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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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
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(Exact name of registrant as specified in its charter)
Delaware 63-0573222
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Intergraph Corporation
Huntsville, Alabama 35894-0001
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (256) 730-2000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. ( )
As of January 31, 1999, there were 48,690,820 shares of Intergraph
Corporation Common Stock $0.10 par value outstanding. The aggregate
market value of the voting stock held by nonaffiliates of the
registrant was approximately $231,974,000 based on the closing sale
price of such stock as reported by NASDAQ on January 29, 1999,
assuming that all shares beneficially held by executive officers and
members of the registrant's Board of Directors are shares owned by
"affiliates," a status which each of the executive officers and
directors individually disclaims.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
--------- -------------------
Portions of the Annual Report to Shareholders
for the year ended December 31, 1998 Part I, Part II, Part IV
Portions of the Proxy Statement for the
May 13, 1999 Annual Shareholders' Meeting Part III
PART I
ITEM 1. BUSINESS
Overview
Intergraph Corporation (the "Company"), founded in 1969, is a
vendor of enterprise computing solutions, including hardware,
software, consulting and support services, for technical,
creative, and information technology (IT) professionals working
in a variety of industry sectors and government.
The Company offers open, industry standard technical solutions
for the enterprise, including Microsoft Corporation's Windows-
based software, Intel Corporation's microprocessor-based
hardware, and related services to meet engineering, design,
modeling, analysis, mapping, IT, and creative computing needs.
The Company's products are sold through industry-focused direct
and indirect channels worldwide, with United States and European
revenues representing approximately 80% of total revenues for
1998.
Background
Until the mid 1990s, the unique demands of high end technical
computing required tremendous processing and graphics
capabilities that could only be performed using reduced
instruction set computing (RISC) workstations for the UNIX
operating system. These systems cost considerably more than the
Intel microprocessor-powered/Microsoft Windows-based PCs widely
used today for word processing, spreadsheets, and other less
demanding applications.
In 1992, the Company began evaluation of a transition from its
own Clipper RISC microprocessor to the Intel microprocessor and
from the UNIX operating system to Microsoft's Windows NT, a 32
bit operating system powerful enough to run both technical and
business applications on a less expensive hardware platform. In
late 1992, the Company concluded that systems with Intel
microprocessors and Windows operating systems would become
capable of supporting high end computing and other enterprise
wide computing environments, while at the same time maintaining
interoperability with existing UNIX-based systems. The Company,
therefore, chose to migrate products from its own Clipper
microprocessor to Intel's and from the UNIX operating system to
Windows NT. This decision, in effect, expanded the availability
of the Company's workstations and software applications to
Windows-based computing environments not previously addressed by
the Company. It also allowed the Company's software applications
to operate on a variety of other hardware architectures provided
by vendors using the Windows NT operating system. Prior to this
decision, the Company's software applications operated
principally on its proprietary hardware platforms.
At the end of 1994, the Company completed a two-year
development effort to port its technical software applications to
the Windows NT operating system, and to make Windows NT available
on all of its workstations. Sales of Windows-based software grew
to represent 48% of software revenues in 1994, 70% in 1995, 78%
in 1996, 87% in 1997, and 90% in 1998.
The Company ceased development of its own Clipper RISC
microprocessor at the end of 1993 and made a substantial
investment in the redesign of its hardware platform for
utilization of Intel's microprocessor. The Company chose to use
only Intel microprocessors and to focus its efforts and image
creation toward its core capabilities, specifically very high
performance computational and 3D graphics capabilities. This
high-end market place in the Windows NT operating system
environment is supported only by Intel products. The transition
from its proprietary hardware architecture to that of Intel was
substantially completed during 1994. Intel-based systems grew to
represent 74% of hardware unit sales in 1994, 95% in 1995, and
approximately 100% in 1996, 1997 and 1998. See "Manufacturing
and Sources of Supply" and Item 3, Legal Proceedings, following
for discussion of litigation between the Company and Intel, and
Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for discussion of effects of the Intel
dispute on operating results of the Company.
Reflecting a trend toward outsourcing in the industry, on
November 13, 1998, the Company completed a transaction with SCI
Technology, Inc. (SCI), a wholly owned subsidiary of SCI Systems,
Inc., pursuant to which the Company sold substantially all of its
U.S. manufacturing inventory and assets to SCI, and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. In addition, the Company licensed
certain related intellectual property to SCI, and SCI employed
approximately 300 of the Company's manufacturing employees. For
a complete description of the SCI transaction, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1998 annual report,
portions of which are incorporated by reference in this Form 10-K
annual report.
Significant contingencies related to the SCI transaction
include the right of SCI to return to the Company any inventory
included in the initial sale that proves unusable in the
manufacturing of current products, the ability of the Company to
obtain most favorable pricing for products purchased from SCI
through higher volumes, and the ability of the Company to
accurately forecast its requirements of SCI.
The Company expects to benefit from its outsourcing to SCI
through lower employee headcount and lower per unit costs for
materials and overhead expenses, both of which should improve
earnings and cash flow. Outsourcing will also allow Intergraph
Computer Systems, the Company's hardware business unit, to focus
on its core competencies of graphics, workstations, and systems
integration. However, the Company retains the risk associated
with inventory excess and obsolescence, defined in the agreement
as any component or material in SCI's inventory for more than 60
days and which is in excess of demand as reflected in the
Company's six month forecast, if not mitigated by SCI with the
vendor. The Company has the option to either purchase this
inventory from SCI or authorize SCI to obtain liquidation offers
from third parties.
Currently, the Company, through its Intergraph Computer Systems
business unit, markets and sells a complete line of workstations,
personal computers (PCs), and servers based on Intel's Pentium,
Pentium Pro, Pentium II and Pentium III Xeon microprocessors and
the Windows NT operating system. The Company's Intel/Windows-
based solutions include low to high-end workstations and PCs,
servers, software applications, peripherals, consulting,
networking, system migration, training, and maintenance and
support services. Depending upon user requirements, these
products and services can be provided as point solutions or as
integrated, complete solutions that include all necessary
hardware, software, and support services.
The Company believes that its operating system and hardware
architecture strategies are the correct choices. However,
competing operating systems and products are available in the
market, and competitors of the Company offer or are adopting
Windows NT and Intel as the systems for their products.
Improvement in the Company's operating results will depend on its
ability to accurately anticipate customer requirements and
technological trends and to rapidly and continuously develop and
deliver new hardware and software products that are competitively
priced, offer enhanced performance, and meet customers'
requirements for standardization and interoperability, and will
further depend on its ability to successfully implement its
strategic direction. In addition, the Company faces significant
operational and financial uncertainty of unknown duration due to
its dispute with Intel.
In terms of broad market segments, the Company's
mapping/geographic information systems and
architecture/engineering/construction product applications
continue to dominate the Company's product mix at approximately
47% and 19% of total systems sales in 1998, respectively,
compared to 57% and 27%, respectively, in 1997. In March 1998,
the Company sold its Solid Edge and Engineering Modeling System
product lines to Electronic Data Systems Corporation and its
Unigraphics Solutions, Inc. subsidiary. As a result, mechanical
design, engineering and manufacturing applications no longer
represent a significant portion of the Company's product mix.
These applications represented 14% of total systems sales in
1997. For further information regarding the sale of these
product lines, see Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the
Company's 1998 annual report, portions of which are incorporated
by reference in this Form 10-K annual report.
Business Entities
Effective January 1, 1998, the Company divided its business
into four separate units for operational and management purposes:
Intergraph Computer Systems (ICS), Intergraph Public Safety, Inc.
(IPS), VeriBest, Inc., and the Software and Federal Systems
business (Intergraph). The Company believes that this
business structure provides greater focus and clear
accountability for each as a business enterprise. For further
information regarding the Company's operating segments, including
financial information for 1998, see Management's Discussion and
Analysis of Financial Condition and Results of Operations and
Note 11 of Notes to Consolidated Financial Statements contained
in the Company's 1998 annual report, which are incorporated
herein by reference.
Intergraph Computer Systems
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In January 1998, Intergraph Computer Systems (ICS) was
established as a wholly-owned subsidiary of the Company.
Headquartered in Huntsville, Alabama with a staff of
approximately 1,200 people worldwide, ICS develops and supplies
high performance Intel/Windows NT-based graphics workstations and
PCs, servers, and 3D graphics subsystems.
Intergraph Computer Systems is comprised of three business
units: Visual Computing, Intense3D, and Enterprise Solutions.
