-----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, I8y/tKDbI45rwsJKLDqSc8+Q0NuE+EE2PjNkT/KES5fCBKnkWDrLCVst8ClAArMo WBzYRCNbVsOMu1+AI9hhWA== 0000351145-96-000008.txt : 19960814 0000351145-96-000008.hdr.sgml : 19960814 ACCESSION NUMBER: 0000351145-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGRAPH CORP CENTRAL INDEX KEY: 0000351145 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 630573222 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09722 FILM NUMBER: 96611015 BUSINESS ADDRESS: STREET 1: THIGPEN HQ011 #9384 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2057302000 10-Q 1 ============================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-9722 INTERGRAPH CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 63-0573222 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Intergraph Corporation Huntsville, Alabama 35894-0001 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (205) 730-2000 ----------------- (Telephone Number) 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 Common stock, par value $.10 per share: 47,044,424 shares outstanding as of June 30, 1996 ============================================================================= INTERGRAPH CORPORATION FORM 10-Q June 30, 1996 INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1996 and 2 December 31, 1995 Consolidated Statements of Operations for the quarters ended June 30, 1996 and 1995 3 Consolidated Statements of Operations for the six months ended June 30, 1996 and 1995 4 Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 - 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 - 16 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 PART I. FINANCIAL INFORMATION INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) - ------------------------------------------------------------------------------ June 30, December 31, 1996 1995 - ------------------------------------------------------------------------------ (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 37,081 $ 56,407 Accounts receivable, net 295,735 324,051 Inventories 104,032 111,813 Refundable income taxes 5,715 6,391 Other current assets 37,619 43,190 - ------------------------------------------------------------------------------ Total current assets 480,182 541,852 Investments in affiliated companies 15,167 11,636 Other assets 61,539 59,900 Property, plant, and equipment, net 195,317 212,657 - ------------------------------------------------------------------------------ Total Assets $752,205 $826,045 ============================================================================== Liabilities and Shareholders' Equity Trade accounts payable $ 36,758 $ 54,352 Accrued compensation 52,398 51,301 Other accrued expenses 59,643 72,479 Billings in excess of sales 53,911 63,707 Income taxes payable 4,793 6,720 Short-term debt and current maturities of long-term debt 27,585 32,153 - ------------------------------------------------------------------------------ Total current liabilities 235,088 280,712 Deferred income taxes 3,850 3,881 Long-term debt 33,062 37,388 - ------------------------------------------------------------------------------ Total liabilities 272,000 321,981 - ------------------------------------------------------------------------------ Shareholders' equity: Common stock, par value $.10 per share - 100,000,000 shares authorized; 57,361,362 shares issued 5,736 5,736 Additional paid-in capital 233,428 233,940 Retained earnings 387,221 408,791 Cumulative translation adjustment 4,185 8,650 - ------------------------------------------------------------------------------ 630,570 657,117 Less - cost of 10,316,938 treasury shares at June 30, 1996 and 10,501,309 treasury shares at December 31, 1995 (150,365) (153,053) - ------------------------------------------------------------------------------ Total shareholders' equity 480,205 504,064 - ------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $752,205 $826,045 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - ------------------------------------------------------------------------------ Quarter Ended June 30, 1996 1995 - ------------------------------------------------------------------------------ (In thousands except per share amounts) Revenues Systems $ 174,915 $ 161,646 Maintenance and services 93,251 98,521 - ------------------------------------------------------------------------------ Total revenues 268,166 260,167 - ------------------------------------------------------------------------------ Cost of revenues Systems 112,973 101,326 Maintenance and services 53,823 57,454 - ------------------------------------------------------------------------------ Total cost of revenues 166,796 158,780 - ------------------------------------------------------------------------------ Gross profit 101,370 101,387 Product development 25,914 29,530 Sales and marketing 67,076 69,490 General and administrative 23,129 23,983 Restructuring charge --- 7,470 - ------------------------------------------------------------------------------ Loss from operations ( 14,749) ( 29,086) Interest expense ( 1,182) ( 870) Interest income 395 348 Gains on sales of investments in affiliated companies --- 5,596 Equity in earnings of affiliated companies 1,738 1,454 Other income (expense) - net ( 1,381) 600 - ------------------------------------------------------------------------------ Loss before income taxes ( 15,179) ( 21,958) Income taxes --- --- - ------------------------------------------------------------------------------ Net loss $( 15,179) $( 21,958) ============================================================================== Net loss per share $( .32) $( .48) ============================================================================== Weighted average shares outstanding 46,922 45,929 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - ------------------------------------------------------------------------------ Six Months Ended June 30, 1996 1995 - ------------------------------------------------------------------------------ (In thousands except per share amounts) Revenues Systems $ 338,099 $ 325,688 Maintenance and services 186,773 191,808 - ------------------------------------------------------------------------------ Total revenues 524,872 517,496 - ------------------------------------------------------------------------------ Cost of revenues Systems 218,481 206,336 Maintenance and services 109,620 111,625 - ------------------------------------------------------------------------------ Total cost of revenues 328,101 317,961 - ------------------------------------------------------------------------------ Gross profit 196,771 199,535 Product development 51,249 59,670 Sales and marketing 129,454 136,808 General and administrative 47,554 47,269 