-----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, VA10q0Y2pQoPYoul8q/pOSDb7CvOYD3X3Y5UgtrC/tF7DywdJS9G//xfApdii1LD Vwm/uYV7Wo7h3kvN6JIz/A== 0000351145-99-000041.txt : 19990518 0000351145-99-000041.hdr.sgml : 19990518 ACCESSION NUMBER: 0000351145-99-000041 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: SEC FILE NUMBER: 000-09722 FILM NUMBER: 99625366 BUSINESS ADDRESS: STREET 1: THIGPEN HQ011 #9384 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2567302000 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, 1999 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) (256) 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: 48,780,369 shares outstanding as of March 31, 1999 =============================================================================== INTERGRAPH CORPORATION FORM 10-Q * March 31, 1999 INDEX Page No. -------- PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 2 Consolidated Statements of Operations for the quarters ended March 31, 1999 and 1998 3 Consolidated Statements of Cash Flows for the quarters ended March 31, 1999 and 1998 4 Notes to Consolidated Financial Statements 5 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. OTHER INFORMATION ----------------- Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 * 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 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, 1999 1998 - ------------------------------------------------------------------------------ (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 91,267 $ 95,473 Accounts receivable, net 299,511 312,123 Inventories 40,768 38,001 Other current assets 37,867 48,928 - ------------------------------------------------------------------------------ Total current assets 469,413 494,525 Investments in affiliates 9,191 12,841 Other assets 67,395 61,240 Property, plant, and equipment, net 121,491 127,368 - ------------------------------------------------------------------------------ Total Assets $667,490 $695,974 ============================================================================== Liabilities and Shareholders' Equity Trade accounts payable $ 59,208 $ 64,545 Accrued compensation 45,990 42,445 Other accrued expenses 88,615 79,160 Billings in excess of sales 64,882 68,137 Short-term debt and current maturities of long-term debt 10,717 23,718 - ------------------------------------------------------------------------------ Total current liabilities 269,412 278,005 Deferred income taxes 3,165 3,142 Long-term debt 59,744 59,495 - ------------------------------------------------------------------------------ Total liabilities 332,321 340,642 - ------------------------------------------------------------------------------ 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 221,337 222,705 Retained earnings 232,250 249,808 Accumulated other comprehensive income - cumulative translation adjustment 903 4,161 - ------------------------------------------------------------------------------ 460,226 482,410 Less - cost of 8,580,993 treasury shares at March 31, 1999 and 8,719,612 treasury shares at December 31, 1998 (125,057) (127,078) - ------------------------------------------------------------------------------ Total shareholders' equity 335,169 355,332 - ------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $667,490 $695,974 ============================================================================== 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, 1999 1998 - ------------------------------------------------------------------------------ (In thousands except per share amounts) Revenues Systems $170,308 $168,383 Maintenance and services 81,769 77,435 - ------------------------------------------------------------------------------ Total revenues 252,077 245,818 - ------------------------------------------------------------------------------ Cost of revenues Systems 119,959 120,988 Maintenance and services 48,774 46,907 - ------------------------------------------------------------------------------ Total cost of revenues 168,733 167,895 - ------------------------------------------------------------------------------ Gross profit 83,344 77,923 Product development 17,169 23,700 Sales and marketing 47,913 59,938 General and administrative 26,165 26,534 Nonrecurring operating charges --- 14,761 - ------------------------------------------------------------------------------ Loss from operations ( 7,903) (47,010) Gain on sale of assets --- 102,767 Arbitration settlement ( 8,562) --- Interest expense ( 1,418) ( 2,189) Other income (expense) - net 325 ( 626) - ------------------------------------------------------------------------------ Income (loss) before income taxes (17,558) 52,942 Income tax expense --- 3,500 - ------------------------------------------------------------------------------ Net income (loss) $(17,558) $ 49,442 ============================================================================== Net income (loss) per share - basic $ (0.36) $ 1.03 - diluted $ (0.36) $ 1.02 ============================================================================== Weighted average shares outstanding - basic 48,697 48,219 - diluted 48,697 48,335 ============================================================================== 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, 1999 1998 - ------------------------------------------------------------------------------ (In thousands) Cash Provided By (Used For): Operating Activities: Net income (loss) $(17,558) $49,442 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 11,596 13,964 Gain on sale of assets --- (102,767) Noncash portion of nonrecurring operating --- 13,978 charges Arbitration settlement 8,562 --- Net changes in current assets and liabilities 181 20,373 - ------------------------------------------------------------------------------ Net cash provided by (used for) operating activities 2,781 ( 5,010) - ------------------------------------------------------------------------------ Investing Activities: Proceeds from sales of assets 19,919 102,000 Purchases of property, plant, and equipment ( 2,752) ( 3,668) Capitalized software development costs ( 4,580) ( 2,465) Business acquisition, net of cash acquired ( 1,742) --- Purchase of software rights --- (26,292) Other ( 935) 120 - ------------------------------------------------------------------------------ Net cash provided by investing activities 9,910 69,695 - ------------------------------------------------------------------------------ Financing Activities: Gross borrowings 45 --- Debt repayment (15,282) (15,215) Proceeds of employee stock purchases and exercises of stock options 653 761 - ------------------------------------------------------------------------------ Net cash used for financing activities (14,584) (14,454) - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash ( 2,313) ( 772) - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents ( 4,206) 49,459 Cash and cash equivalents at beginning of period 95,473 46,645 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of period $91,267 $96,104 ============================================================================== 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, 1998 to provide comparability with the current period presentation. NOTE 2: Litigation. As further described in the Company's Form 10-K filing for its year ended December 31, 1998, the Company has ongoing litigation, in particular that with Intel Corporation. For further background information, see the Company's Form 10-K annual report for the year ended December 31, 1998. Significant litigation developments during 1999 are discussed below. Bentley Litigation. The Company maintains an equity ownership position in Bentley Systems, Incorporated ("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 March 1996, BSI commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia, relating to the respective rights of the companies under their April 1987 Software License Agreement and other matters, including the Company's alleged failure to properly account for and pay to BSI certain royalties on its sales of BSI software products, and seeking significant damages. On March 26, 1999, the Company and BSI executed a Settlement Agreement and Mutual General Release ("the Agreement") to settle this arbitration and mutually release all claims related to the arbitration or otherwise, except for a) certain litigation between the companies that is the subject of a separate settlement