Visual Computing develops and supplies high performance Windows
NT-based graphics solutions for creative professionals in markets
that include publishing and prepress, digital media, and
production broadcasting. Intense3D develops and supplies state
of the art three dimensional graphics subsystems to major
workstation OEMs, including the Visual Computing business unit of
ICS. Enterprise Solutions provides Intel/Windows-based PCs,
workstations, and servers for enterprise computing, other
hardware products, and enterprise service solutions that include
networking solutions, firewalls, installation packages, systems
management solutions, consulting, training, and support.
Visual Computing offers workstation products for a range of
users. TDZ 3D graphics workstations offer animators, mechanical
CAD designers, and other graphics professionals high end,
industry standard graphics and computing power on price
competitive Pentium II-based systems running Windows NT. StudioZ
workstations are Pentium II/Windows NT-based systems for creating
computer generated images and digital betacam quality video for
the entertainment and broadcast markets. ExtremeZ 2D graphics
workstations are Pentium II-based systems for prepress and
publishing professionals. All computer systems offer numerous
options that permit customers to select systems that meet their
unique needs, including a selection of display monitors,
upgradeable memory, and specialized peripherals.
Intense3D provides high-performance, Windows NT-based 3D
graphics accelerators for visualization, CAD, digital content
creation, virtual reality, and simulation software applications.
Options include a complete range of Intense3D Wildcat and
Intense3D Pro accelerators for mainstream 3D applications up to
the most demanding creative and technical applications.
Enterprise Solutions' product and service offerings include
Intel/Windows-based PCs, workstations, servers, fully integrated
optical disk products, backup solutions, firewalls, networking
and system management solutions, as well as consulting,
installation packages, rapid application deployment solutions,
and Microsoft training. Depending on user requirements,
Enterprise Solutions' products and services can be provided as
point solutions or as integrated solutions that include all
necessary hardware, software, and support services for an
enterprise.
Intergraph Computer Systems also offers special purpose
peripherals such as disk and tape drives, printers, and other
devices which may be manufactured in house or sold as original
equipment from third parties.
Intergraph Public Safety, Inc.
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In January 1997, Intergraph Public Safety, Inc. (IPS) was
established as a wholly-owned subsidiary of the Company.
Headquartered in Huntsville, Alabama, IPS provides total public
safety solutions on a global basis. IPS solutions include
computer hardware and software systems, training, maintenance,
customer support, and outsourcing services.
On January 1, 1999, the Utilities business of Intergraph was
formally merged into IPS, increasing the subsidiary's total
headcount to approximately 660 people worldwide. IPS's popular
dispatch technology is a complementary application to the
Utilities mainstream geospatial products, such as ActiveFRAMME.
By linking the two, the Company is responding to utilities'
increased demand for a total solution that integrates AM/FM/GIS,
outage management and computer-aided dispatch. The Utilities
business will continue to further develop the Company's core
geospatial offerings, while collaboration with Intergraph Public
Safety will augment those offerings by adding computer-aided
dispatch and outage management components.
IPS utility solutions assist companies in the management of
customer centric geographic information systems (GIS) data
containing all the information necessary for distributing
electricity or gas, tracking distribution, and managing service
disruptions. IPS's geospatial resource management solution
spatially enables this data, integrating operational support
systems such as outage analysis, providing real time information
for customer service, and increasing operational efficiency
enterprisewide. Utility solutions offered by IPS include
engineering design and facilities management, technical document
workflow and archiving, mobile computing and field support,
outage management, spatial data analysis and data warehouse, and
real time display facility analysis.
The merger allows the Utilities group to focus expertise and
resources in three strategic industry sectors: electric; gas,
water and pipeline; and telecommunications. Sales, marketing and
project services efforts are vertically focused along these
segment lines.
IPS public safety develops, markets, and implements computer-
based solutions for emergency medical and rescue units, fire
departments, law enforcement organizations, and other public
safety agencies around the world. Other industries utilizing IPS
solutions include automobile clubs for roadside assistance, and
airports, campuses, and military bases for security systems.
IPS's public safety strategy is to provide products
representing a complete solution for public safety agencies. All
IPS products are designed to participate in a comprehensive,
integrated public safety information system. These products
include computer-aided dispatch, police, fire, and emergency
management systems, records management systems, jail management
systems, civil process and mug shot systems, mobile computer
systems, integrated radio and telephony solutions, interfaces to
alarm systems, management information reporting systems,
personnel rostering systems, and training management systems.
The foundation product for IPS is its computer-aided dispatch
system. This product fully integrates interactive, intelligent
mapping with dispatching, records management, and state of the
art communications capabilities. Designed specifically to
support command and control operations, the system is composed of
high performance graphics workstations and software. Records
management is enhanced by a database that includes geographic map
information as well as address, incident history, and traffic
pattern data.
IPS solutions are Intel processor/Windows NT-based and rely on
Oracle Corporation's relational databases. By incorporating
industry standard hardware and software with its products, IPS is
able to provide customers with the best price and performance
features available. IPS distributes its products worldwide
through direct and indirect sales channels. IPS distributes its
Utilities products directly in the U.S. Outside the U.S.,
Utilities products are sold through the Intergraph Corporation
distribution channels.
VeriBest, Inc.
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In January 1996, VeriBest, Inc. was established as a wholly-
owned subsidiary of the Company. VeriBest employs a staff of
approximately 270 people worldwide, with concentrations at its
corporate headquarters in Boulder, Colorado and development
centers in Huntsville, Alabama and Mountain View, California.
VeriBest serves the electronics design automation market,
providing software design tools, design processes, and consulting
services for developers of electronic systems. The first
electronic design automation (EDA) company to port its tools to
Windows NT and fully support computer-aided-engineering/computer-
aided-design/printed circuit board tools in the Intel/Windows
environment, VeriBest provides its electronic system design
solutions to the computer, telecommunications, automotive,
industrial control, and consumer industries.
VeriBest's core competencies include analog and digital
simulation, signal integrity, printed circuit board (PCB)
implementation, and enterprisewide design data and process
management, and full FPGA/PLD design support including
integration with logic synthesis tools from Synopsys and
Synplicity. These core competencies are focused on several
current market trends: the switch from point tools to integrated
tools suites, the switch to hardware description languages for
FPGA and PLD design, very high speed PCB's in the
telecommunications and computer market segments, and the adoption
of Windows NT as a workstation class operating system.
Integration is particularly important because it increases the
efficiency of the product development process, which
substantially improves the customer's ability to get their
products to market. To further improve customer's time to
market, VeriBest offers consulting services to customize the
product design process for each customer's unique product
development needs and enterprise data management philosophy.
VeriBest distributes its products worldwide through a direct
sales channel, telesales, value added resellers, e-commerce (the
Web), and through original equipment manufacturer (OEM)
arrangements. VeriBest's multi-level distribution strategy,
started in 1997, was enhanced by two events that occurred at the
end of 1998. In December 1998, VeriBest shipped new versions of
all of its products. This release of software, some two years in
the making, allows VeriBest to more efficiently sell its
technology at multiple price points through multiple channels.
In November of 1998 it was announced that the FPGA vendor Actel
had selected VeriBest as the source from which it would OEM a
full tool suite for the design of its high performance FPGA and
PLD silicon products. The addition of the Actel installed base
is expected to substantially enhance the over 18,000 seats of
VeriBest software currently installed around the world.
Intergraph
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Intergraph develops, markets, and supports technical solutions
for the enterprise, including open, interdisciplinary software
applications, specialized industry specific hardware, consulting,
and support services. Intergraph provides these business
solutions to three primary industries: process and building,
mapping and geoengineering (including transportation and state
and local governments), and federal government.
Intergraph's principal software applications are based on
Microsoft Windows, including operating systems, architecture
components, and development environments. This open technology
foundation enables Intergraph's software to interoperate with
thousands of third-party Windows-based technical and business
applications as well as with UNIX-based applications. An
additional graphics foundation used by the Company for certain
Intergraph software applications is MicroStation, software owned
by Bentley Systems, Inc., an approximately 50%-owned affiliate of
the Company. MicroStation provides fundamental graphics element
creation, maintenance, and display functions for the Company's
UNIX- and Intel-based workstations. In 1998, MicroStation sales
represented approximately 8% of the Company's total software
revenue. See Item 3, Legal Proceedings, following and
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 12 of Notes to Consolidated
Financial Statements contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for discussion of the Company's
arbitration proceedings and business relationship with Bentley
Systems, Inc.
Process & Building. Intergraph provides total life cycle
solutions to the process and building industries, including plant
design, architectural, and shipbuilding solutions, as well as
global service and support.
