-----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, Q5TJYOTCpF1l2PwyMcwzaEW3gtjPjImFBcGJtQtxJfVubjL00mVas4+GWS3d7t6s T9EaqKwuBa551gu/hvupGg== 0000351145-97-000004.txt : 19970514 0000351145-97-000004.hdr.sgml : 19970514 ACCESSION NUMBER: 0000351145-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97602465 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 March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-9722 INTERGRAPH CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 63-0573222 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Intergraph Corporation Huntsville, Alabama 35894-0001 - ---------------------------------------- ------------ (Address of principal executive offices) (Zip Code) (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: 47,836,471 shares outstanding as of March 31, 1997 ============================================================================ INTERGRAPH CORPORATION FORM 10-Q * March 31, 1997 INDEX Page No. ---------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1997 and December 31, 1996 2 Consolidated Statements of Operations for the quarters ended March 31, 1997 and 1996 3 Consolidated Statements of Cash Flows for the quarters ended March 31, 1997 and 1996 4 Notes to Consolidated Financial Statements 5 - 6 Item 2. Management's Discussion and Analysis of Financial Condition 7 - 13 and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 *Information contained in this Form 10-Q includes statements that are forward looking as defined in Section 21-E of the Securities Exchange Act of 1934. Actual results may 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 described in the Company's filings with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and this Form 10-Q. PART I. FINANCIAL INFORMATION INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) - ----------------------------------------------------------------------------- March 31, December 31, 1997 1996 - ----------------------------------------------------------------------------- (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 54,581 $ 50,674 Accounts receivable, net 292,620 326,117 Inventories 87,578 89,411 Other current assets 39,076 37,718 - ----------------------------------------------------------------------------- Total current assets 473,855 503,920 Investments in affiliates 18,060 19,102 Other assets 59,432 59,106 Property, plant, and equipment, net 164,573 174,219 - ----------------------------------------------------------------------------- Total Assets $715,920 $756,347 ============================================================================= Liabilities and Shareholders' Equity Trade accounts payable $ 48,516 $ 51,205 Accrued compensation 49,894 50,364 Other accrued expenses 68,405 72,798 Billings in excess of sales 58,986 62,869 Short-term debt and current maturities of long-term debt 15,182 35,880 - ----------------------------------------------------------------------------- Total current liabilities 240,983 273,116 Deferred income taxes 6,120 6,204 Long-term debt 55,943 29,764 - ----------------------------------------------------------------------------- Total liabilities 303,046 309,084 - ----------------------------------------------------------------------------- Shareholders' equity: Common stock, par value $.10 per share - 100,000,000 shares authorized; 57,361,362 shares issued 5,736 5,736 Additional paid-in capital 228,655 229,675 Retained earnings 313,390 339,679 Unrealized holding gain on securities of affiliate 3,268 6,858 Cumulative translation adjustment 644 6,049 - ----------------------------------------------------------------------------- 551,693 587,997 Less - cost of 9,524,891 treasury shares at March 31, 1997, and 9,656,295 treasury shares at December 31, 1996 (138,819) (140,734) - ----------------------------------------------------------------------------- Total shareholders' equity 412,874 447,263 - ----------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $715,920 $756,347 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - ----------------------------------------------------------------------------- Quarter Ended March 31, 1997 1996 - ----------------------------------------------------------------------------- (In thousands except per share amounts) Revenues Systems $169,043 $163,184 Maintenance and services 83,715 93,522 - ----------------------------------------------------------------------------- Total revenues 252,758 256,706 - ----------------------------------------------------------------------------- Cost of revenues Systems 110,238 105,508 Maintenance and services 54,910 55,797 - ----------------------------------------------------------------------------- Total cost of revenues 165,148 161,305 - ----------------------------------------------------------------------------- Gross profit 87,610 95,401 Product development 25,959 25,335 Sales and marketing 59,703 62,378 General and administrative 25,057 24,425 Nonrecurring operating charge 1,095 --- - ----------------------------------------------------------------------------- Loss from operations (24,204) (16,737) Interest expense ( 1,235) ( 1,223) Equity in earnings of affiliates 1,468 2,180 Gain on sale of investment in affiliate --- 9,373 Other income (expense) - net ( 2,318) 16 - ----------------------------------------------------------------------------- Loss before income taxes (26,289) ( 6,391) Income taxes --- --- - ----------------------------------------------------------------------------- Net loss $(26,289) $( 6,391) ============================================================================= Net loss per share $( .55) $( .14) ============================================================================= Weighted average shares outstanding 47,758 46,902 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - ----------------------------------------------------------------------------- Quarter Ended March 31, 1997 1996 - ----------------------------------------------------------------------------- (In thousands) Cash Provided By (Used For): Operating Activities: Net loss $(26,289) $( 6,391) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 15,962 18,655 Gain on sale of investment in affiliate --- ( 9,373) Equity in earnings of affiliated companies ( 1,468) ( 2,180) Net changes in current assets and liabilities 13,983 11,733 - ----------------------------------------------------------------------------- Net cash provided by operating activities 2,188 12,444 - ----------------------------------------------------------------------------- Investing Activities: Purchases of property, plant, and equipment ( 4,995) (11,753) Capitalized software development costs ( 2,111) ( 5,593) Proceeds from sale of division and investment in affiliate 