agreement and b) payment for products and services obtained or provided in the normal course of business since January 1, 1999. Both the Company and BSI expressly deny any fault, liability, or wrongdoing concerning the claims that were the subject matter of the arbitration and have settled solely to avoid continuing litigation with each other. Under the terms of the Agreement, the Company on April 1, 1999 made payment to BSI of $12,000,000 and transferred to BSI ownership of three million of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3,500,000 on the Company's books. As a result of the settlement, Intergraph's equity ownership in BSI has been reduced to approximately 33%. Additionally, the Company had a $1,200,000 net receivable from BSI relating to business conducted prior to January 1, 1999 which was written off in connection with the settlement. At March 31, 1999, the Company accrued a nonoperating charge to earnings of $8,562,000 ($.18 per share) in connection with the settlement, representing the portion of settlement costs not previously accrued. This charge is included in "Arbitration settlement" in the consolidated statement of operations for the quarter ended March 31, 1999. The $12,000,000 payable to BSI is included in "Other accrued expenses" in the March 31, 1999 consolidated balance sheet, and the Company's investment in BSI (reflected in "Investments in affiliates" in the March 31, 1999 consolidated balance sheet) has been reduced by $3,500,000. The April 1 $12,000,000 payment to BSI was funded primarily from existing cash balances. For further discussion regarding the Company's liquidity, see Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. NOTE 3: Zydex. On January 15, 1998, the Company's litigation with Zydex, Inc. was settled, resulting in the Company's purchase of 100% of the common stock of Zydex for $26,300,000 with $16,000,000 paid at closing of the agreement and the remaining amount to be paid in 15 equal monthly installments, including interest. In March 1998, the Company prepaid in full the remaining amount payable to Zydex. The former owner of Zydex retains certain rights to use, but not sell or sublicense, plant design system application software ("PDS") for a period of 15 years following the date of closing. In addition to the purchase price of common stock, the Company was required to pay additional royalties to Zydex in the amount of $1,000,000 at closing of the agreement. These royalties were included in the Company's 1997 results of operations and therefore did not affect first quarter 1998 results. The first quarter 1998 cash payments to Zydex were funded by the Company's primary lender and by proceeds from the sale of the Company's Solid Edge and Engineering Modeling System product lines. See Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q for a discussion of the Company's liquidity. The Company capitalized the $26,300,000 cost of the PDS software rights and is amortizing it over an estimated useful life of seven years. The unamortized balance, approximately $21,600,000 at March 31, 1999, is included in "Other assets" in the March 31, 1999 consolidated balance sheet. NOTE 4: Inventories are stated at the lower of average cost or market and are summarized as follows: ----------------------------------------------------------- March 31, December 31, 1999 1998 ----------------------------------------------------------- (In thousands) Raw materials $ 1,129 $ 2,739 Work-in-process 3,443 3,594 Finished goods 20,135 15,597 Service spares 16,061 16,071 ----------------------------------------------------------- Totals $40,768 $38,001 =========================================================== NOTE 5: Property, plant, and equipment - net includes allowances for depreciation of $256,649,000 and $259,074,000 at March 31, 1999 and December 31, 1998, respectively. NOTE 6: In January 1999, the Company acquired the assets of PID, an Israeli software development company, for $5,655,000. At closing, the Company paid $2,180,000 in cash, with the remainder due in varying installments through February 2002. The accounts and results of operations of PID have been combined with those of the Company since the date of acquisition using the purchase method of accounting. This acquisition did not materially affect the Company's revenues, net loss, or loss per share for the quarter ended March 31, 1999, nor is it expected to have a significant impact on results for the remainder of the year. NOTE 7: In November 1998, the Company sold substantially all of its U.S. manufacturing assets to SCI Technology, Inc. (SCI) a wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed responsibility for manufacturing of substantially all of the Company's hardware products. The total purchase price was $62,404,000, $42,485,000 of which was received during fourth quarter 1998. The final purchase price installment of $19,919,000 was received on January 12, 1999. For a complete discussion of the SCI transaction and its anticipated impact on future operating results and cash flows, see the Company's Form 10-K annual report for the year ended December 31, 1998. NOTE 8: In first quarter 1998, the Company sold its Solid Edge and Engineering Modeling System product lines to Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary for $105,000,000 in cash. The Company recorded a gain on this transaction of $102,767,000 ($2.13 per share). This gain is included in "Gain on sale of assets" in the consolidated statement of operations for the quarter ended March 31, 1998. NOTE 9: In first quarter 1998, the Company reorganized its European operations to reflect the organization of the Company into four distinct business units and to align operating expenses more closely with revenue levels in that region. The cost of this reorganization, primarily for employee severance pay and related costs, was originally estimated at $5,400,000 and recorded as a nonrecurring operating charge in the first quarter 1998 consolidated statement of operations. During the remainder of 1998, approximately $2,200,000 of the costs accrued in the first quarter were reversed as the result of the incurrence of lower severance costs than originally anticipated. In fourth quarter 1998, additional European reorganization costs of $2,000,000 were recorded for further headcount reductions. Approximately 80 European positions were eliminated in the sales and marketing, general and administrative, and pre- and post-sales support areas. Cash outlays to date related to this charge approximate $3,700,000, with $800,000 and $600,000 expended in the first quarters of 1998 and 1999, respectively. The remaining costs are expected to be paid over the remainder of 1999 and are included in "Other accrued expenses" in the March 31, 1999 consolidated balance sheet. The Company estimates the European reorganization will result in annual savings of approximately $7,000,000. The remainder of first quarter 1998 nonrecurring operating charges consists primarily of write-offs of a) certain intangible assets, primarily capitalized business system software no longer in use, b) goodwill recorded on a prior acquisition of a domestic subsidiary and determined to be of no value, and c) a noncompete agreement with a former third party consultant. Prior to the write-off, amortization of these intangibles accounted for approximately $3,400,000 of the Company's annual operating expenses. NOTE 10: Supplementary cash flow information is summarized as follows: Changes in current assets and liabilities, net of the effects of business acquisitions, divestitures, and nonrecurring operating charges, in reconciling net income (loss) to net cash provided by (used for) operations are as follows: ----------------------------------------------------------- Cash Provided By (Used For) Operations Quarter Ended March 31, 1999 1998 ----------------------------------------------------------- (In thousands) (Increase) decrease in: Accounts receivable, net $6,377 $32,790 Inventories (1,242) ( 1,835) Other current assets (4,723) ( 656) Increase (decrease) in: Trade accounts payable (3,981) (11,353) Accrued compensation and other accrued expenses 5,851 ( 373) Billings in excess of sales (2,101) 1,800 ----------------------------------------------------------- Net changes in current assets and liabilities $ 181 $20,373 =========================================================== Investing and financing transactions in first quarter 1999 that did not require