For more than 20 years, engineering/procurement/and
construction (EPC) contractors, and process plant owner/operators
have used Intergraph solutions to design, construct, operate and
maintain petrochemical, chemical, pharmaceutical, food and
beverge, oil and gas, power generation, and mining industries
from small stand-alone facilities to large global projects.
Intergraph life cycle solutions increase the value of plant data
by optimizing its storage, creation, management, integration, and
access across the global enterprise. Intergraph solutions reduce
design and contruction time, lower costs, enhance global
execution, extend the life and usability of engineering data, and
make data an integral part of the facility asset.
According to industry analyst Daratech of Cambridge,
Massachusetts, in 1998 Intergraph held a 56.6% revenue share of
the 3D plant design and visualization market, more than 3.5 times
more than the closest competitor. In the 2D plant design market
segment, Intergraph held a 15.5% revenue share, an increase of
18.6% over 1997. Combined with revenue share from the recently
acquired PID business, Intergraph holds a 22.2% revenue share -
virtually tied with the number two vendor, Bentley Systems,
(22.3%) in the 2D plant design market place.
Demand for Intergraph Plant Design System (PDS), the Company's
flagship plant design solution, remains strong. PDS provides:
- - Automation that improves productivity
- - Three-dimensional modeling that helps designers create a
better design
- - Interference-checking to reduce or eliminate field rework
- - Accurate material takeoffs that cut costs
- - Specification-driven design and checking that improves
accuracy
PDS supports process flow diagrams, piping and instrumentation
diagrams, instrumentation data management, piping, equipment,
heating/ventilation/air conditioning, electrical, structural, and
other engineering aspects of a plant.
The Intergraph SmartPlant family of process solutions,
including SmartPlant P&ID, SmartPlant Explorer, and SmartSketch,
is an open line of discipline-specific software tools that
provides an integrated solution for the entire plant life cycle.
Knowledge-based, intuitive, easy-to-use, accessible, flexible,
and data neutral, SmartPlant supports global workflows. It
enables users to create logical and physical definitions of the
plant model and enables access to plant data from conceptual
design to decommissioning.
The successor to PDS, SmartPlant includes expanded
functionality for front-end engineering and design (FEED),
operation, and maintenance phases. An open system that preserves
legacy plant data, SmartPlant will access and use PDS project and
related data, enabling users to migrate to SmartPlant on a module-
by-module basis, as their resources allow.
Relying on 20 years of industry experience and market
leadership, Intergraph develops life cycle information management
solutions that unlock the true value of plant data, making it
easily accessible and usable. Intergraph's engineering
information management solution is the Asset & Information
Management (AIM) suite.
Intergraph's architectural solutions automate the building
design process. With the Project Architect family,
architecture/engineering firms and corporate or governmental
offices can develop and model building concepts as well as
produce construction documents. Included in the Project
Architect family are capabilities for producing three-dimensional
models of design concepts, architectural drawings, reports,
engineering plans, and construction drawings. Intergraph
FrameWorks Plus models the physical structure of buildings.
FrameWorks Plus integrates with third-party analysis software for
evaluating designs by simulating stresses encountered in end use.
Shipbuilding solutions provide software systems and services
for commercial and military ship design, construction, and
management. In cooperation with international industry partners,
Intergraph is developing the next generation solution that will
streamline shipbuilding processes, lower manpower and material
costs, and reduce the time to construct world class marine
vessels. This software solution will provide the capability to
create a ship design that speeds product development from
conception to market delivery. It also provides capabilities for
performing risk analysis, design integrity and functional
engineering review of new and modified product designs.
Mapping and Geoengineering. To help agencies strategically and
efficiently manage transportation networks, Intergraph
transportation solutions integrate maps, photos, property
records, survey and engineering data, inspection reports, traffic
safety, and congestion statistics. Intergraph photogrammetry,
civil engineering, and mapping products provide transportation
solutions that include imaging, design, modeling, reprographics,
plotting, training, integration, and professional services.
Industry and government transportation professionals use
Intergraph photogrammetry solutions as a front end to mapping,
geographic information systems (GIS), and civil engineering
software from a variety of leading vendors. Photogrammetry is
used for spatial and volume measurement of terrain in studies of
the earth's surface. By comparing sequences of aerial
photographs taken over time, professionals can monitor land use
and environmental compliance, develop site plans for highways and
railways, perform defense reconnaissance, and plan improvements
in urban infrastructure and utilities. Intergraph's Windows NT-
based end-to-end digital photogrammetry production system
includes tools for aerotriangulation, mapping, automatic digital
terrain model collection, and orthophoto generation. Intergraph
also offers a software kit that transforms a PC into a low-cost,
high-performance photogrammetry seat for applications such as
model orientation, stereo compilation, and digital terrain
modeling (DTM) collection and editing.
For civil engineering, Intergraph's SelectCAD family of
products allows departments of transportation and
engineering/construction firms to easily switch between AutoCAD,
IntelliCad 98 and MicroStation platforms, while using the same
civil engineering tools for each of the various graphics engines.
InRoads SelectCAD provides features needed for projects ranging
from field design to construction. The software offers advanced
DTM capability plus associative alignments with spirals, user-defined
typical sections, and parametrically driven decision tables. Plans,
profiles, cross sections, contour maps or shaded analytical models
can be extracted to the user's standards.
For state and local governments, Intergraph develops and
implements civil engineering and mapping/GIS solutions for land
records and mapping, asset management, public works, public
safety, transportation engineering, infrastructure modeling,
planning, and other functions.
Intergraph's suite of civil engineering solutions offers local
governments a full complement of solutions, from data collection
to site design to water resources. Intergraph civil design
products integrate with Intergraph GIS solutions to meet the
needs of state and city governments around the world. Both civil
and GIS product lines remove proprietary barriers by providing
automated mapping, spatial analysis, network modeling, and
integration with multimedia, satellite imagery, spreadsheets,
documents, and more. The software also provides seamless
integration with major vendor data formats.
Intergraph's mapping/GIS solutions help governments improve
public service, respond more efficiently to legislated and
political mandates, implement successful GIS systems quickly, and
reduce the total cost of GIS ownership. The dominant mapping/GIS
solution for transportation agencies is Intergraph's GeoMedia, a
complete Windows-based desktop GIS solution for all decision
support query and reporting activities. Using GeoMedia software,
GIS professionals can access multiple geographic data sources
simultaneously for display, analysis, and presentation. GeoMedia
uses data servers to enable users to view and analyze multiple
databases simultaneously, allows integration of multiple data
types in a single environment, includes a complete set of
advanced analysis, and provides an open development platform for
creating custom applications. Designed to accommodate the
enterprisewide GIS environment, GeoMedia and GeoMedia Web Map
together enable open data access, analysis, and distribution of
spatial data and information across the World Wide Web for use
throughout the enterprise.
Intergraph's MGE is used by transportation agencies as a high-
end software for basemap analysis. MGE is the foundation for
Intergraph's Modular GIS Environment (MGE) family of mapping and
GIS software products. MGE offers project management, coordinate
system operations, data query and access, multiple configuration
options, and a range of common tools valuable to MGE modules.
MGE is interoperable with the GeoMedia product suite.
Also provided are solutions for end-to-end digital map and
cartographic production. These solutions help cartographers
manage the map production environment. From map scanning to map
printing, Intergraph's end-to-end cartographic production tools
provide the means to collect, process, and output data.
Federal Systems. The Federal Systems business unit of
Intergraph markets and sells commercial off-the-shelf and
specially developed products and services to government agencies
around the world. Federal Systems' offerings include ruggedized
workstations, mapping and information systems, environmental
management solutions, modeling and simulation systems, and state
of the art security systems. Intergraph has been a top provider
of computer hardware, software, and professional services
solutions to the U.S. government for many years.
Product Development
The Company believes a strong commitment to ongoing product
development is critical to success in the interactive computer
graphics industry.
Product development expenditures include all costs related to
designing new or improving existing hardware and software.
During the year ended December 31, 1998, the Company spent $83.8
million (8.1% of revenues) for product development activities
compared to $98.1 million (8.7% of revenues) in 1997, and $103.4
million (9.4% of revenues) in 1996. See Management's Discussion
and Analysis of Financial Condition and Results of Operations
contained in the Company's 1998 annual report, portions of which
are incorporated by reference in this Form 10-K annual report,
for further discussion of product development expenses, including
portions capitalized and their recoverability.
