-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RP7fCrsbLfPIw1OwQZoVvpXooqNSRKfJ8IhSiLiENKbplqrfXq/SxYErtZDM1FLq BdSwsXYktuwi3x1aciHVRA== 0000351145-00-000014.txt : 20000323 0000351145-00-000014.hdr.sgml : 20000323 ACCESSION NUMBER: 0000351145-00-000014 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERGRAPH CORP CENTRAL INDEX KEY: 0000351145 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 630573222 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-09722 FILM NUMBER: 575167 BUSINESS ADDRESS: STREET 1: THIGPEN HQ011 #9384 CITY: HUNTSVILLE STATE: AL ZIP: 35894-0001 BUSINESS PHONE: 2567302000 10-K 1 ============================================================================ 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________ to________ Commission file number 0-9722 INTERGRAPH CORPORATION ---------------------- (Exact name of registrant as specified in its charter) Delaware 63-0573222 -------------------- -------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) Intergraph Corporation Huntsville, Alabama 35894-0001 --------------------- -------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code: (256) 730-2000 -------------- 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 --------------------------------------- (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, 2000, there were 49,252,406 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 $252,402,000 based on the closing sale price of such stock as reported by The Nasdaq Stock Market on January 31, 2000, 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, 1999 Part I, Part II, Part IV Portions of the Proxy Statement for the May 18, 2000 Annual Meeting of Shareholders Part III PART I ITEM 1. BUSINESS Overview Intergraph Corporation (the "Company"), founded in 1969, is a technical solutions and systems integration company, providing customizable core computer software, consulting, services, and computer hardware to governments and industries worldwide. Known for its leadership, technology, and global service infrastructure, the Company supports technical and creative professionals in a range of sectors, including local and federal government, transportation, mapping/geographic information systems ("GIS"), utilities, communications, public safety, and process and building. The Company offers software solutions based on Microsoft Corporation's Windows operating systems and hardware systems based on Intel Corporation's Pentium-class microprocessors, as well as related professional services to satisfy engineering, design, modeling, analysis, mapping, information technology, and creative computing needs. The Company's products and services are sold through industry-focused direct and indirect channels worldwide, with United States and European revenues representing approximately 79% of total revenues for 1999. 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") based workstations for the UNIX operating system. These systems cost considerably more than the Intel microprocessor-powered/Microsoft Windows-based personal computers ("PCs") widely used at the time 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, based on commitments from Intel, the Company concluded that systems with Intel microprocessors and Windows operating systems would become capable of supporting high-end computing and other enterprisewide 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 microprocessors and from the UNIX operating system to Microsoft 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. The Company ceased development of the 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, and since 1995, substantially all of the Company's hardware sales have been comprised of Intel-based systems. At the end of 1994, the Company also completed the 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 have grown sequentially each year and currently represent over 90% of the Company's total software revenues. In 1996, a dispute with Intel over the use of Intergraph patents key to the development of Intel Pentium processors disrupted relations between the Company and Intel, causing significant delays in the Company's hardware development and manufacturing cycles. Unable to acquire Intel microprocessors and technical information crucial to its product development, the Company could not introduce new hardware lines on a timetable competitive with other hardware vendors. As a consequence, the Company was unable to compete favorably in the high-performance Intel processor-powered workstation markets it pioneered. In November 1997, in response to Intel's actions, the Company filed a lawsuit against Intel, alleging that Intel was using its dominant market position in an attempt to coerce Intergraph into giving up certain key patent rights. These coercive tactics included the withholding of essential design and defect information for released Intel products and the intentional interference with Intergraph customers and suppliers. See "Manufacturing and Sources of Supply" and Item 3, Legal Proceedings, following, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1999 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for further discussion of the Company's dispute with Intel and its effects on the Company's business and consolidated operating results. In efforts to reduce losses and return to profitability, the Company took significant measures, including the outsourcing of its manufacturing function to SCI Technology Inc. ("SCI"), a wholly owned subsidiary of SCI Systems Inc., in 1998 (for further information about the SCI transaction, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1999 annual report, portions of which are incorporated by reference in this Form 10-K annual report), extensive reductions to its workforce in 1998 and 1999, and sales of several non-core product lines. In third quarter 1999, the Company exited the PC and generic server businesses, which had been irreparably damaged as a result of the dispute with Intel. Currently, the Company, through its Intergraph Computer Systems business unit, markets and sells Intel/Windows- based high-end workstations and specialty servers, and digital video products. In order to maximize profitability in its remaining hardware businesses, the Company is actively seeking partnerships with companies that offer complementary technologies and sales channels. In terms of broad market segments, the Company's mapping/GIS and process and building applications continue to dominate the Company's product mix at approximately 50% and 19% of total systems sales in 1999, respectively, compared to 47% and 19%, respectively, in 1998. Due to the sale of the Company's Solid Edge and Engineering Modeling System product lines in March 1998, 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. The Company believes that its operating system, hardware architecture, and software applications strategies are the correct choices. However, competing operating systems, hardware products, and software applications are available in the market, and the Company competes with companies with greater financial resources in each of the markets it serves. Improvement in the Company's operating results will continue to depend on its ability to accurately anticipate customer requirements and technological trends and to rapidly and continuously develop and deliver new 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. Discontinued Operation On October 31, 1999, the Company sold its VeriBest Inc. operating segment to Mentor Graphics Corporation, a global provider of electronic hardware and software design solutions and consulting services. As a result, electronic design automation software and services no longer represent a portion of the Company's revenues. For further discussion regarding the sale of VeriBest, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1999 annual report, portions of which are incorporated by reference in this Form 10-K annual report. Business Entities The Company's continuing operations are divided into three separate business units for operational and management purposes: the Software and Federal Systems ("Federal") business (collectively, the Software and Federal businesses form what is termed "Intergraph"), Intergraph Computer Systems ("ICS"), and Intergraph Public Safety, Inc. ("IPS"). For further information regarding the Company's operating segments, including financial information for 1999 and 1998, see 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 1999 annual report, which are incorporated herein by reference. Intergraph - ---------- Intergraph develops, markets, and supports technical solutions for many industries as well as federal, state, and local governments. Products include open, interdisciplinary software applications, specialized industry specific hardware, consulting, and support services. Intergraph provides business solutions to three primary industries: process and building, federal government, and mapping/GIS (including transportation and state and local governments). 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. ("BSI"), an approximately 33%-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 1999, MicroStation sales represented approximately 5% of the Company's total software revenue. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 of Notes to Consolidated Financial Statements contained in the Company's 1999 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for discussion of the Company's business relationship and past arbitration proceedings with BSI. Process and Building. Process & Building Solutions ("PBS") is a global organization that supplies software and services to the process, power, and marine industries. PBS focuses on integrated life cycle engineering solutions for the design, construction, and operation of plants and ships, with emphasis on engineering information management and on linking the engineering systems with business systems. For more than 20 years, engineering/procurement/and construction ("EPC") contractors, and process and power plant owner/operators have used Intergraph solutions to design, construct, operate and maintain facilities for petrochemical, chemical, pharmaceutical, food and beverage, oil and gas, power generation, and mining industries. Intergraph life cycle engineering solutions increase the value of plant data by facilitating capture and re-use of information throughout the life cycle of a plant, resulting in significant productivity gains, operational efficiencies, and higher profits. According to industry analyst Daratech of Cambridge, Massachusetts, in 1999 Intergraph held a 59% revenue share of the 3D plant design and visualization market. In the 2D plant design market segment, Intergraph held a 24.5% revenue share. The Company's Plant Design System ("PDS") is a comprehensive, intelligent engineering application that creates and maintains an accurate database of plant information. That information is a valuable asset for regulatory compliance, streamlining operations, maintenance, and downstream retrofit projects. Integration features enable concurrent engineering, multiple disciplines working on a project simultaneously, improving design coordination, reducing errors, and increasing productivity. PDS consists of integrated 2D and 3D modules which correspond to basic tasks in the plant design workflow, including 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. In addition to PDS, Process & Building Solutions delivers its SmartPlant family of products, including SmartPlant P&ID, SmartSketch, SmartPlant Explorer, and SmartPlant Review, to support life cycle engineering needs of the process and power industries. Because plant data is populated in an open data model, this data can be easily accessed and used by engineering, procurement, construction, maintenance, management, and any other relevant users who need it. PBS's shipbuilding solutions provide software systems and services for commercial and military ship design, construction, and management. In cooperation with international industry partners, PBS 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. GSCAD is the next-generation naval and shipbuilding solution for design, construction, and management. GSCAD design, planning, and engineering analysis tools are built on an enterprisewide, integrated infrastructure that accesses real-time information. 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. Federal Systems. The Federal Systems business unit markets and sells specially developed hardware and software solutions, commercial off-the-shelf products, and professional consulting services to governments around the world. Products include specialized hardware, mapping and information systems, logistics and financial systems, environmental management solutions, modeling and simulation systems and security systems. The Federal business unit also supports U.S. state and local governments with GIS solutions, and sells and supports civil engineering and GIS-based transportation solutions. Effective March 2000, the Federal Systems business was renamed Intergraph Government Solutions. For more than 20 years, Intergraph has been a top provider of computer hardware, software, and professional services solutions to federal, state, and local governments, enabling governments worldwide to achieve maximum performance in military and civilian computing environments. To better serve its government markets, Intergraph's Federal business unit is divided into three primary groups: the hardware solutions division, the government solutions division, and the mapping and information systems division. The hardware solutions division develops ruggedized workstations for military and government engineering applications. Its flagship product, the TD-R 2000 series workstation, is an integral part of the U.S. Navy's Smart Ship technology program, enabling the Navy to sustain high operational workloads with reduced crews. Hardware solutions also develops specialized turnkey systems for the military and surveillance communities, including mission planning and video analysis systems. The government solutions division ("GSD") develops, implements, and supports specialized software solutions and consulting services to meet logistics systems, information management, financial systems integration, and transportation engineering needs of the Army, Navy, and Air Force branches of the U.S. military. GSD also develops and implements civil engineering solutions, and sells and supports U.S. state and local governments with 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. To help government agencies strategically and efficiently manage transportation networks, Intergraph transportation software integrates 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. The mapping and information systems division ("IMIS") develops and supports mapping systems, products, and services to the world's major mapping and charting organizations. IMIS also provides specialized systems, products, and services to military agencies and national and local governments. Solutions include map and chart production, security, identification, intelligence, environmental, command and control, and geospatial data exploitation systems. Mapping/GIS. Mapping/GIS includes geospatial solutions and imaging solutions. It develops, markets, and supports geospatial solutions for business GIS, land records management, rail transportation, environmental management, utilities and communications companies, and commercial map production. Solutions provide geographic visualization and analysis tools useful in many businesses, including real estate, retailing, service networks, transportation networks, site assessment, agriculture, insurance, and health care. Mapping/GIS also develops and sells geospatial solutions that 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. Mapping/GIS sells its geospatial solutions for government through Federal Systems. Mapping/GIS solutions include Intergraph's GeoMedia family of products. The dominant mapping/GIS solution for business and government, including transportation agencies, GeoMedia is a complete Windows-based desktop GIS solution for all decision support query and reporting activities. Intergraph's MGE is also 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. Mapping/GIS also provides 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. Z/I Imaging Corporation, a 60%-owned joint venture with Carl Zeiss formed in October 1999, develops, markets, and sells Windows NT-based imaging solutions for photogrammetry professionals. Solutions include aerial cameras, stereo softcopy, workstations, analytic stereo plotters, photogrammetric scanners, and image management, processing, and distribution software. Z/I Imaging systems are nonproprietary, enabling industry and government professionals to use them as a front-end to mapping, GIS, and civil engineering software from a variety of leading vendors. Intergraph Computer Systems - --------------------------- Intergraph Computer Systems, a wholly owned subsidiary of Intergraph Corporation formed in 1998, develops high-performance core hardware, including high-end