========================================================================
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 September 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: 46,132,166 shares
outstanding as of September 30, 2002
INTERGRAPH CORPORATION
FORM 10-Q*
September 30, 2002
INDEX
Page No.
---------
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
--------------------
Consolidated Balance Sheets at September 30,
2002, and December 31, 2001 2
Consolidated Statements of Income for the
quarters and nine months ended
September 30, 2002, and 2001 3
Consolidated Statements of Cash Flows for
the nine months ended September 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
-----------------
Item 4. Controls and Procedures 20
-----------------------
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 21
-----------------
Item 6. Exhibits and Reports on Form 8-K 22
--------------------------------
SIGNATURES 23
CERTIFICATIONS 24 - 25
* 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)
- -------------------------------------------------------------------------
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------
(In thousands, except share and per share amounts)
Assets
Cash and cash equivalents $344,780 $99,773
Short-term investments --- 11,035
- -------------------------------------------------------------------------
Total cash and short-term investments 344,780 110,808
Accounts receivable, net 157,324 158,873
Inventories, net 20,652 24,125
Other current assets 48,206 32,687
- -------------------------------------------------------------------------
Total current assets 570,962 326,493
Investments in affiliates 19,857 20,654
Capitalized software development costs, net 29,411 24,209
Other assets 21,071 34,680
Property, plant, and equipment, net 51,986 51,974
- -------------------------------------------------------------------------
Total Assets $693,287 $458,010
=========================================================================
Liabilities and Shareholders' Equity
Trade accounts payable $18,405 $22,897
Accrued compensation 31,292 31,693
Other accrued expenses 35,101 43,765
Billings in excess of sales 35,031 37,968
Income taxes payable 20,940 9,913
Short-term debt and current maturities
of long-term debt 1,647 2,619
- -------------------------------------------------------------------------
Total current liabilities 142,416 148,855
- -------------------------------------------------------------------------
Deferred income taxes 19,027 2,573
Long-term debt --- 1,114
Other noncurrent liabilities 2,516 2,729
- -------------------------------------------------------------------------
Total noncurrent liabilities 21,543 6,416
- -------------------------------------------------------------------------
Minority interest in consolidated subsidiaries 7,811 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 205,125 210,748
Retained earnings 495,906 208,268
Accumulated other comprehensive loss (9,076) (20,603)
- -------------------------------------------------------------------------
697,691 404,149
Less - cost of treasury shares (11,229,196
at September 30, 2002, and 7,539,419 at
December 31, 2001) (176,174) (108,936)
- -------------------------------------------------------------------------
Total shareholders' equity 521,517 295,213
- -------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $693,287 $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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues
Systems $81,014 $70,547 $219,368 $225,135
Maintenance 31,174 28,804 89,503 93,519
Services 21,328 27,705 70,311 80,315
- -------------------------------------------------------------------------
Total revenues 133,516 127,056 379,182 398,969
- -------------------------------------------------------------------------
Cost of revenues
Systems 43,501 35,652 112,897 113,845
Maintenance 14,664 15,512 42,396 52,110
Services 15,284 19,742 49,159 60,493
- -------------------------------------------------------------------------
Total cost of revenues 73,449 70,906 204,452 226,448
- -------------------------------------------------------------------------
Gross profit 60,067 56,150 174,730 172,521
Product development 14,593 13,230 39,310 40,318
Sales and marketing 24,103 22,244 71,606 70,065
General and administrative 18,139 18,512 55,991 56,080
Reorganization credit --- --- --- (384)
- -------------------------------------------------------------------------
Income from operations 3,232 2,164 7,823 6,442
Patent litigation gain (loss) (1,186) --- 292,380 ---
Gain (Loss) on sales of assets (1,331) 530 17,214 5,361
Interest income 2,262 1,253 4,923 5,052
Other income (expense), net 1,184 (665) 2,633 (2,116)
- -------------------------------------------------------------------------
Income before income taxes
and minority interest 4,161 3,282 324,973 14,739
Income tax expense (1,300) (2,500) (37,050) (6,500)
- -------------------------------------------------------------------------
Income before minority
interest 2,861 782 287,923 8,239
Minority interest in earnings
of consolidated subsidiaries (188) 460 (285) (200)
- -------------------------------------------------------------------------
Net income $ 2,673 $ 1,242 $287,638 $ 8,039
=========================================================================
Net income per share - basic $ .06 $ .03 $ 5.92 $ .16
- diluted $ .05 $ .02 $ 5.62 $ .16
=========================================================================
Weighted average shares
outstanding - basic 46,311 49,655 48,579 49,516
- diluted 48,754 51,854 51,155 51,546
=========================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTERGRAPH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- -------------------------------------------------------------------------
Nine Months Ended September 30, 2002 2001
- -------------------------------------------------------------------------
(In thousands)
Cash Provided By (Used For):
Operating Activities:
Net income $287,638 $ 8,039
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 6,872 9,082
Amortization 11,616 10,782
Gains on sales of assets (17,214) (5,361)