The industry in which the Company competes continues to be
characterized by rapid technological change, which results in
shorter product cycles, higher performance and lower priced
product offerings, intense price and performance competition, and
development and support of software standards that result in less
specific hardware and software dependencies by customers. The
Company believes the life cycle of its products to be less than
two years, and it is therefore engaged in continuous product
development activity. The operating results of the Company and
others in the industry will continue to depend on the ability to
accurately anticipate customer requirements and technological
trends and to rapidly and continuously develop and deliver new
hardware and software products that are competitively priced,
offer enhanced performance, and meet customers' requirements for
standardization and interoperability.
Manufacturing and Sources of Supply
Reflecting a trend toward outsourcing in the industry, on
November 13, 1998, the Company sold substantially all of its U.S.
manufacturing inventory and assets to SCI Technology, Inc. (SCI),
a wholly-owned subsidiary of SCI Systems, Inc., and SCI assumed
responsibility for manufacturing of substantially all of the
Company's hardware products. Prior to the sale, this
responsibility, which included the assembly and testing of
components and subassemblies manufactured by the Company and
others, was that of Intergraph Computer Systems (ICS), a wholly-
owned subsidiary of the Company. This outsourcing is expected to
bring the manufacturing and materials costs of ICS in line with
those of its competitors. ICS does, however, retain certain
risks, including its ability to accurately forecast its
manufacturing requirements of SCI and risks associated with
inventory excess and obsolescence as defined in the agreement.
For a complete description of the SCI transaction and its
anticipated impact on future operating results and cash flows,
see Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report.
Substantially all of the Company's microprocessor needs are
currently supplied by Intel Corporation. See Item 3, Legal
Proceedings, following and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the
Company's 1998 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for a discussion of
the Company's litigation proceedings with Intel and its related
effects on the Company's microprocessor supply and results of
operations.
The Company is not required to carry extraordinary amounts of
inventory to meet customer demands or to ensure allotment of
parts from its suppliers.
Sales and Support
Sales. The Company's systems are sold through a combination of
direct and indirect channels in approximately 65 countries
worldwide. Direct channel sales, which provide the majority of
the Company's systems revenues, are generated by the Company's
direct sales force through sales offices in over 40 countries
worldwide. The efforts of the direct sales force are augmented
by sales through indirect channels, including dealers, value
added resellers, distributors, and system integrators. Sales
through indirect channels provided approximately 22% of total
Company systems revenues in 1998 and 1997, compared to 18% in
1996.
Each of the Company's four major business entities maintains
its own sales force. Intergraph's selling efforts are organized
along key industry lines (process and building, federal systems,
and mapping and geoengineering, including transportation,
photogrammetry, and state and local governments) for its major
product applications. The Company believes an industry focus
better enables it to meet the specialized needs of customers. In
general, the direct sales forces are compensated through a
combination of base salary and commission. Sales quotas are
established along with certain incentives for exceeding quota.
Additional specific incentive programs may be established
periodically.
Customer Support. The Company believes that a high level of
customer support is important to the sale of interactive graphics
systems. Customer support includes preinstallation guidance,
customer training, onsite installation, hardware preventive
maintenance, repair service, software help desk and technical
support services in addition to consultative professional
services. The Company employs engineers and technical
specialists to provide customer assistance, maintenance, and
training. Maintenance and repair of systems are covered by
standard warranties and by maintenance agreements to which most
users subscribe. The trend in the industry toward lower priced
products and longer warranty periods has resulted in reduced
levels of maintenance revenue for the Company. The Company
believes this trend will continue in the future, though it may be
partially offset by growth in the Company's professional services
business. The Company is endeavoring to grow its services
business and has redirected the efforts of its hardware
maintenance organization to focus increasingly on systems
integration and training. Revenues on these services, however,
produce lower gross margins than maintenance revenues.
International Operations
International markets, particularly Europe and Asia, continue
in importance to the industry and to the Company. Sales outside
the U.S. represented approximately 51% of total revenues in 1998
and 53% in 1997. European and Asia Pacific revenues represented
31% and 10%, respectively, of total revenues in 1998 (31% and
12%, respectively, in 1997). The Company's operations are
subject to and may be adversely affected by a variety of risks
inherent in doing business internationally, such as government
policies or restrictions, currency exchange fluctuations, and
other factors.
There are currently wholly-owned sales and support subsidiaries
of the Company located in every major European country. European
subsidiaries are supported by service and technical assistance
operations located in The Netherlands. Outside of Europe, the
Company's systems are sold and supported through a combination of
subsidiaries and distributorships. At December 31, 1998, the
Company had approximately 1,300 employees in Europe, 780
employees in the Asia Pacific region, and 650 employees in other
international locations.
Fluctuations in the value of the U.S. dollar in international
markets can have a significant impact on the Company's results of
operations. The Company conducts business in all major markets
outside the U.S., but the most significant of these operations
with respect to currency risk are located in Europe and Asia.
Local currencies are the functional currencies for the Company's
European subsidiaries. The U.S. dollar is the functional
currency for all other international subsidiaries. With respect
to the currency exposures in these regions, the objective of the
Company is to protect against financial statement volatility
arising from changes in exchange rates with respect to amounts
denominated for balance sheet purposes in a currency other than
the functional currency of the local entity. The Company will
therefore enter into forward exchange contracts related to
certain balance sheet items, primarily intercompany receivables,
payables, and formalized intercompany debt, when a specific risk
has been identified. Periodic changes in the value of these
contracts offset exchange rate related changes in the financial
statement value of these balance sheet items. Forward exchange
contracts, generally less than three months in duration, are
purchased with maturities reflecting the expected settlement
dates of the balance sheet items being hedged, and only in
amounts sufficient to offset possible significant currency rate
related changes in the recorded values of these balance sheet
items, which represent a calculable exposure for the Company from
period to period. Since this risk is calculable and these
contracts are purchased only in offsetting amounts, neither the
contracts themselves nor the
exposed foreign currency denominated balance sheet items are
likely to have a significant effect on the Company's financial
position or results of operations. The Company does not
generally hedge exposures related to foreign currency denominated
assets and liabilities that are not of an intercompany nature,
unless a significant risk has been identified. It is possible
the Company could incur significant exchange gains or losses in
the case of significant, abnormal fluctuations in a particular
currency. By policy, the Company is prohibited from market
speculation via forward exchange contracts and therefore does not
take currency positions exceeding its known financial statement
exposures, and does not otherwise trade in currencies. At
December 31, 1998, the Company's only outstanding forward
contracts related to formalized intercompany loans between the
Company's European subsidiaries.
The Company has historically experienced slower collection
periods for its international accounts receivable than for
similar sales to customers in the United States. The Company is
experiencing slow collections throughout the Middle East region,
particularly in Saudi Arabia. Total accounts receivable from
Middle Eastern customers was approximately $23 million at
December 31, 1998 and $21 million at December 31, 1997.
See Management's Discussion and Analysis of Financial Condition
and Results of Operations and Notes 1, 4, and 11 of Notes to
Consolidated Financial Statements contained in the Company's 1998
annual report, portions of which are incorporated by reference in
this Form 10-K annual report, for further discussion of the
Company's international operations.
U.S. Government Business
Total revenue from the United States government was
approximately $166 million in 1998, $177 million in 1997, and
$161 million in 1996, representing approximately 16% of total
revenue in 1998 and 1997, and 15% in 1996. The majority of these
revenues are attributed to the Federal Systems business unit of
the Intergraph operating segment.
The Company sells to the U.S. government under long term
contractual arrangements, primarily indefinite delivery,
indefinite quantity and cost plus award fee contracts, and
through commercial sales of products not covered by long term
contracts. Approximately 44% of total federal government
revenues are earned under long term contracts. The Company
believes its relationship with the federal government to be good.
While it is fully anticipated that these contracts will remain in
effect through their expiration, the contracts are subject to
termination at the election of the government. Any loss of a
significant government contract would have an adverse impact on
the results of operations of Intergraph Federal Systems and the
Company as a whole.
The Company has historically experienced slower collection
periods for its U.S. government accounts receivable than for its
commercial customers. At December 31, 1998, accounts receivable
from the U.S. government was approximately $55 million versus
approximately $53 million at December 31, 1997.
Backlog
An order is entered into backlog only when the Company receives
a firm purchase commitment from a customer. The Company's
backlog of unfilled systems orders at December 31, 1998 and 1997
was $237 million and $169 million, respectively. Substantially
all of the December 1998 backlog of orders is expected to be
shipped during 1999.
The Company does not consider its business to be seasonal,
though typically fourth quarter orders and revenues exceed those
of other quarters.