workstations, add-in graphics subsystems, specialty servers, and digital video products, for use in numerous professional-level creative and technical disciplines. Headquartered in Huntsville, Alabama, ICS employs a staff of approximately 800 people worldwide. ICS builds on the core hardware with the value add of extensive market knowledge to create high-performance, leading-edge, and highly reliable visual computing solutions for the digital media, visual simulation, mechanical CAD and publishing/prepress markets. ICS high-performance workstations and specialty servers are embraced by an ever-growing number of customers in the digital content creation markets. The Information Technology ("IT") Services division of ICS offers products and services including 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, and rapid application deployment solutions. Depending on user requirements, IT Services' 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. The Intense3D division of ICS develops and sells add-in graphics subsystems for the Windows NT/Intel platform. Used in high-performance workstations and PCs, the Intense3D family of accelerators delivers performance at affordable prices in graphics-intensive markets that include mechanical computer-aided design ("CAD"), traditional CAD, animation, content creation, visual simulation, scientific visualization, graphics arts, and digital media. Intense3D's Wildcat graphics accelerators are certified with the leading software vendors from across many disciplines, and are used by researchers, engineers, designers, and scientists who need to interact in real time with complex visual data sets. Intense3D provides 3D graphics cards to leading computer vendors such as Dell, IBM, Compaq, Fujitsu, and Siemens. Intergraph Public Safety, Inc. - ------------------------------ In January 1997, Intergraph Public Safety, Inc. was established as a wholly-owned subsidiary of the Company. IPS includes the Public Safety, Utilities and Communication groups. IPS solutions include computer hardware and software systems, systems implementation, training, maintenance, customer support, and outsourcing services for the public safety and utilities markets. The subsidiary is headquartered in Huntsville, Alabama and has a staff of approximately 780 people worldwide. Public Safety develops, markets, and implements and supports 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 Public Safety solutions include automobile clubs for roadside assistance, and airports, campuses, and military bases for security systems. Public Safety products represent a complete solution for public safety agencies. Public Safety products are designed to interoperate 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 Public Safety 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. On January 1, 1999, Intergraph's Utilities and Communications business was formally merged into IPS. Public Safety's popular dispatch technology is a complementary application to their 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 and Communications business continues to develop the Company's core geospatial offerings, while collaboration with Public Safety augments those offerings by adding computer-aided dispatch and outage management components. This business focuses its expertise and resources in two strategic industry sectors: Utilities and Communications. Sales, marketing and project services efforts are vertically focused along these sectors. Utilities and Communications solutions are also sold through the Intergraph Corporation international distribution channels. A leading supplier of Windows NT-based geospatial resource management solutions, this business provides software and services that help energy and communications companies manage their geospatial data and respond to customer needs. The Utilities solutions assist electric, gas, pipeline, and water companies in the management of customer-centric GIS data, which contains all the information necessary for distributing electricity or gas, tracking distribution, and managing service disruptions. Its geospatial resource management solution spatially enables this data, integrating operational support systems such as outage analysis, and provides real time information for customer service, thereby increasing operational efficiency enterprisewide. Solutions 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. For Communications, geospatial network resource management solutions are provided to help the international communications industry automate its network facility mapping, planning, design, and maintenance for outside and inside plant. IPS's 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. 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, 1999, the Company spent $62.6 million (6.8% of revenues) for the product development activities of its continuing operations compared to $76.8 million (7.6% of revenues) in 1998 and $90.3 million (8.2% of revenues) in 1997. See Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1999 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 is 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 for most 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 the trend toward outsourcing in the hardware industry, in fourth quarter 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. ICS retains 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 impact on operating results and cash flows, see Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 1999 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 1999 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 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 products 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 product 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 25% of total Company systems revenues in 1999, compared to 22% in 1998 and 1997. Each of the Company's major business entities maintains its own sales force. Intergraph's selling efforts are organized along key industry lines (process and building, federal, state and local government, mapping/GIS, utilities and public safety) 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. Revenues from these services, however, typically produce lower gross margins than maintenance revenues. International Operations International markets, particularly Europe and Asia, continue in importance to the industry and to each of the Company's operating segments. Sales outside the U.S. represented approximately 52% of total revenues from continuing operations in 1999, compared to 51% in 1998. European and Asia Pacific revenues represented 31% and 11%, respectively, of total revenues from continuing operations in both 1999 and 1998. 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, 1999, the Company had approximately 1,100 employees in Europe, 740 employees in the Asia Pacific region, and 640 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 possibly 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, 1999 and 1998, the Company's outstanding forward contracts related to formalized intercompany loans between the Company's European subsidiaries and were immaterial to the Company's financial position. 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 $20 million at December 31, 1999 and $23 million at December 31, 1998. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes 1, 5, and 12 of Notes to Consolidated Financial Statements contained in the Company's 1999 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 $149 million in 1999, $166 million in 1998, and $177 million in 1997, representing approximately 16% of total revenues in all three years. The majority of these revenues are attributed to the Federal 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 52% of the Company's 1999 federal government revenues were 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 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, 1999, accounts receivable from the U.S. government was approximately $33 million versus approximately $55 million at December 31, 1998. 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, 1999 and 1998 was $209 million and $237 million, respectively. Substantially all of the December 1999 backlog of orders is expected to be shipped during 2000. 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 intense 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. The Company's competition varies among its different product application areas. The Company considers its principal competitors in the hardware market to be IBM, Hewlett Packard Corporation, Compaq Computer Corporation, Dell Computer Corporation, and Silicon Graphics, Inc. In the process and building industry, Intergraph competes with the software products of Bentley Systems, Inc. (an approximately 33%- owned affiliate of the Company), Cadcentre, Rebis Industrial Workgroup Software, and several smaller companies. The Company's primary competitors in the utilities and mapping/GIS markets are ESRI, Autodesk Inc., Smallworld, and MapInfo. The primary competitors of Intergraph Public Safety are TriTech Software Systems, Litton PRC, Tiburon, Inc., and Printrak International Inc. Several companies with greater financial resources than the Company, including IBM, Hewlett Packard, Dell, and Compaq are active in the industries served by the Company. 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 facilities are subject to numerous laws and regulations designed to protect the environment. 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. ("BSI"), an approximately 33%-owned affiliate of the Company, under which the Company sells MicroStation, a software product developed and maintained by BSI 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 Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 of Notes to Consolidated Financial Statements contained in the Company's 1999 annual report, portions of which are incorporated by reference in this Form 10-K annual report, for further discussion of the Company's affiliation and past arbitration proceedings with BSI. 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, which is used in the Company's workstation and server products, is widely available, and many companies, including Intergraph, are attempting to develop patent positions concerning technological improvements related to personal computers, workstations and servers. With the possible exception of its ongoing litigation with Intel (in which the Company expects to prevail), it does not appear that 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. In addition, computer software technology is increasingly being protected by patents, and many companies, including Intergraph, are developing patent positions for software innovations. It is unknown at the present time whether patented software technology will be made generally available under license or whether specific innovations will be held by their inventors and not made available to others. In many cases, it may be possible to employ software techniques that avoid the patents of others, but the possibility exists that some features needed to compete successfully in a particular segment of the software market may be unavailable or may demand unacceptable costs due to royalty requirements. Patented software techniques that become de facto industry standards are among those that are likely to raise costs or prevent the Company from competing successfully in particular markets. 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. These 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. Risks and Uncertainties In addition to those described above and in Item 3, Legal Proceedings, 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 1999 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, 1999, the Company had approximately 5,700 employees. Of these, approximately 2,480 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 distribution center are located in Huntsville, Alabama. All of the Company's operating segments have corporate headquarters located within the Huntsville facilities. The Company's operating segments also maintain sales and support facilities throughout the world. The Company owns over 1,900,000 square feet of space in Huntsville that is utilized for product development, distribution, sales and administration. The Huntsville facilities also include over 500 acres of unoccupied land. The Company maintains sales and support locations in major U.S. cities outside of Huntsville through operating leases. Outside the U.S., the Company owns approximately 280,000 square feet of space, primarily its Nijmegen distribution center. 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 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 attempted 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 required 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"). On November 5, 1999, the Appeals Court vacated the preliminary injunction that had been entered by the Alabama Court. This ruling by the Appeals Court is not expected to impact Company operations as Intel is bound by an Agreement and Consent Order with the Federal Trade Commission entered March 17, 1999 not to restrict microprocessor sales to the Company and not to take coercive actions that were identified by the Company in its legal action against Intel. 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" was 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. On September 15, 1998, the Company filed a cross motion with the Alabama Court requesting summary adjudication in favor of the Company. 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. On June 4, 1999, the Alabama Court granted the Company's September 15, 1998 motion and ruled that Intel has no license to use the Company's Clipper patents as Intel had claimed in its motion for summary judgment. On October 12, 1999, the Alabama Court reversed its June 4, 1999 order and dismissed the Company's patent claims against Intel. The Company is confident that Intel has no license to use the Clipper patents and believes that the court's original decision on this issue was correct. On October 15, 1999, the Company appealed the Alabama Court's October 12, 1999 order. No decision has been entered. The Company believes that Intel's counterclaims, including the alleged infringement of seven Intel patents, will not result in material adverse consequences for the Company. At an oral hearing held February 25, 2000, the Alabama Court indicated that the trial date for this case, previously scheduled for June, 2000, will be continued. A formal schedule has not been entered, but the Company believes it likely that trial will be re-scheduled for the Summer of 2001. On March 10, 2000 the Alabama Court entered an order dismissing the antitrust claims of the Company against Intel, based in part upon a February 17, 2000 decision by the Appeals Court in another case (CSU v. Xerox). The Company considers this dismissal to be in error and intends to vigorously pursue its antitrust case against Intel. At present, the Company is considering a number of possible options which may include bringing an immediate appeal of the order of the Alabama Court or an appeal following the end of trial and judgment on the merits of the Company's case in chief. At the present time, the Company is unable to determine the effect, if any, of this dismissal on the Company's overall case against Intel. During the course of the Intel litigation, the Company has employed a variety of experts to prepare estimates of the damages suffered by the Company under various claims of injury brought by the Company. The following damage estimates were provided to Intel in the August/September 1999 time frame in due course of the litigation process: estimated damages for injury covered under non-patent claims through June 1999 - $100 million; estimated additional damages for injury covered under non-patent claims through December 2003 - $400 million, subject to present- value reduction. These numbers are estimates only and any recovery of damages in this litigation could be substantially less than these estimates or substantially greater than these estimates depending on a variety of factors that cannot be determined at this time. Factors that could lead to recovery of substantially less that these estimates include, but are not limited to, the failure of the Alabama Court or the Appeals Court to sustain the legal basis for one or more of the Company's claims, the failure of the jury to award amounts consistent with these estimates, the failure of the Alabama Court or the Appeals Court to sustain any jury award in amounts consistent with these estimates, the settlement by the Company of the Intel litigation in an amount inconsistent with these estimates, and the failure of the Company to successfully defend itself from Intel's patent counterclaims in the Alabama Court and in the Appeals Court and a consequential recovery by Intel for damages and/or a permanent injunction against the Company. Factors that could lead to recovery substantially greater than these estimates include, but are not limited to, success by the Company in recovering punitive damages on one or more of its non-patent claims. 