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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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)
Huntsville, Alabama 35894-0001
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(256) 730-2000
----------------------------------------------------
(Registrant's Telephone Number, including area code)
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: 46,734,105 shares
outstanding as of July 31, 2002
INTERGRAPH CORPORATION
FORM 10-Q*
June 30, 2002
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets at June 30, 2002, and
December 31, 2001 2
Consolidated Statements of Income for the quarters and six
months ended June 30, 2002, and 2001 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002, and 2001 4
Notes to Consolidated Financial Statements 5 - 11
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations 12 - 19
-------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 - 20
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PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 20
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 21
---------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K 21
--------------------------------
SIGNATURES 22
* Information contained in this Form 10-Q includes statements that
are forward-looking as defined in Section 21E of the Securities
Exchange Act of 1934. Actual results may differ materially from
those projected in the forward-looking statements. Information
concerning factors that could cause actual results to differ
materially from those in the forward-looking statements is described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report on Form 10-K and this Form 10-
Q.
PART I. FINANCIAL INFORMATION
---------------------
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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June 30, December 31,
2002 2001
- --------------------------------------------------------------------------------
(In thousands, except share and per share amounts)
Assets
Cash and cash equivalents $101,035 $99,773
Short-term investments 254,777 11,035
- --------------------------------------------------------------------------------
Total cash and short-term investments 355,812 110,808
Accounts receivable, net 158,851 158,873
Inventories, net 22,485 24,125
Other current assets 46,153 32,687
- --------------------------------------------------------------------------------
Total current assets 583,301 326,493
Investments in affiliates 30,666 20,654
Capitalized software development costs, net 28,261 24,209
Other assets 25,678 34,680
Property, plant, and equipment, net 51,295 51,974
- --------------------------------------------------------------------------------
Total Assets $719,201 $458,010
================================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $18,012 $22,897
Accrued compensation 28,562 31,693
Other accrued expenses 35,722 43,765
Billings in excess of sales 36,944 37,968
Income taxes payable 36,056 9,913
Short-term debt and current maturities of
long-term debt 3,257 2,619
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Total current liabilities 158,553 148,855
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Deferred income taxes 19,577 2,573
Long-term debt --- 1,114
Other noncurrent liabilities 2,621 2,729
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Total noncurrent liabilities 22,198 6,416
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Minority interest in consolidated
subsidiaries 7,623 7,526
- --------------------------------------------------------------------------------
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 206,642 210,748
Retained earnings 493,233 208,268
Accumulated other comprehensive loss (7,620) (20,603)
- --------------------------------------------------------------------------------
697,991 404,149
Less - cost of treasury shares
(10,668,407 at June 30, 2002, and
7,539,419 at December 31, 2001) (167,164) (108,936)
- --------------------------------------------------------------------------------
Total shareholders' equity 530,827 295,213
- --------------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $719,201 $458,010
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
- --------------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues
Systems $67,460 $72,405 $138,354 $154,588
Maintenance 30,167 30,497 58,329 64,715
Services 24,943 24,889 48,983 52,610
- --------------------------------------------------------------------------------
Total revenues 122,570 127,791 245,666 271,913
- --------------------------------------------------------------------------------
Cost of revenues
Systems 32,899 33,331 69,396 78,193
Maintenance 13,516 17,218 27,732 36,598
Services 17,312 19,280 33,875 40,751
- --------------------------------------------------------------------------------
Total cost of revenues 63,727 69,829 131,003 155,542
- --------------------------------------------------------------------------------
Gross profit 58,843 57,962 114,663 116,371
Product development 12,451 13,983 24,717 27,088
Sales and marketing 24,926 25,636 47,503 47,821
General and administrative 18,794 16,962 37,852 37,568
Reorganization credit --- --- --- (384)
Income from operations 2,672 1,381 4,591 4,278
Patent litigation gain 293,566 --- 293,566 ---
Gains on sales of assets 17,015 --- 18,545 4,831
Interest expense (37) (582) (140) (1,143)
Other income, net 2,506 3,128 4,250 3,491
- --------------------------------------------------------------------------------
Income before income taxes and
minority interest 315,722 3,927 320,812 11,457
Income tax expense (35,100) (1,600) (35,750) (4,000)
- --------------------------------------------------------------------------------
Income before minority
interest 280,622 2,327 285,062 7,457
Minority interest in earnings of
consolidated subsidiaries (35) (497) (97) (660)
- --------------------------------------------------------------------------------
Net income $280,587 $1,830 $284,965 $6,797
================================================================================
Net income per share - basic $5.67 $.04 $5.73 $.14
- diluted $5.37 $.04 $5.44 $.13
================================================================================
Weighted average shares
outstanding - basic 49,506 49,638 49,729 49,641
- diluted 52,204 52,018 52,375 51,577
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended June 30, 2002 2001
- --------------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net income $284,965 $6,797
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,766 5,640
Amortization 7,303 6,961
Gains on sales of assets (18,545) (4,831)
Net changes in current assets and liabilities 18,768 (16,275)
- --------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 297,257 (1,708)
- --------------------------------------------------------------------------------
Investing Activities:
Net proceeds from sales of assets 18,798 1,534
Purchases of property, plant, and equipment (4,656) (4,196)
Purchases of short-term investments (254,197) ---
Proceeds from maturities of short-term investments 11,035 ---
Capitalized software development costs (6,265) (1,687)
Business acquisitions (981) (3,002)
Other (1,394) (36)
- --------------------------------------------------------------------------------
Net cash used for investing activities (237,660) (7,387)
- --------------------------------------------------------------------------------
Financing Activities:
Gross borrowings 1,044 ---
Debt repayment (1,520) (14,692)
Purchase of treasury stock (66,819) ---
Proceeds of employee stock purchases and exercise
of stock options 4,485 2,053
- --------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities (62,810) (12,639)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash 4,475 (2,175)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,262 (23,909)
Cash and cash equivalents at beginning of period 99,773 119,848
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Cash and cash equivalents at end of period $101,035 $95,939
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
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 2001 amounts to
provide comparability with the current period presentation.