891 9,761 Other ( 1,059) 214 - ----------------------------------------------------------------------------- Net cash used for investing activities ( 7,274) ( 7,371) - ----------------------------------------------------------------------------- Financing Activities: Gross borrowings 28,396 7,602 Debt repayment (21,214) (25,553) Proceeds of employee stock purchases and exercise of stock options 841 1,181 - ----------------------------------------------------------------------------- Net cash provided by (used for) financing activities 8,023 (16,770) - ----------------------------------------------------------------------------- Effect of exchange rate changes on cash 970 ( 741) - ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 3,907 (12,438) Cash and cash equivalents at beginning of period 50,674 56,407 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 54,581 $ 43,969 ============================================================================= 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 statements of operations and cash flows for the quarter ended March 31, 1996 to provide comparability with the current period presentation. NOTE 2: As further described in the Company's Form 10-K filing for its year ending December 31, 1996, the Company has been party to certain arbitration proceedings with its 50%-owned affiliate, Bentley Systems, Inc. In May 1997, the Company was notified of an adverse determination of one of such proceedings. See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q for further details. NOTE 3: Inventories are stated at the lower of average cost or market and are summarized as follows: ----------------------------------------------------- March 31, December 31, 1997 1996 ----------------------------------------------------- (In thousands) Raw materials $25,925 $26,601 Work-in-process 29,021 24,008 Finished goods 11,368 12,945 Service spares 21,264 25,857 ----------------------------------------------------- Totals $87,578 $89,411 ===================================================== NOTE 4: Property, plant, and equipment - net includes allowances for depreciation of $289,921,000 and $307,536,000 at March 31, 1997 and December 31, 1996, respectively. NOTE 5: In first quarter 1997 the Company sold an unprofitable business unit to a third party. Total loss on the sale was $8,100,000, of which $7,000,000 ($.15 per share) had been recorded as an asset revaluation in fourth quarter 1996. The remaining loss of $1,100,000 ($.02 per share) was recorded upon final determination of the loss and closure of the sale in first quarter 1997 and is included in "Nonrecurring operating charge" in the consolidated statement of operations for that period. In addition, the Company has discontinued the operations of a second unprofitable business unit. This business closure did not materially affect the results of operations of the Company in first quarter 1997. Revenues and losses of these two business units totaled $24,000,000 and $16,000,000, respectively, for the full year 1996. Assets of the business units totaled $14,000,000 at December 31, 1996. NOTE 6: In the quarter ended March 31, 1996, the Company sold its stock investment in an affiliated company at a gain of $9,373,000 ($.20 per share). The gain is included in "Gain on sale of investment in affiliate" in the consolidated statement of operations for the quarter ended March 31, 1996. 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 business divestitures, in reconciling net loss to net cash provided by operations are as follows: --------------------------------------------------------------- Cash Provided By (Used For) Operations Quarter Ended March 31, 1997 1996 --------------------------------------------------------------- (In thousands) (Increase) decrease in: Accounts receivable $22,514 $31,628 Inventories (4,503) (5,832) Other current assets ( 290) 1,896 Increase (decrease) in: Trade accounts payable (1,755) (9,427) Accrued compensation and other accrued expenses ( 771) (4,951) Billings in excess of sales (1,212) (1,581) --------------------------------------------------------------- Net changes in current assets and liabilities $13,983 $11,733 =============================================================== Cash payments for income taxes totaled $918,000 and $1,080,000 for the quarters ended March 31, 1997 and 1996, respectively. Cash payments for interest in those periods totaled $1,243,000 and $1,198,000, respectively. First quarter 1997 investing and financing transactions that did not require cash included the sale of a noncore business unit of the Company in part for guaranteed notes receivable and future royalties totaling $3,200,000, and a $3,590,000 unfavorable mark-to-market adjustment of an investment in an affiliated company. There were no significant non-cash investing and financing transactions in the first quarter of 1996. NOTE 8: Net loss per share is computed by dividing net loss by the weighted average number of common and equivalent common shares outstanding. Employee stock options are the only common stock equivalent and are included in the weighted average number of common shares only if dilutive. Weighted average common and equivalent common shares outstanding for both the primary and fully diluted loss per share calculations for the quarters ended March 31, 1997 and 1996 were 47,758,000 and 46,902,000, respectively. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, which establishes standards for computing and presenting earnings per share for publicly held entities. The Statement is effective for fiscal years ending after December 15, 1997. Upon adoption, the Statement requires restatement of prior period earnings per share data. The Company will adopt this Statement for its fiscal year ending December 31, 1997 and does not expect the adoption of this new standard to materially affect previously reported or future earnings per share data. INTERGRAPH CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY - ------- Earnings. In first quarter 1997 the Company incurred a net loss of $.55 per share on revenues of $252.8 million. The first quarter 1996 loss was $.14 per share on revenues of $256.7 million, including a $9.4 million ($.20 per share) gain on the sale of an investment in an affiliated company. The first quarter 1997 loss from operations was $.51 per share versus a loss of $.36 per share for the first quarter of 1996. The $.15 per share quarter-to-quarter operating loss increase results primarily from a 16% decline in maintenance revenues and a 5.9 point decline in maintenance and professional services margin, while the Company's continuing operating losses in general are the result of stagnant revenues, declining margins, and operating expenses that are too