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. 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 F. Taylor Jr. 55 Chief Executive Officer and Director 1977 Robert E. Thurber 59 Executive Vice President and Director 1977 Graeme J. Farrell 57 Executive Vice President 1994 Penman R. Gilliam 62 Executive Vice President 1994 Lewis N. Graham Jr. 45 Executive Vice President 1997 Stephen J. Phillips 58 Executive Vice President 1987 Preetha R. Pulusani 39 Executive Vice President 1997 William E. Salter 58 Executive Vice President 1984 K. David Stinson Jr. 46 Executive Vice President 1996 John W. Wilhoite 48 Executive Vice President 1988 and Chief Financial Officer Edward A. Wilkinson 66 Executive Vice President 1987 Manfred Wittler 59 Executive Vice President 1989 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. He was elected Vice President in 1977 and Executive Vice President in 1982. He assumed management responsibility for the Company's public safety division in 1995. Effective March 2, 2000, he was elected Chief Executive Officer of Intergraph Corporation. Mr. Taylor holds degrees in mathematics and physics. Robert E. Thurber, a founder of the Company, has been a Director since 1972. Mr. Thurber was elected Vice President in June 1997 and is currently serving as Executive Vice President and Chief Engineer. Mr. Thurber holds a master's degree in engineering. Graeme J. Farrell joined the Company in February 1986 as the Financial Controller for Intergraph's subsidiaries in Australia and New Zealand. In 1987, the Company appointed him Finance Director for its Asia-Pacific region. He was elected Vice President of Business Operations for Asia-Pacific in 1994, and in August 1999 he was elected Executive Vice President. Prior to joining the Company, Mr. Farrell was involved in accounting software development for five years, and prior to that he was Finance director of Dennison Manufacturing's (USA) Australian operations for five years. Mr. Farrell is a Chartered Secretary and qualified accountant holding a public practice certificate. Penman R. Gilliam joined the Company in April 1994 as Executive Vice President responsible for federal programs. Mr. Gilliam is currently responsible for the federal mapping and information systems organization. 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, the senior civilian responsible for overall production, operations, and research. 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 Executive Vice President in 1998, with responsibility for the mapping and geoengineering divisions of Intergraph. He is currently the Chief Executive Officer of Z/I Imaging, Inc., a 60%-owned photogrammetry company formed in October 1999. Mr. Graham holds a bachelor's degree in physics and a master'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, with responsibility for the mapping and geographic information systems business of Intergraph, since August 1998. Ms. Pulusani holds a master's degree in 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 and President of Intergraph Government Solutions. 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, with responsibility 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 and is currently 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. Manfred Wittler joined the Company in 1989 as Vice President. In 1991, he was elected Executive Vice President, with responsibility for sales and support in Europe, Canada, and Latin America. He has served as Chairman of the Board of Intergraph Computer Systems ("ICS") since November 1999 and was appointed Chief Executive Officer of ICS in January 2000. 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 58 of the Intergraph Corporation 1999 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, 1999 appearing under "Five Year Financial Summary" on the inside front page of the Intergraph Corporation 1999 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 16 to 32 of the Intergraph Corporation 1999 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 27 to 32 of the Intergraph Corporation 1999 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 33 to 57 of the Intergraph Corporation 1999 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 6 of the Intergraph Corporation proxy statement relative to the annual meeting of shareholders to be held May 18, 2000, 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 14 to 15 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 18, 2000, 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 4 of the Intergraph Corporation proxy statement relative to the annual meeting of shareholders to be held May 18, 2000, 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 1999 annual report to shareholders: Consolidated Balance Sheets at December 31, 1999 and 1998 33 Consolidated Statements of Operations for the three years ended December 31, 1999 34 Consolidated Statements of Cash Flows for the three years ended December 31, 1999 35 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1999 36 Notes to Consolidated Financial Statements 37-56 Report of Independent Auditors 57 * Incorporated by reference from the indicated pages of the 1999 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, 1999 22 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) 10(a) * Employment Contract of Manfred Wittler dated November 1, 1989 (5) and amendments dated February 18, 1998 (8) and June 7, 1999. 10(b) Amended and Restated Loan and Security Agreement, by and between Intergraph Corporation and Foothill Capital Corporation, dated November 30, 1999 10(c) * Intergraph Corporation 1997 Stock Option Plan (6) and amendment dated January 11, 1999. (11) 10(d) Indemnification Agreement between Intergraph Corporation and each member of the Board of Directors of the Company dated June 3, 1997 (7). 10(e) * Employment Contract of Wade Patterson dated May 30, 1997 (7) and amendment dated November 2, 1998. (10) 10(f) * Intergraph Corporation Nonemployee Director Stock Option Plan (8). 10(g) * Employment Contract of Klaas Borgers dated September 1, 1997. (10) 10(h) 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 (9). 10(i) * Intergraph Computer Systems Holding, Inc. 1998 Stock Option Plan. (10) 13 Portions of the Intergraph Corporation 1999 Annual Report to Shareholders incorporated by reference in this Form 10-K Annual Report 21 Subsidiaries of the Company 23 23 Consent of Independent Auditors 24 27 Financial Data Schedule 99(a) Consent of Lawrence R. Greenwood 99(b) Consent of Joseph C. Moquin * 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 June 30, 1997, under the Securities Exchange Act of 1934, File No. 0-9722. (8) 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. (9) 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. (10) Incorporated by reference to exhibits filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1998, under the Securities Exchange Act of 1934, File No. 0-9722. (11) Incorporated by reference to exhibit filed with the Company's Registration Statement on Form S-8 dated May 24, 1999, under the Securities Exchange Act of 1933, File No. 333-79137. - ------------------ (b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended December 31, 1999. (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 includes 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. 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 1999 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 F. Taylor Jr. Date: March 21, 2000 ----------------------- James F. Taylor Jr. Chief Executive Officer (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 Chairman of the Board March 21, 2000 - ---------------------------- James W. Meadlock /s/ James F. Taylor Jr. Chief Executive Officer - ---------------------------- and Director March 21, 2000 James F. Taylor Jr. /s/ Robert E. Thurber Executive Vice President - ---------------------------- and Director March 21, 2000 Robert E. Thurber /s/ Larry J. Laster - ---------------------------- Director March 21, 2000 Larry J. Laster - ---------------------------- Director March 21, 2000 Thomas J. Lee - ---------------------------- Director March 21, 2000 Sidney L. McDonald /s/ John W. Wilhoite Executive Vice President - ---------------------------- and Chief Financial Officer John W. Wilhoite (Principal Financial and Accounting Officer) March 21, 2000 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 1999 $13,814,000 6,900,000 4,648,000 (1) $16,066,000 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 Allowance for obsolete inventory deducted from inventories in the balance sheet 1999 $31,249,000 23,187,000 (3) 20,540,000 (2) $33,896,000 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 (1) Uncollectible accounts written off, net of recoveries. (2) Obsolete inventory reduced to net realizable value. (3) Includes a $7 million inventory write-down resulting from the Company's exit from the personal computer and generic server businesses in third quarter 1999. EX-21 2 INTERGRAPH CORPORATION AND SUBSIDIARIES EXHIBIT 21 ---- SUBSIDIARIES OF REGISTRANT State or Other Percentage of Jurisdiction Voting Securities Name of Incorporation Owned by Parent - ----------------------------------- ----------------- ----------------- Intergraph Asia Pacific, Inc. Delaware 100 Intergraph Computer Systems Holding, Inc. Delaware 100 Intergraph European Manufacturing, L.L.C. Delaware 100 Intergraph (Italia), L.L.C. Delaware 100 Intergraph (Middle East), L.L.C. Delaware 100 Intergraph Public Safety, Inc. Delaware 100 Z/I Imaging Corporation Delaware 60 Intergraph Benelux B.V. The Netherlands 100 Intergraph Danmark A/S Denmark 100 Intergraph CR spol. s r.o. Czech Republic 100 Intergraph (Deutschland) GmbH Germany 100 Intergraph Espana, S.A. Spain 100 Intergraph Europe (Polska) Sp. z o.o. Poland 100 Intergraph Finland Oy Finland 100 Intergraph (France) SA France 100 Intergraph GmbH (Osterreich) Austria 100 Intergraph (Hellas) S.A. Greece 100 Intergraph Norge A/S Norway 100 Intergraph (Portugal) Sistemas de Computacao Grafica, S.A. Portugal 100 Intergraph (Sverige) AB Sweden 100 Intergraph (Switzerland) A.G. Switzerland 100 Intergraph (UK), Ltd. United Kingdom 100 Intergraph Public Safety Belgium S.A. Belgium 100 Intergraph Public Safety Deutschland, GmbH Germany 100 Public Safety France, SA France 100 Intergraph Public Safety U.K., Ltd. United Kingdom 100 Z/I Imaging GmbH Germany 60 Z/I Imaging (Hellas) S.A. Greece 60 Z/I Imaging UK Ltd. United Kingdom 60 Intergraph China, Ltd. Hong Kong 100 Intergraph BEST (Vic) Pty. Ltd. Australia 100 Intergraph Computer (Shenzhen) Co. Ltd. China 100 Intergraph Corporation (N.Z.) Limited New Zealand 100 Intergraph Corporation Pty. Ltd. Australia 100 Intergraph Corporation Taiwan Taiwan, R.O.C. 100 Intergraph Hong Kong Limited Hong Kong 100 Intergraph Industry Solutions K.K. Japan 100 Intergraph Japan K.K. Japan 100 Intergraph Korea, Ltd. Korea 100 Intergraph Public Safety (New Zealand) Limited New Zealand 100 Intergraph Public Safety Pty. Ltd. Australia 100 Intergraph Systems Singapore Pte Ltd. Singapore 100 Intergraph Computer Services Industry & Trade, A.S. Turkey 100 Intergraph Canada, Ltd. Canada 100 Intergraph Computer Systems Canada, Inc. Canada 100 Intergraph Public Safety Canada Ltd. Canada 100 Intergraph de Mexico, S.A. de C.V. Mexico 100 Intergraph Electronics Ltd. Israel 100 Intergraph Servicios de Venezuela C.A. Venezuela 100 Intergraph Saudi Arabia Ltd. Saudi Arabia 75 EX-23 3 EXHIBIT 23 ---- CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Intergraph Corporation and subsidiaries of our report dated January 27, 2000, included in the 1999 Annual Report to Shareholders of Intergraph Corporation. Our audits also included the financial statement schedule of Intergraph Corporation listed in Item 14(a)(2). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth herein. We also consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-25880) pertaining to the Stock Bonus Plan dated December 22, 1988; in the Registration Statement (Form S-8 No. 33-53849) pertaining to the Intergraph Corporation 1992 Stock Option Plan dated May 27, 1994; in the Registration Statement (Form S-8 No. 33-57211) pertaining to the Assumption of Options under the InterCAP Graphics Systems, Inc. 1989 Stock Option Plan and 1994 Nonqualified Stock Option Program dated January 10, 1995; in the Registration Statement (Form S-8 No. 33-59621) pertaining to the 1995 Intergraph Corporation Employee Stock Purchase Plan dated May 26, 1995; in the Registration Statement (Form S-8 No. 333-79129) pertaining to the Intergraph Corporation Nonemployee Director Stock Option Plan dated May 24, 1999; in the Registration Statement (Form S-8 No. 333-79137) pertaining to the Intergraph Corporation 1997 Stock Option Plan dated May 24, 1999; and in the related Prospectuses, of our report dated January 27, 2000, with respect to the consolidated financial statements and schedule of Intergraph Corporation and subsidiaries included or incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1999. Birmingham, Alabama March 21, 2000 EX-10.A 4 INTERGRAPH - ---------- Memorandum - ------------------------------------------------------------ Office of the CEO Date: June 7, 1999 To: Manfred Wittler From: Jim Meadlock Subject: Employee Agreement/Addendum to U.S. Contract - ------------------------------------------------------------ Manfred, The following summarizes our agreement: 1. Your annual salary base will be increased by $10,000 per month effective May 31, 1999. 2. Intergraph will pay reasonable relocation costs for essential household goods to be shipped from Germany. 3. Your housing allowance will be discontinued in the Netherlands and will be replaced by the same amount (after conversion to U.S. dollars). 4. At termination of employment with Intergraph, Intergraph will ensure that you did not lose money on the buying and reselling of the residence that you currently have under contract. 5. You will be provided a company car. 6. Your overseas travel will be business class. 7. In the event that your employment is terminated by Intergraph prior to your retirement, you will receive one (1) year severance. Additionally, I will recommend to the Intergraph Board that you receive a seat on the Intergraph Board. Apart from the above, all other employment conditions remain in effect. /s/ Jim Meadlock /s/ Manfred Wittler - ----------------- -------------------- Jim Meadlock Manfred Wittler - ------------------------------------------------------------ EX-10.B 5 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT by and between INTERGRAPH CORPORATION, and FOOTHILL CAPITAL CORPORATION Dated as of November 30, 1999 TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION 1 1.1 DEFINITIONS 1 1.2 ACCOUNTING TERMS 23 1.3 CODE 23 1.4 CONSTRUCTION 23 1.5 SCHEDULES AND EXHIBITS 23 2. LOAN AND TERMS OF PAYMENT 24 2.1 REVOLVING ADVANCES 24 2.2 LETTERS OF CREDIT 24 2.3 TERM LOAN 26 2.4 SUBFACILITY FOR BORROWER'S PERMITTED F/X CONTRACTS (THE "F/X LINE") 27 2.5 OVERADVANCES 28 2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND CALCULATIONS 28 2.7 COLLECTION OF ACCOUNTS 30 2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS 30 2.9 DESIGNATED ACCOUNT 31 2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS 31 2.11 FEES 31 2.12 MAXIMUM AMOUNT 32 3. CONDITIONS; TERM OF AGREEMENT 32 3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE, LETTER OF CREDIT, AND F/X LINE INDEMNITY 32 3.2 CONDITIONS PRECEDENT TO ALL ADVANCES, ALL LETTERS OF CREDIT, AND ALL F/X LINE INDEMNITIES ON OR AFTER THE CLOSING DATE 34 3.3 CONDITION SUBSEQUENT 35 3.4 TERM 37 3.5 EFFECT OF TERMINATION 37 3.6 EARLY TERMINATION BY BORROWER 37 3.7 TERMINATION UPON EVENT OF DEFAULT 37 4. CREATION OF SECURITY INTEREST 37 4.1 GRANT OF SECURITY INTEREST 37 4.2 NEGOTIABLE COLLATERAL 39 4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL 39 4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED 39 4.5 POWER OF ATTORNEY 40 4.6 RIGHT TO INSPECT 41 5. REPRESENTATIONS AND WARRANTIES 41 5.1 NO ENCUMBRANCES 41 5.2 ELIGIBLE ACCOUNTS 41 5.3 [INTENTIONALLY OMITTED] 41 5.4 EQUIPMENT 41 5.5 LOCATION OF INVENTORY AND EQUIPMENT 41 5.6 INVENTORY RECORDS 41 5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN 41 5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES 42 5.9 DUE AUTHORIZATION; NO CONFLICT 42 5.10 LITIGATION 43 5.11 NO MATERIAL ADVERSE CHANGE 43 5.12 SOLVENCY 43 5.13 EMPLOYEE BENEFITS 43 5.14 ENVIRONMENTAL CONDITION 44 5.15 SECURITIES ACCOUNTS 44 5.16 YEAR 2000 COMPLIANCE 44 6. AFFIRMATIVE COVENANTS 45 6.1 ACCOUNTING SYSTEM 45 6.2 COLLATERAL REPORTING 45 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES 46 6.4 TAX RETURNS 47 6.5 GUARANTOR REPORTS 48 6.6 RETURNS 48 6.7 TITLE TO EQUIPMENT 48 6.8 MAINTENANCE OF EQUIPMENT 48 6.9 TAXES 48 6.10 INSURANCE 49 6.11 NO SETOFFS OR COUNTERCLAIMS 50 6.12 LOCATION OF INVENTORY AND EQUIPMENT 50 6.13 COMPLIANCE WITH LAWS 50 6.14 EMPLOYEE BENEFITS 50 6.15 LEASES 51 6.16 YEAR 2000 COMPLIANCE 51 6.17 COPYRIGHT REGISTRATIONS 51 6.18 SALE OR OTHER DISPOSITION OF BORROWER'S HARDWARE BUSINESS 52 7. NEGATIVE COVENANTS 52 7.1 INDEBTEDNESS 52 7.2 LIENS 