NOTE 2 - LITIGATION
As further described in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, the Company continues part
of its ongoing litigation with Intel Corporation ("Intel"). See
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") in this Form 10-Q for a discussion
of 2002 developments.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of average cost or market and
are summarized as follows:
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June 30, December 31,
2002 2001
- ------------------------------------------------------------------
(In thousands)
Raw materials $6,623 $3,920
Work-in-process 632 1,952
Finished goods 6,410 8,716
Service spares 8,820 9,537
- ------------------------------------------------------------------
Totals $22,485 $24,125
==================================================================
Inventories on hand at June 30, 2002, and December 31, 2001,
relate primarily to specialized hardware assembly activity in the
Company's Intergraph Solutions Group ("ISG") and Z/I Imaging
Corporation ("Z/I Imaging") business segments, and to the
Company's continuing warranty and maintenance obligations on
computer hardware previously sold. Amounts reflected as work-in-
process relate primarily to sales contracts accounted for under
the percentage-of-completion method.
NOTE 4 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Product development costs are charged to expense as incurred;
however, the costs incurred for the development of computer
software that will be sold, leased, or otherwise marketed are
capitalized when technological feasibility of the product has been
established. Such capitalized costs are amortized on a straight-
line basis over a period of two to three years. Amortization of
these capitalized costs, included in "Cost of revenues - Systems"
in the consolidated statements of income, amounted to $1.3 million
in second quarter 2002 compared to $1 million in second quarter
2001, and $2.3 million and $2.2 million in the first six months of
2002 and 2001, respectively.
The Company increased product development expenses for costs
normally eligible for capitalization by $2.6 million and $2.2
million in second quarter 2002 and 2001, respectively, and $5.1
million and $4.2 million in the first six months of 2002 and 2001,
respectively, due to net realizable value concerns. Accumulated
amortization (net of fully amortized projects) in the consolidated
balance sheets at June 30, 2002, and December 31, 2001, was $11.1
million and $8.8 million, respectively.
NOTE 5 - INTANGIBLE ASSETS
The Company adopted Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" in first quarter 2002.
The Company currently reviews all intangible assets on a quarterly
basis, and the adoption of this statement did not impact the
Company's financial statements. The Company's intangible assets
include capitalized software development costs (included as a
separate line in the consolidated balance sheets) and other
intangible assets (included in "Other assets" in the consolidated
balance sheets).
At June 30, 2002, and December 31, 2001, the Company's intangible
assets and related accumulated amortization (net of fully
amortized assets) consisted of the following:
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As of June 30, 2002 As of December 31, 2001
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- --------------------------------------------------------------------------------
(In thousands)
Capitalized software
development $39,387 $(11,126) $28,261 $32,982 $(8,773) $24,209
Other intangible assets 43,855 (27,725) 16,130 43,787 (23,174) 20,613
- --------------------------------------------------------------------------------
Totals $83,242 $(38,851) $44,391 $76,769 $(31,947) $44,822
================================================================================
The Company recorded amortization expense of $3.8 million for both
second quarter 2002 and 2001, and $7.3 million and $7 million for
first half 2002 and 2001, respectively. Based on the current
intangible assets subject to amortization, the estimated
amortization expense for the remainder of 2002 and each of the
succeeding five years is as follows: $8 million in 2002, $12
million in 2003, $8 million in 2004, $7 million in 2005, $5
million in 2006, and $4 million in 2007.
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net includes accumulated
depreciation of approximately $131.2 million and $130.5 million at
June 30, 2002, and December 31, 2001, respectively.
NOTE 7 - SUPPLEMENTARY CASH FLOW INFORMATION
Changes in current assets and liabilities, net of the effects of
business acquisitions and divestitures, in reconciling net income
to net cash provided by (used for) operations are as follows:
- ---------------------------------------------------------------------------
Cash Provided By (Used For) Operations
Six Months Ended June 30, 2002 2001
- ---------------------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $5,566 $(3,131)
Inventories, net 1,952 459
Other current assets 5,787 4,113
Increase (decrease) in:
Trade accounts payable (4,893) (5,844)
Accrued compensation and other accrued
expenses (13,319) (8,712)
Income taxes payable 25,744 917
Billings in excess of sales (2,069) (4,077)
- ---------------------------------------------------------------------------
Net changes in current assets and
liabilities $18,768 $(16,275)
===========================================================================
Significant non-cash investing and financing transactions in
second quarter 2002 include a $4.1 million unfavorable mark-to-
market adjustment on the Company's long-term investment in
Creative Technology Ltd. ("Creative") and the elimination of a
$15.3 million cumulative mark-to-market adjustment on its long-
term investment in 3Dlabs Inc., Ltd. ("3Dlabs") stock. For first
half 2002, the Company recognized a total favorable adjustment of
$6.7 million on its long-term investments. See Note 9 for
detailed information regarding the Company's unrealized gains and
losses on its long-term investments.
There were no significant non-cash investing and financing
transactions in the second quarter of 2001. Significant non-cash
investing and financing transactions in first half 2001 included
the receipt of common stock with a value of approximately $10
million as additional consideration for the third quarter 2000
sale of the Company's Intense3D graphics accelerator division to
3Dlabs. Also included in 2001 is a $4.3 million increase to a
note receivable as additional consideration for the fourth quarter
2000 sale of its civil, plotting, and raster product lines.
NOTE 8 - EARNINGS PER SHARE
Basic income per share is computed using the weighted average
number of common shares outstanding. Diluted income per share is
computed using the weighted average number of common and
equivalent common shares outstanding. Employee stock options are
the Company's only common stock equivalent and are included in the
calculation only if dilutive. For the quarters ended June 30,
2002, and 2001, these dilutive common stock equivilents were
2,698,000 and 2,380,000, respectively. For the six months ended
June 30, 2002, and 2001, these dilutive shares were 2,646,000 and
1,936,000, respectively.
NOTE 9 - COMPREHENSIVE INCOME (LOSS)
For the quarters ended June 30, 2002, and 2001, total
comprehensive income (loss) was $267.3 million and ($166,000),
respectively. For the six-month periods ending June 30, 2002, and
2001, total comprehensive income was $297.9 million and $2.8
million, respectively. Comprehensive income differs from net
income due to non-equity items that include unrealized gains and
losses on certain investments in debt and equity securities and
foreign currency translation adjustments.
Comprehensive income is as follows:
- -----------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
- -----------------------------------------------------------------------------
(In thousands)
Net income $280,587 $1,830 $284,965 $6,797
Unrealized holding gains
(losses) arising during
the period (2,742) (1,065) 23,303 (743)
Reclassification adjustment
for gains included in net
income (16,632) --- (16,632) ---
Translation adjustment for
financial statements
denominated in a foreign
currency 6,110 (931) 6,312 (3,205)
- -----------------------------------------------------------------------------
Comprehensive income
(loss) $267,323 $(166) $297,948 $2,849
=============================================================================
NOTE 10 - GAIN ON PATENT LITIGATION
During the second quarter of 2002, the Company recognized a gain
of $293.6 million from the settlement of a patent infringement
lawsuit. For a complete discussion, see "Litigation" and "Patent
Litigation Gain" included in MD&A.