The Company does not ordinarily provide return of merchandise
or extended payment terms to its customers.
Competition
The industry in which the Company competes continues to be
characterized by price and performance competition. To compete
successfully, the Company and others in the industry must
accurately anticipate customer requirements and technological
trends and rapidly and continuously develop products with
enhanced performance that can be offered at competitive prices.
The Company, along with other companies in the industry, engages
in the practice of price discounting to meet competitive industry
conditions. Other important competitive factors include quality,
reliability, customer service and support, and training.
Management of the Company believes that competition will remain
intense, particularly in product pricing.
Competition in the interactive computer graphics industry
varies among the different product application areas. The
Company considers its principal competitors in the interactive
computer graphics market to be IBM, Hewlett Packard Corporation,
Compaq Computer Corporation, Sun MicroSystems, Inc., Silicon
Graphics, Inc., and Mentor Graphics, Inc. In the low end
graphics market, Intergraph competes with the software products
of Autodesk, Inc., Bentley Systems, Inc. (an approximately 50%-
owned affiliate of the Company), Softdesk, Inc., and several
smaller companies. In the personal computer market, Intergraph
competes with vendors such as Compaq Computer Corporation and
Dell Computer Corporation. The primary competitors of Intergraph
Public Safety are TriTech Software Systems, Litton PRC, Tiburon,
Inc., and Printrak International Inc. VeriBest's primary
competitors are Cadence Design Systems, Inc., Viewlogic Systems,
Inc., and Mentor Graphics, Inc. Several companies with greater
financial resources than the Company, including IBM, Hewlett
Packard, Sun, and Compaq are active in the industry.
The Company provides point solutions and solutions which are
Windows compliant and integrated -- workstations, servers,
peripherals, and software configured by the Company to work
together and satisfy customers' requirements. By delivering such
integration, the Company believes it has an advantage over other
vendors who provide only hardware or software, leaving system
integration to the customer. In addition, the Company believes
that its experience and extensive worldwide customer service and
support infrastructure represent a competitive advantage.
Environmental Affairs
The Company's manufacturing facilities are subject to numerous
laws and regulations designed to protect the environment,
particularly from plant wastes and emissions. In the opinion of
the Company, compliance with these laws and regulations has not
had, and should not have, a material effect on the capital
expenditures, earnings, or competitive position of the Company.
Licenses, Copyrights, Trademarks, Patents, and Proprietary
Information
The Company develops its own graphics, data management, and
applications software as part of its continuing product
development activities. The Company has standard license
agreements with Microsoft Corporation for use and distribution of
the Windows NT operating system and with UNIX Systems
Laboratories for use and distribution of the UNIX operating
system. The license agreements are perpetual and allow the
Company to sublicense the operating systems software upon payment
of required sublicensing fees. The Company also has an extensive
program for the licensing of third party application and general
utility software for use on systems and workstations.
The Company has a non-exclusive license agreement with Bentley
Systems, Inc. (Bentley), an approximately 50%-owned affiliate of
the Company, under which the Company sells MicroStation, a
software product developed and maintained by Bentley and utilized
in many of the Company's software applications, via its direct
sales force, and via its indirect sales channels if MicroStation
is sold with other Intergraph products. See Item 3, Legal
Proceedings, following and Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 12 of
Notes to Consolidated Financial Statements contained in the
Company's 1998 annual report, portions of which are incorporated
by reference in this Form 10-K annual report, for further
discussion of the Company's affiliation with Bentley.
The Company owns and maintains a number of registered patents
and registered and unregistered copyrights, trademarks, and
service marks. The patents and copyrights held by the Company
are the principal means by which the Company preserves and
protects the intellectual property rights embodied in the
Company's hardware and software products. Similarly, trademark
rights held by the Company are used to preserve and protect the
goodwill represented by the Company's registered and unregistered
trademarks.
As industry standards proliferate, there is a possibility that
the patents of others may become a significant factor in the
Company's business. Personal computer technology is widely
available, and many companies, including Intergraph, are
attempting to develop patent positions concerning technological
improvements related to personal computers and workstations.
With the possible exception of its ongoing litigation with Intel
(in which the Company expects to prevail), it does not appear the
Company will be prevented from using the technology necessary to
compete successfully, since patented technology is typically
available in the industry under royalty bearing licenses or
patent cross licenses, or the technology can be purchased on the
open market. Any increase in royalty payments or purchase costs
would increase the Company's costs of manufacture, however, and
it is possible that some key improvement necessary to compete
successfully in markets served by the Company may not be
available.
An inability to retain significant third party license rights,
in particular the Microsoft license, to protect the Company's
copyrights, trademarks, and patents, or to obtain current
technical information or any required patent rights of others
through licensing or purchase, all of which are important to
success in the industry in which the Company competes, could
significantly reduce the Company's revenues and adversely affect
its results of operations.
Technology significant to the Company is sometimes made
available in the form of proprietary information or trade secrets
of others. Prior to the dispute with Intel, Intel had made
freely available technical information used by the Company to
design, market and support its products that use Intel
components. Such information is claimed by Intel to be
proprietary and is made available by Intel only under
nondisclosure agreements. Prior to the April 1998 ruling of the
Alabama Court (See Item 3, Legal Proceedings, following), Intel
was withholding such information, attempting to cancel existing
agreements and refusing to enter into new nondisclosure
agreements with the Company. Intel's actions are the subject
matter of current litigation, and Intel has appealed the April
1998 court ruling. Intel's actions have damaged the Company by
slowing the introduction of new products using Intel components
and preventing proper maintenance and support of Company products
using Intel components. The Company expects the Appeals Court to
uphold the April 1998 ruling. However, if the ruling is
overturned, the Company will be materially affected and may be
forced to alter its future business plans or to accept
unfavorable terms from Intel in settlement of the lawsuit.
Risks and Uncertainties
In addition to those described above and in Item 3, Legal
Proceedings, following, the Company has risks and uncertainties
related to its business and operating environment. See
Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 2 of Notes to Consolidated
Financial Statements contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for further discussion of these risks
and uncertainties.
Employees
At December 31, 1998, the Company had approximately 6,700
employees. Of these, approximately 2,730 were employed outside
the United States. The Company's employees are not subject to
collective bargaining agreements, and there have been no work
stoppages due to labor difficulties. Management of the Company
believes its relations with employees to be good.
ITEM 2. PROPERTIES
The Company's corporate offices and primary manufacturing
facility are located in Huntsville, Alabama. With the exception
of VeriBest, all of the Company's operating segments have
corporate headquarters located within the Huntsville facilities.
VeriBest is headquartered in Boulder, Colorado with development
centers in Huntsville, Alabama and Mountain View, California.
The Company's operating segments maintain sales and support
facilities throughout the world.
The Company owns over 1,800,000 square feet of space in
Huntsville that is utilized for manufacturing, product
development, sales and administration. The Huntsville facilities
also includes over 500 acres of unoccupied land. The Company
maintains subsidiary company facilities, including those of its
VeriBest operating segment, and sales and support locations in
major U.S. cities outside of Huntsville through operating leases.
Under the terms of its manufacturing outsourcing agreement with
SCI, the Company is leasing its Huntsville manufacturing
facilities, consisting of approximately 248,000 square feet of
space, to SCI for a period of six to twelve months before SCI
moves the former Intergraph manufacturing operation to another
facility. It is anticipated that the transition of manufacturing
from Intergraph to SCI facilities will take place in the second
quarter of 1999.
Outside the U.S., the Company owns approximately 450,000 square
feet of space, primarily its Nijmegen distribution center and
European headquarters facility. Sales and support facilities are
leased in most major international locations.
The Company considers its facilities to be adequate for the
immediate future.
ITEM 3. LEGAL PROCEEDINGS
Intel Corporation
- -----------------
The Company filed a legal action on November 17, 1997, in U.S.
District Court, the Northern District of Alabama, Northeastern
Division (the "Alabama Court"), charging Intel Corporation, the
supplier of all of the Company's microprocessor supply, with
anticompetitive business practices. In the lawsuit, Intergraph
alleges that Intel is attempting to coerce the Company into
relinquishing to Intel certain computer hardware patents through
a series of wrongful acts, including interference with business
and contractual relations, interference with technical assistance
from third party vendors, breach of contract, negligence,
misappropriation of trade secrets, and fraud based upon Intel's
failure to promptly notify the Company of defects in Intel's
products and timely correction of such defects, and further
alleging that Intel has infringed upon the Company's patents.