53 7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES 53 7.4 DISPOSAL OF ASSETS 54 7.5 CHANGE NAME 54 7.6 [INTENTIONALLY OMITTED] 54 7.7 NATURE OF BUSINESS 54 7.8 PREPAYMENTS AND AMENDMENTS 54 7.9 CHANGE OF CONTROL 54 7.10 CONSIGNMENTS 54 7.11 DISTRIBUTIONS 54 7.12 ACCOUNTING METHODS 55 7.13 INVESTMENTS 55 7.14 TRANSACTIONS WITH AFFILIATES 55 7.15 SUSPENSION 55 7.16 [INTENTIONALLY OMITTED] 55 7.17 USE OF PROCEEDS 55 7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES 55 7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA 55 7.20 FINANCIAL COVENANTS 56 7.21 CAPITAL EXPENDITURES 57 8. EVENTS OF DEFAULT 57 9. FOOTHILL'S RIGHTS AND REMEDIES 59 9.1 RIGHTS AND REMEDIES 59 9.2 REMEDIES CUMULATIVE 61 10. TAXES AND EXPENSES 61 11. WAIVERS; INDEMNIFICATION 62 11.1 DEMAND; PROTEST; ETC 62 11.2 FOOTHILL'S LIABILITY FOR COLLATERAL 62 11.3 INDEMNIFICATION 62 12. NOTICES 62 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER 63 14. DESTRUCTION OF BORROWER'S DOCUMENTS 64 15. GENERAL PROVISIONS 64 15.1 EFFECTIVENESS 64 15.2 SUCCESSORS AND ASSIGNS 64 15.3 SECTION HEADINGS 65 15.4 INTERPRETATION 65 15.5 SEVERABILITY OF PROVISIONS 65 15.6 AMENDMENTS IN WRITING 65 15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION 65 15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS 65 15.9 INTEGRATION 66 15.10 CONFIDENTIALITY 66 SCHEDULES AND EXHIBITS ---------------------- Schedule P-1 Permitted Liens Schedule P-2 Permitted Other Investments Schedule R-1 Real Property Collateral Schedule 5.8 Subsidiaries - Capitalization and Assets Schedule 5.10 Litigation Schedule 5.13 ERISA Benefit Plans Schedule 5.14 Environmental Condition Schedule 6.12 Location of Inventory and Equipment Schedule 7.1 Indebtedness Exhibit C-1 Form of Compliance Certificate Exhibit F-1 Form of F/X Bank Parameters Letter Exhibit F-2 Form of F/X Reserve Reduction Certificate Exhibit F-3 Form of F/X Reserve Increase Certificate AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ------------------------------------------------ THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of November 30, 1999, between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill"), with a place of business located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California 90025-3333, and INTERGRAPH CORPORATION, a Delaware corporation ("Borrower"), with its chief executive office located at One Madison Industrial Park, Huntsville, Alabama 35894. R E C I T A L S: - - - - - - - - WHEREAS, Borrower and Foothill are parties to that certain Loan and Security Agreement, dated as of December 20, 1996 (the "Original Loan Agreement"), as amended by that certain Amendment Number One to Loan and Security Agreement, dated as of January 14, 1997, that certain Amendment Number Two to Loan and Security Agreement, dated as of November 25, 1997, that certain Amendment Number Three to Loan and Security Agreement, dated as of October 30, 1998, that certain Amendment Number Four to Loan and Security Agreement, dated as of April 29, 1999, and that certain Amendment Number Five to Loan and Security Agreement, dated as of October 26, 1999 (the Original Loan Agreement, as so amended and as otherwise modified or supplemented from time to time prior to the Closing Date, is referred to herein as the "Existing Loan Agreement"); WHEREAS, Borrower and Foothill desire to amend and restate the Existing Loan Agreement in its entirety as provided in this Agreement, it being understood that no repayment of the obligations under the Existing Loan Agreement is being effected hereby, but merely an amendment and restatement in accordance with the terms hereof. NOW THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Borrower and Foothill agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have the following definitions: "Account Debtor" means any Person who is or who may become obligated under, with respect to, or on account of, an Account. "Accounts" means all presently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale, license, or lease of goods or software or the rendition of services by Borrower, irrespective of whether earned by performance, and any and all credit insurance, guaranties, or security therefor. "Advances" has the meaning set forth in Section 2.1(a). "Additional Term Loan" has the meaning set forth in Section 2.3. "Affiliate" means, as applied to any Person, any other Person who directly or indirectly controls, is controlled by, is under common control with or is a director or officer of such Person. For purposes of this definition, "control" means: (a) solely when "Affiliate" is used in determining Eligible Accounts, the possession, directly or indirectly, of the power to vote 5% or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person; and (b) in all other cases, the possession, directly or indirectly, of the power to vote 10% or more of the securities having ordinary voting power for the election of directors or the direct or indirect power to direct the management and policies of a Person. "Agreement" has the meaning set forth in the preamble hereto. "Appraised Assets" means items of Equipment that are the subject of that certain appraisal, dated September 27, 1999, performed by Acuval Associates, Inc. or any subsequent appraisal performed by a qualified appraiser satisfactory to Foothill. "Asset Disposition" means any sale, license, lease, exchange, transfer, or other disposition (including any disposition as part of a sale and lease-back transaction), directly or indirectly, by Borrower of any of the properties or assets of Borrower. "Authorized Person" means any officer or other employee of Borrower. "Average Unused Portion of Maximum Revolving Amount" means, as of any date of determination, (a) the Maximum Revolving Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the Letter of Credit Usage during the immediately preceding month. "Availability" means the amount of money that Borrower is entitled to borrow as Advances under Section 2.1, such amount being the difference derived when (a) the sum of the principal amount of Advances then outstanding (including any amounts that Foothill may have paid for the account of Borrower pursuant to any of the Loan Documents and that have not been reimbursed by Borrower) is subtracted from (b) the lesser of (i) the Maximum Revolving Amount less the sum of (y) the Letter of Credit Usage and (z) the F/X Reserve, or (ii) the Borrowing Base less the sum of (y) the Letter of Credit Usage and (z) the F/X Reserve. "Bankruptcy Code" means the United States Bankruptcy Code (11 U.S.C. section 101 et seq.), as amended, and any successor statute. "Benefit Plan" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "Bentley Equity Interests" means the equity interests in Bentley Systems, Inc. owned of record by Borrower as of the Original Closing Date and the rights of Borrower related thereto under that certain Stockholders' Agreement, dated June 11, 1987, by and among Bentley Systems, Inc., Borrower, and the "Management Stockholders" party thereto (as amended). "Books" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "Borrower" has the meaning set forth in the preamble to this Agreement. "Borrowing Base" has the meaning set forth in Section 2.1(a). For purposes of this definition, any amount that is denominated in a currency other than Dollars shall be valued in Dollars based on the applicable Exchange Rate for such currency as of the date 1 Business Day prior to the date of determination. "Business Day" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close. "Certifying Officer" means any one or more of the following officers of Borrower: Treasurer, Assistant Treasurer, Chief Financial Officer, and Chief Accounting Officer. "Change of Control" shall be deemed to have occurred at such time as a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 25% of the total voting power of all classes of Stock then outstanding of Borrower entitled to vote in the election of directors. "Closing Date" means the date of the first to occur of the making of the initial Advance, the issuance of the initial Letter of Credit, or the issuance of the initial F/X Line indemnity under this Agreement, in each case, pursuant to this Agreement. "Code" means the California Uniform Commercial Code. "Collateral" means all right, title, or interest of Borrower with respect to the following: (a) the Accounts, (b) the Books, (c) the Equipment, (d) the General Intangibles, (e) the Inventory, (f) the Negotiable Collateral, (g) the Real Property Collateral, (h) the Investment Property, (i) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of Foothill, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Access Agreement" means a landlord waiver, mortgagee waiver, bailee letter, or acknowledgement agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance reasonably satisfactory to Foothill. "Collections" means all cash, checks, notes, instruments, and other items of payment (including, insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds). "Compliance Certificate" means a certificate substantially in the form of Exhibit C-1 and delivered by a Certifying Officer of Borrower to Foothill. "Consolidated Current Assets" means, as of any date of determination, the aggregate amount of all current assets of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current assets. "Consolidated Current Liabilities" means, as of any date of determination, the aggregate amount of all current liabilities of Borrower and its Subsidiaries that would, in accordance with GAAP, be classified on a balance sheet as current liabilities. For purposes of this definition, all Obligations outstanding under this Agreement shall be deemed to be current liabilities without regard to whether they would be deemed to be so under GAAP. "copyright" shall have the meaning ascribed to such term in the United States Copyright Act of 1976, as amended, and includes unregistered copyrights. "Copyright Security Agreement" means an Amended and Restated Copyright Security Agreement, in form and substance satisfactory to Foothill, dated as of even date herewith, between Borrower and Foothill. "Currency Protection Agreement" shall mean any currency swap, cap, or collar agreement or other similar insurance-type agreement in connection with hedging against foreign currency rate fluctuations. "Daily Balance" means the amount of an Obligation owed at the end of a given day. "deems itself insecure" means that the Person deems itself insecure in accordance with the provisions of Section 1208 of the Code. "Default" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "Designated Account" means account number 635504-2506 of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) which has been designated, in writing and from time to time, by Borrower to Foothill. "Designated Account Bank" means Norwest Bank Minnesota, whose office is located at Sixth & Marquette, Minneapolis, Minnesota, 55479, and whose ABA number is 091000019. "Dilution" means, in each case based upon the experience of the immediately prior 90 days, the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, returns, credits, or other dilution with respect to the Accounts, by (b) Collections with respect to Accounts (in each case, excluding intercompany Accounts and extraordinary items) plus the Dollar amount of clause (a). "Dilution Reserve" means, as of any date of determination pursuant to the report of Dilution delivered under Section 6.2, an amount sufficient to reduce Foothill's advance rate against Eligible Accounts by 1 percentage point for each percentage point by which Dilution is in excess of 8%. "Dollars or $" means United States dollars. "Domestic Accounts" means Accounts with respect to which the Account Debtor maintains its chief executive office in the United States or is organized under the laws of the United States or any State thereof. "Early Termination Premium" has the meaning set forth in Section 3.6. "Eligible Accounts" means Eligible Domestic Accounts, Eligible Foreign Accounts, and Eligible Unbilled Accounts. "Eligible Domestic Accounts" means those Accounts created by Borrower in the ordinary course of business, that arise out of Borrower's sale, license, or lease of goods or software or rendition of services, and that strictly comply with each and all of the representations and warranties respecting Accounts made by Borrower to Foothill in the Loan Documents; provided, however, that standards of eligibility may be fixed and revised from time to time by Foothill in Foothill's reasonable credit judgment. Eligible Domestic Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 60 days of due date (or, in the case of Federal Accounts, 90 days of due date) or Accounts with selling terms of more than 60 days; (b) Accounts owed by an Account Debtor or its Affiliates where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above; (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower; (d) Accounts with respect to which goods are placed on consignment, guaranteed sale, sale or return, sale on approval, bill and hold, or other terms by reason of which the payment by the Account Debtor may be conditional; (e) Accounts that are not payable in Dollars or with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit that is satisfactory to Foothill (as to form, substance, and issuer or domestic confirming bank) and that, upon the occurrence and during the continuance of an Event of Default, has been delivered to Foothill and is directly drawable by Foothill (provided, however, that nothing herein shall limit Foothill's right to not make an Advance or issue a Letter of Credit or F/X Line indemnity upon the occurrence and during the continuance of an Event of Default), or (z) the Account is covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill; (f) Accounts with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability (whether pursuant to a contractual discrepancy or otherwise), or has made any claim with respect to the Account; provided, however, that the foregoing only shall apply to the extent of such right of setoff, disputed liability, or other claim giving rise to such contra-account. (g) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed 10% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, that in the case of the United States and its departments, agencies, and instrumentalities, taken as a whole, the foregoing percentage shall be fifty percent (50%) before the excess would be deemed ineligible; (h) Accounts with respect to which the Account Debtor is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business; (i) Accounts the collection of which Foothill, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition and with respect to which Foothill has notified Borrower of such belief; (j) Accounts (other than Eligible Unbilled Accounts) with respect to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor, the services giving rise to such Account have not been performed and accepted by the Account Debtor, or the Account otherwise does not represent a final sale; (k) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other state that requires a creditor to file a Business Activity Report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice of Business Activities Report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement; (l) At such times as Foothill may determine in its sole discretion, Federal Accounts (exclusive, however, of Accounts with respect to which Borrower has complied, to the satisfaction of Foothill and subject to Section 4.4(c) hereof, with the Assignment of Claims Act, 31 U.S.C. section 3727); (m) At such times as Foothill may determine in its sole discretion, Accounts with respect to which the Account Debtor is any State of the United States (exclusive, however, of: (i) Accounts owed by any State that does not have a statutory counterpart to the Assignment of Claims Act; and (ii) Accounts owed by any State that has a statutory counterpart to the Assignment of Claims Act and with respect to which Borrower has complied, to the satisfaction of Foothill and subject to Section 4.4(c) hereof, with such statutory counterpart); (n) Federal Accounts arising under any one underlying contract or any series of related underlying contracts, the total amount of which obligations owing Borrower exceeds 10% of all Eligible Accounts, to the extent of the obligations owing under such contract or contracts in excess of such percentage; (o) Federal Accounts in respect of which the subject contract for goods and services is designated by the Account Debtor as "classified" (i.e., the ability of Foothill to receive information regarding such contract or such Account is restricted by rules or regulations of the United States or any department, agency, or instrumentality of the United States in respect of classified information); (p) [intentionally omitted]; (q) Accounts which represent progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services, except to the extent that such progress payments or other advance billings are expressly permitted by the terms of the subject contract (including so-called "maintenance contracts"); or (r) Accounts with respect to