Restructuring charge --- 7,470 - ------------------------------------------------------------------------------ Loss from operations ( 31,486) ( 51,682) Interest expense ( 2,405) ( 1,830) Interest income 880 889 Gains on sales of investments in affiliated companies 9,373 5,596 Equity in earnings of affiliated companies 3,918 2,403 Other income (expense) - net ( 1,850) 194 - ------------------------------------------------------------------------------ Loss before income taxes ( 21,570) ( 44,430) Income taxes --- --- - ------------------------------------------------------------------------------ Net loss $( 21,570) $( 44,430) ============================================================================== Net loss per share $( .46) $( .97) ============================================================================== Weighted average shares outstanding 46,947 45,766 ============================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------ Six Months Ended June 30, 1996 1995 - ------------------------------------------------------------------------------ (In thousands) Cash provided by (used for): Operating Activities: Net loss $(21,570) $(44,430) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 38,211 39,379 Non-cash portion of restructuring charge --- 6,900 Collection of income tax refunds 1,811 22,109 Gains on sales of investments in affiliated companies ( 9,373) ( 5,596) Equity in earnings of affiliated companies ( 3,918) ( 2,403) Net changes in current assets and liabilities 81 9,837 - ----------------------------------------------------------------------------- Net cash provided by operating activities 5,242 25,796 - ----------------------------------------------------------------------------- Investing Activities: Purchase of property, plant, and equipment (17,092) (21,223) Capitalized software development costs ( 9,882) (13,470) Proceeds from sales of investments in affiliated companies 9,761 7,028 Other ( 652) ( 3,810) - ----------------------------------------------------------------------------- Net cash used for investing activities (17,865) (31,475) - ----------------------------------------------------------------------------- Financing Activities: Gross borrowings 10,197 13,639 Debt repayment (19,636) (32,620) Proceeds of employee stock purchases 1,822 1,976 Proceeds of exercise of stock options 244 1,571 - ----------------------------------------------------------------------------- Net cash used for financing activities ( 7,373) (15,434) - ----------------------------------------------------------------------------- Effect of exchange rate changes on cash 670 2,190 - ----------------------------------------------------------------------------- Net decrease in cash and cash equivalents (19,326) (18,923) Cash and cash equivalents at beginning of period 56,407 61,393 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 37,081 $ 42,470 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary for a fair presentation of results for the interim periods presented. Certain reclassifications have been made to the previously reported consolidated balance sheet at December 31, 1995 and to the consolidated statements of operations and cash flows for the six months ended June 30, 1995 to provide comparability with the current period presentation. NOTE 2: In October 1995, the Company entered into a three year, $100 million revolving credit agreement with a group of lenders. This line of credit represents the Company's primary source of external funding. At May 31, 1996, the Company did not meet the cumulative minimum required level of earnings before income taxes, interest, and non-cash items required by the agreement, and by terms of the agreement the line of credit was reduced to $75 million. As of June 30, 1996, the Company was not in compliance with the capital expenditure covenant of the agreement. The lenders have stated their desire to renegotiate the financial covenants prior to providing a waiver of default for failure to comply with the capital expenditure covenant. The Company expects to successfully negotiate modifications to the financial covenants resulting in the ability to comply with the modified covenants in the future. The lenders have also stated that an availability reserve of $25 million will be placed on the line of credit until the Company has met the modified financial covenants for a consecutive six month period, effectively reducing the line to $50 million for that period. The lenders have stated that they do not plan to exercise any remedies of the default condition, which include but are not limited to termination of the agreement with all obligations under the agreement becoming immediately due and payable. An international subsidiary of the Company has a $21 million term loan agreement with a bank, guaranteed by the parent company, which includes cross-default provisions with the Company's revolving credit agreement. As such, the Company was not in compliance with the cross-default provisions included in the term loan agreement as of June 30, 1996. The bank has agreed to waive its remedies of this default condition. NOTE 3: Inventories are stated at the lower of average cost or market and are summarized as follows: ------------------------------------------------------------ June 30, December 31, 1996 1995 ------------------------------------------------------------ (In thousands) Raw materials $ 30,132 $ 36,336 Work-in-process 23,153 25,037 Finished goods 20,808 17,140 Service spares 29,939 33,300 ------------------------------------------------------------ Totals $104,032 $111,813 ============================================================ INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: Property, plant, and equipment - net includes allowances for depreciation and amortization of $304.5 million and $304.6 million at June 30, 1996 and December 31, 1995, respectively. NOTE 5: In the quarter ended March 31, 1996, the Company sold its stock investment in an affiliated company at a gain of $9.4 million ($.20 per share). The gain is included in "Gains on sales of investments in affiliated companies" in the consolidated statement of operations for the six months ended June 30, 1996. In the quarter ended June 30, 1995, the Company sold one of its subsidiaries at a gain of $5.0 million ($.11 per share). The subsidiary was not significant to the Company's results of operations. The gain is included in "Gains on sales of investments in affiliated companies" in the consolidated statements of operations for the quarter and six months ended June 30, 1995. NOTE 6: During the second quarter of 1995, the Company undertook a restructuring program designed to further adapt the Company's cost structure to changed industry and market conditions. The