high for the level of revenue being generated by the Company. Disposition of Noncore Business Units. In first quarter 1997 the Company sold an unprofitable business unit to a third party. Total loss on the sale was $8,100,000, of which $7,000,000 ($.15 per share) had been recorded as an asset revaluation in fourth quarter 1996. The remaining loss of $1,100,000 ($.02 per share) was recorded upon final determination of the loss and closure of the sale in first quarter 1997 and is included in "Nonrecurring operating charge" in the consolidated statement of operations for that period. In addition, the Company has discontinued the operations of a second unprofitable business unit. This business closure did not materially affect the results of operations of the Company in first quarter 1997. Revenues and losses of these two business units totaled $24,000,000 and $16,000,000, respectively, for the full year 1996. Assets of the business units totaled $14,000,000 at December 31, 1996. Litigation. As further described in the Company's Form 10-K filing for its year ending December 31, 1996, the Company has been party to certain arbitration proceedings with its 50%-owned affiliate, Bentley Systems, Inc. (BSI), the developer and owner of MicroStation, a software product utilized in many of the Company's software applications and for which the Company serves as a nonexclusive distributor. In May 1997, the Company received notice of the adverse determination of an arbitration proceeding with BSI in which the Company had alleged that BSI had inappropriately and without cause terminated a contractual arrangement with the Company, and in which BSI had filed a counterclaim against the Company seeking significant damages as the result of the Company's alleged failure to use best efforts to sell software support services pursuant to terms of the contractual arrangement terminated by BSI. The arbitrator's award against the Company is in the amount of $6.1 million, against which the Company will offset approximately $5.8 million in fees otherwise owed the Company by BSI. The cash position of the Company will therefore not be significantly adversely affected by this arbitration award. However, the Company will record a charge to earnings in the full amount of the $6.1 million award, or approximately $.13 per share. In addition, the contractual arrangement that was the subject of this arbitration has been terminated effective with the award, and as a result the Company will no longer sell the related software support services. The Company believes the cessation of such sales will not materially affect its financial position, results of operations, or cash flows in future periods, although there likely will be an increase in the expense of providing support services for certain MicroStation customers. The Company has one other arbitration proceeding in process related to its business relationship with BSI. The Company is vigorously defending its positions in that proceeding, but at present is unable to predict its outcome. Separately, the Company has engaged an investment banking firm to value and sell its ownership interest in BSI. At present, this firm is not actively seeking a buyer for the Company's interest in BSI due to disagreement between the Company and BSI regarding information to be provided potential buyers. See "MicroStation" below and the Company's Form 10-K for the year ended December 31, 1996 for further details of the Company's business relationship with BSI, its sales of MicroStation, and the financial effects on the Company of changes in this business relationship. The Company has other ongoing litigation, in particular that with Zydex, Inc., on which it is at present unable to predict an outcome. See the Company's Form 10-K filing for its year ended December 31, 1996 for further description of the Zydex matter. Remainder of the Year. Industry conditions and changes in operating system and hardware architecture strategies (as more fully described in the Company's Form 10-K filing for its year ended December 31, 1996) resulted in a transition period for the Company characterized by revenues that declined from 1992 through 1994, by restructuring charges in 1993 and 1995, and by annual net losses from 1993 through 1995. Although the Company substantially completed its operating system and hardware architecture transition in 1995, revenue to date associated with resulting new product offerings has not met expectations, and gross margin on product sales has continued to decline due primarily to price competition in the industry. The Company expects that industry trends toward higher performance and lower priced products, intense competition, rapidly changing technologies, shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers will continue in 1997 and beyond. The Company continues to believe that its operating system and hardware architecture strategies will prove to be the correct choices, that the industry is accepting Windows-NT, and that Windows-NT will become the dominant operating system in markets served by the Company. However, acceptance of this system and the Company's new products has been slower than anticipated, and the timing of such acceptance is unpredictable. Competing operating systems and products are available in the market, and several competitors of the Company offer or are adopting Windows-NT as the operating system for their products. There can be no assurance that the Windows-NT operating system will become dominant in markets served by the Company or that the Company's product strategies will result in restoration of profitability. Improvement in the Company's operating results will depend on its ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new hardware and software products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability. To achieve profitability, the Company must substantially increase sales volume and further align its operating expenses with the level of revenue being generated. ORDERS/REVENUES - --------------- Orders. First quarter systems orders totaled $159.0 million, an increase of 10% from first quarter 1996. U.S. orders increased 26% from the first quarter 1996 level due to improved orders in the U.S. commercial and federal areas of 61% and 24%, respectively. This improvement was partially offset by a decline in orders resulting from disposal of the two unprofitable business units described above. Excluding this impact, U.S. orders increased approximately 39% over first quarter 1996. Total international systems orders declined 3% from first quarter 1996. A 40% decline in Asia Pacific orders more than offset slight increases in all other international regions. First quarter 1996 Asia Pacific orders included two unusually large individual