Net changes in current assets and liabilities 4,977 (2,770)
- -------------------------------------------------------------------------
Net cash provided by operating activities 293,889 19,772
- -------------------------------------------------------------------------
Investing Activities:
Net proceeds from sales of assets 30,749 4,297
Purchases of property, plant, and equipment (7,970) (6,503)
Purchases of short-term investments (254,197) ---
Proceeds from maturities of short-term
investments 266,654 ---
Capitalized software development costs (9,070) (3,510)
Business acquisitions (981) (3,002)
Other (1,984) 305
- -------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 23,201 (8,413)
- -------------------------------------------------------------------------
Financing Activities:
Gross borrowings 81 69
Debt repayment (2,172) (15,619)
Purchase of treasury stock (78,818) (1,876)
Proceeds of employee stock purchases and
exercise of stock options 5,957 2,922
- -------------------------------------------------------------------------
Net cash used for financing activities (74,952) (14,504)
- -------------------------------------------------------------------------
Effect of exchange rate changes on cash 2,869 (1,264)
- -------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 245,007 (4,409)
Cash and cash equivalents at beginning of
period 99,773 119,848
- -------------------------------------------------------------------------
Cash and cash equivalents at end of period $344,780 $115,439
=========================================================================
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 its Annual Report on Form 10-K for the
year ended December 31, 2001, Intergraph Corporation ("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:
- -------------------------------------------------------------------------
September 30, December 31,
2002 2001
- -------------------------------------------------------------------------
(In thousands)
Raw materials $ 6,507 $ 3,920
Work-in-process 833 1,952
Finished goods 5,404 8,716
Service spares 7,908 9,537
- -------------------------------------------------------------------------
Totals $20,652 $24,125
=========================================================================
Inventories on hand at September 30, 2002, and December 31, 2001,
relate primarily to specialized hardware assembly activity in the
Company's Intergraph Solutions Group ("ISG") and Intergraph
Mapping and Geospatial Solutions ("IMGS") 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 $1.7 million
in third quarter 2002 compared to $1.3 million in third quarter
2001, and $4 million and $3.5 million in the first nine months of
2002 and 2001, respectively.
The Company increased product development expenses for costs
normally eligible for capitalization by $2.7 million and $2.4
million in third quarter 2002 and 2001, respectively, and by $7.8
million and $6.6 million in the nine months ended September 30,
2002, and 2001, respectively, due to net realizable value
concerns. Accumulated amortization (net of fully amortized
projects) in the consolidated balance sheets at September 30,
2002, and December 31, 2001, was $12.8 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 discussed in
Note 4) and other intangible assets (included in "Other assets" in
the consolidated balance sheets).
At September 30, 2002, and December 31, 2001, the Company's
intangible assets and related accumulated amortization (net of
fully amortized assets) consisted of the following:
- --------------------------------------------------------------------------
As of September 30, 2002 As of December 31, 2001
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
- --------------------------------------------------------------------------
(In thousands)
Capitalized software
development $42,193 $(12,782) $29,411 $32,982 $ (8,773) $24,209
Other intangible
assets 44,625 (30,408) 14,217 43,787 (23,174) 20,613
- --------------------------------------------------------------------------
Totals $86,818 $(43,190) $43,628 $76,769 $(31,947) $44,822
==========================================================================
The Company recorded amortization expense of $4.3 million and $3.8
million for third quarter 2002 and 2001, respectively, and $11.6
million and $10.8 million for the first nine months of 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: $4 million in 2002, $14 million in 2003, $9 million in
2004, $7 million in 2005, $5 million in 2006, and $5 million in
2007.
NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT, NET
Property, plant, and equipment, net includes accumulated
depreciation of approximately $128.5 million and $130.5 million at
September 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
Nine Months Ended September 30, 2002 2001
- -------------------------------------------------------------------------
(In thousands)
(Increase) decrease in:
Accounts receivable, net $6,237 $11,381
Inventories, net 3,782 (3,592)
Other current assets 2,169 5,718
Increase (decrease) in:
Trade accounts payable (4,462) (735)
Accrued compensation and other
accrued expenses (9,833) (14,613)
Income taxes payable 10,969 1,334
Billings in excess of sales (3,885) (2,263)
- -------------------------------------------------------------------------
Net changes in current assets and
liabilities $4,977 $(2,770)
=========================================================================
There were no significant non-cash investing and financing
transactions in third quarter 2002. Significant non-cash
investing and financing transactions in the first nine months of
2002 include a $5.4 million favorable net mark-to-market
adjustment on the Company's long-term investments. This amount
consists primarily of a $5.1 million unfavorable mark-to-market
adjustment on the Company's investment in Creative Technology Ltd.
("Creative") and a $27.3 million favorable mark-to-market
adjustment on its investment in 3Dlabs Inc., Ltd. ("3Dlabs"),
offset by a reclassification adjustment of $16.6 million upon the
sale of its investment in 3Dlabs stock. See Note 9.