program, as originally planned, consisted of direct reductions in workforce, other workforce reductions through attrition, and disposition of four unprofitable non-core business units over the twelve month period ending June 30, 1996. The program, had it been fully executed with respect to the four business units, would have provided an operating expense reduction of approximately $100 million annually on a prospective basis. Of this total anticipated annual savings, approximately $66 million was to be derived from disposition of the business units. As of June 30, 1996, the Company does not have committed buyers for these business units. The Company is continuing its efforts to sell these businesses and does not anticipate incurrence of a loss on the sale of any of the units. Revenues and losses of the four business units totaled $31 million and $15 million, respectively, for the first half of 1996 ($39 million and $20 million, respectively, for the first half of 1995), and their total assets are approximately $45 million. The Company estimates annual savings related to restructuring actions taken thus far under the plan of $35 million, derived primarily from reduced employee headcount. The second quarter 1995 restructuring charge totaled $7.5 million, primarily for employee severance pay and related costs. Approximately 450 positions were eliminated through direct reductions in workforce, with approximately 350 others eliminated through attrition. All employee groups were affected, but the majority of eliminated positions derived from the research and development, systems engineering and support, and sales and marketing areas. The total cash expenditure through December 31, 1995 was $3.6 million. Cash expenditures during the first half of 1996 were insignificant. The $7.5 million charge is included in "Restructuring charge" in the 1995 consolidated statement of operations. Unrelated to the 1995 restructuring plan, the Company announced in July 1996 its intention to sell its 50% ownership interest in Bentley Systems, Inc. See Management's Discussion and Analysis of Financial Condition and Results of Operations for further description of the Company's relationship with Bentley. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7: Supplementary cash flow information is summarized as follows: Changes in current assets and liabilities, net of the effects of a business acquisition and divestiture and restructuring charges, in reconciling net loss to net cash provided by operations are as follows: ----------------------------------------------------------------- Cash Provided By (Used For) Operations Six Months Ended June 30, 1996 1995 ----------------------------------------------------------------- (In thousands) (Increase) decrease in: Accounts receivable, net $23,187 $53,258 Inventories 8,718 ( 7,495) Refundable income taxes ( 425) ( 1,685) Other current assets 5,728 ( 7,036) Increase (decrease) in: Trade accounts payable (17,036) 66 Accrued compensation and other accrued expenses ( 8,510) ( 611) Billings in excess of sales ( 9,012) (24,984) Income taxes payable ( 2,569) ( 1,676) ----------------------------------------------------------------- Net changes in current assets and liabilities $ 81 $ 9,837 ================================================================= Cash payments for income taxes totaled $2,784,000 and $2,136,000 for the six months ended June 30, 1996 and 1995, respectively. Cash payments for interest during those periods totaled $2,286,000 and $1,396,000, respectively. There were no significant non-cash investing and financing transactions in the first half of 1996. Investing and financing transactions in the first half of 1995 that did not require cash consisted of acquisition of a business for total consideration of $7,500,000, consisting of issuance of 797,931 shares of the Company's common stock and the granting of options on 148,718 of the Company's shares to employees of the acquired company. NOTE 8: Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. For long-lived assets and certain intangible assets to be held and used by an entity, including goodwill, the Statement requires a review for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including an estimate of the future cash flows expected to result from use of the asset and its eventual disposition. An impairment loss, based on a comparison of the carrying value to the fair value of the asset, must be recognized if the sum of the expected future cash flows from the asset is less than the carrying amount of the asset. For long-lived assets and certain identifiable intangible assets to be disposed of, the Statement requires financial statement reporting at the lower of the carrying amount or fair value of the asset less cost to sell. Application of this Statement did not materially affect the Company's results of operations or financial position in the first half of 1996. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9: Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which is effective for transactions entered into during calendar year 1996 for the Company, establishes accounting and reporting standards for stock-based employee compensation plans including, with respect to the Company, stock options and employee stock purchase plans. The Statement defines a fair value-based method of accounting for employee stock options under which compensation cost is measured at the date options are granted and recognized by charges to expense over the employees' service periods, and it encourages entities to adopt that method of accounting. It also allows entities to continue to measure compensation cost using the method prescribed under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under which compensation expense is recognized for the excess, if any, of the market price of the stock at grant date over the amount the employee must pay to acquire the stock. The Company, under the provisions of APB No. 25, recognizes no compensation expense for employee stock options when options are granted to employees at a price equal to the market price of the Company's stock at the date of grant, and recognizes no compensation expense for the price discount given its employees under its employee stock purchase plan. The Company has elected to remain under the provisions of APB No. 25 with respect to its employee stock options that are granted at market price at date of grant, and with respect to its employee stock purchase plan. This decision will result in recognition of no compensation expense for stock options or employee stock purchases in 1996 and future years. However, in accordance with the disclosure provisions of the Statement, and commencing with its 1996 Annual Report to Shareholders, the