cash included the acquisition of a business in part for future obligations totaling approximately $3,475,000, the sale of fixed assets in part for a $2,100,000 short-term note receivable, and the financing of new financial and administrative systems with a long-term note payable of approximately $2,000,000. There were no significant noncash investing and financing transactions in the first quarter of 1998. NOTE 11: Basic income (loss) per share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per share is computed using the weighted average number of common and equivalent common shares outstanding. Employee stock options are the Company's only common stock equivalent and are included in the calculation only if dilutive. NOTE 12: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information". This Statement replaces previous requirements that segment information be reported along industry lines with a new operating segment approach. Operating segments are defined as components of a business for which separate financial information is regularly evaluated in determining resource allocation and operating performance. The Company's operating segments are Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc. (IPS), VeriBest, Inc. (VeriBest) and the Software and Federal Systems ("Federal") business (collectively, the Software and Federal businesses form what is termed "Intergraph"), none of which were considered to be reportable segments under previous external reporting standards. The Company's reportable segments are strategic business units which are organized by the types of products sold and the specific markets served. They are managed separately due to unique technology and marketing strategy resident in each of the Company's markets. ICS supplies high performance Windows NT-based graphics workstations and PCs, 3D graphics subsystems, servers, and other hardware products. IPS develops, markets, and implements systems for public safety agencies. VeriBest serves the electronic design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. Intergraph supplies software and solutions, including hardware purchased from ICS, consulting, and services to the process and building and infrastructure industries and provides services and specialized engineering and information technology to support Federal government programs. The Company evaluates performance of the operating segments based on revenue and income from operations. Sales among the operating segments, the most significant of which are sales of hardware products from ICS to the other segments, are accounted for under a transfer pricing policy. Transfer prices approximate prices that would be charged for the same or similar property to similarly situated unrelated buyers. In the U.S., intersegment sales of products and services to be used for internal purposes are charged at cost. For international subsidiaries, transfer price is charged on intersegment sales of products and services to be used for either internal purposes or sale to customers. The following table sets forth revenues and operating income (loss) by operating segment for the quarters ended March 31, 1999 and 1998.
- ------------------------------------------------------------------------------------------------------------ Intergraph ----------------- Total (In thousands) ICS IPS VeriBest Software Federal Corporate Eliminations Company - ------------------------------------------------------------------------------------------------------------ Quarter ended March 31, 1999: Revenues Unaffiliated customers $ 62,177 $20,334 $ 7,467 $120,715 $41,384 --- --- $252,077 Intersegment revenues 31,148 957 53 1,830 1,380 --- $(35,368) --- - -------------------------------------------------------------------------------------------------------------- Total Revenues $ 93,325 $21,291 $ 7,520 $122,545 $42,764 --- $(35,368) $252,077 - -------------------------------------------------------------------------------------------------------------- Operating income (loss) before nonrecurring operating charges $ (6,667) $ 1,927 $(1,801) $ 3,393 $ 4,233 $(8,981) $ (7) $ (7,903) - -------------------------------------------------------------------------------------------------------------- Quarter ended March 31, 1998: Revenues Unaffiliated customers $ 54,233 $12,375 $ 6,905 $139,484 $32,821 --- --- $245,818 Intersegment revenues 56,777 65 185 631 1,424 --- $(59,082) --- - ------------------------------------------------------------------------------------------------------------- Total Revenues $111,010 $12,440 $ 7,090 $140,115 $34,245 --- $(59,082) $245,818 - ------------------------------------------------------------------------------------------------------------- Operating income (loss) before nonrecurring operating charges $(19,551) $ 857 $(4,698) $ 425 $(2,458) $(6,732) $ (92) $(32,249) - --------------------------------------------------------------------------------------------------------------
Effective January 1, 1999, the Utilities business of Intergraph was merged into IPS, increasing the operating segment's first quarter 1999 revenues and operating income by $9,000,000 and $1,000,000, respectively, and reducing the Intergraph Software operating segment figures by those amounts. Amounts included in the "Corporate" column consist of general corporate expenses, primarily general and administrative expenses (including legal fees of $4,282,000 and $3,356,000 in first quarter 1999 and 1998, respectively) remaining after charges to the operating segments based on segment usage of those services. Significant profit and loss items for first quarter 1999 that are not allocated to the segments and not included in the analysis above include an $8,562,000 charge for an arbitration settlement agreement reached with Bentley Systems, Inc. (see Note 2). Such items for first quarter 1998 include a gain on sale of assets of $102,767,000 (see Note 8) and nonrecurring operating charges of $14,761,000 (see Note 9). The Company does not evaluate performance or allocate resources based on assets and, as such, it does not prepare balance sheets for its operating segments, other than those of its wholly-owned subsidiaries. NOTE 13: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Under this Statement, all nonowner changes in equity during a period are reported as a component of comprehensive income (loss). During the first quarters of 1999 and 1998, the Company's comprehensive income (loss) totaled ($20,816,000) and $49,586,000, respectively. Comprehensive income (loss) differs from net income (loss) due to foreign currency translation adjustments. NOTE 14: Effective January 1, 1999, the Company adopted American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", which defines computer software costs to be capitalized or expensed to operations. Implementation of this new accounting standard did not significantly affect the Company's first quarter 1999 results of operations, nor is it expected to have a significant impact on results for the remainder of the year, as the Company has historically been in substantial compliance with the practice required by the Statement. NOTE 15: Subsequent Event. On April 15, 1999, the Company completed the sale of InterCAP Graphics Systems, Inc., a wholly owned subsidiary, to Micrografx, a global provider of enterprise graphics software, for $12,150,000, consisting of $3,853,000 in cash received at closing, a deferred payment of $2,500,000 due in August 1999, and a $5,797,000 convertible subordinated debenture due in March 2002. The resulting gain on this transaction, expected to be in the range of $10,000,000 to $12,000,000, will be included in the Company's second quarter 1999 operating results. InterCAP's revenues and losses for 1998 were $4,660,000 and $1,144,000, respectively, ($3,600,000 and $1,853,000 for 1997). Assets of the subsidiary at December 31, 1998 totaled $1,550,000. The subsidiary did not have a material effect on the Company's results of operations for first quarter 1999. INTERGRAPH CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY - ------- Earnings. In first quarter 1999, the Company incurred a net loss of $.36 per share on revenues of $252.1 million, including an $8.6 million ($.18 per share) charge for settlement of its arbitration proceedings with Bentley Systems, Inc. (See "Litigation" following.) In first quarter 1998, the Company earned net income of $1.02 per share on revenues of $245.8 million, including a $102.8 