There were no significant non-cash investing and financing
transactions in third quarter 2001. Significant non-cash
investing and financing transactions in the first nine months of
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, offset by a $5.8 million
unfavorable mark-to-market adjustment. 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 September
30, 2002, and 2001, these dilutive common stock equivalents were
2,443,000 and 2,199,000, respectively. For the nine months ended
September 30, 2002, and 2001, these dilutive shares were 2,576,000
and 2,030,000, respectively.
NOTE 9 - COMPREHENSIVE INCOME
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------
(In thousands)
Net income $2,673 $1,242 $287,638 $8,039
Unrealized holding gains (losses)
arising during the period (1,223) (4,151) 22,080 (5,783)
Reclassification adjustment for gains
included in net income --- --- (16,632) ---
Translation adjustment for financial
statements denominated in a
foreign currency (233) 3,532 6,079 326
- -------------------------------------------------------------------------
Comprehensive income $1,217 $ 623 $299,165 $2,582
=========================================================================
NOTE 10 - PATENT LITIGATION GAIN (LOSS)
In third quarter 2002, $1.2 million in costs associated with
patent litigation were offset against gains from the patent
litigation settlement. During the nine months ended September 30,
2002, the Company recognized a net gain of $292.4 million from the
settlement of the patent infringement lawsuit. For a complete
discussion, see "Patent Litigation Gain (Loss)" and "Litigation"
in MD&A.
NOTE 11 - GAIN (LOSS) ON SALES OF ASSETS
For third quarter 2002, the Company recognized a loss on the sale
of assets of $1.3 million compared to a gain of $530,000 in third
quarter 2001. Gains on sales of assets were $17.2 million and $5.4
million for the nine months ended September 30, 2002, and 2001.
For a complete discussion, see "Gain (Loss) on Sales of Assets"
included in MD&A.
NOTE 12 - ACQUISITIONS AND DIVESTITURES
There were no acquisitions or divestitures during third quarter
2002. In second quarter 2002, the Company sold its ownership
interest in 3Dlabs to Creative for approximately $40.2 million in
cash and stock and recorded a gain of approximately $17 million.
In March 2002, the Company completed the sale of its subsidiary in
Greece 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. 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. The gain and loss on these transactions are included in
"Gain (Loss) on sales of assets" in the consolidated statement of
income for the nine months ended September 30, 2002.
In third quarter 2001, the Company closed the sale of its Saudi
Arabian operation and recorded a $680,000 gain offset by a
$150,000 impairment reserve in anticipation of an expected loss on
the fourth quarter sale of Intergraph Middle East, Ltd. ("IMEL").
The net gain of $530,000 is included in "Gain (Loss) on sales of
assets" in the consolidated statements of income for the third
quarter and nine months ended September 30, 2001. During the nine
months ended September 30, 2001, the Company also acquired (in
January 2001) 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 nine months ended September 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.
On October 17, 2002, but effective as of October 1, 2002, the
Company purchased the remaining 40% ownership interest of Z/I
Imaging Corporation ("Z/I Imaging") from Carl Zeiss B.V.
("Zeiss"), a German company. The Company transferred certain
reconnaissance camera assets and paid $6 million, net in cash.
The film-based commercial mapping cameras and the newly
introduced Digital Mapping Camera remain a part of Z/I Imaging.
NOTE 13 - SEGMENT REPORTING
The Company consists of four core business segments, along with an
Intellectual Property division ("IP") and a corporate oversight
function ("Corporate"). The four core business segments consist
of ISG, IMGS, PP&O, and Intergraph Public Safety, Inc. ("IPS").
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 professional services, specially developed software
and ruggedized hardware, and commercial-off-the-shelf products to
federal, state, and local governments, as well as to commercial
customers. ISG also includes the U.S. hardware maintenance and
network services businesses.
Beginning in third quarter 2002, the IMGS segment results also
include the results of Z/I Imaging. 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. Z/I Imaging, previously a 60%-owned
segment of the Company, supplies end-to-end photogrammetry
solutions for front-end data collection to mapping-related and
engineering markets. On October 17, 2002, but effective as
of October 1, 2002, the Company purchased the remaining 40%
ownership interest of Z/I Imaging from Zeiss.
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.
Intergraph has created an Intellectual Property division to
maximize the value of the Company's portfolio of patents,
copyrights, and trademarks. This division has 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 consulting firm
to assist in the formulation and implementation of its licensing
program, and has begun evaluating products that may benefit from
the licensing of Intergraph technology.
Amounts 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 the Company (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 are accounted for under a transfer
pricing policy. Transfer prices approximate prices that would be
charged for the same or similar property or services to similarly
situated unrelated buyers.
The following table sets forth revenues and operating income
(loss) by business segment for the quarter and nine months ended
September 30, 2002, and 2001.