Company will provide proforma basis information to reflect results of operations and earnings per share had compensation expense been recognized for these items. NOTE 10: In January 1995, the Company acquired all of the outstanding stock of InterCAP Graphics Systems, Inc. for total consideration of $7.5 million, consisting of issuance of 797,931 shares of the Company's common stock and the granting of stock options on 148,718 of the Company's shares to employees of InterCAP. InterCAP is engaged in the business of designing and producing computer software systems that assist in creating, editing, converting and presenting technical illustrations used by large manufacturing firms. The accounts and results of operations of InterCAP have been combined with those of the Company since the date of acquisition using the purchase method of accounting. The acquisition has not had a material effect on the Company's results of operations. INTERGRAPH CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY - ------- Earnings. In the second quarter of 1996 the Company incurred a net loss of $.32 per share on revenues of $268.2 million versus a loss in the second quarter of 1995 of $.48 per share on revenues of $260.2 million. For the first half of 1996, the Company lost $.46 per share on revenues of $524.9 million versus a loss of $.97 per share on revenues of $517.5 million for the same prior year period. The first half 1996 loss included a $9.4 million ($.20 per share) gain on the sale of an investment in an affiliated company. The second quarter and first half 1995 loss included a $7.5 million ($.16 per share) restructuring charge (see "Restructuring" below) and a $5.0 million gain ($.11 per share) on the sale of a subsidiary operation. Losses excluding these non-recurring items and all other items of non-operating income and expense totaled $.67 per share in the first half of 1996 versus $.97 per share for the first half of 1995. This $.30 per share improvement results primarily from a 6% decline in operating expenses. The Company's first half 1996 loss from operations results primarily from a revenue shortfall and from declining gross margins. The Company believes its new operating system, software application offerings, and hardware architecture strategies will prove to be the correct choices; however, revenue to date associated with new software product offerings has not met expectations, resulting in a revenue base that is not adequate to cover operating expenses. Remainder of the Year. The Company expects that current industry conditions characterized by rapidly changing technologies, demand for higher performance and lower priced products, intense competition, shorter product cycles, and by development and support of software standards that result in less specific hardware and software dependencies by customers will continue in 1996 and beyond. The Company believes the life cycle of its products to be less than two years, and it is therefore engaged in continuous product development activity. The operating results of the Company and others in the industry will continue to depend on the ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new hardware and software products that are competitively priced, deliver enhanced performance, and meet customer requirements for standardization and interoperability. The Company believes that its new operating system and hardware architecture strategies, the availability of new products, and the cost benefits of the 1995 restructuring of its business will act to improve its operating results. However, to achieve profitability, the Company must substantially increase sales volume while continuing to control cost. Restructuring. During the second quarter of 1995, the Company undertook a restructuring program designed to further adapt the Company's cost structure to changed industry and market conditions. The program, as originally planned, consisted of direct reductions in workforce, other workforce reductions through attrition, and disposition of four unprofitable non-core business units over the twelve month period ending June 30, 1996. The program, had it been fully executed with respect to the four business units, would have provided an operating expense reduction of approximately $100 million annually on a prospective basis. Of this total anticipated annual savings, approximately $66 million was to be derived from disposition of the business units. As of June 30, 1996, the Company does not have committed buyers for these business units. The Company is continuing its efforts to sell these business units and does not anticipate incurrence of a loss on the sale of any of the units. Revenues and losses of the four business units totaled $31 million and $15 million, respectively, for the first half of 1996 ($39 million and $20 million, respectively, for the first half of 1995), and their total assets are approximately $45 million. The Company estimates annual savings related to restructuring actions taken thus far under the plan of $35 million, derived primarily from reduced employee headcount. The second quarter 1995 restructuring charge totaled $7.5 million, primarily for employee severance pay and related costs. Approximately 450 positions were eliminated through direct reductions in workforce, with approximately 350 others eliminated through attrition. All employee groups were affected, but the majority of eliminated positions derived from the research and development, systems engineering and support, and sales and marketing areas. The total cash expenditure through December 31, 1995 was $3.6 million. Cash expenditures during the first half of 1996 were insignificant. The $7.5 million charge is included in "Restructuring charge" in the 1995 consolidated statement of operations. Bentley Systems, Inc. The Company has a non-exclusive license agreement with Bentley Systems, Inc. (BSI), a 50%-owned affiliate of the Company, under which the Company has a right to sell MicroStation, a software product developed and maintained by BSI and utilized in many of the Company's software applications, via its direct sales force, and to sell MicroStation via its indirect sales channels if MicroStation is sold with other Intergraph products. During the first half of 1996, the Company's sales of MicroStation declined by 45% from the prior year level to approximately $14 million. Effective January 1, 1996, the per copy royalty payable by the Company to BSI was increased 31%. In addition, in 1995 BSI was obligated to pay the Company a per copy distribution fee based on BSI's MicroStation sales to resellers. In 1996, the Company no longer has the right to receive per copy distribution fees from BSI. The Company estimates that the effect of reduced revenues, increased royalties