NOTE 11 - GAINS ON SALES OF ASSETS
Gains on sales of assets were $17 million for second quarter 2002
and $18.5 million for first half 2002, compared to $4.8 million
for first half 2001, all of which was recognized in the first
quarter. For a complete discussion, see "Gains on Sales of Assets"
included in MD&A.
NOTE 12 - ACQUISITIONS AND DIVESTITURES
In second quarter 2002, the Company sold its ownership interest in
3Dlabs to Creative for approximately $40.2 million in cash and
stock. The Company recorded a gain on this transaction of
approximately $17 million, which is included in "Gains on sales of
assets" in the consolidated statement of income for the six months
ended June 30, 2002. For a complete discussion, see "Gains on
Sales of Assets" included in MD&A.
In March 2002, the Company completed the sale of its Greece
subsidiary for approximately $120,000, which was received in April
2002. The Company retained a 20% interest in the subsidiary, but
the buyer has a right to purchase this interest for a fixed price
of $30,000. This right will expire December 31, 2002. The Company
recorded a loss on this transaction of $455,000, which is included
in "Gains on sales of assets" in the consolidated statement of
income for the six months ended June 30, 2002. The subsidiary did
not have a material effect on the Company's results of operations
or financial position for any periods prior to the sale.
In January 2001, the Company acquired the MARIAN materials
management business unit from debis Systemhaus Industry GmbH of
Germany for a purchase price consisting of approximately $1.8
million paid at closing and additional payments due March 1, 2002,
(paid in April 2002) and 2003, to be calculated as 15% of the
annual revenues earned by the Company from the sale of MARIAN
products in 2001 and 2002, respectively. The Company's payment at
closing is included in "Business acquisitions" in the Company's
consolidated statement of cash flows for the six months ended June
30, 2001. The accounts and results of operations of MARIAN have
been combined with those of Intergraph Process, Power & Offshore
("PP&O") since the January 1, 2001, effective date of the
acquisition using the purchase method of accounting.
NOTE 13 - SEGMENT REPORTING
The Company consists of five core business segments, along with an
Intellectual Property division ("IP") and a corporate oversight
function ("Corporate"). The five core business segments consist
of ISG, Intergraph Mapping and GIS Solutions ("IMGS"), PP&O,
Intergraph Public Safety, Inc. ("IPS"), and Z/I Imaging. The
Company's reportable segments are strategic business units that
are organized by the types of products sold and the specific
markets served.
ISG provides specially developed software and ruggedized hardware,
commercial off-the-shelf products, and professional services to
federal, state, and local governments worldwide, as well as to
commercial customers. ISG also includes the U.S. hardware
maintenance and network services businesses. To better reflect
the industries it serves, the segment changed its name from
Intergraph Government Solutions to Intergraph Solutions Group in
May 2002.
IMGS develops, markets, and supports geospatial infrastructure
management (GIM), land information management (LIM), and map
production and exploitation solutions for state and local
governments, land records and use management, transportation,
utilities and public works projects, military and national mapping
agencies, and defense and intelligence communities.
PP&O supplies software and services to the process, power, and
offshore (petroleum and natural gas) industries.
IPS develops, markets, and implements systems for the public
safety, utilities, and communications markets.
Z/I Imaging, a 60%-owned subsidiary of the Company, supplies end-
to-end photogrammetry solutions for front-end data collection to
mapping related and engineering markets.
Intergraph has created an Intellectual Property division to
maximize the value of the Company's portfolio of patent,
copyrights, and trademarks. This division will have the
responsibility of managing all aspects of the Company's
intellectual property with the goal of identifying, protecting and
profiting from its intellectual capital. The Company has retained
a consultant to assist in the formulation and implementation of
its licensing program, and has begun evaluating the technology
sector, companies, and products that may benefit from the
licensing of Intergraph technology.
Amounts included in the "Corporate" category include revenues and
costs for Teranetix (a provider of computing support and hardware
integration services), international hardware maintenance, and
general corporate functions. Operating expenses for the Corporate
category consist of general corporate expenses, primarily general
and administrative expenses remaining after charges to the
business segments based on usage of administrative services. The
Corporate category also includes the remainder of the Middle East
operations, portions of which were sold in 2001 (with the sale of
the remaining portion closing in April 2002, effective October
2001).
The Company evaluates the performance of its business segments
based on revenue and income from operations. The accounting
policies of the reportable segments are consistent across segments
and are the same as those used in preparation of the consolidated
financial statements of Intergraph Corporation (see Note 1 of
Notes to Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December
31, 2001). Sales between the business segments, the most
significant of which are associated with hardware maintenance
services provided by ISG and Corporate (international hardware
maintenance) to the other business units, 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. Transfer price is charged on
all intersegment sales of products and services.
The following table sets forth revenues and operating income
(loss) by business segment for the quarters and six months ended
June 30, 2002, and 2001.
