - ----------------------------------------------------------- Total depreciation and amortization expense from continuing operations $33,886 $45,093 =========================================================== Significant profit and loss items that were not allocated to the segments and not included in either the "Current Segments" or "Previous Segments" analyses above include reorganization charges (credits) of ($384,000), $8,498,000, and $15,596,000 in 2001, 2000, and 1999, respectively, gains on sales of assets of $11,243,000, $49,546,000, and $13,223,000 in the three respective years, and an $8,562,000 charge for an arbitration settlement with BSI in 1999. The Company does not evaluate performance or allocate resources based on assets and, as such, it does not prepare balance sheets for its business segments, other than those of its wholly owned subsidiaries. Revenues from the U.S. government were $143,000,000 in 2001, $132,400,000 in 2000, and $149,300,000 in 1999, representing approximately 27%, 19%, and 16% of total revenue in 2001, 2000, and 1999, respectively. The majority of these revenues are attributed to the IGS business segment. The U.S. government was the only customer accounting for more than 10% of consolidated revenue in each year of the three- year period ended December 31, 2001. International markets, particularly Europe and Asia, continue in importance to each of the Company's business segments, except for IGS. 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 third-party 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, capitalized software development costs, investments in affiliates and other non-current assets. Assets have been allocated to geographic areas based on their physical location.
- -------------------------------------------------------------------------------- Revenues Long-lived Assets 2001 2000 1999 2001 2000 1999 - -------------------------------------------------------------------------------- (In thousands) United States $281,734 $333,980 $438,649 $115,920 $113,271 $130,762 Europe 146,406 188,212 285,548 10,291 13,462 24,194 Asia Pacific 49,243 85,662 98,773 3,067 7,826 14,167 Other International 54,678 82,600 91,910 2,239 2,874 3,878 - -------------------------------------------------------------------------------- Total $532,061 $690,454 $914,880 $131,517 $137,433 $173,001 ================================================================================
NOTE 13 - RELATED PARTY TRANSACTIONS BSI: The Company maintains an equity ownership position in BSI, the developer and owner of MicroStation, a software product for which the Company serves as a nonexclusive distributor. Under the Company's distributor agreement with BSI, the Company purchases MicroStation products for resale to third parties. The Company's purchases from BSI were approximately $1,350,000 in 2001, $3,830,000 in 2000, and $2,980,000 in 1999. The Company's sales to BSI were approximately $1,130,000 in 2001, with a receivables balance at December 31, 2001, of $407,000. There were no sales to BSI for 2000 and 1999. At December 31, 2001, and 2000, the Company had amounts payable to BSI of approximately $560,000 and $2,310,000, respectively. On December 27, 2000, the Company sold its MicroStation- based civil engineering, plotting, and raster conversion software product lines to BSI for initial proceeds of approximately $24,600,000, consisting of $13,600,000 in cash and an $11,000,000 note due in quarterly installments through December 2003. In the first quarter of 2001, the Company reported an additional gain from the BSI transaction of approximately $4,200,000 as the initial consideration for the sale, and the Company's note receivable from BSI was increased based upon a revised calculation of transferred maintenance revenues for the products sold to BSI, as provided for in the original sale agreement. The agreement also provided for additional purchase price consideration based on renewals through December 1, 2001, of maintenance contracts related to the product lines. The Company recorded this additional purchase price consideration of $5,900,000 in December 2001. This additional gain, revision, purchase price consideration, and the proceeds received at closing of the transaction resulted in gains of approximately $10,100,000 and $23,000,000, respectively, in the 2001 and 2000 consolidated statements of operations and cash flows. This resulted in an increase in the note of $10,100,000 in the year 2001. Under the agreement, the Company may continue to sell and support MicroStation and certain other BSI products, including the product lines sold to BSI, through reseller agreements with BSI. The operating results of all of the Company's business segments, except Z/I Imaging, are affected by this agreement. The gross margin of the affected business segments has been negatively impacted by the loss of maintenance revenue for the product lines sold and by increased software license costs for purchases from BSI. The resulting negative impact should be partially offset by a reduction in operating