and discontinued distribution fees on first half 1996 results of operations was a 3% reduction in revenues and an increase in net loss of approximately $11 million or $.24 per share. In July 1996, the Company announced that it has engaged an investment banking firm to value and sell its 50% ownership interest in Bentley. New Products. During the first quarter of 1996, the Company announced a complete line of workstations and servers based on Intel Corporation's Pentium Pro microprocessor, including the TD desktop and high-end TDZ workstations for graphics-intensive applications, the StudioZ workstation for manipulation of video and film imagery, and a line of Web servers for meeting the heavy demand of visitors to a web site. These products began shipping in the first quarter with the exception of the StudioZ workstation, which will begin shipping in the third quarter. During the second quarter of 1996, the Company announced a new add-in 3D graphics card, Intense 3D, which delivers workstation class 3D graphics to the Pentium- or Pentium Pro-based personal computer. In addition, the Company has entered into a joint marketing and sales relationship with MCI Telecommunications Corporation for the Internet/Intranet connectivity market. In late 1995, the Company announced its Jupiter technology, a Windows-based component software architecture that is the foundation of many new computer-aided-design/computer-aided manufacturing/computer-aided-engineering (CAD/CAM/CAE) and geographic information systems (GIS) applications software developed by the Company. The first two products built on Jupiter technology began shipping in the second quarter. Initial sales of these products did not meet Company expectations or contribute substantially to revenues for the quarter due in part to the offering of these products on a "try and buy" basis and resulting delays in sales, and to certain performance issues in the initial release of the software. The Company continues to believe that these products will be key contributors to the long- term success of the Company. Purchase Business Combination. In January 1995, the Company acquired all of the outstanding stock of InterCAP Graphics Systems, Inc. for total consideration of $7.5 million, consisting of issuance of 797,931 shares of the Company's common stock and the granting of stock options on 148,718 of the Company's shares to employees of InterCAP. InterCAP is engaged in the business of designing and producing computer software systems that assist in creating, editing, converting and presenting technical illustrations used by large manufacturing firms. The accounts and results of operations of InterCAP have been combined with those 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. ORDERS/REVENUES - --------------- Orders. Second quarter and first half 1996 systems orders totaled $185.4 million and $329.7 million, respectively, an increase of approximately 6% and 1%, respectively, from the same prior year periods. U.S. systems orders were down 8% and 4%, respectively, from the second quarter and first half 1995 levels. The decrease in first half 1996 U.S. systems orders results from an orders decline in one of the Company's non-core business units that is part of the Company's restructuring plan. Excluding this business unit, U.S. systems orders were up 3% from the first half 1995 level. International systems orders were up 19% and 6%, respectively, from the second quarter and first half 1995 levels. European systems order levels were up slightly; other international systems orders increased 10% over the first half of 1995 due primarily to orders for the Company's Public Safety software product and related consulting services. Second quarter systems orders were up 29% from the first quarter 1996 level, with all regions showing improvement. NAVAIR/SPAWAR Contract. In July 1994, the U.S. Navy awarded the Company the Naval Air Systems Command and Space and Naval Warfare Command contract ("NAVAIR and SPAWAR") to provide CAD/CAM/CAE systems and services for electronics and mechanical applications. The estimated maximum value of the NAVAIR/SPAWAR contract is $398 million, and the term of the contract is twelve years, assuming all optional annual renewals of the contract are exercised. Under the terms of the contract, the customer is obligated to purchase only $1 million in systems and services, and there can be no assurance that the Company will receive orders for the maximum value of the contract. Given the nature of the contract, the Company cannot determine the amount of orders that will be received or anticipate the level of annual revenues over the term of the contract. Orders and revenues under this contract in the first half of 1996 were not significant. Soon after the original award, the NAVAIR/SPAWAR contract was formally protested by one of the losing bidders. The Company supported the efforts of the Navy in defending against the protest, and in October 1994, the Company was notified that the original award was upheld. This holding was appealed through the federal court system, and in July 1996, the Company was notified that the contract would stand as originally awarded. No further protests of this contract are expected. Revenues. Total revenues for second quarter and first half of 1996 were $268.2 million and $524.9 million, respectively, up slightly from comparable 1995 levels. Sales outside the U.S. represented 54% of total revenues in the first half of 1996, relatively unchanged from the first half and full year 1995 levels. European revenues were 34% of total revenues for the first half of 1996, also relatively unchanged from the first half and full year 1995 levels. Systems. Systems revenue for the second quarter and first half of 1996 was $174.9 million and $338.1 million, respectively, up 8% and 4%, respectively, from the same prior year periods. Federal government systems revenues were up 17% from the first half 1995 level, while U.S. commercial systems revenue declined 3%, resulting in an overall 3% systems revenue increase in the U.S. The decrease in first half 1996 U.S. commercial systems revenues results from a revenue decline in one of the Company's non-core business units that is part of the Company's restructuring plan. Excluding this business unit, U.S. systems revenues were up 7% from the first half 1995 level. International systems revenues were up 4% from the first half 1995 level. European and other international systems revenues increased by 1% and 10%, respectively. First half 1996 total hardware revenues increased 14% from the prior year period. Workstation and server unit sales in the first half of 1996 were up 53% from the prior year period, while workstation and server revenues increased only 29% due to a 