million ($2.13 per share) gain on the sale of its Solid Edge and Engineering Modeling System product lines and a $14.8 million ($.31 per share) charge for nonrecurring operating expenses, primarily for employee termination costs and write-off of certain intangible assets. First quarter 1999 loss from operations excluding nonrecurring operating expenses was $.16 per share versus a $.67 per share loss for first quarter 1998. The improvement is the result of a 17% decline in operating expenses and a 1.4 point increase in gross margin. Nonrecurring Operating Charges. In first quarter 1998, the Company reorganized its European operations to reflect the organization of the Company into four distinct business units and to align operating expenses more closely with revenue levels in that region. The cost of this reorganization, primarily for employee severance pay and related costs, was originally estimated at $5.4 million and recorded as a nonrecurring operating charge in the first quarter 1998 consolidated statement of operations. During the remainder of 1998, approximately $2.2 million of the costs accrued in the first quarter were reversed as the result of incurrence of lower severance costs than originally anticipated. In fourth quarter 1998, additional European reorganization costs of $2 million were recorded for further headcount reductions. Approximately 80 European positions were eliminated in the sales and marketing, general and administrative, and pre- and post-sales support areas. Cash outlays to date related to this charge approximate $3.7 million, with $.8 million and $.6 million expended in the first quarters of 1998 and 1999, respectively. The remaining costs are expected to be paid over the remainder of 1999 and are included in "Other accrued expenses" in the March 31, 1999 consolidated balance sheet. The Company estimates the European reorganization will result in annual savings of approximately $7 million. The remainder of the first quarter 1998 nonrecurring operating charges consists primarily of write-offs of a) certain intangible assets, primarily capitalized business system software no longer in use, b) goodwill recorded on a prior acquisition of a domestic subsidiary and determined to be of no value, and c) a noncompete agreement with a former third party consultant. Prior to the write-off, amortization of these intangibles accounted for approximately $3.4 million of the Company's annual operating expenses. Litigation. As further described in the Company's Form 10-K filing for its year ended December 31, 1998, the Company has ongoing litigation, in particular that with Intel Corporation, and its business is subject to certain risks and uncertainties. For further background information see the Company's Form 10-K annual report for the year ended December 31, 1998. Significant litigation developments during 1999 are discussed below. Bentley Litigation. The Company maintains an equity ownership position in Bentley Systems, Incorporated ("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 March 1996, BSI commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia, relating to the respective rights of the companies under their April 1987 Software License Agreement and other matters, including the Company's alleged failure to properly account for and pay to BSI certain royalties on its sales of BSI software products, and seeking significant damages. On March 26, 1999, the Company and BSI executed a Settlement Agreement and Mutual General Release ("the Agreement") to settle this arbitration and mutually release all claims related to the arbitration or otherwise, except for a) certain litigation between the companies that is the subject of a separate settlement agreement and b) payment for products and services obtained or provided in the normal course of business since January 1, 1999. Both the Company and BSI expressly deny any fault, liability, or wrongdoing concerning the claims that were the subject matter of the arbitration and have settled solely to avoid continuing litigation with each other. Under the terms of the Agreement, the Company on April 1, 1999 made payment to BSI of $12 million and transferred to BSI ownership of three million of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3.5 million on the Company's books. As a result of the settlement, Intergraph's equity ownership in BSI has been reduced to approximately 33%. Additionally, the Company had a $1.2 million net receivable from BSI relating to business conducted prior to January 1, 1999 which was written off in connection with the settlement. At March 31, 1999, the Company accrued a nonoperating charge to earnings of approximately $8.6 million ($.18 per share) in connection with the settlement, representing the portion of settlement costs not previously accrued. This charge is included in "Arbitration settlement" in the consolidated statement of operations for the quarter ended March 31, 1999. The $12 million payable to BSI is included in "Other accrued expenses" in the March 31, 1999 consolidated balance sheet, and the Company's investment in BSI (reflected in "Investments in affiliates" in the March 31, 1999 consolidated balance sheet) has been reduced by $3.5 million. The $12 million payment to BSI was funded primarily from existing cash balances. For further discussion regarding the Company's liquidity, see "Liquidity and Capital Resources" following. Year 2000 Issue. As further described in the Company's Form 10-K annual report for the year ended December 31, 1998, the Company has initiated a program to mitigate and/or prevent the possible adverse effects on its operations of Year 2000 problems in its software and hardware products sold to customers and in its internally used software and hardware. The Company's efforts to identify and resolve Year 2000 issues related to its hardware and software product offerings are nearing completion and should be substantially complete at the end of second quarter 1999. All products currently offered in the Company's standard price list are Year 2000 compliant or will be so certified as new versions and utilities are released. In addition, the Company has completed a significant effort to contact its customers and business partners to ensure that customers are aware of how to acquire detailed Year 2000 information regarding any Intergraph-produced product. The Company's Web site allows customers to request specific product information related to the Year 2000 issue, and provides a mechanism for requesting specific product upgrade paths. Customers under maintenance contract with the Company are being upgraded to compliant versions of the Company's software, and selected hardware remedies have been completed where appropriate. Accordingly, the Company does not believe that any Year 2000 problems in its installed base of products or in its current product offerings present a material exposure for the Company. However, the Company could suffer a loss of maintenance revenue should its customers discontinue any noncompliant products and not replace them with other products of the Company, and product sales could be lost should customers replace any noncompliant products with products of other companies. In addition, any liability claims by customers would increase the Company's legal expenses and, if successful, could have an adverse impact on the results of operations and financial position of the Company. The Company's product compliance costs have not had and are not anticipated to have a material impact on its results of operations or financial condition. Year 2000 readiness of the Company's business critical internal systems has been made a top priority by the Company's Year 2000 program team. All business critical internal systems upgrades and programming changes are scheduled to be tested and implemented by the end of second quarter 1999. The Company completed the majority of these implementations in first quarter 1999 and is currently on target to meet this deadline. The Company believes that it will successfully implement all internal systems changes and replacements necessary to ensure the Year 2000 compliance of all business critical internal systems, but has contingency plans to further upgrade existing systems if implementation falls behind schedule. Year 2000 compliance costs related to the Company's internal systems have not had and are not anticipated to have a material impact on its results of operations or financial condition. The