expenses of the IMGS business segment as the segment will no longer be producing or marketing the products sold to BSI. In first quarter 1999, the Company entered into an arbitration settlement agreement with BSI under which the Company made payment of $12,000,000 and transferred to BSI ownership of 3,000,000 of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3,500,000 on the Company's books. As a result of the settlement, the Company's equity ownership in BSI was reduced from approximately 50% to approximately 31%. Additionally, the Company had a $1,200,000 net receivable from BSI relating to business conducted prior to January 1, 1999, which was written off in connection with the settlement. The Company recorded a nonoperating charge to earnings of $8,562,000 in connection with this settlement, representing the portion of settlement costs not previously accrued. This charge is included in "Arbitration settlement" in the consolidated statement of operations for the year ended December 31, 1999. See "Arbitration Settlement" included in MD&A for further discussion of the Company's arbitration proceeding and business relationship with BSI. Zeiss: Zeiss, a manufacturer of aerial cameras and photogrammetric scanning systems, has a 40% ownership interest in Z/I Imaging, a 60%-owned and consolidated subsidiary of the Company formed October 1, 1999. See "Minority Interest" in Note 1 for a discussion of the formation of Z/I Imaging. Z/I Imaging and Zeiss are party to various license, supply, and reseller agreements under which the two companies sell products and services to each other, and Zeiss subsidiaries in Europe provide services to Z/I Imaging subsidiaries in that region through various administrative, marketing, and development services agreements. Z/I Imaging's purchases from Zeiss totaled $7,228,000 in 2001, $12,151,000 in 2000, and $1,770,000 during the three-month period ended December 31, 1999. Related payables to Zeiss were $3,300,000, $2,498,000, and $3,003,000 at December 31, 2001, 2000, and 1999, respectively. Z/I Imaging's other transactions with Zeiss during these periods were insignificant to the Company's consolidated results and financial position. 3Dlabs: As initial proceeds from the July 2000 sale of its Intense3D graphics accelerator division, the Company received approximately 3,000,000 (excluding shares in escrow) of the common shares of 3Dlabs. In March 2001, the Company received approximately 7,591,000 shares valued at $10,000,000. The Company now has an equity ownership interest of approximately 37% in 3Dlabs (see Notes 1 and 15). Under its agreement with 3Dlabs, the Company served as intermediary between 3Dlabs and SCI (the Company's contract manufacturer) for manufacturing performed by SCI for 3Dlabs. In 2001, this obligation to serve as intermediary expired. The Company earned no margin on the inventory purchased from SCI and sold to 3Dlabs, and recorded no associated revenues or cost of revenues in its results of operations. Gross billings to 3Dlabs during 2001 and the second half of 2000 totaled $17,833,000 and $14,114,000, respectively. At December 31, 2001, and 2000, the Company's receivables from 3Dlabs for inventory purchased on its behalf totaled $1,543,000 and $6,271,000, respectively. This non-trade receivable is included in "Other current assets" in the Company's December 31, 2001, and 2000, consolidated balance sheets. NOTE 14 - SHAREHOLDER RIGHTS PLAN On March 4, 2002, the Board approved an amendment to the Shareholder Rights Plan that was adopted on August 25, 1993. As part of this plan, the Board 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 $65, 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 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 under certain circumstances. The Rights expire on March 5, 2012. NOTE 15 - ACQUISITIONS AND DIVESTITURES Marian: In January 2001, the Company acquired the MARIAN materials management business unit from debis Systemhaus Industry GmbH of Germany for a purchase price consisting of 2,000,000 Euros paid at closing and additional payments due March 1, 2002, and 2003 to be calculated as 15% of the annual revenues earned by the Company from the sale of MARIAN products in 2001 and 2002. The Company's payment at closing approximated $1,820,000 and is included in "Business acquisitions" in the Company's consolidated statement of cash flows for the year ended December 31, 2001. The Company accounted for the acquisition as a purchase of the intangible assets (amortized over a useful life of 2 years) and software rights (of which the intangible assets are amortized over a useful life of 4 years and the maintenance contract is amortized over a useful life of 3 years). The unamortized balance, approximately $1,700,000 at December 31, 2001, is included in "Other assets" in the Company's consolidated balance sheet. The accounts and results of operations of MARIAN have been combined with those of PP&O since the January 1, 2001, effective date of the acquisition using the purchase method of accounting. This acquisition did