- -------------------------------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------
(In thousands)
Revenues:
ISG:
Unaffiliated customers $ 33,290 $ 32,673 $ 96,596 $ 98,391
Intersegment revenues 824 1,155 3,903 5,374
- -------------------------------------------------------------------------
34,114 33,828 100,499 103,765
- -------------------------------------------------------------------------
IMGS:
Unaffiliated customers 37,291 32,285 109,178 108,440
Intersegment revenues 1,699 4,203 6,093 9,415
- -------------------------------------------------------------------------
38,990 36,488 115,271 117,855
- -------------------------------------------------------------------------
PP&O:
Unaffiliated customers 31,635 27,204 89,517 82,369
Intersegment revenues 840 1,400 3,055 4,026
- -------------------------------------------------------------------------
32,475 28,604 92,572 86,395
- -------------------------------------------------------------------------
IPS:
Unaffiliated customers 28,344 29,028 75,955 88,735
Intersegment revenues 143 (78) 238 38
- -------------------------------------------------------------------------
28,487 28,950 76,193 88,773
- -------------------------------------------------------------------------
IP:
Unaffiliated customers 100 --- 100 ---
Intersegment revenues --- --- --- ---
- -------------------------------------------------------------------------
100 --- 100 ---
- -------------------------------------------------------------------------
Corporate:
Unaffiliated customers 2,856 5,866 7,836 21,034
Intersegment revenues 1,266 2,260 2,373 9,649
- -------------------------------------------------------------------------
4,122 8,126 10,209 30,683
- -------------------------------------------------------------------------
138,288 135,996 394,844 427,471
- -------------------------------------------------------------------------
Eliminations (4,772) (8,940) (15,662) (28,502)
- -------------------------------------------------------------------------
Total revenues $133,516 $127,056 $379,182 $398,969
=========================================================================
- -------------------------------------------------------------------------
Operating income (loss):
ISG $ 188 $ 2,444 $ 4,626 $ 8,103
IMGS 751 1,847 4,291 7,437
PP&O 5,773 1,559 15,020 4,163
IPS 4,198 2,532 6,239 4,847
IP (33) (1,196) (3,568) (1,921)
Corporate (7,645) (5,022) (18,785) (16,187)
Eliminations --- --- --- ---
- -------------------------------------------------------------------------
Total $ 3,232 $ 2,164 $ 7,823 $ 6,442
=========================================================================
Significant profit and loss items that were not allocated to the
segments and not included in the analysis above include $1.2
million in expenses related to patent litigation and a loss on the
sale of assets of $1.3 million for third quarter 2002 and a
$530,000 gain on the sale of assets for third quarter 2001. Net
gains on patent litigation were $292.4 million for the first nine
months of 2002 and gains on sales of assets were $17.2 million and
$5.4 million for the nine months ended September 30, 2002, and
2001, respectively. These were all considered non-recurring
transactions and are included in the non-operating income
(expense) section 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 - LETTERS OF CREDIT
On September 4, 2002, in order to reduce the cost of issuing
letters of credit, the Company established a credit line with
Wells Fargo Bank to cover its outstanding letters of credit. This
credit line is secured by $15 million of interest-bearing
securities. Under this arrangement, the Company earns interest on
the securities and withdrawal of securities is allowed, but
restricted such that the Company must maintain a level of
securities sufficient to cover total outstanding letters of credit
which were $10.3 million at September 30, 2002.
NOTE 15 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In first quarter 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.
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, 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 third quarter 2002, the Company earned net income of $2.7
million on revenues of $133.5 million compared to third quarter
2001 net income of $1.2 million on revenues of $127.1 million.
Third quarter 2002 income from operations was $3.2 million
compared to $2.2 million for third quarter 2001. For the first
nine months of 2002, the Company earned net income of $287.6
million on revenues of $379.2 million compared to net income of $8
million on revenues of $399 million for the first nine months of
2001. Income from operations was $7.8 million and $6.4 million
for the nine months ended September 30, 2002, and 2001,
respectively. See "Non-Operating Income (Expense)" for
discussions of non-operating items included in net income.
Orders
Third quarter 2002 systems and services orders totaled $85
million, up approximately 8% from third quarter 2001. For the
nine months ended September 30, 2002, systems and services orders
were $270 million, down approximately 6% from the comparable
period in 2001.
Revenues
Total revenues for third quarter 2002 were $133.5 million, up 5%
from the comparable prior-year period. For the first nine months
of 2002, total revenues were $379.2 million, down 5% from the
comparable period in 2001.
Sales outside the United States represented approximately 42% of
total revenues in the nine months ended September 30, 2002, down
from 47% for the comparable period in 2001. European revenues
were 25% of total revenues for the first nine months of 2002, down
slightly from 27% for the comparable period in 2001.
Systems. Systems revenues for third quarter 2002 were $81
million, up 14.8% from third quarter 2001. This increase is spread
over several business units. ISG's increase is attributed to a
one-time $4.8 million sale of third-party software. IPS also had
a one-time increase of $2.3 million related to the completion of a
large outsourcing contract in Australia and PP&O had a $2.2
million Shipbuilding Platform Technology sale. For the nine
months ended September 30, 2002, systems revenues were $219.4
million, relatively flat compared to the comparable period in
2001.