The Company's patents define the architecture of the cache memory
of an Intergraph developed microprocessor. The Company believes
this architecture is at the core of Intel's entire Pentium line
of microprocessors and systems. On December 3, 1997, the Company
amended its complaint to include a count charging Intel with
violations of federal antitrust laws. Intergraph asserts claims
for compensatory and treble damages resulting from Intel's
wrongful conduct and infringing acts, and punitive damages in an
amount sufficient to punish and deter Intel's wrongful conduct.
Additionally, the Company requested that Intel be enjoined from
continuing the alleged wrongful conduct which is anticompetitive
and/or violates federal antitrust laws, so as to permit
Intergraph uninterrupted development and sale of Intel-based
products.
On November 21, 1997, the Company filed a motion in the Alabama
Court to enjoin Intel from disrupting or delaying its supply of
products and product information, pending resolution of
Intergraph's legal action. On April 10, 1998, the Alabama Court
ruled in favor of Intergraph and ordered that Intel be
preliminarily enjoined from terminating Intergraph's rights as a
strategic customer in current and future Intel programs, and from
otherwise taking any action adversely affecting Intel's business
relationship with Intergraph or Intergraph's ability to design,
develop, produce, manufacture, market or sell products
incorporating, or based upon, Intel products or information. The
Court's ruling requires that Intel carry out business with
Intergraph under the same terms and conditions, with the same
rights, privileges, and opportunities as Intel makes available to
Intergraph's competitors who are also strategic customers of
Intel. In response to the Alabama Court's decision, on April 16,
1998, Intel appealed to the United States Court of Appeals for
the Federal Circuit (the "Appeals Court"). Intel and the Company
have each filed briefs with the Appeals Court, and oral arguments
were presented on December 9, 1998. No decision has been
entered.
Intel filed a retaliatory legal action on November 17, 1997, in
the U.S. District Court, the Northern District of California (the
"California Court"), requesting, among other things, i) that the
Court declare Intergraph's patents invalid and/or not infringed
by Intel, ii) that Intergraph be enjoined from making further
assertions that Intel's customers infringe Intergraph's patents
through use of Intel's microprocessors, iii) that the Court
declare that Intel has no obligation to disclose any of its trade
secrets or other confidential information to Intergraph, and iv)
that the Court declare that Intel's decision to discontinue the
provision of trade secrets and other confidential information to
Intergraph does not violate any doctrine of federal or state
statutory or common law. Intel filed a second legal action in
the California Court on November 24, 1997, charging Intergraph
with breach of contract related to wrongful retention of and
failure to return Intel information supplied under nondisclosure
agreements, and misappropriation of trade secrets as a result of
the same. Intel asserted claims for damages and awards and
requested a preliminary and permanent injunction under which
Intergraph would return and make no further use of Intel
confidential information. On December 8, 1997, the Alabama Court
directed the Company and Intel to file joint motions in the
California cases to stay the two legal actions brought by Intel,
pending the Court's consideration of a motion to transfer and
consolidate venue. The joint motions were filed and stays were
granted by the California Court. On January 15, 1998, Intel
filed a motion before the Alabama Court for a change in venue to
California. On May 18, 1998, the Alabama Court denied this
motion, and Intel subsequently dropped the two retaliatory
lawsuits which Intel had brought against the Company in
California.
On June 17, 1998, Intel filed its answer in the Alabama case,
which included counterclaims against Intergraph, including claims
that Intergraph has infringed seven patents of Intel. On July 8,
1998, the Company filed its answer to the Intel counterclaims,
among other things denying any liability under the patent
infringement asserted by Intel. On June 17, 1998, Intel filed a
motion before the Alabama Court seeking a summary judgment
holding that Intel is licensed to use the patents that the
Company asserted against Intel in the Company's original
complaint. This "license defense" is based on Intel's
interpretation of the facts surrounding the acquisition by the
Company of the Advanced Processor Division of Fairchild
Semiconductor Corporation in 1987. The Company is vigorously
contesting Intel's motion for summary judgment on the license
defense, and filed a cross motion with the Alabama Court
September 15, 1998 requesting summary adjudication in favor of
the Company. No decision has been entered.
On November 13, 1998, the Company amended its complaint to
include two additional counts of patent infringement against
Intel. The Company requested the court to issue a permanent
injunction enjoining Intel from further infringement, and to
order that the financial impact of the infringement be calculated
and awarded in treble to Intergraph. No decision has been
entered.
On January 29, 1999, Intergraph filed a motion requesting the
Alabama Court to require Intel to show cause why it should not be
held in contempt for its failure to comply with the Court's
automated discovery order and for improperly designating
discovery materials as protected by the attorney client
privilege. In its motion, Intergraph requested the Court to set
a status conference on discovery and a hearing on its motion. No
decision has been entered.
In a scheduling order entered June 25, 1998, the Alabama Court
set a trial date of February 14, 2000.
The Company believes it was necessary to take legal action
against Intel in order to defend its workstation business, its
intellectual property, and the investments of its shareholders.
The Company is vigorously prosecuting its positions and defending
against Intel's claims and believes it will prevail in these
matters, but at present is unable to predict an outcome.
Bentley Systems, Inc.
- ---------------------
The Company is the owner of approximately 50% of the
outstanding stock of Bentley Systems, Inc. ("Bentley"), the
developer and owner of MicroStation, a software product utilized
in many of the Company's software applications and for which the
Company serves as a nonexclusive distributor. In May 1997, the
Company received notice of the adverse determination of an
arbitration proceeding with Bentley in which the Company had
alleged that Bentley inappropriately and without cause terminated
a contractual arrangement with the Company, and in which Bentley
had filed a counterclaim against the Company seeking significant
damages as the result of the Company's alleged failure to use
best efforts to sell software support services pursuant to terms
of the contractual arrangement terminated by Bentley. The
arbitrator's award against the Company was in the amount of $6.1
million. In addition, the contractual arrangement that was the
subject of this arbitration was terminated effective with the
award and, as a result, the Company no longer sells the related
software support services under this agreement. The Company and
Bentley have entered into a new agreement which establishes
single support services between the two companies.
In a second proceeding brought in March 1996, Bentley commenced
arbitration against the Company with the American Arbitration
Association, Atlanta, Georgia, alleging that the Company failed
to properly account for and pay to Bentley certain royalties on
its sales of Bentley software products, and seeking significant
damages. Hearings on this matter are in process and are
scheduled to conclude with a decision from the arbitration panel
in second quarter of 1999. The Company denies that it has
breached any of its contractual obligations to Bentley and is
vigorously defending its position in this proceeding, but at
present is unable to predict an outcome.
See Management's Discussion and Analysis of Financial Condition
and Results of Operations contained in the Company's 1998 annual
report, portions of which are incorporated by reference in this
Form 10-K annual report, for further discussion of the Company's
business relationship with Intel and Bentley and effects of
litigation and arbitration proceedings on the Company's financial
position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Certain information with respect to the executive officers of
the Company is set forth below. Officers serve at the discretion
of the Board of Directors.
Name Age Position Officer Since
- ---- --- -------- -------------
James W. Meadlock 65 Chairman of the Board
and Chief Executive Officer 1969
James F. Taylor Jr. 54 Executive Vice President and
Director, Intergraph
Corporation and Chief Executive
Officer, Intergraph Public
Safety, Inc. 1977
Robert E. Thurber 58 Executive Vice President and
Director 1977
Lawrence F. Ayers Jr. 66 Executive Vice President 1987
Klaas Borgers 54 Executive Vice President 1994
Penman R. Gilliam 61 Executive Vice President 1994
Lewis N. Graham Jr. 44 Executive Vice President 1997
Richard H. Lussier 53 Executive Vice President 1996
Nancy B. Meadlock 60 Executive Vice President 1969
Wade C. Patterson 37 Executive Vice President,
Intergraph Corporation and
Chief Executive Officer and
President, Intergraph Computer
Systems 1994
Stephen J. Phillips 57 Executive Vice President 1987
Preetha R. Pulusani 38 Executive Vice President 1997
Charles E. Robertson Jr. 45 Chief Executive Officer and
President, VeriBest, Inc. 1992
William E. Salter 57 Executive Vice President 1984
K. David Stinson Jr. 45 Executive Vice President 1996
John W. Wilhoite 47 Executive Vice President and
Chief Financial Officer 1988
Edward A. Wilkinson 65 Executive Vice President 1987
Allan B. Wilson 50 Executive Vice President 1982
Manfred Wittler 58 Executive Vice President 1989
James W. Meadlock, a founder of the Company, has served as
Chairman of the Board of Directors since the Company's inception
in 1969 and is Chief Executive Officer. Mr. Meadlock received a
degree in electrical engineering from North Carolina State
University in 1956. Mr. Meadlock and Nancy B. Meadlock are
husband and wife.