- ----------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
- ----------------------------------------------------------------------------
(In thousands)
Revenues:
ISG:
Unaffiliated customers $28,494 $29,621 $63,306 $65,718
Intersegment revenues 2,028 2,064 3,079 4,219
- ----------------------------------------------------------------------------
30,522 31,685 66,385 69,937
- ----------------------------------------------------------------------------
IMGS:
Unaffiliated customers 29,038 26,263 61,033 58,835
Intersegment revenues 2,185 2,721 3,963 4,637
- ---------------------------------------------------------------------------
31,223 28,984 64,996 63,472
- ---------------------------------------------------------------------------
PP&O:
Unaffiliated customers 29,667 26,445 57,882 55,165
Intersegment revenues 1,215 1,492 2,215 2,626
- ---------------------------------------------------------------------------
30,882 27,937 60,097 57,791
- ---------------------------------------------------------------------------
IPS:
Unaffiliated customers 26,776 30,001 47,611 59,707
Intersegment revenues 42 119 95 116
- ---------------------------------------------------------------------------
26,818 30,120 47,706 59,823
- ---------------------------------------------------------------------------
Z/I Imaging:
Unaffiliated customers 5,675 8,489 10,854 17,320
Intersegment revenues 1,373 3,473 3,940 5,827
- ---------------------------------------------------------------------------
7,048 11,962 14,794 23,147
- ---------------------------------------------------------------------------
IP:
Unaffiliated customers --- --- --- ---
Intersegment revenues --- --- --- ---
- ---------------------------------------------------------------------------
--- --- --- ---
- ---------------------------------------------------------------------------
Corporate:
Unaffiliated customers 2,920 6,972 4,980 15,168
Intersegment revenues 657 3,846 1,107 7,389
- ---------------------------------------------------------------------------
3,577 10,818 6,087 22,557
- ---------------------------------------------------------------------------
130,070 141,506 260,065 296,727
- ---------------------------------------------------------------------------
Eliminations (7,500) (13,715) (14,399) (24,814)
- ---------------------------------------------------------------------------
Total revenues $122,570 $127,791 $245,666 $271,913
===========================================================================
Operating income (loss):
ISG $1,865 $2,392 $4,438 $5,659
IMGS 25 317 2,154 3,312
PP&O 5,012 1,328 9,247 2,604
IPS 1,918 1,216 2,041 2,315
Z/I Imaging 310 2,192 811 3,792
IP (381) (410) (3,535) (725)
Corporate (6,431) (4,140) (11,140) (11,165)
Eliminations 354 (1,514) 575 (1,514)
- ---------------------------------------------------------------------------
Total $2,672 $1,381 $4,591 $4,278
===========================================================================
Significant profit and loss items that were not allocated to the
segments and not included in the analysis above for second quarter
2002 include the $293.6 million patent litigation gain and gains
on sales of assets of $17 million (gains on sales of assets of
$18.5 million and $4.8 million for the six-month comparison for
2002 and 2001, respectively). These were all considered non-
recurring transactions and are included in other income in the
consolidated statements of income.
The Company does not evaluate performance or allocate resources
based on assets and, as such, it does not prepare balance sheets
for its business segments, other than those of its wholly owned
subsidiaries.
NOTE 14 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2002, the following accounting
pronouncements issued by the Financial Accounting Standards Board
("FASB") became effective for the Company: SFAS No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
The adoption of these Statements did not have a significant impact
on the Company's consolidated operating results or financial
position for the quarter.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13,
and Technical Corrections," which requires gains and losses on
extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as
previously required under Statement 4 and requires certain
modifications to capital leases. The provisions related to the
rescission of Statement 4 become effective for the Company in
2003, the provisions related to Statement 13 became effective for
the Company for transactions occurring after May 15, 2002, and all
other provisions of this statement became effective for financial
statements issued after May 15, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses
financial accounting and reporting for costs associated with exit
or disposal activities. The provisions of this Statement are
effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged.
The Company does not expect the adoption of SFAS 145 and SFAS 146
to have a significant impact on its consolidated results of
operations or financial position.
INTERGRAPH CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 including,
but not limited to, market conditions and their anticipated impact
on the Company and its vertical business segments, expectations
regarding future results and cash flows, information regarding the
development, timing of introduction, and performance of new
products, and expectations regarding the Company's various ongoing
litigation proceedings, including those with Intel. These forward-
looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those
anticipated in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not
limited to, worldwide economic conditions, increased competition,
rapid technological change, unanticipated changes in customer
requirements, uncertainties with respect to the Company's
installed customer base for discontinued hardware products,
inability to protect the Company's intellectual property rights,
inability to access the technology necessary to compete in the
markets served, inability to complete certain sales and lease
transactions as planned, risks associated with doing business
internationally, risks associated with various ongoing litigation
proceedings, and other risks detailed in our annual and quarterly
filings with the Securities and Exchange Commission ("SEC").
RESULTS OF OPERATIONS
Earnings
In second quarter 2002, the Company earned net income of $280.6
million on revenues of $122.6 million, compared to second quarter
2001 net income of $1.8 million on revenues of $127.8 million.
Second quarter 2002 income from operations was $2.7 million
compared to $1.4 million for second quarter 2001. For the first
half of 2002, the Company earned net income of $285 million on
revenues of $245.7 million, compared to the first half of 2001,
where the Company earned net income of $6.8 million on revenues of
$271.9 million. Income from operations for the first half of 2002
was $4.6 million compared to $4.3 million for the first half of
2001. See "Patent Litigation Gain" and "Gains on Sales of Assets"
for a discussion of non-operating items included in net income.
Orders
Second quarter and first half 2002 systems and services orders
totaled $97.1 million and $185 million, respectively, down
approximately 23.8% and 11.3%, from the comparable prior-year
periods. The second quarter 2002 decrease is primarily
attributable to the signing of large contracts in second quarter
2001 in the ISG and IPS business segments.
Revenues
Total revenues for second quarter and first half 2002 were $122.6
million and $245.7 million, respectively, down 4.1% and 9.7% from
the comparable prior-year periods.
Sales outside the United States represented approximately 42% of
total revenues in first half 2002, down from 45.7% for the
comparable period in 2001. European revenues were 25.7% of total
revenues for first half 2002, down slightly from the first half
2001 level.
Systems. Systems revenues for second quarter and first half 2002
were $67.5 million and $138.4 million, respectively, down 6.8% and
10.5% from the comparable prior-year periods. The decrease in
systems revenue is spread over several business units. Decreases
in Corporate sales are attributed to the completion of several
hardware manufacturing contracts in 2001 and to less revenue from
the sale of hardware spares inventory. IPS also contributed to
the decline in revenue due to the economic slowdown in the
Utilities and Communications industry in 2002. Z/I Imaging has
encountered similar economic slow-downs in their market which has
caused customers to delay capital investments in the first half of
2002.
Maintenance. Revenues from maintenance and support of Company
products totaled $30.2 million in second quarter 2002 and $58.3
million for first half 2002, nearly flat with second quarter 2001
and down 9.9% from first half 2001. Maintenance revenue declined
as more hardware continued to be removed from maintenance
contracts because of the Company's exit from the hardware
business.
Services. Services revenues, consisting primarily of revenues
from Company-provided implementation and consulting services,
totaled $24.9 million for the second quarter and $49 million for
the first half of 2002, flat with second quarter 2001 and down
6.9% from the first half of 2001. The decrease in services
revenues is primarily due to the completion of several large IPS
projects and the sale of the Middle East operations in 2001. This
decrease is partially offset by increased revenues on several
projects in the PP&O business segment. The Company is endeavoring
to grow its services business; however, revenues from these
services by nature typically fluctuate significantly from quarter
to quarter and produce lower gross margins than systems or
maintenance revenues.