orders. New Products. During the first quarter, the Company added a line of Intel/Windows-based personal workstations that are priced to compete with PCs. The workstations have features and performance required by professional users and provide 3D graphics that the Company believes users will require in the future. In addition, the Company announced two new software products, Solid Edge 3.0 and GeoMedia, based on its Jupiter technology. Solid Edge 3.0 is a solid modeling system for designing mechanical parts and assemblies. The Company believes it removes the obstacles that once prevented companies from using 3D solid modeling as a mainstream design tool. GeoMedia allows users to access data warehouses virtually anywhere in the world and simultaneously perform analyses with varying data types and formats. Shipment of these products is planned to begin in the second quarter of 1997. Revenues. Total revenues for first quarter 1997 were $252.8 million, down approximately 2% from first quarter 1996. Sales outside the U.S. represented 55% of total revenues in first quarter 1997, relatively unchanged from the first quarter and full year 1996 mix. European revenues were 35% of total revenues for first quarter, compared to 37% for first quarter 1996 and 33% for the full year 1996. Systems. Systems revenue for first quarter was $169.0 million, up 4% from the same prior year period. U.S. commercial revenues were up 31%, while federal government and U.S. divisions' revenues declined by 2% and 66%, respectively, resulting in an overall 5% systems revenue increase in the U.S. Excluding the impact of the two unprofitable business units disposed of in the first quarter, U.S. systems revenues were up 13% from first quarter 1996. International systems revenues were up 3% from first quarter 1996 as a result of modest increases in all regions, with the exception of the Asia Pacific region, which experienced a 13% systems revenue decline as a result of an unusually large shipment to a single customer in first quarter 1996. Hardware revenues for first quarter 1997 increased 18% from the prior year period. Unit sales of workstations and servers were up 59% from first quarter 1996, while workstation and server revenues increased only 9% due to a 32% decline in the average per unit selling price. Sales of peripheral hardware products increased by 45% from the prior year period due to sales of graphics cards introduced during the second quarter of 1996. Software revenues declined 4% from the prior year level, including a 21% decline in MicroStation revenues (see further details below). Excluding MicroStation, software revenues increased 3% from first quarter 1996 due primarily to an increase in plant design, information management, and infrastructure software applications sales, partially offset by a decline in mechanical software sales. Sales of Windows-based software represented approximately 80% of total software revenues in the first quarter of 1997, up from approximately 70% in the first quarter of 1996. The Company is unable to predict the level of success of its products in the marketplace; however, it expects systems revenue levels to increase sequentially throughout the remainder of the year through growth in core product sales and sales of new hardware and software product offerings. MicroStation. Through the end of 1994, the Company had an exclusive license agreement with BSI, a 50%-owned affiliate of the Company, under which the Company distributed MicroStation, a software product developed and maintained by BSI and utilized in many of the Company's software applications. As a result of settlement of a dispute between the companies relative to the exclusivity of the Company's distribution license, effective January 1, 1995, the Company had a nonexclusive license to sell MicroStation via its direct sales force and to sell MicroStation via its indirect sales channels if MicroStation is sold with other Intergraph products. The Company's sales of MicroStation have declined each year since the change in the license agreement. During first quarter 1997, the Company's sales of MicroStation declined by approximately 21% from the same prior year period. The Company estimates that this decline increased first quarter 1997 net loss by approximately $2 million or $.04 per share. The Company is unable to predict the level of MicroStation sales that will occur in the future, but it is possible such sales will be further reduced. Maintenance and Services. Maintenance and services revenue consists of revenues from maintenance of Company systems and from Company provided training, consulting, and other services. These forms of revenue totaled $83.7 million for first quarter 1997, down 10% from the same prior year period. Maintenance revenues totaled $62.8 million for the quarter, down 16% from the same prior year period. The trend in the industry toward lower priced products and longer warranty periods has resulted in reduced levels of maintenance revenue, and the Company believes this trend will continue in the future. Services revenue represents approximately 8% of total revenues and has increased 10% from the same prior year period. Growth in services revenue has acted to partially offset the decline in maintenance revenue. The Company is endeavoring to increase revenues from its services business. Such revenues, however, produce lower gross margins than maintenance revenues. GROSS MARGIN - ------------ The Company's total gross margin was 34.7% for first quarter 1997, down 2.5 points from first quarter 1996 and 2.1 points from the full year 1996 levels. Systems margin for first quarter 1997 was 34.8%, down .5 points from first quarter 1996 and down 1.0 point from the full year 1996 level as a result of higher hardware content in the product mix and strengthening of the U.S. dollar in international markets, primarily Europe, partially offset by a slight decline in price discounting. In general, the Company's systems margin may be lowered by price competition, a stronger U.S. dollar in international markets, the effects of technological changes on the value of existing inventories, and a higher mix of federal government sales, which generally produce lower margins than commercial sales. Systems margins may be improved by higher software content in the product, a weaker dollar in international markets, a higher mix of international systems sales to total systems sales, and reductions in prices of component parts, which generally tend to decline over time in the industry. The Company is unable to predict the effects that many of these factors may have, but expects continuing pressure on its systems margin due primarily to industry price competition. Maintenance and services margin for first quarter 1997 was 34.4%, down 