6% decline in the average per unit sales price. Software revenues were down 4% from the prior year level, including a 45% decline in MicroStation revenues (for further discussion of this impact on the Company, see "Bentley Systems, Inc." above). Excluding MicroStation, software revenues increased 9% from the first half 1995 level due primarily to an increase in plant design and electronics software applications sales. Sales of Windows-based software represented approximately 74% of total software revenues in the first half of 1996, up from approximately 64% in the first half of 1995. For the first half of 1996, hardware revenues were in line with planned revenue levels; however, software revenues were well below plan. The software revenue shortfall can be attributed to slower than anticipated orders for the Company's new Jupiter Windows-based software products, soft demand in Europe, less than expected effectiveness in indirect sales channels, and loss of MicroStation sales. Maintenance and Services. Maintenance and services revenue consists of revenues from maintenance of Company systems and from Company-provided training, consulting, and other services. These forms of revenue totaled $93.3 million for the second quarter and $186.8 million for the first half of 1996, a decrease of 5% and 3%, respectively, from the comparable prior year periods. Maintenance revenues for the first half of 1996 totaled $145.3 million, a 10% decline from the same prior year period. The trend in the industry toward lower priced products and longer warranty periods has resulted in a decline in maintenance revenues. Services revenue represents approximately 8% of total first half 1996 revenues and has increased 36% from the same prior year period. GROSS MARGIN - ------------ The Company's total gross margin for the second quarter and first half of 1996 was approximately 37.5% versus 38.6% for the first half of 1995 and 39.1% for the full year 1995. Systems margin for the second quarter and first half of 1996 was 35.4%, down 1.9 points from the second quarter 1995 level, down 1.2 points from the first half 1995 level, and down 2.7 points from the full year 1995 level. The decline is due primarily to a higher hardware content in the product. Additionally, in 1996, the Company no longer is due per copy distribution fees on BSI's MicroStation sales to resellers, and the Company is paying per copy royalties to BSI at a 31% higher rate (for further discussion of this impact on the Company, see "Bentley Systems, Inc." above). In general, systems margin may be lowered by price competition, a stronger dollar in international markets, effects of technological changes on the value of existing inventories, and a higher mix of federal government sales, which generally produce lower margins than commercial sales, to total systems sales. Systems margins may be improved by higher software content in the product, a weaker dollar in international markets, a higher mix of international systems sales to total systems sales, and by reductions in prices of component parts, which generally tend to decline over time in the industry. The Company is unable to predict the effects that many of these factors may have, but expects continuing pressure on its systems margin due primarily to industry price competition. Maintenance and services margin for the second quarter and first half of 1996 was 42.3% and 41.3%, respectively, relatively flat with the comparable prior year periods. Full year 1995 maintenance and services margin was 41%. OPERATING EXPENSES (exclusive of restructuring charges) - ------------------------------------------------------- Operating expenses for the second quarter and first half of 1996 decreased 6% from the comparable prior year periods. Total employee headcount has declined 5% from the first half 1995 level. Product development expense for the second quarter and first half of 1996 declined 12% and 14%, respectively, from the same prior year periods. Sales and marketing expense for the second quarter and first half of 1996 declined 4% and 5%, respectively. These declines from 1995 levels are due primarily to a decline in headcount and related overhead expenses resulting from restructuring actions taken in the second quarter of 1995. The decline in sales and marketing expense was offset to a degree by increased product advertising and promotional expenses associated with the Company's new product offerings. General and administrative expenses for the first half of 1996 are flat with the prior year level. NONOPERATING INCOME AND EXPENSE - ------------------------------- Interest expense was $1.2 million for the second quarter and $2.4 million for the first half of 1996 versus $.9 million and $1.8 million, respectively, for the same prior year periods. The Company's outstanding debt increased in comparison to the same prior year periods. See "Liquidity and Capital Resources" below for discussion of the Company's current financing requirements. In the first quarter of 1996, the Company sold a stock investment in an affiliated company, resulting in a gain of $9.4 million ($.20 per share). In the second quarter of 1995, the Company sold one of its subsidiary operations, resulting in a gain of $5 million ($.11 per share). These gains are included in "Gains on sales of investments in affiliated companies" in the consolidated statements of operations. "Other income (expense) - net" in the consolidated statements of operations consists primarily of aggregate foreign exchange gains/losses, other miscellaneous items of nonoperating income and expense, and nonrecurring charges/credits. IMPACT OF CURRENCY FLUCTUATIONS AND CURRENCY RISK MANAGEMENT - ------------------------------------------------------------ Fluctuations in the value of the U.S. dollar in international markets can have a significant impact on the Company's results of operations. For the first half of 1996 and the full year 1995, approximately 54% of the Company's revenues were derived from customers outside the United States, primarily through subsidiary operations. Most subsidiaries sell to customers and incur and pay operating expenses in local currency. These local currency revenues and expenses are translated to dollars for U.S. reporting purposes. A stronger U.S. dollar will decrease the level of reported U.S. dollar orders and revenues, decrease the dollar gross margin, and decrease reported dollar operating expenses of the international subsidiaries. A weaker U.S. dollar will have the opposite effect. The currency effect of the slightly stronger U.S. dollar thus far in 1996 has not materially affected the Company's results of operations. The Company conducts business in all major markets outside of the U.S., but the most significant of these operations