Gross Margin
The Company's total gross margin for second quarter 2002 was 48%
compared to 45.4% for the second quarter 2001. For the first half
of 2002, total gross margin was 46.7% compared to 42.8% for the
first half of 2001.
Systems margin was 51.2% for second quarter 2002, down from 54% in
second quarter 2001. First half 2002 systems margin was 49.8%, up
slightly from 49.4% in the first half of 2001. Although revenues
declined as discussed above, gross margin percentages for the year
have remained relatively flat due to higher software content and
cost reductions. In general, the Company's systems margin may be
improved by higher software content in the product mix, a weaker
U.S. dollar in international markets, and a higher mix of
international systems sales to total systems sales when the dollar
is weaker in international markets. Systems margins may be
lowered by price competition, a higher hardware content in the
product mix, a stronger U.S. dollar in international markets, and
a higher mix of federal government sales, which generally produce
lower margins than commercial sales. While unable to predict the
effects that many of these factors may have on its systems
margins, the Company expects to maintain the improvements
resulting from the Company's exit from the hardware business.
Maintenance margin for second quarter 2002 was 55.2%, increasing
from 43.5% in the second quarter 2001. For the first half of
2002, maintenance margin was 52.5%, up from 43.4% for the
comparable prior-year period. Although the Company's revenues
have declined due to the exit from the hardware business, costs
have also declined, primarily due to overall headcount reductions
and reduced third-party expenses in PP&O. The higher software
content of maintenance contracts has also improved margins.
Services margin was 30.6% for second quarter 2002, up from 22.5%
in second quarter 2001. For the first half of 2002, services
margin was 30.8%, up from 22.5% in the first half of 2001.
Although revenues for the first half of 2002 declined, as noted
above, the higher services margin is attributed to significantly
lower costs in 2002. Significant fluctuations in services
revenues and margins from period to period are not unusual. For
contracts other than those accounted for under the percentage-of-
completion method, costs are expensed as incurred, with revenues
recognized either at the end of the performance period or based on
milestones specified in the contract.
Operating Expenses
Operating expenses for the second quarter and first half of 2002
were $56.2 million and $110.1 million, respectfully, relatively
flat with second quarter 2001 and down 2.1% from the first half of
2001. Product development expense was $12.5 million for second
quarter 2002 and $24.7 million for the first half of 2002, down
11% from the second quarter 2001 level and down 8.8% from the
first half 2001 level. The decrease in product development
expense is primarily due to increased software development costs
qualifying for capitalization, principally from the Company's PP&O
and IMGS segments. Sales and marketing expense was $24.9 million
for second quarter 2002 and $47.5 million for first half of 2002,
down 2.8% from the $25.6 million second quarter 2001 amount and
flat compared to the $47.8 million first half 2001 level. General
and administrative expense was $18.8 million for second quarter
2002, up 10.8% from the second quarter 2001 level due primarily to
increased medical benefits and additional bad debt reserves.
Additionally, legal expenses in the second quarter of 2002, along
with other costs associated with the patent litigation, were
offset against the gain from the patent settlement that is shown
in other income in the consolidated statements of income. During
the first half of 2002, general and administrative expense was
$37.9 million, relatively flat compared to the first half 2001
level.
Patent Litigation Gain
In April 2002, Intergraph and Intel settled a patent infringement
lawsuit filed in Alabama Federal Court in 1997 for $300 million,
which the Company received in May. The Company recognized a net
gain of $293.6 million on this transaction, which is included in
"Patent litigation gain" in the consolidated statement of income
for the six months ended June 30, 2002. The Company has requested
that the SEC staff concur with this financial statement
presentation of the patent settlement. (See "Litigation" for
further discussion on this transaction.)
Gains on Sales of Assets
In July 2000, Intergraph sold its Intense3D graphics division to
3Dlabs for approximately 11.2 million shares of 3Dlabs common
stock. In first quarter 2002, the Company reported an additional
gain of approximately $2 million from the 2000 sale of its
Intense3D graphics accelerator division to 3Dlabs as the shares
originally placed in escrow were released in March 2002. (See the
Company's Annual Report on Form 10-K for the year ended December
31, 2001, for further discussion of the 3Dlabs transactions). In
May 2002, Creative purchased all of the outstanding shares of
3Dlabs for $3.60 per share, paying one-third in cash and two-
thirds in Creative common stock. The Company recognized a gain of
$17 million on the sale of its shares of 3Dlabs to Creative, which
is included in "Gains on sale of assets" in the consolidated
statement of income for the six months ended June 30, 2002. At
June 30, 2002, the Company owned approximately 2.3 million shares
of Creative common stock with a market value of approximately
$20.6 million.
The Company also recognized a loss of approximately $455,000 on
the March 2002 sale of its Greece subsidiary in first quarter
2002.
There were no asset sales in second quarter 2001. In first
quarter 2001, the Company reported an additional gain of
approximately $4.3 million from the BSI transaction as the initial
consideration for the sale (along with the Company's note
receivable from BSI) was increased based upon a revised
calculation of transferred maintenance revenues for the products
sold to BSI, as provided for in the original sale agreement. The
Company also reported a $580,000 additional gain from the 3Dlabs
transaction. This gain was the result of the final calculation
and settlement of the earn-out provisions with 3Dlabs. (See the
Company's Annual Report on Form 10-K for the year ended December
31, 2001, for complete details of these transactions.)
See Notes 11 and 12 of Notes to Consolidated Financial Statements
contained in this Form 10-Q for further information regarding
gains on sales of assets and divestitures.
Non-Operating Income and Expense
Interest expense was $37,000 for second quarter 2002 and $140,000
for first half 2002, compared to $582,000 for second quarter 2001
and $1.1 million for first half 2001. The Company's average
outstanding debt declined from the first half 2001 level due to
repayment of borrowings (utilizing the proceeds from sales of
various non-core businesses and assets) and lower interest rates.
See "Liquidity and Capital Resources" for a discussion of the
Company's current financing arrangements.