5.9 points from first quarter 1996 and 4.4 points from the full year 1996 level due to a decline in maintenance revenue without a corresponding decline in maintenance cost, and to an increase in professional services cost without a corresponding increase in professional services revenue. The Company believes that the trend in the industry toward lower priced products and longer warranty periods will continue to reduce its maintenance revenue, which will pressure maintenance margin in the absence of corresponding cost reductions. OPERATING EXPENSES - ------------------ Operating expenses for first quarter 1997 were flat with the comparable prior year period. Total employee headcount has declined 4.5% from that same period. Sales and marketing expense declined 4% from first quarter 1996 due primarily to strengthening of the U.S. dollar in international markets, primarily Europe, and to slight expense declines in most geographic regions. Product development and general and administrative expenses increased slightly as compared to the prior year period. NONOPERATING INCOME AND EXPENSE - ------------------------------- Interest expense was $1.2 million for both first quarter 1997 and 1996. The Company's average outstanding debt has increased in comparison to the first quarter of 1996; however, the Company's rate of interest on the debt has declined approximately 2 points due primarily to a change in lenders under the Company's primary credit facility. See "Liquidity and Capital Resources" below for a discussion of the Company's current financing arrangements. 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). The gain is included in "Gain on sale of investment in affiliate" in the consolidated statement of operations for the quarter ended March 31, 1996. "Other income (expense) - net" in the consolidated statements of operations consists primarily of foreign exchange 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 quarter of 1997 and the full year 1996, approximately 55% of the Company's revenues were derived from customers outside the United States, primarily through subsidiary operations. Most subsidiaries sell to customers and incur and pay operating expenses in local currency. These local currency revenues and expenses are translated to dollars for U.S. reporting purposes. A stronger U.S. dollar will decrease the level of reported U.S. dollar orders and revenues, decrease the dollar gross margin, and decrease reported dollar operating expenses of the international subsidiaries. For the first quarter of 1997, the U.S. dollar strengthened on average from its first quarter 1996 level, which decreased reported dollar revenues, orders, and gross margin, but also decreased reported dollar operating expenses in comparison to the prior year period. Currency effects did not have a material impact on the Company's results of operations for the first quarter of 1997 and 1996. 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 Italy) and Australia. Primarily, but not exclusively in these locations, the Company has certain currency related asset and liability exposures against which certain measures, primarily hedging, are taken to reduce currency risk. With respect to these exposures, the objective of the Company is to protect against financial statement volatility arising from changes in exchange rates with respect to amounts denominated for balance sheet purposes in a currency other than the functional currency of the local entity. The Company therefore enters into forward exchange contracts primarily related to these balance sheet items (intercompany receivables, payables, and formalized intercompany debt). Periodic changes in the value of these contracts offset exchange rate related changes in the financial statement value of these balance sheet items. Forward exchange contracts are purchased with maturities reflecting the expected settlement dates of these balance sheet items (generally three months or less), and only in amounts sufficient to offset possible significant currency rate related changes in the recorded values of these balance sheet items, which represent a calculable exposure for the Company from period to period. Since this risk is calculable, and these contracts are purchased only in offsetting amounts, neither the contracts themselves nor the exposed foreign currency denominated balance sheet items are likely to have a significant effect on the Company's financial position or results of operations. 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 $26.3 million in first quarter 1997 versus $6.4 million in first quarter 1996. These losses 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 March 31, 1997, cash totaled $54.6 million compared to $50.7 million at December 31, 1996. Cash generated from operations in first quarter 1997 totaled $2.2 million ($12.4 million in first quarter 1996). Net cash used for investing activities totaled $7.3 million in first quarter 1997 and 1996. Included in investing activities were capital expenditures of $5.0 million ($11.8 million in first quarter 1996), primarily for Intergraph products used in hardware and software development and sales and marketing activities. The Company expects that capital expenditures will require $40 to $50 million for the full year 1997, primarily for these same purposes. The Company's term loan and revolving credit agreement contains certain restrictions on the level of the Company's capital expenditures. Other significant investing activities included $2.1 million for capitalizable software development costs ($5.6 million in first quarter 1996). Investing activities in the first quarter of 1996 also included $9.8 million in proceeds from the sale of an investment in an affiliated company. Net cash provided by financing activities in first quarter 1997 totaled $8.0 million versus a net use of cash of $16.8 million in first quarter 1996. First quarter 1997 financing activities included a $7.2 million net addition to short- and long-term debt, compared with a net repayment of $18.0 million in the first quarter of 1996. In January 1997, the Company entered into a three year fixed term loan and revolving credit agreement. Available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, including accounts receivable, inventory, and property, plant, and equipment, with maximum borrowings of $100 million. The term loan portion of the agreement is in the principal amount of $20 million, with principal due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.5% at March 31, 1997) plus .625%. The agreement requires the Company to pay a facility fee at an annual rate of .15% of the maximum amount available under the credit line, an unused credit line fee at an annual rate of .25% of the average unused