which a surety or other bond has been issued in respect of the performance by Borrower of the subject contract for goods or services. "Eligible Foreign Accounts" means those Accounts created by Borrower, with respect to which the Account Debtor is IBM United Kingdom Ltd., a corporation organized under the laws of the United Kingdom, Dell Asia Pacific Sdn., a company organized under the laws of Malaysia, Dell Products, a company organized under the laws of Ireland, Compaq Asia Pacific Pte Ltd., a company organized under the laws of Singapore, or Hewlett Packard, a company organized under the laws of France, that do not qualify as Eligible Domestic Accounts solely because the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States or any State thereof. "Eligible Unbilled Accounts" means those Domestic Accounts created by Borrower that do not qualify as Eligible Domestic Accounts solely because they constitute Unbilled Accounts. "Equipment" means all of Borrower's present and hereafter acquired machinery, machine tools, motors, equipment, furniture, furnishings, fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including, (a) any interest of Borrower in any of the foregoing, and (b) all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, 29 U.S.C. section 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. "ERISA Affiliate" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "ERISA Event" means (a) a Reportable Event with respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Benefit Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA Affiliates. "Event of Default" has the meaning set forth in Section 8. "Exchange Rate" means the nominal rate of exchange available to Foothill in a chosen foreign exchange market for the purchase of the applicable non-Dollar currency at 12:00 noon, local time, 1 Business Day prior to any date of determination, expressed as the number of units of such currency per Dollar. "Excluded Foreign Portion" means, with respect to any Foreign Subsidiary, the portion (if any) of the equity securities of such Subsidiary owned of record by Borrower with voting power that is in excess of 65% of the total combined voting power of issued and outstanding stock of such Subsidiary entitled to vote. "Excluded Foreign Subsidiary Securities" means (a) the Excluded Foreign Portion (if any) of the equity securities of any Foreign Subsidiary of Borrower identified in Schedule II of the Pledge Agreement (as the same may be amended or supplemented from time to time), and (b) subject to the last paragraph of Section 6.3, 100% of the fully diluted issued and outstanding equity securities of any other Foreign Subsidiary of Borrower. "Exempt Copyright" means any Incipient Copyright or any Obsolete Copyright. "Existing Loan Agreement" has the meaning set forth in the Recitals to this Agreement. "Federal Accounts" means Accounts where the United States or any department, agency, or instrumentality of the United States is the Account Debtor. "FEIN" means Federal Employer Identification Number. "Foothill" has the meaning set forth in the preamble to this Agreement. "Foothill Account" has the meaning set forth in Section 2.7. "Foothill Expenses" means all: costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by Foothill; fees or charges paid or incurred by Foothill in connection with Foothill's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC (or equivalent) searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Personal Property Collateral or Real Property Collateral appraisals), real estate surveys, real estate title policies and endorsements, and environmental audits; costs and expenses incurred by Foothill in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Foothill resulting from the dishonor of checks; costs and expenses paid or incurred by Foothill to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Personal Property Collateral or the Real Property Collateral, or any portion thereof, irrespective of whether a sale is consummated; costs and expenses paid or incurred by Foothill in examining Borrower's Books; costs and expenses of third party claims or any other suit paid or incurred by Foothill in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Foothill's relationship with Borrower (or any of its Subsidiaries party to one or more Loan Documents); and Foothill's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower), defending, or concerning the Loan Documents, irrespective of whether suit is brought. "Foreign Currency Letter of Credit" means (a) a Letter of Credit payable in a denomination other than in Dollars, or (b) a Letter of Credit with a face amount in Dollars-equivalent of a denomination other than in Dollars. "Foreign Currency Reserve" means an amount equal to 5% of the aggregate outstanding face amount of Foreign Currency Letters of Credit (if any); provided, however, that Foothill shall have the right to adjust the then extant Foreign Currency Reserve (if any) upwards or downwards in its reasonable business credit judgment. "Foreign Subsidiary" means any Subsidiary organized under the laws of a jurisdiction other than the United States or any State thereof. "F/X Bank" means Norwest Bank Minnesota, National Association, or any successor thereto. "F/X Bank Parameters Letter" means that certain letter agreement, dated as of January 14, 1997, between F/X Bank and Borrower, a copy of which is attached hereto as Exhibit F-1, regarding the parameters under which F/X Bank provides foreign exchange currency services to Borrower. "F/X Line" has the meaning set forth in Section 2.4. "F/X Reserve" means, as of any date of determination, a reserve equal to the maximum amount of obligations of Foothill to indemnify F/X Bank against losses or expenses incurred by F/X Bank in connection with Permitted F/X Contracts. As of the Closing Date, the amount of the F/X Reserve is $0. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's present and future general intangibles and other personal property (including contract rights, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, literature, reports, catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), other than goods, Accounts, and Negotiable Collateral. "Governing Documents" means the certificate or articles of incorporation, by-laws, or other organizational or governing documents of any Person. "Governmental Authority" means any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Hardware Business" means all or substantially all of the assets of Borrower comprising the business of manufacturing, or having manufactured, Intergraph hardware products (the "Products") for Borrower's interactive computer graphics systems and the related Inventory of Borrower as of the Closing Date. The term "Products" does not include Image Stations, ruggedized workstations, local products sold through EDC, TAMPS workstations, photoscans, scan servers, and printers/plotters/scanners sold through Borrower. "Hazardous Materials" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Huntsville Property" means the Real Property (and related improvements thereto) of Borrower located in or about Huntsville, Alabama. "ICS" means Intergraph Computer Systems, Inc., a Delaware corporation. "IG Australia" means Intergraph Corporation Pty., Ltd.. a corporation organized under the laws of Australia. "IG Australia Existing Lender" means National Bank of Australia. "IG Australia Existing Lender Pay-Off Letter" means a letter, in form and substance reasonably satisfactory to Foothill, from IG Australia Existing Lender respecting the amount necessary to repay in full all of the obligations of Borrower or IG Australia owing to IG Australia Existing Lender and obtain a termination or release of all of the Liens existing in favor of IG Australia Existing Lender in and to the properties or assets of Borrower and its Subsidiaries. "IG Benelux" means Intergraph Benelux B.V., a corporation organized under the laws of The Netherlands. "IG Benelux Existing Lender" means ING Bank, N.V.. "IG Delaware" means Intergraph Delaware, Inc., a Delaware corporation. "Incipient Copyright" means any copyright that: (a) relates to software of Borrower under development (whether in the form of a new product, a new version of a pre-existing product, an upgrade, add-on, or modification to a pre-existing product, or otherwise) that has not yet become a completed product, version, upgrade, add-on, or modification or is not yet being marketed by or on behalf of Borrower; or (b) is not the subject of licenses thereof or other dispositions by Borrower giving rise to Accounts. "Indebtedness" means: (a) all obligations of Borrower for borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of Borrower under capital leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or other obligation of any other Person; provided, however, that the term "Indebtedness" shall not include (i) liabilities or obligations arising out of or relating to guarantees, warranties, or other commitments that products or systems sold by Borrower or any of its Affiliates will meet particular performance or operating specifications ("Commercial Performance Guarantees"), or (ii) liabilities arising out of or relating to agreements or commitments of Borrower to maintain the financial condition or solvency of any Affiliate of Borrower that are made, in the ordinary course of Borrower's business consistent with past practices, in connection with or in fulfillment of any Commercial Performance Guarantee. "Initial Term Loan" has the meaning set forth in Section 2.3. "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Interest Rate Agreement" shall mean any interest rate swap agreement or any other similar insurance-type agreement in connection with any interest "cap" or "collar" transaction or any other interest rate hedging transaction. "Intercompany Notes" means promissory notes, if any, evidencing loan obligations between Borrower and any of its Subsidiaries that constitute loans qualifying under the definition of "Permitted Subsidiary Loans and Capital Contributions" or that are permitted under Section 7.1(d). "Inventory" means all present and future inventory in which Borrower has any interest, including goods held for sale, license, or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "Investment Property" means "investment property" as that term is defined in section 9115 of the Code, whether now owned or hereafter acquired. "IPS" means Intergraph Public Safety, Inc., a Delaware corporation. "IPS Copyright Security Agreement" means a Copyright Security Agreement, in form and substance satisfactory to Foothill, between IPS and Foothill relative to the copyrights transferred to IPS by Borrower that remain subject to Foothill's Liens. "IPS Trademark Security Agreement" means a Trademark Security Agreement, in form and substance satisfactory to Foothill, between IPS and Foothill relative to the trademark's transferred to IPS by Borrower that remain subject to Foothill's Liens. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "L/C" has the meaning set forth in Section 2.2(a). "L/C Guaranty" has the meaning set forth in Section 2.2(a). "Letter of Credit" means an L/C or an L/C Guaranty, as the context requires. "Letter of Credit Usage" means the sum of (a) the undrawn amount of Letters of Credit, plus (b) the amount of unreimbursed drawings under Letters of Credit, plus an amount equal to the Foreign Currency Reserve. "Lien" means any interest in property securing an obligation owed to, or a claim by, any Person other than the owner of the property, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, adverse claim or charge, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of- way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Liquidation Value" means, in respect of any item of Equipment, the net orderly liquidation value of such item of Equipment as determined by a qualified appraiser selected by Foothill. "Loan Account" has the meaning set forth in Section 2.10. "Loan Documents" means this Agreement, the Letters of Credit, the F/X Bank Parameters Letter, the Lockbox Agreements, the Mortgages, the Copyright Security Agreement, the Patent Security Agreement, the Pledge Agreement, the Trademark Security Agreement, the Reaffirmation Agreement, the Restructuring Consent, the IPS Copyright Security Agreement, the IPS Trademark Security Agreement, any note or notes executed by Borrower and payable to Foothill, and any other agreement entered into, now or in the future, in connection with this Agreement. "Lockbox Account" shall mean a depositary account established pursuant to one of the Lockbox Agreements. "Lockbox Agreements" means those certain Lockbox Operating Procedural Agreements and those certain Depository Account Agreements, in form and substance reasonably satisfactory to Foothill, each of which is among Borrower, Foothill, and the Lockbox Bank. "Lockbox Bank" means Bank One, as successor to First National Bank of Chicago. "Lockboxes" has the meaning set forth in Section 2.7. "M&S" means M&S Computing Investments, Inc., a Delaware corporation. "Material Adverse Change" means (a) a material adverse change in the business, operations, results of operations, assets, liabilities or condition of Borrower, (b) the material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Foothill to enforce the Obligations or to realize upon the Collateral, (c) a material adverse effect on the value of the Collateral or the amount that Foothill would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral, or (d) a material impairment of the priority of Foothill's Liens with respect to the Collateral; provided, however, that the determination of any Material Adverse Change shall be made after giving effect to the reserves, if any, created by Foothill against the Borrowing Base, or the reduction, if any, made by Foothill of the applicable advance rates based upon the Borrowing Base, in each case, in respect of the event or circumstance giving rise to such material adverse change, material impairment, or material adverse effect. "Maturity Date" has the meaning set forth in Section 3.4. "Maximum Amount" means $100,000,000, as such amount may be reduced from time to time pursuant to Section 2.12. "Maximum Revolving Amount" means, as of any date of determination, the result of (a) the Maximum Amount, minus (b) the then outstanding principal balance of the Term Loan. "Mortgage Policies" means mortgagee title insurance policies (or marked commitments to issue the same) for the Real Property Collateral issued by a title insurance company reasonably satisfactory to Foothill in amounts reasonably satisfactory to Foothill. "Mortgages" means one or more mortgages, deeds of trust, or deeds to secure debt, executed by Borrower in favor of Foothill, the form and substance of which shall be reasonably satisfactory to Foothill, that encumber the Real Property Collateral and the related improvements thereto. "Multiemployer Plan" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "Negotiable Collateral" means all of Borrower's present and future letters of credit, notes, drafts, instruments, investment property, security entitlements, securities (including the shares of stock of Subsidiaries of Borrower, but expressly excluding the Excluded Foreign Subsidiary Securities and the Bentley Equity Interests), documents, personal property leases (wherein Borrower is the lessor), chattel paper, and Borrower's Books relating to any of the foregoing. "Net Worth" means, as of any date of determination, Borrower's total stockholder's equity. "Obligations" means all loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations under any outstanding Letters of Credit, premiums (including Early Termination Premiums), liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees, charges, costs, or Foothill Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties owing by Borrower to Foothill of any kind and description (whether pursuant to or evidenced by the Loan Documents or pursuant to any other agreement between Foothill and Borrower, and irrespective of whether for the payment of money), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including any debt, liability, or obligation owing from Borrower to others that Foothill may have obtained by assignment or otherwise, and further including all interest not paid when due and all Foothill Expenses that Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "Obligor" means any of Borrower or any of its Subsidiaries party to one or more Loan Documents, including M&S, IG Delaware, and IPS. "Obsolete Copyright" means any copyright that relates to software owned by Borrower that: (a) is no longer sold or marketed by Borrower; (b) is not generating any material amount of Accounts or revenues of Borrower; or (c) does not have a material fair market value. "Old Second Amendment" means that certain Amendment Number Two to Loan and Security Agreement, dated as of November 25, 1997, between Foothill and Borrower. "Old Second Amendment Closing Date" means the first date on which all of the conditions to the effectiveness of the Old Second Amendment have been satisfied (or waived or postponed by Foothill in its sole discretion) pursuant to the terms thereof. "Ordinary Course Dispositions" means Asset Dispositions of (a) Inventory in the ordinary course of business, (b) Equipment that is substantially worn, damaged, or obsolete in the ordinary course of business, (c) Equipment that is a so- called "internal equipment item" that is replaced by Borrower in the ordinary course of business and consistent with past practices with another such item of equal or greater value, and (d) Equipment that is a so-called "demonstration item" in the ordinary course of business and consistent with past practices. "Original Closing Date" means January 6, 1997. "Original Loan Agreement" has the meaning set forth in the Recitals to this Agreement. "Overadvance" has the meaning set forth in Section 2.5. "Participant" means any Person to which Foothill has sold a participation interest in its rights under the Loan Documents. "Patent Security Agreement" means an Amended and Restated Patent Security Agreement, in form and substance satisfactory to Foothill, dated as of even date herewith, between Borrower and Foothill. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "Permitted Appraised Assets Dispositions" means, subject to the prior or concurrent satisfaction of the Release Condition therefor, Asset Dispositions of Appraised Assets (in the ordinary course of Borrower's business and consistent with past practices), free and clear of Foothill's Lien thereon (other than Foothill's Lien in the proceeds of such Asset Disposition), so long as: (a) Borrower replaces the Appraised Asset that is the subject of such Asset Disposition (the "Disposed Appraised Asset") with a newly acquired item of Equipment of equal or greater comparable value than the appraised value of the Disposed Appraised Asset set forth in the most recent appraisal thereof and reports such Asset Disposition and replacement pursuant to Section 6.2; and (b) in the case of any single Asset Disposition or series of integrated Asset Dispositions involving one or more Disposed Appraised Assets with an aggregate appraised value of $250,000 or more, a Certifying Officer of Borrower shall deliver to Foothill a certificate, in form and substance satisfactory to Foothill, demonstrating in reasonable detail that the value of such newly acquired item or items of Equipment are of equal or greater comparable value than the appraised value of the relevant Disposed Appraised Asset set forth in the most recent appraisal thereof. "Permitted Bentley Dispositions" means, subject to the prior or concurrent satisfaction of the Release Condition therefor, Asset Dispositions of the Bentley Equity Interests. "Permitted Disposition" means (a) Ordinary Course Dispositions, (b) Permitted Bentley Dispositions, (c) subject to the prior or concurrent satisfaction of the applicable Release Condition therefor and the establishment and maintenance of a reserve against the Borrowing Base relative thereto, Asset Dispositions of (1) that portion of the Huntsville Property commonly known as Building 25 or 25A, or (2) that portion of the Huntsville Property denominated as "Excess Land" or "Raw Land" as referenced on page 9 of that certain report of Appraisal Associates Incorporated, dated September 22, 1999 relative to the Huntsville Property, in each case, free and clear of Foothill's Lien thereon (other than Foothill's Lien in the proceeds of such Asset Disposition), (d) subject to the prior or concurrent satisfaction of the applicable Release Condition therefor, Asset Dispositions of the assets that are the subject of Permitted Toehold Investments and Permitted Other Investments, (e) Permitted Appraised Assets Dispositions, (f) Restructuring Transactions constituting Asset Dispositions, (g) the sale or other disposition of Borrower's Hardware Business, and (h) subject to the prior or concurrent satisfaction of the applicable Release Condition therefor and the establishment and maintenance of a reserve against the Borrowing Base relative thereto, other Asset Dispositions not in the ordinary course of Borrower's business that do not exceed, on a book value basis, $5,000,000 in the aggregate in any fiscal year and do not exceed, on a book value basis, $250,000 in any one transaction or series of related transactions. "Permitted F/X Contracts" means foreign currency exchange contracts between F/X Bank and Borrower that: (a) are in respect of marked-to-market risk on foreign exchange future trades or options; (b) are entered into by Borrower in the ordinary course of its business; (c) are entered into in connection with the operational needs of Borrower's business and not for speculative purposes; (d) do not have a maturity date that is after the date five (5) Business Days prior to the Maturity Date; and (e) are provided by F/X Bank pursuant to the F/X Bank Parameters Letter. "Permitted Investments" means: (a) Permitted Ordinary Course Investments; (b) Permitted Repayment Investments; (c) Permitted Toehold Investments; (d) Permitted Subsidiary Loans and Capital Contributions; (e) Permitted Other Investments; and (f) Restructuring Transactions constituting equity investments. "Permitted Liens" means (a) Liens held by Foothill, (b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii) are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) purchase money Liens in respect of Equipment and the interests of lessors under operating leases and of lessors under capital leases to the extent that the acquisition or lease of the underlying asset is permitted under Section 7.21 and so long as the Lien only attaches to the asset purchased or acquired and only secures the purchase price of the asset, (e) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet due and payable, or (ii) are the subject of Permitted Protests, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) Liens or deposits to secure performance of bids, tenders, or leases (to the extent permitted under this Agreement), incurred in the ordinary course of business of Borrower and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower, (i) Liens of or resulting from any judgment or award that would not have a Material Adverse Effect and as to which the time for the appeal or petition for rehearing of which has not yet expired, or in respect of which Borrower is in good faith prosecuting an appeal or proceeding for a review, and in respect of which a stay of execution pending such appeal or proceeding for review has been secured, (j) Liens with respect to the Real Property Collateral that are exceptions to the commitments for title insurance issued in connection with the Mortgages, as accepted by Foothill, (k) with respect to any Real Property that is not part of the Real Property Collateral, easements, rights of way, zoning and similar covenants and restrictions, and similar encumbrances that customarily exist on properties of Persons engaged in similar activities and similarly situated and that in any event do not materially interfere with or impair the use or operation of the Collateral by Borrower or the value of Foothill's Lien thereon or therein, or materially interfere with the ordinary conduct of the business of Borrower, and (l) software escrow arrangements entered into in the ordinary course of business consistent with past practice. "Permitted Ordinary Course Investment" means (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America with a maturity not exceeding one year, (b) certificates of deposit, time deposits, banker's acceptances or other instruments of a bank having a combined capital and surplus of not less than $500,000,000 with a maturity not exceeding one year, (c) investments in commercial paper rated at least A-1 or P- 1 maturing within one year after the date of acquisition thereof, (d) money market accounts maintained at a bank having combined capital and surplus of no less than $500,000,000 or at another financial institution reasonably satisfactory to Foothill, (e) loans and advances to officers and employees of Borrower in the ordinary course of business in an aggregate amount at any one time outstanding not to exceed $3,000,000, (f) [intentionally omitted], (g) investments in negotiable instruments for collection, (h) advances in connection with purchases of goods or services in the ordinary course of business, and (i) deposits required in connection with leases. "Permitted Other Investments" means the equity investments of Borrower as of the Closing Date identified on Schedule P-2. "Permitted Protest" means the right of Borrower to protest any Lien other than any such Lien that secures the Obligations, tax (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in accordance with GAAP (or, if higher, in an amount that Foothill in good faith and in its reasonable credit judgment believes to be appropriate under the circumstances), (b) any such protest is instituted and diligently prosecuted by Borrower in good faith, and (c) Foothill is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Liens of Foothill in and to the Collateral. "Permitted Repayment Investment" means (a) the contribution or loan by Borrower to IG Benelux of approximately $15,000,000 to enable IG Benelux to repay, in full, all of its indebtedness owing to the IG Benelux Existing Lender, or (b) subject to the timely satisfaction of the condition set forth in Section 3.3(f), the contribution or loan by Borrower to IG Australia of approximately $24,000,000 to enable IG Australia to repay, in full, all of its indebtedness owing to the IG Australia Existing Lender. "Permitted Spot Trades" means foreign currency exchange transactions between F/X Bank and Borrower that: (a) are in respect of foreign exchange spot value trades; (b) are entered into by Borrower in the ordinary course of its business; and (c) are entered into in connection with the operational needs of Borrower's business and not for speculative purposes; and (d) are conducted pursuant to the F/X Bank Parameters Letter. "Permitted Subsidiary Loans and Capital Contributions" means loans and capital contributions made after the Original Closing Date by Borrower to any Subsidiary of Borrower; provided, however, that all such loans and capital contributions made by Borrower shall not exceed, in the aggregate: (a) $20,000,000 during the 1997 calendar year; (b) $25,000,000 during the 1998 calendar year (including the "ICS Capital Infusion", the "Intergraph European Subsidiary Recapitalization Transactions", the transactions described in item (iii) of the definition of "IPS Recapitalization Transactions", and the transactions described in item (ii) of the definition of "Veribest Recapitalization Transaction", in each case as such terms are used and defined in the Restructuring Consent); (c) $30,000,000 during the 1999 calendar year; and (d) $30,000,000 during the each calendar year thereafter. "Permitted Toehold Investment" means the acquisition of an equity interest in a Person other than a Subsidiary of Borrower (but not to exceed 10% of all of the issued and outstanding equity interests of such Person on a fully diluted basis) so long as (a) no Default or Event of Default shall have occurred and be continuing or would result from the consummation of the proposed acquisition, (b) the Person, in whom the equity interest is being acquired, is engaged in the same business as that of Borrower or any of its Subsidiaries or in a business reasonably related thereto, (c) the relevant equity interest being acquired in such Person is acquired directly by Borrower, (d) to the extent required under Section 4.2, Borrower shall have executed and delivered a supplement to the Pledge Agreement and shall have perfected Foothill's security interest in the acquired equity interest, and (e) the aggregate amount expended by Borrower in respect of all such Permitted Toehold Investments does not exceed $1,000,000 in any fiscal year. "Person" means and includes natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means all Collateral other than the Real Property Collateral. "Plan" means any employee benefit plan, program, or arrangement maintained or contributed to by Borrower or with respect to which it may incur liability. "Pledge Agreement" means an Amended and Restated Pledge Agreement, in form and substance satisfactory to Foothill, dated as of even date herewith, among Borrower, IG Delaware, M&S, IPS, and Foothill. "Reaffirmation Agreement" means the Reaffirmation Agreement, dated as of the Closing Date, by each of the Obligors party to a Loan Document in favor of Foothill, in form and substance satisfactory to Foothill, pursuant to which each of each such Obligor reaffirms its obligations under the Loan Documents to which it is party (including any grants of security interests in favor of Foothill) notwithstanding the amendment and restatement of the Existing Loan Agreement effected by this Agreement. "Real Property" means any estates or interests in real property now owned or hereafter acquired by Borrower. "Real Property Collateral" means the parcel or parcels of Real Property and the related improvements thereto now owned by Borrower and identified on Schedule R-1, and any Real Property hereafter acquired by Borrower. "Reference Rate" means, the rate of interest announced within Wells Fargo Bank, N.A. at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Release Condition" means, in respect of any Asset Disposition, that (a) no Default or Event of Default has occurred and is continuing or would result therefrom, and (b) Borrower is receiving at least fair value (as determined in accordance with Section 3439 of the California Civil Code, as amended) for the property or assets that are the subject of the Asset Disposition. "Reportable Event" means any of the events described in Section 4043(c) of ERISA or the regulations thereunder other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations. "Reserve" means, as of any date of determination, an amount equal to the product of (i) $297,619 times (ii) the number of months (or any portions thereof) separating such date from November 30, 1999. Without limiting the generality of the foregoing and solely by way of example, the amount of the Reserve would equal: (x) zero (-0-) as of November 30, 1999; (y) $297,619 as of December 1, 1999; and (z) $595,238 as of January 1, 2000. "Restructuring Consent" means that certain letter agreement, dated as of August 31, 1998, between Borrower and Foothill pursuant to which Foothill consented to the consummation of the transactions described therein. "Restructuring Transactions" means the transactions contemplated under and described in the Restructuring Consent. "Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by Section 601 of ERISA. "Securities Account" means a "securities account" as that term is defined in the Code. "Solvent" means, with respect to any Person on a particular date, that on such date (a) at fair valuations, all of the properties and assets of such Person are greater than the sum of the debts, including contingent liabilities, of such Person, (b) the present fair salable value of the properties and assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person is able to realize upon its properties and assets and pay its debts and other liabilities, contingent obligations and other commitments as they mature in the normal course of business, (d) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's properties and assets would constitute unreasonably small capital after giving due consideration to the prevailing practices in the industry in which such Person is engaged. In computing the amount of contingent liabilities at any time, it is intended that such liabilities will be computed at the amount that, in light of all the facts and circumstances existing at such time, represents the amount that reasonably can be expected to become an actual or matured liability. "Subsidiary" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of stock or other ownership interests having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. Anything to the contrary notwithstanding, Bentley Systems, Inc. shall not be deemed to be a Subsidiary of Borrower. "Supplemental Reserve" means, $2,500,000. "Term Loan" has the meaning set forth in Section 2.3. "Trademark Security Agreement" means an Amended and Restated Trademark Security Agreement, in form and substance satisfactory to Foothill, dated as of even date herewith, between Borrower and Foothill. "Triggering Event" means any of (a) the occurrence and continuation of an Event of Default, or (b) Foothill deems itself insecure. "Unbilled Accounts" means Domestic Accounts that are fully earned by performance, but have not yet been billed to the Account Debtor and that, as of any date of determination, arise from the sale of goods or rendition of services within the prior 60 days. "United States" means the United States of America, or any department, agency, or instrumentality of any of the foregoing. "Voidable Transfer" has the meaning set forth in Section 15.8. "Year 2000 Compliant" means, with regard to any Person and any software, that such software in goods produced or sold by, or utilized by and material to the business operations or financial condition of, such Person are able to interpret and manipulate data on and involving all calendar dates correctly and without causing any abnormal ending scenario, including in relation to dates in and after the Year 2000. 