Maintenance. Revenues from maintenance and support of Company
products totaled $31.2 million in third quarter 2002, up 8.2% from
third quarter 2001. This increase was due primarily to IPS'
growing maintenance base and PP&O's increase in Global Alliance
Agreements revenue. For the first nine months of 2002,
maintenance and support revenues totaled $89.5 million, down 4.3%
from the comparable period in 2001. Maintenance revenue declined
for the year primarily due to expired hardware contracts not being
renewed.
Services. Services revenues, consisting primarily of revenues
from implementation and consulting services, totaled $21.3 million
for third quarter 2002, down 23% from third quarter 2001. For the
first nine months of 2002, services revenues were $70.3 million,
down 12.5% from the comparable period in 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. 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 third quarter 2002 was 45%
compared to 44.2% for third quarter 2001. For the first nine
months of 2002, total gross margin was 46.1%, up from 43.2% for
the comparable period in 2001.
Systems margin was 46.3% for third quarter 2002, down from 49.5%
in third quarter 2001. Systems revenue for third quarter 2002
includes a significant, non-recurring government purchase of third-
party software with very low profit margin. Excluding this
transaction, systems margin for third quarter would be 49.1%. The
first nine months of 2002 systems margin was 48.5%, down from
49.4% in the first nine months 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.
Maintenance margin for third quarter 2002 was 53%, increasing from
46.1% in third quarter 2001. For the first nine months of 2002,
maintenance margin was 52.6%, up from 44.3% 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, reduced
third-party expenses, and higher software content of maintenance
contracts.
Services margin was 28.3% for third quarter 2002, flat compared to
28.7% in third quarter 2001. For the first nine months of 2002,
services margin was 30.1%, up from 24.7% in the first nine months
of 2001. Although revenues for the first nine months of 2002
declined, as noted above, the higher services margin is attributed
to considerably 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 in
the period in which revenues are recognized.
Operating Expenses
Total operating expenses for the third quarter and first nine
months of 2002 were $56.8 million and $166.9 million,
respectively, up 5.3% from $54 million in third quarter 2001 and
relatively flat with $166.1 million in the first nine months of
2001.
Product development expense was $14.6 million for third quarter
2002 and $39.3 million for the first nine months of 2002, up 10.3%
from third quarter 2001 and down 2.5% from the first nine months
of 2001. Third quarter product development expense is slightly
higher across most segments. The year-to-date decrease is
primarily due to decreased headcount in IPS and increased costs
qualifying for capitalization in the first half of 2002.
Sales and marketing expense was $24.1 million for third quarter
2002 and $71.6 million for the first nine months of 2002, up 8.4%
from the $22.2 million third quarter 2001 amount and relatively
flat compared to $70.1 million for the first nine months of 2001.
The increase in the third-quarter comparison is due primarily to
increased headcount and travel for PP&O. In addition, ISG
incurred higher sales and marketing expenses in 2002 in order to
increase revenue. Year-to-date expenses remain relatively flat
due to reduced headcount and the absence of expenses from the
Middle Eastern subsidiaries, which were sold in 2001.
General and administrative expense was $18.1 million for third
quarter 2002, relatively flat compared to third quarter 2001
expense of $18.5 million. During the first nine months of 2002,
general and administrative expense was $56 million, relatively
flat compared to $55.7 million in the comparable period in 2001.
Non-Operating Income (Expense)
Patent Litigation Gain (Loss). 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 $292.4 million on
this transaction, which is included in "Patent litigation gain
(loss)" in the consolidated statement of income for the nine
months ended September 30, 2002. During third quarter 2002, the
Company received concurrence from SEC staff of its financial
statement presentation of the patent settlement. (See
"Litigation" for further discussion on this transaction.)
Gain (Loss) on Sales of Assets. In July 2000, Intergraph sold its
Intense3D graphics accelerator division to 3Dlabs for
approximately 11.2 million shares of 3Dlabs common stock. In first
quarter 2002, the Company reported an additional gain of $2
million from that sale 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. In July 2002, Intergraph sold
approximately 789,000 shares of Creative stock for a net loss of
$1.3 million. These transactions are included in "Gain (Loss) on
sales of assets" in the consolidated statement of income for the
nine months ended September 30, 2002. At September 30, 2002, the
Company owned approximately 1.5 million shares of Creative common
stock with a market value at that date of $9.8 million.
The Company recognized gains of $17.2 million and $5.4 million for
the first nine months of 2002 and 2001, respectively. In addition
to the gains and losses related to 3Dlabs and Creative discussed
above, the Company also recognized a loss of $455,000 on the March
2002 sale of its Greek subsidiary in first quarter 2002. In first
quarter 2001, the Company reported an additional gain of
approximately $4.3 million from the BSI transaction 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 $581,000 additional gain
from the 3Dlabs transaction. This gain was the result of the
final calculation and settlement of the earn-out provisions with
3Dlabs. In third quarter 2001, the Company recognized a gain of
$680,000 from the sale of its Saudi Arabian subsidiary and an
impairment reserve of $150,000 for its anticipated sale of IMEL.