"Other income, net" in the consolidated statements of income
consists primarily of interest income, foreign exchange gains and
losses, and other miscellaneous items of non-operating income and
expense. In second quarter 2002, other income, net was $2.5
million, which included a $652,000 foreign exchange gain and
interest income of $1.7 million. In second quarter 2001, other
income, net was $3.1 million, which included a $441,000 foreign
exchange gain and interest income of $1.7 million. In the first
six months of 2002, other income, net was almost $4.3 million,
which included an $872,000 foreign exchange gain and interest
income of $2.7 million. In first half of 2001, other income, net
was $3.5 million, which included a $797,000 write-off of the value
of a convertible debenture held by the Company, a $489,000 foreign
exchange loss, and interest income of $3.8 million. See the
Company's Annual Report on Form 10-K for the year ended December
31, 2001, for complete details of these transactions.
Income Taxes
Income tax expense was $35.1 million for second quarter 2002 and
$35.8 million for first half 2002, compared to $1.6 million for
second quarter 2001 and $4 million for first half 2001. The
Company earned income before taxes and minority interest of $315.7
million and $320.8 million in the second quarter and first half of
2002, respectively, compared to $3.9 million in the second quarter
of 2001 and $11.5 million for the first half of 2001. Income tax
expense for both periods of 2002 was largely a result of the
patent litigation gain and the gains on sales of assets offset by
the utilization of the Company's U.S. net operating loss and tax
credit carryforwards. Income tax expense for both periods of 2001
resulted primarily from taxes on individually profitable majority-
owned subsidiaries, including the Company's 60% ownership interest
in Z/I Imaging. See the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, for details of the Company's tax
position, including its net operating loss and tax credit
carryforwards.
Results By Operating Segment
In second quarter 2002, ISG earned operating income of $1.9
million on revenues of $30.5 million, compared to second quarter
2001 operating income of $2.4 million on revenues of $31.7
million. For the first half of 2002, ISG earned operating income
of $4.4 million on revenues of $66.4 million compared to the first
half of 2001 operating income of $5.7 million on revenues of $69.9
million. The decrease in operating income is a direct result of
lower revenues. The impact of lower revenues on operating income
was mitigated by the fact that revenue reductions were largely in
third-party products where gross margins are smaller than in the
core services business. In addition, overhead rates in the
services business were lower than planned, lessening the impact of
the decline in revenue on operating income.
In second quarter 2002, IMGS earned operating income of $25,000 on
revenues of $31.2 million compared to second quarter 2001
operating income of $317,000 on revenues of $29 million. For the
first six months of 2002, operating income was $2.2 million, down
35% from the 2001 level of $3.3 million. Revenues were $65
million for first half 2002, up slightly from $63.5 million for
first half 2001. The reduction in operating income is the effect
of a downturn in the economy, predominantly in the commercial,
state and local government businesses. The Company believes the
reduced purchasing of Information Technology by local and state
governments will continue in the near future.
In second quarter 2002, PP&O reported operating income of $5
million on revenues of $30.9 million, compared to second quarter
2001 operating income of $1.3 million on revenues of $27.9
million. For the first half of 2002, operating income was $9.2
million on revenues of $60.1 million, a substantial increase over
$2.6 million on revenues of $57.8 million for the first half of
2001. The increase in operating income was due to increased total
revenues, cost reductions (primarily a 16.1% decrease in the
segment's research and development expenses, due to an increase in
costs qualifying for capitalization, and lower third-party
maintenance costs) and improved product mix (growth in higher-
margin products).
In second quarter 2002, IPS earned operating income of $1.9
million on revenues of $26.8 million, compared to second quarter
2001 operating income of $1.2 million on revenues of $30.1
million. IPS reported operating income of $2 million on revenues
of $47.7 million for the first half of 2002 compared to operating
income of $2.3 million on revenues of $59.8 million for the same
period in 2001. Revenues and gross margin dollars decreased
mainly due to the difficult economic environment in the utilities
and communications markets, but were partially offset by lower
operating costs. Competition in this market is fierce and very
price competitive. The financial uncertainty and overcapacity in
the communications market has resulted in few large technology
purchases; however, the utilities and communications sector of IPS
is seeing some demand of its Workforce Management solution as
utilities companies are focused on customer satisfaction and
improved utilization of its work force. Operating income for
second quarter 2002 increased 57.7% from the 2001 level and was
positively impacted by a reduction in operating expenses, largely
due to headcount reductions, causing an increase in operating
income even though revenues were down.
In second quarter 2002, Z/I Imaging earned operating income of
$310,000 on revenues of $7 million, compared to second quarter
2001 operating income of $2.2 million on revenues of $12 million.
For the first half of 2002, operating income was $811,000 on
revenues of $14.8 million compared to operating income of $3.8
million on revenues of $23.1 million. The economic slow-down has
caused some delay in customers' capital investments. Shortfalls
in state sales tax revenues continue to negatively impact spending
within the state Departments of Transportation, who represent a
significant customer segment within Z/I Imaging's U.S. customer
base. The Company has remained profitable by controlling expenses
and slowing down the rate of growth in international operations.
Z/I Imaging has continued to pursue a strategy of new product
development and has successfully completed three test flights of
the new Digital Mapping Camera ("DMC"). The first production
system of DMC is expected to ship in the third quarter of 2002.
In the second quarter of 2002, the Intellectual Properties
division reported an operating loss of $381,000 compared to an
operating loss of $410,000 in the second quarter of 2001. No
revenues were reported in either quarter. For the first six
months of 2002, IP reported an operating loss of $3.5 million
compared to $725,000 for the first half of 2001, both with no
revenues. Costs are primarily outside legal expenses related to
patent litigation that increased substantially in 2002. The
second quarter 2002 legal expenses related to the patent
litigation were offset against the settlement proceeds. See
"Litigation" below.
In second quarter 2002, Corporate reported an operating loss of
$6.4 million on revenues of $3.6 million, compared to a second
quarter 2001 operating loss of $4.1 million on revenues of $10.8
million. For the first six months of 2002, Corporate reported an
operating loss of $11.1 million on revenues of $6.1 million
compared to an operating loss of $11.2 million on revenues of
$22.6 million in the first half of 2001. Current revenues are
primarily associated with the sale of spare parts and spare part
repair fees from hardware maintenance organizations worldwide.
Revenues will continue to decline as a result of the exit from the
hardware business. Operating expenses were slightly higher
because of higher medical benefits and additional bad debt
reserves.
See Note 13 of Notes to Consolidated Financial Statements
contained in this Form 10-Q for further explanation of the
Company's segment reporting.
Litigation
As further described in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, the Company has had ongoing
litigation with Intel since 1997. On April 14, 2002, but
effective as of April 4, 2002, the Company and Intel reached an
agreement during the course of court-ordered mediation that
settles the litigation involving the Company's Clipper patents.