James F. Taylor Jr. joined the Company in July 1969, shortly
after its formation, and is considered a founder. He has served
as a Director since 1973. Mr. Taylor was responsible for the
design and development of the Company's first commercial computer-
aided-design products and for many application specific products.
Mr. Taylor was elected Vice President in 1977. He is currently
an Executive Vice President of the Company and Chief Executive
Officer of Intergraph Public Safety, Inc. Mr. Taylor holds a
bachelor's degree in mathematics.
Robert E. Thurber, a founder of the Company, has been a
Director since 1972. In June 1977, Mr. Thurber was elected Vice
President and is currently Executive Vice President and Chief
Engineer. He is responsible for development of requirements and
strategic direction for application solutions. Mr. Thurber holds
a master's degree in engineering.
Lawrence F. Ayers Jr. joined the Company in September 1987
after 32 years in federal government mapping where he became the
Civilian Director of the Defense Mapping Agency. He served as
Vice President for International Federal Marketing until February
1993. From 1993 to October 1995, he served as Executive Vice
President for the Utility and Mapping Sciences application group.
At present, he serves on the Intergraph staff as Executive Vice
President. Mr. Ayers holds a bachelor's degree in civil
engineering and a master's degree in public administration. Mr.
Ayers has served on a number of national policy committees for
the National Academy of Science and the National Academy of
Public Administration, including the Transportation Research and
Highway Research committees.
Klaas Borgers joined the Company in 1991. He was elected Vice
President in 1994 and has served as Executive Vice President of
the Company and Chief Operating Officer of Intergraph Computer
Systems since 1997. A key person in the development and growth
of Intergraph Computer Systems worldwide operations, Mr. Borgers
directs ICS's sales, services, manufacturing and distribution
operations.
Penman R. Gilliam joined the Company in April 1994 as Executive
Vice President responsible for federal programs. Mr. Gilliam is
the manager responsible for the federal mapping and information
systems organization and the Company's Midworld operations. Mr.
Gilliam came to Intergraph from Hughes Aircraft Company where he
was Vice President of Hughes Communications and Data Systems
Division. From late 1987 through early 1993, Mr. Gilliam served
as Deputy Director of the Defense Mapping Agency (DMA), the
senior civilian responsible for overall production, operations,
and research. Mr. Gilliam also held a number of other positions
with DMA, including production management positions in St. Louis
and Washington D.C. and a program director's position for DMA's
digital production system. Mr. Gilliam holds a bachelor's degree
in mathematics and geology.
Lewis N. Graham Jr. joined the Company in 1985 and has been
involved in the design and delivery of imaging and mapping
systems during most of his career with the Company. He was
elected Vice President in 1997 and has served as Executive Vice
President, managing the mapping and geoengineering division of
Intergraph, since August 1998. Mr. Graham holds a bachelor's
degree in physics and a master's degree in electrical
engineering.
Richard H. Lussier joined the Company in 1979. He was promoted
to Vice President of Sales in 1981 and was later promoted to
Executive Vice President of Worldwide Sales and Support. Mr.
Lussier left the Company in 1990 to pursue personal business
interests. He rejoined the Company in 1996 as Executive Vice
President of U.S. Sales. He is currently responsible for
InterCAP, a wholly-owned Intergraph subsidiary, which develops
and markets world-leading technical illustration software as well
as WEB enabling technology. Mr. Lussier holds a master's degree
in business administration.
Nancy B. Meadlock, a founder of the Company, served as a
Director from 1969 until May 1996, excluding the period from
February 1970 to February 1972. Mrs. Meadlock served as
Secretary for 10 years, was elected Vice President in 1979, and
is currently an Executive Vice President. She holds a master's
degree in business administration. Mrs. Meadlock and James W.
Meadlock are wife and husband.
Wade C. Patterson joined the Company in 1984 as a design
engineer developing UNIX and central processing unit (CPU)
subsystems for Intergraph workstation products. In 1992, Mr.
Patterson managed Windows NT workstation projects as the Company
made the transition from reduced instruction set computing CPUs
to Intel microprocessor-based CPUs. Mr. Patterson has been
responsible for hardware development and marketing for Intergraph
Computer Systems, the Company's hardware subsidiary, since August
1994. He was elected Vice President at that time and is
currently an Executive Vice President of the Company and Chief
Executive Officer and President of Intergraph Computer Systems.
He holds a bachelor's degree in electrical engineering.
Stephen J. Phillips joined the Company as Vice President and
General Counsel in November 1987 when Intergraph purchased the
Advanced Processor Division of Fairchild Semiconductor, where Mr.
Phillips was General Patent Counsel. He was elected Executive
Vice President in August 1992. Mr. Phillips holds a master's
degree in electrical engineering and a juris doctor in law.
Preetha R. Pulusani joined the Company in 1980 as a software
engineer, and since that time has held several positions in the
areas of marketing and development of mapping technology for the
Company. She was elected Vice President in 1997 and has served
as Executive Vice President, responsible for the mapping and
geographic information systems business of Intergraph, since
August 1998. Ms. Pulusani holds a master's degree in computer
science.
Charles E. Robertson Jr. joined the Company in 1992. He has
served as Chief Executive Officer and President of VeriBest, Inc.
since its inception in January 1996. Prior to his current
position, Mr. Robertson held executive positions within the
Company and at Mentor Graphics, Daisy Systems, and Cadnetix. He
holds a bachelor's degree in electrical engineering and computer
science.
William E. Salter joined the Company in April 1973. Since that
time, he has served in several managerial positions in the
Company's federal systems business and as Director of Marketing
Communications. Dr. Salter was elected Vice President in August
1984 and is currently an Executive Vice President of the Company.
He holds a doctorate in electrical engineering.
K. David Stinson Jr. joined the Company in 1996. Prior to
joining the Company, Mr. Stinson acted as Vice President of
Engineering and Nuclear Projects for the Tennessee Valley
Authority (TVA), the nation's largest government owned electric
power utility. Before joining TVA, he was founder and Chief
Executive Officer of Digital Engineering, responsible for
developing software to assist with the operations, maintenance,
and environmental qualification of nuclear facilities and other
process plants. Mr. Stinson was elected Executive Vice President
in 1996, responsible for the process and building business of
Intergraph. He is a graduate of the U.S. Air Force Academy and
holds a masters degree in management administration science.
John W. Wilhoite joined the Company in July 1985 after eleven
years with Price Waterhouse & Co. He has been Controller of the
Company since 1986 and was elected Vice President in 1988. In
May 1998, he was elected Executive Vice President of Finance and
was named Chief Financial Officer in December 1998. Mr. Wilhoite
holds a bachelor's degree in business administration and is a
certified public accountant.
Edward A. Wilkinson joined the Company in 1985 as Director of
Government Relations. He was elected Vice President of Federal
Systems in 1987 and Executive Vice President in 1994. Prior to
joining the Company, Mr. Wilkinson served 34 years in the U.S.
Navy, retiring with the rank of Rear Admiral. He holds a
master's degree in mechanical engineering.
Allan B. Wilson joined the Company in 1980 and was responsible
for the development of international operations outside of Europe
and North America. He was elected Vice President in May 1982 and
Executive Vice President in November 1982. Mr. Wilson is
currently responsible for sales and support for the Company's
Asia Pacific region. He holds bachelor's and master's degrees in
electrical engineering.
Manfred Wittler joined the Company in 1989 as Vice President.
In 1991, he was elected Executive Vice President and is currently
responsible for sales and support for Europe, Canada, and Latin
America. From 1983 through 1989, Mr. Wittler held several
positions with Data General Corporation in Europe, including
Division Vice President. He holds a doctorate in engineering.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The information appearing under "Dividend Policy" and "Price
Range of Common Stock" on page 56 of the Intergraph Corporation
1998 annual report to shareholders is incorporated by reference
in this Form 10-K annual report.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31,
1998, appearing under "Five Year Financial Summary" on the inside
front page of the Intergraph Corporation 1998 annual report to
shareholders is incorporated by reference in this Form 10-K
annual report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing on pages 18 to 33 of the
Intergraph Corporation 1998 annual report to shareholders is
incorporated by reference in this Form 10-K annual report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Information relating to the Company's market risks appearing
under "Impact of Currency Fluctuations and Currency Risk
Management" and "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of
Operations appearing on pages 30 to 33 of the Intergraph
Corporation 1998 annual report to shareholders is incorporated by
reference in this Form 10-K annual report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent
auditors appearing on pages 34 to 55 of the Intergraph
Corporation 1998 annual report to shareholders are incorporated
by reference in this Form 10-K annual report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information appearing under "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of
1934" on pages 4 to 5 of the Intergraph Corporation proxy
statement relative to the annual meeting of shareholders to be
held May 13, 1999, is incorporated by reference in this Form 10-K
annual report. Directors are elected for terms of one year at
the annual meeting of the Company's shareholders.