The sale closed in April 2002, effective October 2001. (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 and losses on sales of assets and divestitures.
Interest Income. Interest income was $2.3 million for third
quarter 2002 compared to $1.3 million for third quarter 2001. The
Company increased its short-term investing beginning May 2002
using funds from the Intel settlement. Interest income was $4.9
million for the first nine months of 2002, relatively flat with
$5.1 million for the comparable period in 2001. Although
interest from short-term investments increased during 2002, there
was also a decline in interest rates and a decrease in the amount
of interest received on the Bentley note. Also, the 2001 amount
included interest received due to settlement of the Micrografx,
Inc. convertible subordinated debenture.
Other Income (Expense), Net. "Other income (expense), net" in the
consolidated statements of income consists primarily of foreign
exchange gains and losses, interest expense, and other
miscellaneous items of non-operating income and expense. In third
quarter 2002, other income (expense), net was $1.2 million, which
included a $770,000 foreign exchange loss, interest expense of
$32,000, rental income of $617,000, and a gain of $977,000 for the
return of real estate assets previously donated. In third quarter
2001, other income (expense), net was a loss of $665,000, which
included a $939,000 foreign exchange loss, interest expense of
$246,000, and rental income of $995,000.
In the first nine months of 2002, other income (expense), net was
$2.6 million, which included a $102,000 foreign exchange gain,
interest expense of $172,000, a gain of $977,000 for the return of
real estate assets previously donated, and rental income of $1.4
million. In the first nine months of 2001, other income
(expense), net was a loss of $2.1 million, which included a
$797,000 write-off of the value of a convertible debenture, a $1.4
million foreign exchange loss, interest expense of $1.4 million,
and rental income of $2.1 million.
Income Taxes
Income tax expense was $1.3 million for third quarter 2002 and
$37.1 million for the first nine months of 2002, compared to $2.5
million for third quarter 2001 and $6.5 million for the first nine
months of 2001. The Company earned income before taxes and
minority interest of $4.2 million and $325 million in the third
quarter and the first nine months of 2002, respectively, compared
to $3.3 million in the third quarter of 2001 and $14.7 million for
the first nine months of 2001. Income tax expense for 2002 is
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 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 third quarter 2002, ISG earned operating income of $188,000 on
revenues of $34.1 million compared to third quarter 2001 operating
income of $2.4 million on revenues of $33.8 million. For the
first nine months of 2002, ISG earned operating income of $4.6
million on revenues of $100.5 million compared to operating income
of $8.1 million on revenues of $103.8 million in the first nine
months of 2001. The third-quarter and year-to-date decreases in
operating income compared to the prior-year periods are due to
lower revenues, increased sales and marketing expenses, and
competitive pricing pressure in both the commercial and government
sectors.
Beginning in third quarter 2002, IMGS segment results will also
include the results of Z/I Imaging. In third quarter 2002, IMGS
earned operating income of $751,000 on revenues of $39 million
compared to third quarter 2001 operating income of $1.8 million on
revenues of $36.5 million. For the first nine months of 2002,
operating income was $4.3 million, down from $7.4 million in 2001.
Revenues were $115.3 million for the first nine months of 2002,
down from $117.9 million for the prior-year period. The reduction
in operating income is primarily due to lower gross margins on
systems sales and higher overall operating expenses and lower-than-
planned revenue due to the downturn in the economy, predominantly
in the commercial, state and local government businesses. The
Company believes local and state governments will continue to
spend less on Information Technology ("IT") in the near future.
In third quarter 2002, PP&O reported operating income of $5.8
million on revenues of $32.5 million, compared to third quarter
2001 operating income of $1.6 million on revenues of $28.6
million. For the first nine months of 2002, operating income was
$15 million on revenues of $92.6 million, a substantial increase
over $4.2 million on revenues of $86.4 million for the first nine
months of 2001. The increase in operating income is due to higher
revenues, cost reductions, improved product mix (growth in higher-
margin products), and several non-recurring transactions that
positively impacted operating income.