Under the terms of the settlement agreement, Intel agreed to pay
$300 million to the Company (proceeds of which were received May
1, 2002), the lawsuit pending in Alabama was dismissed, the
companies signed a cross license agreement, and the Company
assigned certain unrelated patents to Intel. The Company recorded
the $300 million settlement (net of applicable legal fees and
other associated litigation costs) as a separate line item in the
other income (expense) section of its 2002 consolidated income
statement.
The settlement also established a range of damages for the pending
patent infringement suit in Texas. This settlement agreement was
previously filed as a Form 8-K/A of the Company on April 30, 2002,
and is available for public review. Subject to the specific terms
of the settlement, the parties established an award of $150
million to the Company depending upon the outcome of the Texas
district court trial, and an additional $100 million to the
Company depending upon the outcome of an appeal unless Intel can
implement an approved workaround to the infringement. Pursuant to
the terms of the settlement agreement, Intel will pay nothing if
they are found in the Texas district court not to have infringed.
The Texas trial was held in early July 2002. The parties have
provided the court with written briefs summarizing the issues at
trial, and the court has scheduled final closing arguments for
August 29, 2002. The Company does not anticipate a verdict before
mid-September.
The Company has other ongoing litigation, none of which is
considered to represent a material contingency for the Company at
this time; however, any unanticipated unfavorable ruling in any of
these proceedings could have an adverse impact on the Company's
results of operations and cash flow.
Remainder of the Year
The Company expects that the markets in which it competes will
continue to be characterized by intense competition, rapidly
changing technologies, and shorter product cycles. Further
improvement in the Company's operating results will depend on
further market penetration achieved by accurately anticipating
customer requirements and technological trends, and rapidly and
continuously developing and delivering new products that are
competitively priced, offer enhanced performance, and meet
customers' requirements for standardization and interoperability.
Better operating results will also depend on worldwide economic
improvement and the Company's ability to successfully implement
its strategic direction, which includes the operation and growth
of independent vertical business segments. These matters are
subject to known and unknown risks and uncertainties. See
"Cautionary Note Regarding Forward-Looking Statements."
During the remainder of 2002, the Company could engage in
additional transactions affecting its investments in affiliates.
Creative acquired all outstanding shares of 3Dlabs for $3.60 per
share. The transaction closed in May 2002 with the Company
receiving approximately $13.4 million in cash and approximately
2.3 million shares of Creative stock. In July 2002, the Company
sold approximately 800,000 shares of Creative for $7.9 million.
As of July 31, 2002, the Company owns around 1.5 million shares of
Creative. A portion of the Company's remaining shares in Creative
could be sold in the fourth quarter of 2002. On April 22, 2002,
Bentley Systems, Inc. ("BSI") filed documents with the SEC for an
initial public offering ("IPO"). Because of the uncertainly in
the equity markets, however, BSI has decided not to file an
amendment to its registration statement until the IPO market
improves. When BSI's IPO is completed, the Company expects to
sell some portion of its holdings in BSI.
The Company also continues to pursue real estate sales and
facilities consolidation. If successful, these sales should
provide additional cash to the Company as well as reductions in
operating costs.
LIQUIDITY AND CAPITAL RESOURCES
Under the Company's January 1997 seven-year fixed term loan and
revolving credit agreement (as amended), available borrowings are
determined by the amounts of eligible assets of the Company (the
"borrowing base"), as defined in the agreement, primarily accounts
receivable, with maximum availability of $50 million. At June 30,
2002, the borrowing base, representing the maximum available
credit under the line, was approximately $49.8 million, of which
$10.7 million was allocated to support the Company's letters of
credit. At June 30, 2002, the Company had outstanding borrowings
of $1.3 million under this agreement, all of which is classified
as short-term debt in the consolidated balance sheet.
Borrowings are secured by a pledge of substantially all of the
Company's U.S. assets and certain international receivables. The
rate of interest on all borrowings under the agreement is the
greater of 6.5% or the Wells Fargo base rate of interest (4.75% at
June 30, 2002) plus .125%. There are provisions in the agreement
which lower the interest rate upon achievement of sustained
profitability by the Company, but only to the minimum interest
rate of 6.5%. The agreement requires the Company to pay a
facility fee at an annual rate of .15% of the amount available
under the credit line, an unused credit line fee at an annual rate
of .20% of the average unused portion of the revolving credit
line, a letter of credit fee at an annual rate of .75% of the
undrawn amount of all outstanding letters of credit, and a monthly
agency fee. An amendment was executed on August 1, 2001, that
extends the current agreement until January 2004 with no
cancellation penalty to the Company after January 2003, allows pay-
down of the term loan portion of the line, and lowers the facility
to $50 million.
The term loan and revolving credit agreement contains certain
financial covenants of the Company, including minimum net worth,
minimum current ratio, and maximum levels of capital expenditures,
and restrictive covenants that limit or prevent various business
transactions (including purchases of the Company's stock, dividend
payments, mergers, acquisitions of or investments in other
businesses, and disposal of assets including individual
businesses, subsidiaries, and divisions) and limit or prevent
certain other business changes without approval. The Company's
net worth covenant was increased to $250 million, effective August
1, 2001.
The Company is beginning negotiations to terminate its existing
secured credit agreement and expects to have this facility
terminated by the end of this year.
At June 30, 2002, the Company had approximately $3.3 million in
debt on which interest is charged under various floating rate
arrangements. The Company is exposed to market risk of future
increases in interest rates on these loans.
The Company believes that existing cash balances will
substantially exceed cash requirements for operations for 2002.
The Company anticipates no significant non-operating events that
will require the use of cash, with the exception of its stock
repurchase program. In July 2002, this program was extended from
$75 million to $100 million (see the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, for further
discussion).
CRITICAL ACCOUNTING POLICIES AND ISSUES
The preparation of financial statements in conformity with
generally accepted accounting principles requires that management
use judgments to make estimates and assumptions that affect the
amounts reported in the financial statements. As a result, there
is some risk that reported financial results could have been
materially different had other methods, assumptions, and estimates
been used. The Company believes that of its significant
accounting policies, those related to revenue recognition,
capitalized software, deferred taxes, investment in debt and
equity securities, bad debt reserves, and inventory valuation may
involve a higher degree of judgment and complexity as used in the
preparation of its consolidated financial statements. (See the
Company's Annual Report on Form 10-K for the year ended December
31, 2001, for complete descriptions of these significant
policies.)