not result in changes to the Company's reporting segments, and has not had a material effect on the Company's results of operations, nor does the Company expect SFAS 142 to have a material effect on the accounting for this acquisition (see "Recently Issued Accounting Pronouncements" in MD&A). Mid World: In the first quarter of 2001, the Company announced its intention to sell its Mid World operations and convert them into distributorships. During the first quarter of 2001, in connection with its ongoing efforts to sell its Mid World operations, the Company performed a detailed review of all outstanding contracts, commitments, and receivables in the region. A memorandum of understanding was reached on the anticipated completion of the largest contract in the region, resulting in charges to Mid World operations totaling $1,629,000 in the first quarter, including a $923,000 increase to cost of revenues for projected cost overruns and a $706,000 charge to general and administrative expense for the settlement of outstanding receivables for the project. In April 2001, the Company closed the sales of it operations in Turkey and Kuwait. Effective July 2001, the Company also closed the sale of its Saudi Arabian operation and recorded a $680,000 gain. The company also expects to complete the sale of Intergraph Middle East, Ltd. ("IMEL"), based in Abu Dubai, United Arab Emirates, by the end of first quarter 2002, and booked an impairment reserve of $150,000 in third quarter of 2001 in anticipation of an expected loss on the IMEL sale. The gain on Saudi Arabia, net of the IMEL impairment reserve, is included in "Gains on sales of assets" in the 2001 consolidated statements of operations and cash flows. Upon completion of the IMEL sale, the Company will no longer have any subsidiaries in the region and will do business solely through distributors. The Company will retain responsibility for some of the Mid World contracts in effect at the date of the sale. None of the Mid World operations were material to the Company, and the Company believes the sale of these operations will not have a material impact on the Company's consolidated operating results or cash flow. Mid World's consolidated revenues and after-tax loss for 2001 totaled approximately $11,813,000 and $3,257,000, respectively. Consolidated revenues and after-tax losses for 2000 were $21,883,000 and $1,490,000, respectively, and for 1999 were $25,979,000 and $2,435,000, respectively. Net assets for the region totaled approximately $6,000,000 at December 31, 2001. Net assets for December 31, 2000, and 1999 totaled approximately $9,000,000 and $11,000,000, respectively. 3Dlabs: On July 21, 2000 (but with effect from July 1, 2000), the Company sold the Intense3D graphics accelerator division of ICS to 3Dlabs, a supplier of integrated hardware and software graphics accelerator solutions for workstations and design professionals. As initial consideration for the acquired assets, 3Dlabs issued to the Company approximately 3,600,000 of its common shares, subject to a registration rights agreement and a three-year irrevocable proxy granted to 3Dlabs, with an aggregate market value of approximately $13,200,000 on the date of closing. Fifteen percent of the shares are in escrow to cover any potential claims against the Company by 3Dlabs. An earn-out provision in the agreement provided for possible additional consideration, payable March 31, 2001, in stock and/or cash at the option of 3Dlabs, based on various performance measures for the Intense3D operations through the end of 2000, including the financial contribution of the division, the retention of key employees, the delivery schedules of new products, and the performance of products developed by the division. In December 2000, the Company recorded a receivable of $8,550,000 (included in "Other current assets" in the December 31, 2000, consolidated balance sheet) for additional consideration due from 3Dlabs. The Company considered this amount to be the minimum earn- out due from 3Dlabs and, as such, recorded a gain of approximately $15,700,000 in its 2000 results of operations based on the initial proceeds from the sale and this estimated minimum earn-out. This gain is included in "Gains on sales of assets" in the 2000 consolidated statements of operations and cash flows. On March 31, 2001, the Company recorded an additional $600,000 gain as a result of the final calculation and settlement of the earn-out provisions. The total earn-out of $10,000,000, $8,550,000 of which was accrued in fourth quarter 2000 (see above), was paid to the Company in the form of stock of 3Dlabs, increasing the Company's ownership interest to approximately 37%, although this interest is subject to a registration rights agreement and a three-year irrevocable proxy granted to 3Dlabs. This gain is included in "Gains on sales of assets" in the 2001 consolidated statements of operations and cash flows. As a result of the final earn-out settlement, all contingencies and related transitional services associated with the sale of Intense3D have