Company is conducting a program of investigation with its critical suppliers to ensure continuous and uninterrupted supply, and includes Year 2000 provisions in its new supplier agreements. This program consists primarily of a major survey campaign and follow-up with significant suppliers to monitor compliance. The Company has also initiated discussions with other entities with which it interacts electronically, including customers and financial institutions, to ensure those parties have appropriate plans to remediate any Year 2000 issues. To date, responses to third party Year 2000 surveys do not provide assurance that these third parties will achieve Year 2000 compliance, as most companies are reluctant to make such representations. However, most of these parties have Year 2000 programs in place and, to date, no significant risks have been identified. There cannot be complete assurance that the systems of other companies on which the Company relies will be converted timely, and the Company could be adversely impacted by any suppliers, customers, and other businesses who do not successfully address this issue. The Company continues to assess these risks in order to reduce any potential adverse impact. The Company will develop contingency plans by the end of second quarter 1999 to address potential third party noncompliance issues, should any be present. The costs of the Year 2000 project and the dates on which significant phases will be completed are based on management's best estimates, which have been derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans, and other factors. There can be no assurance that these estimates of costs and completion dates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and implement new systems in a timely manner, and similar uncertainties. The Company believes it has an effective program in place to resolve the Year 2000 issue with respect to its internal systems in a timely manner; however, it has not yet completed all necessary phases of this program. In the event that the Company does not complete any additional phases, which is not anticipated, the Company could experience significant delays in sales order processing, shipping, invoicing, and collections, among other areas. In addition, the Company's operations could be materially adversely affected if Year 2000 compliance is not achieved by significant vendors. Remainder of the Year. The Company expects that the industry will continue to be characterized by higher performance and lower priced products, intense competition, rapidly changing technologies, shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers. The Company believes that its operating system and hardware architecture strategies are the correct choices. However, competing operating systems and products are available in the market, and competitors of the Company offer Windows NT and Intel as the systems for their products. Improvement in the Company's operating results will depend on its ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new hardware and software products that are competitively priced, offer enhanced performance, and meet customers' requirements for standardization and interoperability, and will further depend on its ability to successfully implement its strategic direction. In addition, the Company faces significant operational and financial uncertainty of unknown duration due to its dispute with Intel. (See the Company's Form 10-K annual report for the year ended December 31, 1998 for a complete description of the Company's dispute with Intel and for a discussion of the effects of this dispute on the Company's operations.) To achieve and maintain profitability, the Company must increase its sales volume and/or continue to align its operating expenses with the level of revenue and gross margin currently being generated. ORDERS/REVENUES - --------------- Orders. First quarter systems orders totaled $144.1 million, a decline of 8% from first quarter 1998. U.S. orders declined by 15% while international orders were flat with the prior year period. The U.S. decline is primarily attributable to weakness in the Company's U.S. commercial product sector. New Products. In February 1999, the Company announced the availability of Intel's new Pentium III processor at 500 MHz in its line of TDZ 2000 ViZual Workstations. These products include the TDZ 2000 GL2 for the technical and creative markets and the StudioZ RenderRAX III, first in the family of rackmount TDZ 2000 workstations, for the broadcast/video and entertainment markets. The StudioZ RenderRAX III is the first Pentium III processor-based rackmount rendering engine for animation and computer-generated imagery applications. In March 1999, the Company announced the availability of its TDZ 2000 GX1 ViZual Workstations using Intel's new Pentium III Xeon processors at 500 MHz. Other TDZ 2000 GX1 models with Pentium III Xeon processors at 550 MHz will be available simultaneously with Intel's shipment of the new processors. The Company also provides an affordable upgrade path to these faster processors for customers using Intergraph's Pentium II Xeon processor-based TDZ 2000 workstations. The success of new product introductions is dependent on a number of factors, including market acceptance, the Company's management of risk associated with product transition, the effective management of inventory levels in line with anticipated demand, and the industry-wide risk that new products may have defects in the introductory stage. Because of these uncertainties, the Company cannot determine the ultimate effect that new products will have on its sales or operating results. Revenues. Total revenues for first quarter 1999 were $252.1 million, up approximately 3% from first quarter 1998. Sales outside the U.S. represented 51% of total revenues in first quarter 1999, relatively flat with the first quarter and full year 1998 levels. European revenues were 32% of total revenues for first quarter 1999, unchanged from first quarter and full year 1998. Systems. Systems revenue for first quarter was $170.3 million, relatively flat with the prior year period. Competitive conditions manifested in declining per unit sales prices continue to adversely affect the Company's systems revenues and margin. U.S. revenues were up 2%, due primarily to growth in the Company's federal government business. European revenues improved by 5%, while Asia Pacific and Canadian revenues declined by 2% and 23%, respectively. Excluding the impact of a weaker dollar, European revenues improved by only 2% and Asia Pacific revenues declined by 7%. The Canadian revenue decline was due primarily to strengthening of the U.S. dollar against Canadian currency. First quarter 1998 revenues were severely impacted by delays in new product releases, primarily the effect of the Intel lawsuit, resulting in lost sales for the Company as well as increased discounting on available products. A slight recovery from these effects in first quarter 1999 was offset by the decline in revenues resulting from the sale of the Company's Solid Edge and Engineering Modeling System product lines in March 1998. Hardware revenues for first quarter 1999 were down 8% from the prior year period. Unit sales of workstations and servers were up 12%, while workstation and server revenues declined by 3% due to a 14% decline in the average per unit selling price. Price competition in the industry continues to erode per unit selling prices. Sales of peripheral hardware products decreased by 16% from the prior year period due primarily to a 36% decline in sales of storage devices and memory as well as the loss of revenue resulting from the April 1998 sale of the Company's printed circuit board manufacturing facility. Software revenues declined 4% from first quarter 1998. Significant increases in sales of Geomedia, photogrammetry, ICS and Federal software were offset by across the board declines in revenues from other software products, with the exception of plant design software application revenues which remained flat with the prior year period. Plant design is currently the Company's highest volume software offering, representing 28% of total software sales for first quarter 1999. Sales of Windows-based software represented approximately 90% of total software revenues in both first quarter 1999 and 1998. Maintenance and Services. Maintenance and services revenue consists of revenues from maintenance of Company systems and from