In third quarter 2002, IPS earned operating income of $4.2 million
on revenues of $28.5 million, compared to third quarter 2001
operating income of $2.5 million on revenues of $29 million. IPS
reported operating income of $6.2 million on revenues of $76.2
million for the first nine months of 2002 compared to operating
income of $4.8 million on revenues of $88.8 million for the same
period in 2001. The increase in revenue and operating income over
third quarter 2001 is primarily the result of continued strong
performance from the Public Safety division and better performance
from the Utilities and Communications ("UC") division. In
addition, Public Safety had one-time increases in revenue and
income from operations of $2.3 million and $2 million,
respectively, as a result of the sale of software and systems
associated with the completion of a large outsourcing contract in
Australia. In September 2002, the operation of the Bureau of
Emergency Services Telecommunications system in Victoria,
Australia, reverted to the government at the conclusion of a seven-
year outsourcing arrangement. This action will reduce 2003
revenue by $11 million per year but should not have a significant
impact on profitability, with the exception of the one-time sale
in third quarter 2002. For the first nine months of 2002, revenue
declined 14% from the same period in 2001. This decline was in
the UC business. Income from operations increased by 29% during
the same period, due to better gross margins, the one-time sale
mentioned above from the Public Safety business, and cost
reductions in the UC business. The industry-wide slowdown in IT
spending continues for both the utilities and communications
markets. Each quarter, expenses and staffing have been reduced to
bring them in line with expected revenues. The Company
anticipates that revenues will continue to be depressed in the
foreseeable future. In October, the decision was made to merge
the UC division with the IMGS division. There are business
synergies and opportunities for cost savings between the UC and
IMGS businesses because of overlaps in sales, marketing, and
development. The UC industry solutions are built on the IMGS
GeoMedia core technology, and GeoMedia is frequently used by UC
customers for their general geographic information systems (GIS)
needs. The transfer will be completed during fourth quarter 2002
and will become effective for the full year 2003.
In third quarter 2002, the Intellectual Properties division
reported an operating loss of $33,000 compared to an operating
loss of $1.2 million in third quarter 2001. For the first nine
months of 2002, IP reported an operating loss of $3.6 million
compared to $1.9 million for the first nine months of 2001. The
Company has recently announced that Fujitsu Ltd. of Japan has
licensed Intergraph's PIC technology for use in consumer
electronics and embedded applications. The license established a
1% running royalty on current and future Fujitsu products
utilizing the PIC technology. The license provided an initial fee
in the amount of $100,000 in revenue for the Intellectual
Properties division. Costs are primarily outside legal expenses
related to patent litigation that increased substantially in 2002.
The 2002 legal expenses related to the patent litigation were
offset against the settlement proceeds recorded in other income
(expense) in the consolidated statements of income for the three
and nine months ended September 30, 2002. See "Litigation" below.
In third quarter 2002, Corporate reported an operating loss of
$7.6 million on revenues of $4.1 million, compared to a third
quarter 2001 operating loss of $5 million on revenues of $8.1
million. For the first nine months of 2002, Corporate reported an
operating loss of $18.8 million on revenues of $10.2 million
compared to an operating loss of $16.2 million on revenues of
$30.7 million in the first nine months 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.
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 settlement did
not subject the Company to any prospective obligations or cash
flows. Any patents issued in the future will automatically be
licensed to Intel but will not result in any obligations to the
Company. 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. Any costs associated with any
future obligations of the Company are inconsequential.
The settlement also established a range of damages for the then
pending patent infringement suit in Texas. This settlement
agreement was filed on Form 8-K/A 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.
The Texas trial was held in early July 2002 with final closing
arguments on August 29, 2002. On October 10, 2002, the Judge
ruled that Intergraph's PIC patents were valid, enforceable, and
infringed by Intel's Itanium and Itanium 2 products. The Judge
also ruled that Intergraph was entitled to an injunction on
Intel's Itanium and Itanium 2 processors. On October 18, 2002,
Intel filed a combined Motion to Reconsider and Motion for a New
Trial, which was denied. On October 30, 2002, the Court entered a
"Final Judgment and Permanent Injunction" against Intel. Based on
this Final Judgment, Intel must pay $150 million to the Company no
later than November 29, 2002, or face the imposition of a
permanent injunction. The $150 million payment is non-refundable,
regardless of any outcome on appeal, and will stay the injunction,
pending appeal.
Upon payment of the $150 million, Intel has three options: (1)
Intel can pay an additional $100 million to immediately license
the PIC patents, (2) Intel can appeal the decision and will have
to pay an additional $100 million only if they fail to prevail on
appeal, or (3) Intel may design around the infringement. Any
design-around, however, must be approved by the Texas Court and
implemented in the next release of Itanium. Any appeal will be
filed with the Federal Circuit Court of Appeals in Washington,
D.C.
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."
The Company also continues to pursue real estate sales and
facilities consolidation. If successful, these sales should
provide additional cash to the Company.
LIQUIDITY AND CAPITAL RESOURCES
On August 31, 2002, the Company terminated its secured credit
agreement. (See the Company's Annual Report on Form 10-K for the
year ended December 31, 2001, for complete details of this credit
agreement.) Due to its current cash position, the Company
believes a general line of credit is unnecessary at this time.
On September 4, 2002, in order to reduce the cost of issuing
letters of credit, the Company established a credit line with
Wells Fargo Bank to cover its outstanding letters of credit. This
credit line is secured by $15 million of interest-bearing
securities. Under this arrangement, the Company earns interest on
the securities and withdrawal of securities is allowed, but
restricted such that the Company must maintain a level of
securities sufficient to cover total outstanding letters of credit
which were $10.3 million at September 30, 2002.