been satisfied. The market value of the Company's investment in 3Dlabs is included in "Investments in affiliates" in the Company's consolidated balance sheets. On March 11, 2002, Creative Technology Ltd. ("Creative") signed a definitive agreement to acquire 3Dlabs in a stock and cash transaction. Under the terms of the agreement, Creative will purchase the 3Dlabs stock for $3.60 per share, with one-third in cash and two-thirds being converted to Creative stock. The transaction is expected to close in late second quarter 2002. See Note 1 for information regarding the valuation of this investment at December 31, 2001, and December 31, 2000. For the period in 2000 prior to the effective date of the sale, the Intense3D division earned operating income of approximately $8,500,000 on third-party revenues of $34,000,000. Full year 1999 third-party revenue for the division approximated $38,000,000, with operating results at an approximate breakeven level. SGI: On September 8, 2000, the Company formed a strategic alliance with SGI, a worldwide provider of high-performance computing and advanced graphics solutions, under which SGI acquired certain of the Company's hardware production business assets, including ICS' Zx10 family of workstations and servers, and the Company became a reseller of SGI products, offering its software application solutions on the SGI platform. The Company received $299,000 as initial cash consideration for the assets sold to SGI. The agreement contained a provision, which would provide additional purchase price consideration if revenues from the product lines sold reached a certain level in the one-year period after the closing date. The Company did not earn any additional purchase price consideration under this provision. The Company recorded a loss from the initial cash proceeds of this transaction of approximately $280,000. This loss is included in "Gains on sales of assets" in the 2000 consolidated statements of operations and cash flows. The Company has completed all intermediary and transitional services responsibilities related to this sale. Singapore: On November 30, 2000, the Company sold its Singapore subsidiary for approximately $2,700,000, primarily in the form of a long-term note receivable (included in "Other assets" in the December 31, 2000, consolidated balance sheet). The consideration becomes due in varying installments beginning June 30, 2001, and ending December 31, 2004. At December 31, 2001, the balances on the notes in the consolidated balance sheet include approximately $600,000 in "Other current assets" and $1,500,000 in "Other assets." The Company will continue to sell products into Singapore and related territories through a distributor arrangement with the purchaser. The loss on this transaction of $1,300,000 is included in "Gains on sales of assets" in the 2000 consolidated statements of operations and cash flows. Revenues for the disposed subsidiary and related territories totaled $8,153,000 for the period in 2000 prior to their sale, and $8,316,000 in 1999, with operating results at an approximate breakeven level for both years. Assets of the disposed subsidiary and related territories at December 31, 1999, totaled $5,054,000. BSI: See Note 13 for a discussion of the December 2000 sale of the Company's civil, plotting, and raster product lines to BSI. PID: In January 1999, the Company acquired PID, an Israeli software development company, for $5,655,000. At closing, the Company paid $2,180,000 in cash with the remainder due in varying installments through January 2002. The accounts and results of operations of PID have been combined with those of the PP&O business segment of the Company since the date of acquisition using the purchase method of accounting. This acquisition has not had a material effect on the Company's results of operations. InterCAP: In April 1999, the Company sold InterCAP Graphics Systems, Inc., a wholly owned subsidiary, to Micrografx, Inc., a global provider of enterprise graphics software, for $12,150,000, consisting of $3,853,000 in cash received at closing, deferred payments received in September and October 1999 totaling $2,500,000, and a $5,797,000 convertible subordinated debenture due March 2002. See Note 5 for a discussion of the terms of this debenture and its valuation at December 31, 2001, 2000, and 1999. The resulting gain on this transaction of $11,505,000 is included in "Gains on sales of assets" in the 1999 consolidated statements of operations and cash flows. The subsidiary did not have a material effect on the Company's results of operations for the period in 1999 prior to its sale. InterCAP's results of operations were included in the "Intergraph Software" business segment in the Company's 1999 segment presentations. VeriBest: See Note 4 for a discussion of the Company's October 1999 sale of VeriBest, Inc. SCI: In November 1998, the Company sold substantially all of its U.S. manufacturing assets to SCI, a wholly owned subsidiary of SCI Systems, Inc., and SCI assumed responsibility for manufacturing 