Company provided services, primarily training and consulting. These forms of revenue totaled $81.8 million in first quarter 1999, up 6% from the same prior year period. Maintenance revenues totaled $52.7 million for the quarter, down 1% from the prior year period. The trend in the industry toward lower priced products and longer warranty periods has limited the growth potential for maintenance revenue, and the Company believes this trend will continue into the future. Services revenue represents approximately 12% of total revenues and has increased 20% from the same prior year period. Growth in services revenue has acted to offset the decline in maintenance revenue. The Company is endeavoring to grow its services business and has redirected the efforts of its hardware maintenance organization to focus increasingly on systems integration. Revenues from these services, however, typically produce lower gross margins than maintenance revenues. GROSS MARGIN - ------------ The Company's total gross margin for first quarter 1999 was 33.1%, up 1.4 points and 1.6 points from the first quarter 1998 and full year 1998 levels, respectively. Systems margin was 29.6%, up 1.5 points from first quarter 1998 and flat with the full year 1998 level due primarily to a decline in unfavorable manufacturing variances as the result of outsourcing the Company's manufacturing operations in fourth quarter 1998. Additionally, systems margins were positively impacted by weakening of the U.S. dollar in international markets, primarily Europe and Asia, in comparison to the prior year period. In general, the Company's systems margin may be lowered by price competition, a higher hardware content in the product mix, a stronger U.S. dollar in international markets, the effects of technological changes on the value of existing inventories, and a higher mix of federal government sales, which generally produce lower margins than commercial sales. Systems margins may be improved by higher software content in the product, a weaker dollar in international markets, a higher mix of international systems sales to total systems sales, and reductions in prices of component parts, which generally tend to decline over time in the industry. While the Company is unable to predict the effects that many of these factors may have on its systems margins, it expects continuing pressure on its systems margin as the result of increasing industry price competition. Maintenance and services margin for first quarter 1999 was 40.4%, up 1 point from first quarter 1998 and 3.5 points from the full year 1998 level primarily due to a significant improvement in services revenues without a corresponding increase in cost. The Company continues to monitor maintenance and services cost closely and has taken certain measures, including reductions in headcount, to align these costs with the current revenue level. The Company believes that the trend in the industry toward lower priced products and longer warranty periods will continue to curtail its maintenance revenue, which will pressure maintenance margin in the absence of corresponding cost reductions. OPERATING EXPENSES - ------------------ Operating expenses for first quarter 1999 were $91.2 million, down 17% from the comparable prior year period. In response to the level of its operating losses, the Company has taken various actions, including employee terminations and sales of unprofitable business operations, to reduce its average employee headcount by approximately 13% from first quarter 1998. Product development expense declined 28% from first quarter 1998 due primarily to decreases in labor and overhead expenses resulting from the headcount decline and from an increase in software development projects qualifying for capitalization, primarily related to the Company's federal shipbuilding effort. Sales and marketing expense declined 20% from the prior year period due to reductions in advertising and in salaries and commissions from the decline in average headcount. The Company's sales and marketing expenses are inherently activity based and can be expected to increase in quarters of higher activity levels. General and administrative expense was flat with the prior year period. A moderate increase in legal fees related to the Intel litigation was offset by an across the board decline in other expenditures. NONOPERATING INCOME AND EXPENSE - ------------------------------- Interest expense was $1.4 million for first quarter 1999, compared to $2.2 million for first quarter 1998. The Company's average outstanding debt has declined in comparison to first quarter 1998 due primarily to repayment of borrowings under the Company's revolving credit facility using proceeds from sales of assets. See "Liquidity and Capital Resources" below for a discussion of the Company's current financing arrangements. "Other income (expense) - net" in the consolidated statements of operations consists primarily of interest income, foreign exchange losses, equity in the earnings of investee companies, and other miscellaneous items of nonoperating income and expense. 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 1999 and the full year 1998, approximately 51% of the Company's revenues were derived from customers outside the United States, primarily through subsidiary operations. Most subsidiaries sell to customers and incur and pay operating expenses in local currency. These local currency revenues and expenses are translated to U.S. dollars for reporting purposes. A stronger U.S. dollar will decrease the level of reported U.S. dollar orders and revenues, decrease the dollar gross margin, and decrease reported dollar operating expenses of the international subsidiaries. For the first quarter of 1999, the U.S. dollar weakened on average from its first quarter 1998 level, which increased reported dollar revenues, orders, and gross margin, but also increased reported dollar operating expenses in comparison to the prior year period. The Company estimates that this weakening of the U.S. dollar in its international markets, primarily Europe and Asia, improved its first quarter 1999 results of operations by approximately $.03 per share in comparison to first quarter 1998. The Company conducts business in all major markets outside the U.S., but the most significant of these operations with respect to currency risk are located in Europe and Asia. Local currencies are the functional currencies for the Company's European subsidiaries. The U.S. dollar is the functional currency for all other international subsidiaries. With respect to the currency exposures in these regions, the objective of the Company is to protect against financial statement volatility arising from changes in exchange rates with respect to amounts denominated for balance sheet purposes in a currency other than the functional currency of the local entity. The Company will therefore enter into forward exchange contracts related to certain balance sheet items, primarily intercompany receivables, payables, and formalized intercompany debt, when a specific risk has been identified. Periodic changes in the value of these contracts offset exchange rate related changes in the financial statement value of these balance sheet items. Forward exchange contracts, generally less than three months in duration, are purchased with maturities reflecting the expected settlement dates of the balance sheet items being hedged, and only in amounts sufficient to offset possible significant currency rate related changes in the recorded values of these balance sheet items, which represent a calculable exposure for the Company from period to period. Since this risk is calculable, and these contracts are purchased only in offsetting amounts, neither the contracts themselves nor the exposed foreign currency denominated balance sheet items are likely to have a significant effect on the Company's financial position or results of operations. The Company does not generally hedge exposures related to foreign currency denominated assets and liabilities that are not of an intercompany nature, unless a significant risk has been identified. It is possible the Company could incur significant exchange gains or losses in the case of significant, abnormal fluctuations in a particular currency. By policy, the Company is prohibited from market speculation via forward exchange contracts and therefore does not take currency positions exceeding its known financial statement exposures, and does not