1.2 Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower on a consolidated basis unless thecontext clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in writing by Foothill. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. Any reference in this Agreement or in the Loan Documents to this Agreement or any of the Loan Documents shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, and supplements, thereto and thereof, as applicable. 1.5 Schedules and Exhibits. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolving Advances. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrower in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Revolving Amount less the sum of (A) the Letter of Credit Usage, plus (B) the F/X Reserve, or (ii) the Borrowing Base less the sum of (A) the Letter of Credit Usage, plus (B) the F/X Reserve. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (x) the lesser of (i) the result of (A) 80% of Eligible Domestic Accounts, plus (B) the lowest of (1) 80% of Eligible Unbilled Accounts, (2) 40% of the amount of credit availability created by the foregoing clause (A), and (3) $20,000,000, plus (C) the lesser of (1) 80% of Eligible Foreign Accounts, and (2) $3,000,000, minus (D) the amount, if any, of the Dilution Reserve, and (ii) an amount equal to the Collections with respect to the Accounts of Borrower for the immediately preceding 60 day period, minus (y) the Reserve, minus (z) the Supplemental Reserve. (b) Anything to the contrary in Section 2.1(a) above notwithstanding, Foothill may create reserves against or reduce its advance rates based upon Eligible Domestic Accounts or Eligible Unbilled Accounts without declaring an Event of Default if it determines in good faith and in its reasonable credit judgment that there has occurred a Material Adverse Change. (c) [intentionally omitted] (d) Foothill shall have no obligation to make Advances hereunder to the extent they would cause the outstanding Obligations (other than under the Term Loan) to exceed the Maximum Revolving Amount. (e) Amounts borrowed pursuant to this Section 2.1 may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2 Letters of Credit. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to issue letters of credit for the account of Borrower (each, an "L/C") or to issue guarantees of payment (each such guaranty, an "L/C Guaranty") with respect to letters of credit issued by an issuing bank for the account of Borrower. Foothill shall have no obligation to issue a Letter of Credit if any of the following would result: (i) the Letter of Credit Usage would exceed the Borrowing Base less the sum of the amount of outstanding Advances and the F/X Reserve, or (ii) the Letter of Credit Usage would exceed the lower of (y) the Maximum Revolving Amount less the sum of the amount of outstanding Advances and the F/X Reserve, or (z) $60,000,000, or (iii) the outstanding Obligations (other than under the Term Loan) would exceed the Maximum Revolving Amount. Borrower and Foothill acknowledge and agree that certain of the letters of credit that are to be the subject of L/C Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall have an expiry date no later than 60 days prior to the date on which this Agreement is scheduled to terminate under Section 3.4 and all such Letters of Credit shall be in form and substance acceptable to Foothill in its sole discretion. If Foothill is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such amount to Foothill and, in the absence of such reimbursement, the amount so advanced immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances under Section 2.6. (b) Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless from any loss, cost, expense, or liability, including payments made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill arising out of or in connection with any Letter of Credit. Borrower agrees to be bound by the issuing bank's regulations and interpretations of any Letters of Credit guarantied by Foothill and opened to or for Borrower's account or by Foothill's interpretations of any L/C issued by Foothill to or for Borrower's account, even though this interpretation may be different from Borrower's own, and Borrower understands and agrees that Foothill shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Borrower understands that the L/C Guarantees may require Foothill to indemnify the issuing bank for certain costs or liabilities arising out of claims by Borrower against such issuing bank. Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by Foothill under any L/C Guaranty as a result of Foothill's indemnification of any such issuing bank. (c) Borrower hereby authorizes and directs any bank that issues a letter of credit guaranteed by Foothill to deliver to Foothill all instruments, documents, and other writings and property received by the issuing bank pursuant to such letter of credit, and to accept and rely upon Foothill's instructions and agreements with respect to all matters arising in connection with such letter of credit and the related application. Borrower may or may not be the "applicant" or "account party" with respect to such letter of credit. (d) Any and all charges, commissions, fees, and costs incurred by Foothill relating to the letters of credit guaranteed by Foothill shall be considered Foothill Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Foothill. (e) Immediately upon the termination of this Agreement, Borrower agrees to either (i) provide cash collateral to be held by Foothill in an amount equal to 102% of the maximum amount of Foothill's obligations under Letters of Credit, plus an amount equal to the Foreign Currency Reserve, or (ii) cause to be delivered to Foothill releases of all of Foothill's obligations under outstanding Letters of Credit. At Foothill's discretion, any proceeds of Collateral received by Foothill after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.2(e). (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application by any Governmental Authority of any such applicable law, treaty, rule, or regulation, or (ii) compliance by the issuing bank or Foothill with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, without limitation, Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect (and any successor thereto): a. any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letters of Credit issued hereunder, or b. there shall be imposed on the issuing bank or Foothill any other condition regarding any letter of credit, or Letter of Credit, as applicable, issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining any letter of credit, or Letter of Credit, as applicable, or to reduce the amount receivable in respect thereof by such issuing bank or Foothill, then, and in any such case, Foothill may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as the issuing bank or Foothill may specify to be necessary to compensate the issuing bank or Foothill for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate set forth in Section 2.6(a)(i) or (c)(i), as applicable. The determination by the issuing bank or Foothill, as the case may be, of any amount due pursuant to this Section 2.2(f), as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.3 Term Loan. Subject to the terms and conditions of this Agreement, Foothill: (a) made a term loan to Borrower on the Original Closing Date (in the original principal amount of $20,000,000 (the "Initial Term Loan"); and (b) made an additional term loan to Borrower on the Old Second Amendment Closing Date in the original principal amount of $5,000,000 (the "Additional Term Loan"; the Initial Term Loan and the Additional Term Loan are referred to, collectively, as the "Term Loan"). The outstanding principal balance and all accrued and unpaid interest under the Term Loan shall not be due and payable until the earlier to occur of (a) the Maturity Date, and (b) the date of termination of this Agreement, whether by its terms, by acceleration, or otherwise. The unpaid principal balance of the Term Loan may not be prepaid in whole or in part. All amounts outstanding under the Term Loan shall constitute Obligations. 2.4 Subfacility for Borrower's Permitted F/X Contracts (the "F/X Line"). (a) If requested to do so by Borrower, Foothill may, in its sole discretion, enter into agreements with F/X Bank pursuant to which Foothill would indemnify F/X Bank against losses or expenses incurred by F/X Bank in connection with Permitted F/X Contracts, notwithstanding any objections by Borrower as to the amount of such losses or expenses. If Foothill is obligated to advance funds under an F/X Line indemnity, Borrower immediately shall reimburse such amount to Foothill and, in the absence of such reimbursement, the amount so advanced immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances under Section 2.6. If, upon the maturity date of any Permitted F/X Contract, Borrower does not have Availability in an amount sufficient to pay the full amount of Borrower's obligations to F/X Bank under such contract, Foothill may, in its sole discretion, instruct F/X Bank to liquidate such Permitted F/X Contract, at Borrower's sole expense, and to apply any amounts thereunder that would have been payable to Borrower against the amounts owed to F/X Bank by Borrower. Any amounts paid by Foothill to F/X Bank and any other costs or expenses incurred by Foothill in connection with any such Permitted F/X Contracts shall constitute Advances, shall be secured by all of the Collateral, and thereafter shall be payable by Borrower to Foothill together with interest as provided for herein. (b) Borrower hereby agrees to indemnify, save, defend, and hold Foothill harmless from any loss, cost, expense, or liability, including payments made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill arising out of or in connection with any F/X Line indemnity. (c) Any and all charges, commissions, fees, and costs incurred by Foothill relating to Permitted F/X Contracts that are the subject of an F/X Line indemnity by Foothill shall be considered Foothill Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Foothill. (d) Immediately upon the termination of this Agreement, Borrower agrees to either (i) provide cash collateral to be held by Foothill in an amount equal to 105% of the maximum amount of Foothill's obligations under the F/X Line indemnities, or (ii) cause to be delivered to Foothill releases of all of Foothill's obligations under outstanding F/X Line indemnities. At Foothill's discretion, any proceeds of Collateral received by Foothill after the occurrence and during the continuation of an Event of Default may be held as the cash collateral required by this Section 2.4(d). (e) The amount of the F/X Reserve may be reduced from time to time by Foothill upon the receipt and written acceptance by Foothill of an F/X Reserve Reduction Certificate, in the form of that attached hereto as Exhibit F-2, duly executed by both Borrower and F/X Bank, not less than 2 Business Days prior to the requested effective date of such reduction. (f) So long as no Triggering Event has occurred and is continuing or would result therefrom, the amount of the F/X Reserve may be increased from time to time by Foothill in its sole discretion upon the receipt and written acceptance by Foothill of an F/X Reserve Increase Certificate, in the form of that attached hereto as Exhibit F-3, duly executed by both Borrower and F/X Bank, not less than 2 Business Days prior to the requested effective date of such increase. (g) Anything in the Loan Documents to the contrary notwithstanding, Permitted Spot Trades shall be deemed to qualify as Permitted F/X Contracts eligible for coverage under an F/X Line indemnity solely until such time, if ever, as Foothill is obligated to advance funds under an F/X Line indemnity to cover obligations owing but unpaid by Borrower to F/X Bank in respect of Permitted Spot Trades and, thereafter, Permitted Spot Trades shall no longer be deemed to qualify as Permitted F/X Contracts eligible for coverage under an F/X Line indemnity and F/X Line indemnities shall no longer be permitted to be issued in respect of Permitted Spot Trades. 2.5 Overadvances. If, at any time or for any reason, the amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 is greater than either the Dollar or percentage limitations set forth in Sections 2.1 or 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in cash, the amount of such excess to be used by Foothill first, to repay Advances outstanding under Section 2.1 and, thereafter, to be held by Foothill as cash collateral to secure Borrower's obligation to repay Foothill for all amounts paid pursuant to Letters of Credit. 2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations. (a) Interest Rate. Except as provided in clause (b) below, all Obligations (except for undrawn Letters of Credit) shall bear interest at a per annum rate of 0.625 percentage points above the Reference Rate; provided, however, that (i) effective on the date that Foothill receives Borrower's audited financial statements for Borrower's fiscal year ending on December 31, 2000, and provided, that Borrower's net income for such fiscal year determined in accordance with GAAP, as evidenced by such audited financial statements, shall have been greater than $0, the then applicable rate of interest shall be reduced by 0.125 percentage points, and (ii) effective on the date that Foothill receives Borrower's audited financial statements for Borrower's fiscal year ending on December 31, 2001, and provided, that Borrower's net income for such fiscal year determined in accordance with GAAP, as evidenced by such audited financial statements, shall have been greater than or equal to $0, the then applicable rate of interest shall be reduced by 0.125 percentage points. (b) Letter of Credit Fee. Borrower shall pay Foothill a fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.2(d)) equal to 1.5% per annum times the aggregate undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit) shall bear interest at a per annum rate equal to 3.0 percentage points above the per annum rate otherwise applicable thereto, and (ii) the Letter of Credit fee provided in Section 2.6(b) shall be increased to 4.5% per annum times the amount of the undrawn Letters of Credit that were outstanding during the immediately preceding month. (d) Minimum Interest. In no event shall the rate of interest chargeable hereunder for any day be less than 7.0% per annum. To the extent that interest accrued hereunder at the rate set forth herein would be less than the foregoing minimum daily rate, the interest rate chargeable hereunder for such day automatically shall be deemed increased to the minimum rate. (e) Payments. Interest and Letter of Credit fees payable hereunder shall be due and payable, in arrears, on the first day of each month during the term hereof. Borrower hereby authorizes Foothill, at its option, without prior notice to Borrower, to charge such interest and Letter of Credit fees, all Foothill Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section 2.2(d) (as and when accrued or incurred), the fees and charges provided for in Section 2.11 (as and when accrued or incurred), and all installments or other payments due under the Term Loan or any Loan Document to Borrower's Loan Account, which amounts thereafter shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded and shall thereafter accrue interest at the rate then applicable to Advances hereunder. (f) Computation. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately shall be increased or decreased by an amount equal to such change in the Reference Rate. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. (g) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and Foothill, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto as of the date of this Agreement, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Collection of Accounts. Borrower shall at all times maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date, shall instruct all Account Debtors (to the extent not so instructed prior to the Closing Date) with respect to the Accounts, General Intangibles, and Negotiable Collateral of Borrower to remit all Collections in respect thereof to such Lockboxes. Borrower, Foothill, and the Lockbox Bank shall enter into the Lockbox Agreements (to the extent not so entered into prior to the Closing Date), which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at the Lockbox Bank. Borrower agrees that all Collections and other amounts received by Borrower from any Account Debtor or any other source immediately upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby shall be modified by Borrower without the prior written consent of Foothill. Upon the terms and subject to the conditions set forth in the Lockbox Agreements, all amounts received in each Lockbox Account shall be wired each Business Day into an account (the "Foothill Account") maintained by Foothill at a depositary selected by Foothill. 