portion of the revolving credit line, and a monthly agency fee. At March 31, 1997, the Company had outstanding borrowings of $20 million, all of which was classified as long-term debt in the consolidated balance sheet, and an additional $39 million of the available credit line was allocated to support letters of credit issued by the Company. As of this same date, the borrowing base under the credit line was $89 million. The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures. In addition, the agreement includes restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes. In March of 1997, the Company entered into an agreement for the sale and leaseback of one of its facilities. Based on the terms of the agreement, the transaction has been accounted for as a borrowing. The amount borrowed totals $8.4 million and is included in "Long-term debt" in the 1997 consolidated balance sheet. The borrowing will be repaid over a period of 20 years at an implicit rate of interest of 10.7%. At March 31, 1997, the Company had approximately $54 million in debt on which interest is charged under various floating rate arrangements, primarily under its three year term loan and revolving credit agreement, an Australian term loan, and various mortgages. The Company is exposed to market risk of future increases in interest rates on these loans, with the exception of the Australian term loan, on which the Company has entered into an interest rate swap agreement. The Company is not currently generating sufficient cash to adequately fund its operations and build cash reserves, but believes that existing cash balances, together with cash to be generated by operations and cash available under its term loan and revolving credit agreement will be adequate to meet cash requirements for the remainder of 1997. INTERGRAPH CORPORATION AND SUBSIDIARIES PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K (a) Exhibit 10, agreement between Intergraph Corporation and Green Mountain, Inc., dated April 1, 1997.* (b) There were no reports on Form 8-K filed during the quarter ended March 31, 1997. *Denotes management contract or compensatory plan, contract, or arrangement required to be filed as an Exhibit to this Form 10-Q. 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: May 13, 1997 Date: May 13, 1997 EX-10 2 AGREEMENT --------- This agreement is between Intergraph Corporation and Green Mountain, Inc. d.b.a. UNIGLOBE Green Mountain Travel ("UNIGLOBE"). GENERAL - ------- It is a primary objective of Intergraph to maximize its control over the procurement of its business-travel arrangements and minimize its cost of business travel. It is a primary objective of UNIGLOBE to maximize its revenue from handling the personal travel of Intergraph employees. SCOPE - ----- This agreement covers business and personal travel arrangements made by the employees and spouses of Intergraph Corporation or any of its subsidiaries. Intergraph has the exclusive right to include or exclude other companies, subsidiaries, divisions, affiliates, associates or employee groups. DEFINITIONS - ----------- "ARC" means the Airlines Reporting Corporation "IATA" means the International Air Transport Association and "IATAN" means the International Airlines Travel Agent Network. DEDICATED FACILITIES - -------------------- It is a primary objective of Intergraph to process as much of its travel arrangements as is practical, at its discretion, through facilities dedicated to Intergraph, including exclusive pseudo- city codes and ARC/IATA numbers. UNIGLOBE will cooperate fully in assisting Intergraph in achieving this objective. UNIGLOBE will maintain a fully-appointed (as defined herein), full-service (as defined by ARC) travel agency on the premises of Intergraph in Huntsville, Alabama. This location will serve as the primary point of contact for all Intergraph employees wishing to make business-travel arrangements. UNIGLOBE must be kept separate and distinct from any other Green Mountain Inc. travel agencies and must be dedicated to serving Intergraph and others specifically authorized by Intergraph. This will not prohibit service by UNIGLOBE to the general public. UNIGLOBE may be required, at the request of Intergraph, to establish certain Remote Ticketing Branch locations as needed to meet the travel document distribution requirements noted herein. Unless otherwise agreed, all Remote Ticketing Branches will be satellite ticket printer (STP) locations (as classified by ARC) and to be used exclusively for Intergraph. ARC/IATA APPOINTMENTS - --------------------- UNIGLOBE must maintain in good standing all ARC and IATA appointments at each location servicing Intergraph throughout the term of the agreement and Intergraph will cooperate fully in these efforts. Intergraph will permit reasonable access to its premises by authorized representatives of ARC, IATAN, and the airlines for the purposes of verifying that UNIGLOBE and Intergraph are in full compliance with all applicable rules and regulations of these entitles. If this agreement is terminated for any reason, and Intergraph so requests, UNIGLOBE will use its best efforts to assist in transferring the ARC and IATA appointments to Intergraph or its designee. UNIGLOBE will use its best efforts to secure and maintain approval from all major domestic and international airlines and Amtrak to issue their rickets, with full commissions (unless otherwise negotiated by Intergraph), at all UNIGLOBE locations servicing Intergraph. ARC ADMINISTRATION - ------------------ Intergraph will be responsible for the weekly processing of all ARC coupons and ARC Sales reports as well as the timely reconciliation of ARC Area Settlement Bank reports for all transactions at UNIGLOBE. AUTOMATION - ---------- UNIGLOBE will provide Intergraph with a computerized reservations system ("CRS") acceptable to Intergraph to facilitate the booking of airline, ground transportation, lodging and related travel arrangements and the generation of necessary travel documents. UNIGLOBE will also provide a comprehensive, automated accounting and travel-information management system ("Back-Office System") acceptable to Intergraph to facilitate ARC administration and the generation of the generation of the management-information reports defined by Intergraph. The CRS and Back-Office System must be compatible, and fully interfaced with each other. Intergraph reserves the right to request a conversion of the primary CRS used by UNIGLOBE in support of the Intergraph account if, in its sole discretion, such a conversion would result in a substantial material benefit to Intergraph. UNIGLOBE will cooperate fully in such a conversion, including using its best efforts to minimize any costs assessed by the outgoing CRS vendor and, at the request