with respect to currency risk are located in Europe, specifically Germany, U.K., The Netherlands, France and Spain. Primarily but not exclusively in these locations, the Company has certain currency related asset and liability exposures against which certain measures, primarily hedging, are taken to reduce currency risk. With respect to these exposures, the objective of the Company is to protect against financial statement volatility arising from changes in exchange rates with respect to amounts denominated for balance sheet purposes in a currency other than the functional currency of the local entity. The Company therefore enters into forward exchange contracts primarily related to these balance sheet items (intercompany receivables, payables, and formalized intercompany debt). Periodic changes in the value of these contracts offset exchange rate-related changes in the financial statement value of these balance sheet items. Forward exchange contracts are purchased with maturities reflecting the expected settlement dates of these balance sheet items (generally three months or less), and only in amounts sufficient to offset possible significant currency rate related changes in the recorded values of these balance sheet items, which represent a calculable exposure for the Company from period to period. Since this risk is calculable and these contracts are purchased only in offsetting amounts, neither the contracts themselves nor the exposed foreign currency denominated balance sheet items are likely to have a significant effect on the Company's financial position or results of operations. The Company's positions in these derivatives are continuously monitored to ensure protection against the known balance sheet exposures described above. By policy, the Company is prohibited from market speculation via such instruments and therefore does not take currency positions exceeding its known financial statement exposures, and does not otherwise trade in currencies. INCOME TAXES - ------------ The Company incurred a loss before income tax benefit of $21.6 million in the first half of 1996 versus $44.4 million in the first half of 1995. The 1996 loss generated minimal net financial statement tax benefit, as the majority of available tax benefits were offset by tax expenses in individual profitable international subsidiaries. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1996, cash and short-term investments totaled $37.1 million compared to $56.4 million at December 31, 1995. Cash generated from operations in the first half of 1996 totaled $5.2 million ($25.8 million in the first half of 1995, including $22.1 million in refunds of prior years' U.S. federal income tax payments as the result of carryback of the 1994 U.S. tax return loss). Net cash used for investing activities totaled $17.9 million in the first half of 1996 versus $31.5 million in the first half of 1995. Included in investing activities were capital expenditures of $17.1 million ($21.2 million in the first half of 1995), primarily for Intergraph products used in hardware and software development. The Company expects that capital expenditures for the full year 1996 will require $35 to $40 million, primarily for computer equipment manufactured by the Company for use in hardware and software development. The Company's revolving credit agreement contains certain restrictions on the level of the Company's capital expenditures. The Company slightly exceeded the level of capital expenditures allowed under the agreement for the twelve month period ended June 30, 1996 (for further discussion of the impact on the Company, see "Revolving Credit Agreement" below). Other significant investing activities included $9.9 million for capitalizable software development costs ($13.5 million in the first half of 1995) and $9.8 million in proceeds from sales of investments in affiliated companies ($7 million in the first half of 1995). Net cash used for financing activities totaled $7.4 million in the first half of 1996 versus $15.4 million in the first half of 1995. First half 1996 financing activities included $9.4 million for net repayment of short- and long-term debt, compared with $19 million in the first half of 1995. Historically the Company's collection period for accounts receivable has approximated 100 days. Approximately 69% of the Company's sales are derived from the U.S. government and international customers, both of which traditionally carry longer collection periods. The Company endeavors to enforce its payment terms with these and other customers, and grants extended payment terms only in very limited circumstances. Revolving Credit Agreement. In October 1995, the Company entered into a three-year revolving credit agreement with a group of lenders. Borrowings available under the agreement are determined by the amounts of eligible assets of the Company, as defined in the agreement, including cash, accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $100 million. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. and Canada and, under certain circumstances, the accounts receivable of some European subsidiaries of the Company. The rate of interest on all borrowings under the agreement is, at the Company's option, the Citibank base rate of interest plus 1.75% or the Eurodollar rate plus 2.75%. The average effective rate of interest was 10.23% for the period of time in the first half of 1996 during which the Company had outstanding borrowings under the agreement. The agreement requires the Company to pay a commitment fee of .5% annually on the average unused daily portion of the revolving credit commitment. Outstanding borrowings were $12 million under this agreement at June 30, 1996, with an additional $19 million of the available credit line allocated to support letters of credit issued by the Company. The revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum fixed charge coverage, minimum interest coverage, and maximum levels of capital expenditures, including capitalized software development costs. In addition, the agreement requires minimum levels of earnings before income taxes, interest, and non-cash items and includes restrictive covenants that limit various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes. At May 31, 1996, the Company did not meet the minimum required level of earnings before income taxes, interest, and non-cash items, and in accordance with the agreement, the line of credit was reduced from $100 million to $75 million. As of June 30, 1996, the Company was not in compliance with the capital expenditure financial covenant of the agreement. The lenders have stated their desire to renegotiate the financial covenants prior to providing a waiver of default for failure to comply with the capital