otherwise trade in currencies. At March 31, 1999, the Company's only outstanding forward contracts related to formalized intercompany loans between the Company's European subsidiaries and are immaterial to the Company's current financial position. The Company is not currently hedging any of its foreign currency risks in the Asia Pacific region or its U.S. exposures related to foreign currency denominated intercompany loans. Euro Conversion. On January 1, 1999, eleven member countries of the European Monetary Union (EMU) fixed the conversion rates of their national currencies to a single common currency, the "Euro". The national currencies of the participating countries will continue to exist through July 1, 2002. Euro currency will begin to circulate on January 1, 2002. With respect to the Company, U.S. and European business systems are being upgraded to accommodate the Euro. Conversion of all financial systems will be completed at various times through the remainder of 1999. The Company is prepared to conduct business in Euros during 1999 with those customers and vendors who choose to do so. The Company is continuing to evaluate business implications resulting from full Euro conversion by 2002, including the impact of cross-border price transparency within the EMU and exposure to market risk with respect to financial instruments. While the Company has not yet completed its assessment of these business implications on its results of operations or financial condition, it does not anticipate this impact will be material. The Euro did not have a significant impact on the Company's results of operations or cash flows in first quarter 1999. INCOME TAXES - ------------ The Company incurred a pretax loss of $17.6 million in first quarter 1999 versus pretax income of $52.9 million in first quarter 1998. The first quarter 1999 loss generated no net financial statement tax benefit, as tax expenses in individually profitable international subsidiaries offset available tax benefits. Income tax expense for first quarter 1998 resulted primarily from taxes on individually profitable international subsidiaries and U.S. federal alternative minimum tax. The sale of the Solid Edge and Engineering Modeling System product lines did not create a significant regular tax liability for the Company due to the availability of net operating loss carryforwards to offset earnings. RESULTS BY OPERATING SEGMENT - ---------------------------- In first quarter 1999, Intergraph Computer Systems incurred an operating loss of $6.7 million on revenues of $93.3 million, compared to a first quarter 1998 operating loss of $19.6 million on revenues of $111 million. ICS's operating loss improvement resulted primarily from an increase in systems gross margin. Additionally, operating expenses declined by approximately 24% from the prior year period, primarily the result of headcount reductions in 1998. During 1998, ICS's headcount was reduced by approximately 33% as the result of employee terminations, the outsourcing of manufacturing, and normal attrition. ICS's first quarter 1998 results of operations were significantly adversely impacted by factors associated with the Company's dispute with Intel, the effects of which included lost momentum, lost revenue and margin as well as increased operating expenses, primarily for marketing and public relations expenses. (See the Company's Form 10-K annual report for the year ended December 31, 1998 for a complete description of the Company's dispute with Intel and its effects on the operations of ICS and the Company.) ICS's first quarter 1998 margins were also severely impacted by volume and inventory value related manufacturing variances incurred prior to the outsourcing of its manufacturing to SCI in fourth quarter 1998. For first quarter 1999, this outsourcing contributed to the improvement in ICS's systems margins. However, systems gross margin remains insufficient to cover the operating segment's current level of operating expenses. In first quarter 1999, Intergraph Public Safety earned operating income of $1.9 million on revenues of $21.3 million, compared to operating income in first quarter 1998 of $.9 million on revenues of $12.4 million. Effective January 1, 1999, the Utilities business of Intergraph was formally merged into IPS, increasing the operating segment's first quarter revenues and operating income by $9 million and $1 million, respectively. First quarter 1998 operating results for the Utilities business are reflected in the Intergraph Software operating segment. VeriBest incurred operating losses of $1.8 million and $4.7 million in the first quarters of 1999 and 1998, respectively, on revenues of $7.5 million and $7.1 million. Maintenance revenues improved by 31% from first quarter 1998, reflecting growth in the subsidiary's installed software base, and total gross margin increased by approximately 18 points as the result of declining royalty costs. Operating expenses declined by 18% from the prior year period due primarily to restructuring actions taken in fourth quarter 1998. Average employee headcount has declined by approximately 9% from the first quarter 1998 level. VeriBest expects to realize further improvements in its revenues, margins and operating expenses throughout the remainder of 1999 as it continues to direct its selling efforts toward a newly developed line of proprietary products and realizes the benefits of its reduced headcount and revised selling strategy toward indirect methods. In first quarter 1999, the Software business earned operating income of $3.4 million on revenues of $122.5 million, compared to first quarter 1998 operating income of $.4 million on revenues of $140.1 million. Operating income excludes the impact of certain nonrecurring income and operating expense items associated with Software operations, including the first quarter 1999 arbitration settlement accrual of $8.6 million, and in first quarter 1998, the $102.8 million gain on the sale of the business unit's Solid Edge and Engineering Modeling System product lines and nonrecurring operating charges of $14.8 million, primarily for asset write-offs and employee terminations. Operating expenses declined by 21% from the prior year period due to reductions in headcount, particularly in the sales and marketing area as the operating segment has reorganized its sales force to align expenses with the volume of revenue generated. The positive impact of this operating expense decline was partially offset by a 2.3 point decline in systems gross margin, primarily the result of the low sales volume for the quarter. In first quarter 1999, Federal earned operating income of $4.2 million on revenues of $42.8 million, compared to a first quarter 1998 operating loss of $2.5 million on revenues of $34.2 million. The improvement from the prior year period resulted primarily from a 44% decline in operating expenses, due in part to headcount decline and to an increase in shipbuilding software development costs qualifying for capitalization. Systems revenues increased by 21% from the prior year period, resulting in a 6.3 point improvement in systems gross margin. First quarter 1998 revenues and margins were adversely impacted by weakened demand for the Company's hardware product offerings as a result of the Intel dispute and increasing price competition in the industry. See Note 12 of Notes to Consolidated Financial Statements for further explanation of the Company's segment reporting. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At March 31, 1999, cash totaled $91.3 million compared to $95.5 million at December 31, 1998. Cash provided by operations in first quarter 1999 totaled $2.8 million, compared to a cash consumption of $5 million in first quarter 1998. Net cash generated from investing activities totaled $9.9 million in first quarter 1999, compared to a $69.7 million generation in first quarter 1998. First quarter 1999 investing activities included $19.9 million in proceeds from the fourth quarter 1998 sale of the Company's manufacturing assets. (See Note 7 of Notes to Consolidated Financial Statements.) First quarter 1998 investing activities included $102 million in proceeds from the sale of the Company's Solid Edge and Engineering Modeling System product lines and $26.3 million for the purchase of Zydex software rights. Other significant investing activities included expenditures for capitalizable software development costs of $4.6 million in first quarter 1999 ($2.5 million in first quarter 1998) and capital expenditures of $2.8 million in first quarter 1999 ($3.7 million in first quarter 1998), primarily for Intergraph products used in hardware and software development and sales and marketing activities. The Company expects that capital expenditures will require $20 to $25 million for the full year 1999, 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. Net cash used for financing activities totaled $14.6 million in first quarter 1999 and $14.5 million in first quarter 1998. Both quarters included a net repayment of debt of approximately $15.2 million. Under the Company's January 1997 four year fixed term loan and revolving credit agreement (as amended in October 1998), available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, primarily accounts receivable, with maximum borrowings of $125 million. The $25 million term loan portion of the agreement is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (7.75% at March 31, 1999) 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, 1999, the Company had outstanding borrowings of $25 million (the term loan), which was classified as long-term debt in the consolidated balance sheet, and an additional $34.7 million of the available credit line was allocated to support letters of credit issued by the Company and the Company's forward exchange contracts. As of this same date, the borrowing base, representing the maximum available credit under the line, was approximately $81 million (unchanged at April 30, 1999). The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures. In addition, the agreement includes restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes. At March 31, 1999, the Company had approximately $58 million in debt on which interest is charged under various floating rate arrangements, primarily under its four year term loan and revolving credit agreement, mortgages, and an Australian term loan. 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. After several quarters of generating insufficient cash to fund its operations, the Company has generated positive operating cash flow for its second consecutive quarter. The Company expects continued improvement in its operating cash flows throughout 1999 as a result of improved earnings, the outsourcing of its manufacturing operations, and other management actions taken in 1998 and 1999 to reduce operating costs. The Company is managing its cash very closely and believes that the combination of improved cash flow from operations, its existing cash balances, and cash available under its revolving credit agreement will be adequate to meet cash requirements for 1999, including the $12 million payment made to BSI on April 1, 1999. (See "Litigation" preceding.) In the near term, however, the Company must continue to increase its sales volume and/or align its operating expenses more closely with the level of revenue being generated if it is to fund its operations and build cash reserves without reliance on funds generated from asset sales and from external financing. SUBSEQUENT EVENT - ---------------- On April 15, 1999, the Company completed the sale of InterCAP Graphics Systems, Inc., a wholly owned subsidiary, to Micrografx, a global provider of enterprise graphics software, for $12.2 million, consisting of $3.9 million in cash received at closing, a deferred payment of $2.5 million due in August 1999, and a $5.8 million convertible subordinated debenture due in March 2002. The resulting gain on this transaction, expected to be in the range of $10 to $12 million, will be included in the Company's second quarter 1999 operating results. InterCAP's revenues and losses for 1998 were $4.7 million and $1.1 million, respectively ($3.6 million and $1.9 million for 1997). Assets of the subsidiary at December 31, 1998 totaled $1.6 million. The subsidiary did not have a material effect on the Company's results of operations for first quarter 1999. Item 3: Quantitative and Qualitative Disclosures About Market Risk The Company has experienced no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented in the Company's Form 10-K filing for its year ending December 31, 1998. PART II. OTHER INFORMATION ----------------- Item 1: Legal Proceedings The Company maintains an equity ownership position in Bentley Systems, Incorporated ("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 March 1996, BSI commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia, relating to the respective rights of the companies under their April 1987 Software License Agreement and other matters, including the Company's alleged failure to properly account for and pay to BSI certain royalties on its sales of BSI software products, and seeking significant damages. For further background information, see the Company's Form 10-K annual report for the year ended December 31, 1998. On March 26, 1999, the Company and BSI executed a Settlement Agreement and Mutual General Release ("the Agreement") to settle this arbitration and mutually release all claims related to the arbitration or otherwise, except for a) certain litigation between the companies that is the subject of a separate settlement agreement and b) payment for products and services obtained or provided in the normal course of business since January 1, 1999. Both the Company and BSI expressly deny any fault, liability, or wrongdoing concerning the claims that were the subject matter of the arbitration and have settled solely to avoid continuing litigation with each other. Under the terms of the Agreement, the Company on April 1, 1999 made payment to BSI of $12 million and transferred to BSI ownership of three million of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3.5 million on the Company's books. As a result of the settlement, Intergraph's equity ownership in BSI has been reduced to approximately 33%. Additionally, the Company had a $1.2 million net receivable from BSI relating to business conducted prior to January 1, 1999 which was written off in connection with the settlement. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Consolidated Financial Statements contained in this Form 10-Q for further discussion of the effects of this settlement on the Company's financial position, results of operations, and cash flow. INTERGRAPH CORPORATION AND SUBSIDIARIES Item 6: Exhibits and Reports on Form 8-K (a) Exhibit 10(a), agreement between Intergraph Corporation and Green Mountain, Inc., dated April 1, 1999. *(1) Exhibit 27, Financial Data Schedule *Denotes management contract or compensatory plan, contract, or arrangement required to be filed as an exhibit to this Form 10-Q. (b) There were no reports on Form 8-K filed during the quarter ended March 31, 1999. 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/ James W. Meadlock By: /s/ John W. Wilhoite ------------------------- --------------------------- James W. Meadlock John W. Wilhoite Chairman of the Board and Executive Vice President Chief Executive Officer and Chief Financial Officer (Principal Financial and Accounting Officer) Date: May 14, 1999 Date: May 14, 1999 EX-10.A 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 tickets, 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 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 purpose 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, 1999 and will continue until April 1, 2000. 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: 256-730-1029 Fax: 256-536-5942 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 $25,393.00 of gross income, ten percent (10%) (II) On the next $15,236.00 of gross income, five percent (5%) (III) On the balance over $40,629.00 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 Manager, Travel Services Date: 5/7/99 Date: 5/5/99 ______ ______ For: Intergraph Corporation /s/ Milton Legg _____________________________ Milton Legg Vice President 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, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1999 MAR-31-1999 91,267 0 299,511 0 40,768 469,413 378,140 256,649 667,490 269,412 59,744 0 0 5,736 329,433 667,490 170,308 252,077 119,959 168,733 91,247 0 1,418 (17,558) 0 (17,558) 0 0 0 (17,558) ( .36) ( .36) Accounts receivable in the Consolidated Balance Sheet is shown net of allowances for doubtful accounts. Other expenses include Product development expenses, Sales and marketing expenses, and General and administrative expenses.
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