of Intergraph Travel Services, negotiating favorable terms and conditions with the incoming CRS vendor. All discounts, credits or incentives received by UNIGLOBE from the CRS vendor(s) for CRS equipment, software, maintenance, and services must be disclosed to Intergraph Travel Services and will be used to offset the costs associated with servicing the Intergraph account. In the event that this agreement is terminated by either party, Intergraph reserves the right, with the concurrence of the CRS vendor(s), to retain the reservations system(s) equipment, and all Intergraph data associated with the system, and to assume responsibility for any payments for the remaining lease term. OWNERSHIP OF DATA - ----------------- UNIGLOBE agrees that Intergraph owns all data from reservations, ticketing, and billing of Intergraph travel arrangements and that Intergraph, or its authorized third party, will be given complete and unrestricted access to such data. In the event that this agreement is terminated by either party, UNIGLOBE will immediately provide to Intergraph all detail and summary data relative to Intergraph's travel activity stored in computer system(s) provided by UNIGLOBE. STAFFING/PERSONNEL - ------------------ UNIGLOBE will designate a single, qualified employee, acceptable to Intergraph, to act as the manager of UNIGLOBE. Intergraph will be responsible for staffing UNIGLOBE with qualified personnel in sufficient numbers to handle all reservations, ticketing, support and accounting functions required in support of the Intergraph account. INDEPENDENT CONTRACTOR - ---------------------- Intergraph and UNIGLOBE agree that all work performed by either under this agreement will be performed by each as an independent contractor and not as the employee, agent, or representative of the other. Neither party will be represent itself as an employee, agent or representative of the other when dealing with any third party. Neither party will have the authority to bind the other to any agreement with any third party without the prior written authorization of the other party. VENDOR NEGOTIATIONS - ------------------- Intergraph has the primary responsibility for the negotiation of discount and value-added products and services for its travelers. UNIGLOBE and Intergraph will advise each other whenever their combined purchase volumes might be leveraged to produce significant savings to Intergraph. UNIGLOBE will not pledge, or otherwise commit, any of Intergraph's travel activity for the purpose of obtaining volume discounts from travel vendors without the prior, written approval of Intergraph. Intergraph retains the right to negotiate discounts, reduced fares, credits, restriction waivers, and the like directly with airline carriers, and UNIGLOBE will cooperate fully with Intergraph and airline(s) in the negotiation and implementation of such discounts. RIGHTS TO REVENUE - ----------------- UNIGLOBE and Intergraph agree that all revenue, including overrides, generated as a result of Intergraph's business travel and travel-related activities belongs to Intergraph and will be retained by Intergraph to offset its direct and indirect costs associated with managing its business travel. Revenue generated by international travel will be used exclusively to offset Intergraph's costs and reimbursements to UNIGLOBE as outlined herein. Revenue generated as a result of the leisure or personal travel of Intergraph employees or others booked directly with UNIGLOBE will be retained by UNIGLOBE to offset its direct and indirect costs associated with providing these services. OVERRIDES/REVENUE ENHANCEMENTS - ------------------------------ INTERGRAPH and UNIGLOBE acknowledge that certain revenue will accrue to UNIGLOBE in the form of overrides, bonuses, credits, tickets or other revenue enhancements from the travel suppliers used by Intergraph and its business travelers. As noted above, all such revenue, regardless of form, belongs to Intergraph and will be retained by Intergraph to offset its direct and indirect costs associated with managing its business travel. From time to time, Intergraph may not be able to utilize certain non-cash revenue enhancements, including tickets. At the sole discretion of Intergraph Travel Services, unused tickets, credits, vouchers or similar non-cash benefits may be made available to UNIGLOBE. Such situations will be dealt with by Intergraph and UNIGLOBE on a case-by-case basis. FULL DISCLOSURE - --------------- UNIGLOBE will make full disclosure of all revenue, regardless of its source, and operating costs associated with Intergraph's travel activity. FIDUCIARY RELATIONSHIP - ---------------------- UNIGLOBE agrees that it has entered into a fiduciary relationship with Intergraph with respect to all financial obligations and responsibilities assumed by UNIGLOBE under the agreement. UNIGLOBE will maintain separate, complete and accurate records relating solely to Intergraph's business. These records must be available for inspection in Huntsville, Alabama by Intergraph or its representative(s). FINANCIAL AUDITS - ----------------- Intergraph, or its authorized representative, will have the right to perform periodic financial/accounting audits, and to review, in the course of any such audit, any of UNIGLOBE's data, documents, records, worksheets, systems, standards, procedures, or practices related to the agreement. UNIGLOBE must provide Intergraph its full cooperation and any assistance reasonably required to facilitate said audit. RECEIPT OF REVENUE - ------------------ All receipts from the cash sales of airline tickets, or other services, and all airline, ground services, and other commissions or revenue earned as a result of Intergraph's travel activity booked through UNIGLOBE will be distributed to Intergraph. ALLOWABLE EXPENSES - ------------------ The only expenses reimbursable by Intergraph under this agreement are as follows: (a) Direct labor by UNIGLOBE employees at the rate mutually agreed upon by the parties, provided the work was requested by Intergraph's Manager, Travel Services. (b) The monthly UNIGLOBE franchise fee to be calculated in accordance to the attached Exhibit A. (c) Changes for any authorized supplemental services outside the scope of the agreement and requested by Intergraph's Manager, Travel Services, in writing, during the period. (d) Costs of business insurance, operating licenses and taxes, including property taxes, paid by UNIGLOBE and directly attributable to the support of the Intergraph account. UNIGLOBE will use its best efforts to minimize all such costs. (e) All costs for CRS equipment used by UNIGLOBE in support of the Intergraph account, including all hardware, software, data lines, modifications and interface charges, as provided in the CRS