At September 30, 2002, the Company had approximately $1.6 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.
In third quarter 2002, the Company spent approximately $12 million
to repurchase 752,000 shares of its common stock under a stock
repurchase program. During the first nine months of 2002, the
Company spent approximately $78.8 million to repurchase 4.5
million shares.
The Company believes that existing cash balances will
substantially exceed cash requirements for operations for 2002.
The Company does not anticipate significant non-operating events
that will require the use of cash, with the exception of its stock
repurchase program and its October purchase of the remaining 40%
ownership interest of Z/I Imaging. In October 2002, the stock
repurchase program was extended to December 31, 2004, and funding
was increased from $100 million to $175 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 received concurrence from
SEC staff 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 nine months of 2002, approximately 42%
of the Company's revenues were derived from customers outside the
United States, primarily through subsidiary operations, compared
to 47% for the first nine months of 2001. Most international
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 and Asia, improved its results of operations
for the first nine months of 2002 by $.02 per share in comparison
to the first nine months of 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
September 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. The full
Euro conversion in 2002 did not have a material impact on the
Company's results of operations or financial condition, and to
date, the conversion to one common currency has not impacted the
Company's pricing in European markets.
Item 4. Controls and Procedures
-----------------------
The Company, under the direction of the Chief Executive Officer
("CEO") and the Chief Financial Officer ("CFO"), has established
disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the Company in the
reports that it files or submits under the Securities Exchange Act
of 1934 is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms. The
disclosure controls and procedures are also intended to ensure
that such information is accumulated and communicated to the
Company's management, including the CEO and the CFO, as
appropriate to allow timely decisions regarding required
disclosures.
Within ninety days of the filing of this Report, the CEO and the
CFO have reviewed and evaluated the Company's disclosure controls
and procedures. Based on, and as of the date of, that review and
evaluation, the CEO and the CFO have concluded that the Company's
disclosure controls and procedures are effectively serving the
stated purposes.
In addition, there have been no significant changes in the
Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of
their most recent evaluation. No significant deficiencies or
material weaknesses in the internal controls were identified
during the evaluation and, therefore, no corrective action is
required to be taken.
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 settlement did
not subject the Company to any prospective obligations or cash
flows. Any patents issued in the future will automatically be
licensed to Intel but will not result in any obligations to the
Company. 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. Any costs associated with any
future obligations of the Company are inconsequential.
The settlement also established a range of damages for the then
pending patent infringement suit in Texas. This settlement
agreement was filed on Form 8-K/A 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.
The Texas trial was held in early July 2002 with final closing
arguments on August 29, 2002. On October 10, 2002, the Judge
ruled that Intergraph's PIC patents were valid, enforceable, and
infringed by Intel's Itanium and Itanium 2 products. The Judge
also ruled that Intergraph was entitled to an injunction on
Intel's Itanium and Itanium 2 processors. On October 18, 2002,
Intel filed a combined Motion to Reconsider and Motion for a New
Trial, which was denied. On October 30, 2002, the Court entered a
"Final Judgment and Permanent Injunction" against Intel. Based on
this Final Judgment, Intel must pay $150 million to the Company no
later than November 29, 2002, or face the imposition of a
permanent injunction. The $150 million payment is non-refundable,
regardless of any outcome on appeal, and will stay the injunction,
pending appeal.
Upon payment of the $150 million, Intel has three options: (1)
Intel can pay an additional $100 million to immediately license
the PIC patents, (2) Intel can appeal the decision and will have
to pay an additional $100 million only if they fail to prevail on
appeal, or (3) Intel may design around the infringement. Any
design-around, however, must be approved by the Texas Court and
implemented in the next release of Itanium. Any appeal will be
filed with the Federal Circuit Court of Appeals in Washington,
D.C.
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 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit
Number Description
------ -----------
10(b)(i) Termination Agreement and Release, by and
between Intergraph Corporation and Foothill
Capital Corporation, dated August 31, 2002
10(n) Employment Agreement of Dr. Terry Keating dated
October 1, 2002
99.1 Certification pursuant to 18 U.S.C. Section 1350
by James F. Taylor, Jr. dated November 12, 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350
by Larry J. Laster dated November 12, 2002
(b) Reports on Form 8-K:
On October 10, 2002, the Company filed a Current Report on
Form 8-K, reporting a favorable ruling on its PIC patent
infringement lawsuit against Intel Corporation in the Texas
District Court trial
On October 15, 2002, the Company filed a Current Report on
Form 8-K reporting Jim Taylor's intention to retire as the
Company's Chief Executive Officer
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: November 12, 2002 Date: November 12, 2002
CERTIFICATIONS
I, James F. Taylor, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Intergraph Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ James F. Taylor, Jr.
------------------------
James F. Taylor, Jr.
Chief Executive Officer
I, Larry J. Laster, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Intergraph Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Larry J. Laster
---------------------
Larry J. Laster
Chief Financial Officer