expenditure covenant. The Company expects to successfully negotiate modifications to the financial covenants resulting in the ability to comply with the modified covenants in the future. The lenders have also stated that an availability reserve of $25 million will be placed on the line of credit until the Company has met the modified financial covenants for a consecutive six month period, effectively reducing the line to $50 million for that period. The lenders have stated that they do not plan to exercise any remedies of the default condition, which include but are not limited to termination of the agreement with all obligations under the agreement becoming immediately due and payable. An international subsidiary of the Company has a $21 million term loan agreement with a bank, guaranteed by the parent company, which includes cross-default provisions with the Company's revolving credit agreement. As such, the Company was not in compliance with the cross-default provisions included in the term loan agreement as of June 30, 1996. The bank has agreed to waive its remedies of this default condition. At June 30, 1996, the Company had $50 million in debt on which interest is charged under various floating rate arrangements, primarily under short-term credit facilities, mortgages, and a term loan. The Company is exposed to market risk of future increases in interest rates on a total of $29 million of these loans. The Company believes that existing cash balances, together with cash generated by operations and cash available under its revolving credit agreement, will be adequate to meet cash requirements for the remainder of 1996. Cash may also be generated through sale of the Company's non-core businesses though the timing of any such sale is at present uncertain. INTERGRAPH CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 4: Submission of Matters to a Vote of Security Holders Intergraph Corporation's Annual Meeting of Shareholders was held on May 16, 1996. The results of the meeting follow. (1) Seven directors were elected to the Board of Directors to serve for the ensuing year and until their successors are duly elected and qualified. All nominees, with the exception of Richard K. Snelling, were serving as Directors of the Company at the time of their nomination. Votes ---------------------------------- For Against/Withheld ------------- ------------------ Roland E. Brown 38,691,885 612,368 Larry J. Laster 38,859,989 444,263 James W. Meadlock 38,851,224 453,029 Richard K. Snelling 38,847,449 456,804 Keith H. Schonrock, Jr. 38,683,769 620,483 James F. Taylor, Jr. 38,786,230 518,023 Robert E. Thurber 38,839,110 465,143 Mr. Snelling resigned as a Director of the Company August 1, 1996, for personal reasons. (2) Ratification of the appointment by the Board of Directors of Ernst & Young LLP as the Company's independent auditors for the current year was approved by a vote of 39,170,810 for, 69,429 against, and 64,014 abstentions. Item 6: Exhibits and Reports on Form 8-K (a) Exhibit 11, Computations of loss per share, pages 19 to 20. (b) There were no reports on Form 8-K filed during the quarter ended June 30, 1996. INTERGRAPH CORPORATION AND SUBSIDIARIES SIGNATURES Pursuant to the requirements 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 ---------------------- (Registrant) By: /s/ Larry J. Laster By: /s/ John W. Wilhoite - ------------------------------- ------------------------------------ Larry J. Laster John W. Wilhoite Executive Vice President, Vice President and Controller Chief Financial Officer and (Principal Accounting Officer) Director Date: August 13, 1996 Date: August 13, 1996 EX-11 2 Exhibit 11 - ---------- INTERGRAPH CORPORATION AND SUBSIDIARIES COMPUTATIONS OF LOSS PER SHARE - ------------------------------------------------------------------------ Quarter Ended June 30, 1996 1995 - ------------------------------------------------------------------------ (In thousands except per share amounts) NET LOSS $(15,179) $(21,958) ========= ========= PRIMARY Weighted average common shares outstanding 46,922 45,929 Net common shares issuable on exercise of certain stock options (1) --- --- --------- --------- Average common and equivalent common shares outstanding 46,922 45,929 ========= ========= Net loss per share $( .32) $( .48) ========= ========= FULLY DILUTED (2) Weighted average common shares outstanding 46,922 45,929 Net common shares issuable on exercise of certain stock options (1) --- --- --------- --------- Average common and equivalent common shares outstanding 46,922 45,929 ========= ========= Net loss per share $( .32) $( .48) ========= ========= (1) Net common shares issuable on exercise of certain stock options is calculated based on the treasury stock method using the average market price for the primary calculation and the ending market price, if higher than the average, for the fully diluted calculation. (2) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. Exhibit 11 - ---------- INTERGRAPH CORPORATION AND SUBSIDIARIES COMPUTATIONS OF LOSS PER SHARE - ---------------------------------------------------------------------- Six Months Ended June 30, 1996 1995 - ---------------------------------------------------------------------- (In thousands except per share amounts) NET LOSS $(21,570) $(44,430) ========= ========= PRIMARY Weighted average common shares outstanding 46,947 45,766 Net common shares issuable on exercise of certain stock options (1) --- --- --------- --------- Average common and equivalent common shares outstanding 46,947 45,766 ========= ========= Net loss per share $( .46) $( .97) ========= ========= FULLY DILUTED (2) Weighted average common shares outstanding 46,947 45,766 Net common shares issuable on exercise of certain stock options (1) --- --- --------- -------- Average common and equivalent common shares outstanding 46,947 45,766 ========= ======== Net loss per share $( .46) $( .97) ========= ======== (1) Net common shares issuable on exercise of certain stock options is calculated based on the treasury stock method using the average market price for the primary calculation and the ending market price, if higher than the average, for the fully diluted calculation. (2) This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-27 3
5 This schedule contains summary financial information extracted from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1996 JUN-30-1996 37,081 0 295,735 0 104,032 37,619 499,808 304,491 752,205 235,088 33,062 0 0 5,736 474,469 752,205 338,099 524,872 218,481 328,101 228,257 0 2,405 (21,570) 0 (21,570) 0 0 0 (21,570) (.46) (.46) Other expenses include Product development expenses, Sales and marketing expenses, and general and administrative expenses.
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