agreements in place at the time of this agreement. (f) All fees associated with the off-site storage of ARC/IATA accountable documents. PAYMENTS - -------- UNIGLOBE and Intergraph will mutually agree on the administrative details of handling the accounting and distribution of all revenue, including the establishment of procedures to insure that UNIGLOBE is funded in a timely manner for all authorized operating expenses associated with servicing the Intergraph account. UNIGLOBE will provide Intergraph with sufficient information to reconcile invoices submitted for reimbursement. LEISURE/PERSONAL TRAVEL - ----------------------- UNIGLOBE will establish and maintain a leisure-travel office, staffed by UNIGLOBE personnel, on Intergraph's premises in Huntsville, Alabama. All requests received by Intergraph Travel Services from Intergraph employees to handle vacation/leisure- travel arrangements will be referred to this office. No major corporate or group accounts are to be serviced from this office without the prior authorization of Intergraph Travel Services. UNIGLOBE will be responsible for developing various discounted leisure-travel and vacation packages for Intergraph employees. Intergraph agrees to cooperate fully with UNIGLOBE Madison Travel in promoting these packages to Intergraph employees, provided that all such promotion efforts are in compliance with Intergraph policy. The leisure-travel office at Intergraph will use its best efforts to assist Intergraph customers and consultants visiting Huntsville with any changes or new reservations that they may require. Such assistance will be provided even if it does not generate any revenue to UNIGLOBE. During the term of this agreement, no other travel agency will be granted access to Intergraph offices in Huntsville for the propose of soliciting leisure, personal or vacation travel from Intergraph employees. RENT AND UTILITIES - ------------------ Intergraph will provide UNIGLOBE with sufficient office space on Intergraph's premises in Huntsville, Alabama. All costs associated with the ongoing use of the space will be the responsibility of Intergraph. All furnishings and office equipment will be the responsibility of UNIGLOBE. TELECOMMUNICATIONS - ------------------ Intergraph will provide UNIGLOBE with a single telephone line for access to Intergraph telephone network. This line must be used exclusively for communication with Intergraph employees. Unless otherwise agreed, all telephone instruments and related hardware and any external telephone lines will be responsibility of UNIGLOBE. NON-DISCLOSURE - -------------- This agreement is confidential. Neither party will disclose the existence of this agreement or any of its terms or conditions without the other's prior written consent. PUBLICITY - --------- UNIGLOBE agrees to submit to Intergraph all advertising, sales promotion, press releases and other publicity matters relating to the services performed by UNIGLOBE under this agreement wherein Intergraph's names or marks are mentioned or language from which the connection of said names or marks there with may be inferred or implied and UNIGLOBE further agrees not to publish or use such advertising, sales promotion, press releases, or publicity matters without Intergraph's written approval. TERM AND TERMINATION - -------------------- This agreement is effective as of April 1, 1997 and will continue until April 1, 1998. Either party may terminate this agreement upon ninety days written notice to the other. Any termination of this agreement will be without prejudice to any outstanding rights or obligations. CONTINUITY OF SERVICE - --------------------- UNIGLOBE recognizes that the services provided under this agreement are vital to Intergraph's overall effort, that continuity must be maintained without interruption, that upon expiration of this agreement a successor--either Intergraph or another vendor -- may continue these services, and that UNIGLOBE must give its best efforts and cooperation to effect an orderly and efficient transition to a successor. UNIGLOBE will be reimbursed for all reasonable transition costs provided those costs are incurred within an agreed transition period after expiration of the agreement and authorized, in writing, by Intergraph. NOTICES - ------- Notices and other correspondence related to the agreement should be directed to the parties by facsimile, telegraph, first-class mail (postage), or personal delivery, as follows: TO THE COMPANY TO THE AGENCY -------------- ------------- Manager, Travel Services President Mail Stop IW2002 Green Mountain, Inc. Intergraph Corporation Suite 114 Huntsville, Alabama 35894-0004 900 Bob Wallace Avenue Huntsville, Alabama 35801 Fax: 205-730-1029 Fax: 205-536-5942 EXHIBIT A UNIGLOBE SERVICE-FEE CALCULATION For the term of this agreement, the UNIGLOBE Service Fee paid by Intergraph to UNIGLOBE will be calculated as follows: (I) On the first $31,920.00 of gross income, ten percent (10%) (II) On the next $31,920.00 of gross income, seven percent (7%) (III) On the next $21,281.00 of gross income, five percent (5%) (IV) On the balance over $85,121.00 of gross income, two percent (2%) For the purpose of calculating this Service Fee, "gross income" is defined as all commissions or other cash revenue received by UNIGLOBE as a result of Intergraph's travel activity booked through UNIGLOBE. Bonuses, credits, discounts, incentives, or reimbursements paid directly to Intergraph by service providers will not be included in the calculation of gross income. ENTIRE AGREEMENT - ---------------- The agreement constitutes the entire understanding between Intergraph and Green Mountain, Inc. relating to the subject hereof and supersedes all prior communications on the subject. Any further modification of the agreement must be in writing and executed by both parties. For: Green Mountain, Inc. For: Intergraph Corporation /s/ Gerald F Donovan /s/ Pam Kilby - ---------------------- --------------------- Gerald F Donovan Pam Kilby President Senior Staff Supervisor, Travel Services Date: March 31, 1997 Date: March 31, 1997 ---------------- ---------------- For: Intergraph Corporation /s/ Thomas Burridge --------------------- Thomas Burridge Executive Director of Business Development 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 March 31, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 MAR-31-1997 54,581 0 292,620 0 87,578 39,076 454,494 289,921 715,920 240,983 55,943 0 0 5,736 407,138 715,920 169,043 252,758 110,238 165,148 111,814 0 1,235 (26,289) 0 (26,289) 0 0 0 (26,289) (.55) (.55) Other expenses include Product development expenses, Sales and marketing expenses, general and administrative expenses, and nonrecurring operating charges.
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