Information relating to the executive officers of the Company
appearing under "Executive Officers of the Company" on pages 16
to 18 in this Form 10-K annual report is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under "Executive Compensation" on
pages 6 to 13 of the Intergraph Corporation proxy statement
relative to the annual meeting of shareholders to be held May 13,
1999, is incorporated by reference in this Form 10-K annual
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information appearing under "Common Stock Outstanding and
Principal Shareholders" on pages 1 to 3 of the Intergraph
Corporation proxy statement relative to the annual meeting of
shareholders to be held May 13, 1999, is incorporated by
reference in this Form 10-K annual report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
Page in
Annual Report *
---------------
(a) 1) The following consolidated financial statements of
Intergraph Corporation and subsidiaries and the
report of independent auditors thereon are
incorporated by reference from the Intergraph
Corporation 1998 annual report to shareholders:
Consolidated Balance Sheets at December 31, 1998
and 1997 34
Consolidated Statements of Operations for the
three years ended December 31, 1998 35
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998 36
Consolidated Statements of Shareholders' Equity
for the three years ended December 31, 1998 37
Notes to Consolidated Financial Statements 38-54
Report of Independent Auditors 55
* Incorporated by reference from the indicated pages
of the 1998 annual report to shareholders.
Page in
Form 10-K
---------------
2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts and
Reserves for the three years ended December 31, 1998 24
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
Financial statements of 50%-or-less-owned companies have been
omitted because the registrant's proportionate share of income
before income taxes of the companies is less than 20% of
consolidated loss before income taxes, and the investments in and
advances to the companies are less than 20% of consolidated total
assets.
3) Exhibits
Page in
Number Description Form 10-K
------ ----------- ----------------
3(a) Certificate of Incorporation, Bylaws,
and Certificate of Merger (1).
3(b) Amendment to Certificate of Incorporation (2).
3(c) Restatement of Bylaws (3).
4 Shareholder Rights Plan, dated August 25,
1993 (4) and amendment dated March 16, 1999.
10(a)* Employment Contract of Manfred Wittler dated
November 1, 1989 (5) and amendment
dated February 18, 1998 (9).
10(b) Loan and Security Agreement, by and between
Intergraph Corporation and Foothill Capital
Corporation, dated December 20, 1996 and
amendments dated January 14, 1997 (6),
November 25, 1997 (9), and October 30,
1998 (10).
10(c)* Intergraph Corporation 1997 Stock Option Plan (6).
10(d)* Agreement between Intergraph Corporation and
Green Mountain, Inc. dated April 1, 1998 (7).
10(e) Indemnification Agreement between Intergraph
Corporation and each member of the Board of
Directors of the Company dated June 3, 1997 (8).
10(f)* Employment Contract of Wade Patterson dated
May 30, 1997 (8) and amendment dated
November 2, 1998.
10(g)* Intergraph Corporation Nonemployee Director
Stock Option Plan (9).
10(h) Amended and Restated First Mortgage and
Security Agreement, by and between Intergraph
Corporation and Foothill Capital Corporation,
dated November 25, 1997 (9).
10(i)* Employment Contract of Klaas Borgers dated
September 1, 1997.
10(j) Asset Purchase Agreement by and among SCI
Technology, Inc. as Buyer and Intergraph
Corporation as Seller dated November 13,
1998, with Exhibits and Schedule 1 (10).
10(k)* Intergraph Computer Systems Holding, Inc.
1998 Stock Option Plan.
13 Portions of the Intergraph Corporation 1998
Annual Report to Shareholders incorporated
by reference in this Form 10-K Annual Report
21 Subsidiaries of the Company 25
23 Consent of Independent Auditors 26
27 Financial Data Schedule
* Denotes management contract or compensatory plan,
contract, or arrangement required to be filed as an
Exhibit to this Form 10-K
- ----------
(1) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1984, under the Securities Exchange Act
of 1934, File No. 0-9722.
(2) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1987, under the Securities Exchange Act
of 1934, File No. 0-9722.
(3) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993, under the Securities Exchange Act
of 1934, File No. 0-9722.
(4) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated August 25,
1993, under the Securities Exchange Act of 1934, File
No. 0-9722.
(5) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992, under the Securities Exchange Act of
1934, File No. 0-9722.
(6) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, under the Securities Exchange Act of
1934, File No. 0-9722.
(7) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, under the Securities Exchange Act
of 1934, File No. 0-9722.
(8) Incorporated by reference to exhibits filed with the
Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997, under the Securities Exchange Act
of 1934, File No. 0-9722.
(9) Incorporated by reference to exhibits filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997, under the Securities Exchange Act
of 1934, File No. 0-9722.
(10) Incorporated by reference to exhibits filed with the
Company's Current Report on Form 8-K dated November 13,
1998, under the Securities Exchange Act of 1934, File
No. 0-9722.
- ----------
(b) Reports on Form 8-K - on November 25, 1998, the Company filed
a Current Report on Form 8-K (dated November 13, 1998) which
reported a transaction pursuant to which the Company sold
substantially all of its U.S. manufacturing assets to SCI
Technology, Inc. (SCI), and SCI assumed responsibility for
manufacturing of substantially all of the Company's hardware
products.
(c) Exhibits - the response to this portion of Item 14 is
submitted as a separate section of this report.
(d) Financial statement schedules - the response to this portion
of Item 14 is submitted as a separate section of this report.
- ----------
Information contained in this Form 10-K annual report may include
statements that are forward looking as defined in Section 21E of
the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward looking
statements. Additional information concerning factors that could
cause actual results to differ materially from those in the
forward looking statements is contained in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" section of the Company's 1998 annual report, portions
of which are incorporated by reference in this Form 10-K annual
report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ James W. Meadlock Date: March 29, 1999
---------------------------
James W. Meadlock
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
Date
----
/s/ James W. Meadlock Chief Executive Officer and March 29, 1999
- --------------------------- Chairman of the Board
James W. Meadlock (Principal Executive Officer)
/s/ James F. Taylor Jr. Executive Vice President and March 29, 1999
- --------------------------- Director, Intergraph
James F. Taylor Jr. Corporation, and Chief
Executive Officer, Intergraph
Public Safety, Inc.
/s/ Robert E. Thurber Executive Vice President and March 29, 1999
- --------------------------- Director
Robert E. Thurber
/s/ Keith H. Schonrock Jr. Director March 29, 1999
- ---------------------------
Keith H. Schonrock Jr.
- --------------------------- Director March 29, 1999
Larry J. Laster
- --------------------------- Director March 29, 1999
Thomas J. Lee
- --------------------------- Director March 29, 1999
Sidney L. McDonald
/s/ John W. Wilhoite Executive Vice President March 29, 1999
- --------------------------- and Chief Financial Officer
John W. Wilhoite (Principal Financial and
Accounting Officer)
INTERGRAPH CORPORATION AND SUBSIDIARIES
SCHEDULE II ---- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Column A Column B Column C Column D Column E
- ------------------ ---------- ---------- ---------- -------------
Additions
Balance at charged to
beginning costs and Balance at
Description of period expenses Deductions end of period
- ------------------ ---------- ---------- ---------- -------------
Allowance for doubtful
accounts deducted
from accounts
receivable in the
balance sheet 1998 $14,488,000 3,168,000 3,842,000 (1) $13,814,000
1997 $16,703,000 2,844,000 5,059,000 (1) $14,488,000
1996 $20,399,000 (2,049,000) (3) 1,647,000 (1) $16,703,000
Allowance for
obsolete inventory
deducted from
inventories in the
balance sheet 1998 $36,508,000 19,346,000 24,605,000 (2) $31,249,000
1997 $43,223,000 15,582,000 22,297,000 (2) $36,508,000
1996 $34,441,000 24,189,000 15,407,000 (2) $43,223,000
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory reduced to net realizable value.
(3) The Company provides its allowance for doubtful accounts on a
specific identification basis. In 1996, significant improvement
in collection prospects on several large accounts occurred,
resulting in reversal of amounts previously provided in the
allowance for doubtful accounts.