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 was $62,404,000, with the final purchase price installment of $19,919,000 received on January 12, 1999. The first quarter 1999 payments are included in "Net proceeds from sales of assets" in the Company's 1999 consolidated statement of cash flows. These proceeds were used primarily to retire debt. As part of this transaction, SCI retained the option to sell back to the Company any inventory included in the initial sale which had not been utilized in the manufacture and sale of finished goods within six months of the date of the sale (the "unused inventory"). On June 30, 1999, SCI exercised this option and sold to the Company unused inventory having a value of approximately $10,200,000 in exchange for a cash payment of $2,000,000 and a short-term installment note payable in the principal amount of $8,200,000. This note bore interest at a rate of 9% and was paid in three monthly installments concluding October 1, 1999. The Company's payments to SCI were funded primarily from existing cash balances. NOTE 16 - SUMMARY OF QUARTERLY INFORMATION - UNAUDITED - --------------------------------------------------------------------------- Quarter Ended March June Sept. Dec. 31 30 30 31 - --------------------------------------------------------------------------- (In thousands except per share amounts) Year ended December 31, 2001: Revenues $144,122 $127,791 $127,056 $133,092 Gross profit 58,409 57,962 56,150 60,805 Reorganization credit (charges) 384 --- --- --- Income (loss) from operations 2,897 1,381 2,164 1,645 Gains on sales of assets 4,831 --- 530 5,882 Net income (loss) 4,967 1,830 1,242 11,903 Net income (loss) per share - basic . 10 .04 .02 .24 - diluted .10 .04 .02 .23 Weighted average shares outstanding - basic 49,569 49,638 49,655 49,761 - diluted 50,960 52,018 51,854 51,845 Year ended December 31, 2000: Revenues $199,405 $187,981 $158,937 $144,131 Gross profit 72,228 69,007 54,449 56,593 Reorganization credit (charges) --- --- (3,362) (5,136) Income (loss) from operations 358 (2,728) (12,887) (8,384) Gains on sales of assets 3,633 3,491 12,065 30,357 Net income (loss) 1,025 (3,662) (5,279) 18,011 Net income (loss) per share - .02 (.07) (.11) .36 basic and diluted Weighted average shares outstanding - basic 49,254 49,330 49,435 49,480 - diluted 49,475 49,330 49,435 50,000 =========================================================================== For complete descriptions of the net gains on asset sales and reorganization charges included in the Company's results of operations, see Notes 13 and 15 and "Gains on Sales of Assets" and "Reorganization Charges" included in MD&A. 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, 2002, there were 49,919,242 shares of common stock outstanding, held by 3,924 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. - ------------------------------------------------------------- 2001 2000 Period High Low High Low - ------------------------------------------------------------- First Quarter $ 11 3/8 $ 5 3/4 $ 9 $ 4 1/4 Second Quarter 15 31/32 8 11/32 8 7/8 5 Third Quarter 15 1/16 8 11/16 7 15/16 3 1/4 Fourth Quarter 13 7/8 8 1/4 7 1/2 5 5/32 ============================================================= TRANSFER AGENT AND REGISTRAR Computershare Investor Services, LLC 2 North LaSalle Street Chicago, IL 60602 (312) 588-4992 INDEPENDENT AUDITORS Ernst & Young LLP 1901 Sixth Avenue North Suite 1900 AmSouth/Harbert Plaza Birmingham, AL 35203 FORM 10-K A copy of the Company's Form 10-K filed with the Securities and Exchange Commission is available without charge upon written request to Shareholder Relations, Intergraph Corporation, Huntsville, AL 35894-0001. ANNUAL MEETING The annual meeting of Intergraph Corporation will be held May 16, 2002, at the Corporate offices in Huntsville, Alabama. 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, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intergraph Corporation and subsidiaries, at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young Birmingham, Alabama January 30, 2002, except for Note 14 and the eighth paragraph of Note 15, as to which the date is March 11, 2002 Board Members and Executive Officers Board of Directors Executive Officers James F. Taylor Jr. Roger O. Coupland Chairman of the Board and President, Intergraph Chief Executive Officer Public Safety, Inc. Graeme J. Farrell Larry J. Laster Executive Vice President Executive Vice President and Asia Pacific Operations Chief Financial Officer Linda L. Green William E. Salter President, Intergraph Government Solutions Lawrence R. Greenwood Gerhard Sallinger Thomas J. Lee President, Intergraph Process, Power & Offshore Sidney L. McDonald Preetha R. Pulusani President, Intergraph Mapping and GIS Solutions Joseph C. Moquin Edward A. Wilkinson Executive Vice President Jack C. Ickes SECRETARY Vice President, Corporate Services John R. Wynn David Vance Lucas Vice President and General Counsel Larry T. Miles Vice President, Finance Eugene H. Wrobel Vice President and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----