The Company accounted for the Intel settlement as a one-time
event, net of applicable costs, and has requested that the SEC
staff concur with this financial statement presentation.
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 the year ended
December 31, 2001.
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 six months of 2002, approximately 42%
of the Company's revenues were derived from customers outside the
United States, primarily through subsidiary operations, compared
to 46% for the first six months of 2001. Most subsidiaries sell
to customers and incur and pay operating expenses in local
currencies. These local currency revenues and expenses are
translated into U.S. dollars for reporting purposes. A stronger
U.S. dollar will decrease the level of reported U.S. dollar orders
and revenues, decrease the dollar gross margin, and decrease
reported dollar operating expenses of the international
subsidiaries. A weaker U.S. dollar will increase the level of
reported U.S. dollar orders and revenues, increase the dollar
gross margin, and increase the reported dollar operating expenses
of the international subsidiaries. The Company estimates that the
weakening of the U.S. dollar in its international markets,
primarily in Europe, did not have a significant impact on its
results of operations in comparison to first half 2001.
The Company conducts business in many markets outside the United
States, but the most significant of these operations with respect
to currency risk are located in Europe and Asia. Local currencies
are the functional currencies for the Company's European and
Canadian subsidiaries. The U.S. dollar is the functional currency
for all other international subsidiaries. Effective first quarter
2000, the Company ceased hedging any of its foreign currency
risks. The Company had no forward contracts outstanding at June
30, 2002, or December 31, 2001.
Euro Conversion. On January 1, 1999, eleven member countries of
the European Monetary Union ("EMU") fixed the conversion rates of
their national currencies to a single common currency, the "Euro."
In September 2000, and with effect from January 1, 2001, Greece
became the twelfth member of the EMU to adopt the Euro. Euro
currency began to circulate on January 1, 2002, and the individual
national currencies of the participating countries were withdrawn
from circulation by February 28, 2002. All of the Company's
financial systems currently accommodate the Euro, and since 1999,
the Company has conducted business in Euros with its customers and
vendors who chose to do so without encountering significant
administrative problems. While the Company continues to evaluate
the potential impacts of the common currency, at present it has
not identified significant risks related to the Euro and does not
anticipate that full Euro conversion in 2002 will have a material
impact on its results of operations or financial condition. To
date, the conversion to one common currency has not impacted the
Company's pricing in European markets.
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
As further described in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, the Company has had ongoing
litigation with Intel since 1997. On April 14, 2002, but
effective as of April 4, 2002, the Company and Intel reached an
agreement during the course of court-ordered mediation that
settles the litigation involving the Company's Clipper patents.
Under the terms of the settlement agreement, Intel agreed to pay
$300 million to the Company (proceeds of which were received May
1, 2002), the lawsuit pending in Alabama was dismissed, the
companies signed a cross license agreement, and the Company
assigned certain unrelated patents to Intel. The Company recorded
the $300 million settlement (net of applicable legal fees and
other associated litigation costs) as a separate line item in the
other income (expense) section of its 2002 consolidated income
statement.
The settlement also established a range of damages for the pending
patent infringement suit in Texas. This settlement agreement was
previously filed as a Form 8-K/A of the Company on April 30, 2002,
and is available for public review. Subject to the specific terms
of the settlement, the parties established an award of $150
million to the Company depending upon the outcome of the Texas
district court trial, and an additional $100 million to the
Company depending upon the outcome of an appeal unless Intel can
implement an approved workaround to the infringement. Pursuant to
the terms of the settlement agreement, Intel will pay nothing if
they are found in the Texas district court not to have infringed.
The Texas trial was held in early July 2002. The parties have
provided the court with written briefs summarizing the issues at
trial, and the court has scheduled final closing arguments for
August 29, 2002. The Company does not anticipate a verdict before
mid-September.
The Company has other ongoing litigation, none of which is
considered to represent a material contingency for the Company at
this time; however, any unanticipated unfavorable ruling in any of
these proceedings could have an adverse impact on the Company's
results of operations and cash flow.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Intergraph Corporation's Annual Meeting of Shareholders was held
May 16, 2002. The results of the meeting follow.
(1) Seven directors were elected to the Board of Directors
to serve for the ensuing year and until their successors
are duly elected and qualified. All nominees were serving
as Directors of the Company at the time of their
nomination for the current year.
Votes
-----------------------------
For Against/Withheld
---------- ----------------
James F. Taylor, Jr. 43,417,886 2,181,617
Larry J. Laster 43,394,728 2,204,775
Sidney L. McDonald 43,369,051 2,230,452
Thomas J. Lee 43,172,388 2,427,115
Lawrence R. Greenwood 35,054,986 10,544,517
Joseph C. Moquin 43,403,556 2,195,947
Linda L. Green 43,395,474 2,204,029
(2) Proposal to approve and adopt an amendment to the
Company's certificate of incorporation to eliminate the
ability of shareholders to act by written consent in
lieu of a meeting was defeated by a vote of 13,208,238
for, 21,630,538 against, 364,099 abstentions, and
10,396,628 broker non-votes.
(3) Proposal to approve the Intergraph Corporation 2002
Stock Option Plan was approved by a vote of 42,276,982
for, 2,827,138 against, and 495,383 abstentions.
(4) Ratification of the appointment of Ernst & Young LLP
as the Company's independent auditors for the current
fiscal year was approved by a vote of 43,187,782 for,
2,360,012 against, and 51,709 abstentions.
(5) Approval of any proposal which might be submitted by
the Company to adjourn the Meeting to a later date to
solicit additional proxies in favor of any of Proposals
1 through 4 above in the event that there were not
sufficient votes for approval of any of Proposals 1
through 4 at the Meeting was approved by a vote of
29,282,319 for, 14,244,479 against, and 2,072,705
abstentions.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit
Number Description
------- -----------
10(l) Intergraph Corporation Amended and Restated 2002
Stock Option Plan
99.1 Certification pursuant to 18 U.S.C. Section 1350 by
James F. Taylor, Jr. dated August 13, 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350 by
Larry J. Laster dated August 13, 2002
(b) Reports on Form 8-K: None
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 F. Taylor, Jr. By: /s/ Larry J. Laster
-------------------------- ----------------------
James F. Taylor, Jr. Larry J. Laster
Chief Executive Officer Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 13, 2002 Date: August 13, 2002