2.8 Crediting Payments; Application of Collections. The receipt of any Collections by Foothill (whether from transfers to Foothill by the Lockbox Bank pursuant to the Lockbox Agreements or otherwise) immediately shall be applied provisionally to reduce the Obligations outstanding under Section 2.1, but shall not be considered a payment on account unless such Collection item is a wire transfer of immediately available federal funds and is made to the Foothill Account or unless and until such Collection item is honored when presented for payment. From and after the Closing Date, Foothill shall be entitled to charge Borrower for 1 Business Days of `clearance' or `float' at the rate set forth in Section 2.6(a)(i) or Section 2.6(c)(i), as applicable, on all Collections that are received by Foothill (regardless of whether forwarded by the Lockbox Bank to Foothill, whether provisionally applied to reduce the Obligations under Section 2.1, or otherwise). This across-the-board 1 Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of Foothill's financing of Borrower, and shall apply irrespective of the characterization of whether receipts are owned by Borrower or Foothill, and whether or not there are any outstanding Advances, the effect of such clearance or float charge being the equivalent of charging 1 Business Days of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment, and interest shall be recalculated accordingly. Anything to the contrary contained herein notwithstanding, any Collection item shall be deemed received by Foothill only if it is received into the Foothill Account on a Business Day on or before 11:00 a.m. California time. If any Collection item is received into the Foothill Account on a non-Business Day or after 11:00 a.m. California time on a Business Day, it shall be deemed to have been received by Foothill as of the opening of business on the immediately following Business Day. 2.9 Designated Account. Foothill is authorized to make the Advances, the Letters of Credit, and the Term Loan under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(e). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and Borrower, any Advance requested by Borrower and made by Foothill hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Foothill shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances and the Term Loan made by Foothill to Borrower or for Borrower's account, including, accrued interest, Foothill Expenses, and any other payment Obligations of Borrower. In accordance with Section 2.8, the Loan Account will be credited with all payments received by Foothill from Borrower or for Borrower's account, including all amounts received in the Foothill Account from the Lockbox Bank. Foothill shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Foothill Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Foothill unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Foothill written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Foothill the following fees: (a) Modification/Extension Fee. On the Closing Date, a modification/extension fee of $500,000, which fee shall be fully earned and non-refundable when paid; provided, however, that Foothill shall credit $500,000 of the "Commitment Fee" payable by Borrower upon the execution of that certain letter agreement, dated as of October 22, 1999 (the "Commitment Letter") against such modification/extension fee to the extent the Commitment Fee was paid by Borrower and not applied as a credit against the agency fee payable pursuant to Section 2.11(b). (b) Agency Fee. On the Closing Date, an agency fee of $250,000, which fee shall be fully earned and non-refundable when paid; provided, however, that Foothill shall credit $250,000 of the "Commitment Fee" payable by Borrower upon the execution of the Commitment Letter against such agency fee to the extent the Commitment Fee was paid by Borrower and not applied as a credit against the modification/extension fee payable pursuant to Section 2.11(a). (c) Unused Line Fee. On the first day of each month after the Closing Date during the term of this Agreement, an unused line fee in an amount equal to 0.25% per annum times the Average Unused Portion of the then extant Maximum Revolving Amount, which fee shall be fully earned when due; (d) Annual Facility Fee. On the Closing Date and each anniversary of the Closing Date, an annual facility fee in an amount equal to 0.15% of the then extant Maximum Amount, which fee shall be fully earned when due; (e) Financial Examination, Documentation, and Appraisal Fees. Foothill's customary fee of $650 per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower performed by personnel employed by Foothill; Foothill's customary appraisal fee of $1,500 per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral performed by personnel employed by Foothill; and, the actual charges paid or incurred by Foothill if it elects to employ the services of one or more third Persons to perform such financial analyses and examinations (i.e., audits) of Borrower or to appraise the Collateral; and (f) Monthly Agency Fee. On the first day of each month after the Closing Date during the term of this Agreement, a monthly agency fee in an amount equal to $12,500, which fee shall be fully earned when due. 2.12 Maximum Amount. Borrower may elect, at any time and from time to time, by irrevocable written notice to Foothill, to permanently reduce the Maximum Amount by an amount equal to or greater than the lesser of (a) $10,000,000, or (b) the amount by which the Maximum Amount, prior to the effectiveness of any such reduction, exceeds $75,000,000; provided, however, that in no event shall the Maximum Amount be reduced below $75,000,000. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Advance, Letter of Credit, and F/X Line Indemnity. The obligation of Foothill to make the initial Advance, to issue the initial Letter of Credit, or to issue the initial F/X Line indemnity is subject to the fulfillment, to the satisfaction of Foothill and its counsel, of each of the following conditions on or before the Closing Date: (a) the Closing Date shall occur on or before December 10, 1999; (b) Foothill shall have received confirmation of the filing of its financing statements and fixture filings; (c) Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) the Reaffirmation Agreement; (ii) [intentionally omitted]; (iii) the Copyright Security Agreement; (iv) the Patent Security Agreement; and (v) the Trademark Security Agreement; (d) if and to the extent available on or before the Closing Date, Foothill shall have received the original certificates representing or evidencing all of the Pledged Shares (as defined in the Pledge Agreement), together with stock powers or equivalent assignments with respect thereto duly endorsed in blank; (e) Foothill shall have received originals of the Intercompany Notes, together with endorsements with respect thereto duly endorsed in blank; (f) Foothill shall have received a certificate from the Secretary or an Assistant Secretary of each Obligor attesting to the resolutions of such Obligor's Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which it is a party and authorizing specific officers of such Obligor to execute the same; (g) Foothill shall have received copies of each Obligor's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary or an Assistant Secretary of such Obligor; (h) Foothill shall have received a certificate of status with respect to each Obligor, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Obligor, which certificate shall indicate that such Obligor is in good standing in such jurisdiction; (i) Foothill shall have received certificates of status with respect to Borrower, such certificates to be issued by the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions, and (A) with respect to the State of Alabama, shall be dated within 15 days of the Closing Date, and (B) with respect to all other jurisdictions, shall be dated within 70 days of the Closing Date; (j) Foothill shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be reasonably satisfactory to Foothill and its counsel; (k) Foothill shall have received an opinion of the Obligors' counsel in form and substance reasonably satisfactory to Foothill in its sole discretion; (l) Foothill shall have received satisfactory evidence (which evidence may be in the form of a Certificate of a Certifying Officer of Borrower) that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (m) No Material Adverse Change shall have occurred; (n) Foothill shall have received payment of all accrued and unpaid Foothill Expenses; (o) Foothill shall have received (i) commitments from lenders and in amounts acceptable to Foothill in its sole discretion to purchase participation interests in the Obligations pursuant to documentation acceptable to Foothill in its sole discretion, and (ii) participation agreements or amendments to participation agreements, as applicable, in each case, in form and substance satisfactory to Foothill; (p) Borrower shall have retained a consulting firm reasonably acceptable to Foothill (it being understood that Altman & Company is acceptable to Foothill), which consulting firm shall be continued to be retained by Borrower until such time as Borrower shall have net income (determined in accordance with GAAP) of at least $1.00 for a period of 2 consecutive fiscal quarters, or such earlier date as Foothill and Borrower shall mutually agree; (q) Borrower shall have delivered to Foothill a cost-cutting plan for Borrower's fiscal year ending December 31, 2000, which cost-cutting plan shall include such detail as Foothill may reasonably request and shall otherwise be reasonably satisfactory to Foothill; and (r) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance reasonably satisfactory to Foothill and its counsel. 3.2 Conditions Precedent to all Advances, all Letters of Credit, and all F/X Line indemnities on or after the Closing Date. The following shall be conditions precedent to all Advances, all Letters of Credit, and all F/X Line indemnities hereunder on or after the Closing Date: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; and (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, Foothill, or any of their Affiliates. 3.3 Condition Subsequent. As a condition subsequent to initial closing hereunder, Borrower shall perform or cause to be performed the following (the failure by Borrower to so perform or cause to be performed constituting an Event of Default): (a) (i) within 10 Business Days following the Closing Date, Borrower shall have ordered certificates of status with respect to Borrower from the appropriate officer of the jurisdictions in which its failure to be duly qualified or licensed would constitute a Material Adverse Change and paid all fees necessary to obtain such certificates of status, and (ii) within 5 Business Days of receipt by Borrower or its counsel of any such certificate, deliver such certificate to Foothill, which certificate shall indicate that Borrower is in good standing in the applicable jurisdiction; (b) within 30 days of the Closing Date, deliver to Foothill the certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.10, the form and substance of which shall be reasonably satisfactory to Foothill and its counsel; (c) on or before December 31, 1999, Foothill shall have received each of the following documents, duly executed, and each such document shall be in full force and effect: (i) The IPS Copyright Security Agreement; and (ii) The IPS Trademark Security Agreement; (d) upon the request of Foothill (if ever) after the Closing Date, within 30 days after the date of such request: (i) a Mortgage on any Real Property acquired by Borrower after the Closing Date shall have been duly executed and delivered by Borrower, and the same shall be in full force and effect, and such Mortgage shall have been recorded in the office of the county recorder for the county in which such Real Property is located; (ii) Foothill shall have received supplemental opinions of Borrower's counsel, in form and substance satisfactory to Foothill in its sole discretion, in respect of the Mortgage on such after acquired Real Property; (iii) Foothill shall have received a preliminary title report in respect of such after acquired Real Property in form and substance reasonably satisfactory to Foothill; and (iv) Foothill shall have received a phase-I environmental report and a real estate survey shall have been completed with respect to such after acquired Real Property and copies thereof delivered to Foothill; the environmental consultants and surveyors retained for such reports or surveys, the scope of the reports or surveys, and the results thereof shall be acceptable to Foothill in its sole discretion; (e) within 90 days following the Closing Date, Foothill shall have received satisfactory evidence that all existing copyrights of Borrower (other than Exempt Copyrights) required to be registered under Section 6.17 have been registered with the United States Copyright Office (or are the subject of a diligently prosecuted application therefor), and that all such copyrights (other than Exempt Copyrights) and any proceeds thereof are specifically encumbered by the Copyright Security Agreement; (f) within 60 days of either (i) the date that Borrower makes the Permitted Repayment Investment in respect of the indebtedness of IG Australia owing to the IG Australia Existing Lender or (ii) one or more Letters of Credit are issued to IG Australia Existing Lender in support of the indebtedness of IG Australia owing to IG Australia Existing Lender and IG Australia Existing Lender releases its Lien on the capital stock of IG Australia (in either case, the "IG Australia Payoff Date"), execute and deliver an appropriate supplement to the Pledge Agreement and deliver to Foothill possession of the original stock certificates, respecting 65% of the issued and outstanding shares of stock of IG Australia, together with stock powers with respect thereto endorsed in blank; provided, however, that to the extent, if any, that such shares are required to be pledged to the holder of any project financing indebtedness of IG Australia incurred after the IG Australia Payoff Date as security for such indebtedness, then, upon Borrower's written request therefor and with Foothill's prior written consent thereto (not to be unreasonably withheld), Foothill agrees to release its Lien on such shares; provided further, that if such holder will permit such subordination, then, notwithstanding the foregoing proviso, Foothill's Lien on such shares will not be released and will become a subordinate Lien pursuant to documentation in form and substance reasonably satisfactory to Foothill and such holder; and (g) [intentionally omitted] (h) to the extent not available on or before the Closing Date under Section 3.1, Foothill shall have received, within 30 days of the Closing Date, the original certificates representing or evidencing all of the Pledged Shares (as defined in the Pledge Agreement), together with stock powers or equivalent assignments with respect thereto duly endorsed in blank; provided, however, that with respect to any "Pledged Foreign Issuer" (as defined in the Pledge Agreement) as of the Closing Date, the Obligors need not (i) deliver or cause to be delivered the original certificates (to the extent any exist) representing or evidencing the Pledged Shares issued by such Pledged Foreign Issuer, nor (ii) comply or cause to be complied with all applicable foreign law registration requirements for perfecting, under such foreign law, the Lien of Foothill on such Pledged Shares, in each case, until the date 60 days following the Closing Date before the failure to do so would constitute an Event of Default. 3.4 Term. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending on January 7, 2003 (the "Maturity Date"). The foregoing notwithstanding, Foothill shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrower with respect to any outstanding Letters of Credit or any outstanding F/X Line indemnities) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of Borrower's duties, Obligations, or covenants hereunder, and Foothill's continuing security interests in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Foothill's obligation to provide additional credit hereunder is terminated. 3.6 Early Termination by Borrower. Borrower has the option, at any time prior to the Maturity Date and upon 60 days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, the Obligations (including an amount equal to 102% of the undrawn amount of the Letters of Credit plus the Foreign Currency Reserve), in full, together with a premium (the "Early Termination Premium") equal to $1,000,000. The Early Termination Premium provided for in this section shall be deemed included in the Obligations. 3.7 Termination Upon Event of Default. If Foothill terminates this Agreement upon the occurrence of an Event of Default that intentionally is caused by Borrower for the purpose, in Foothill's reasonable judgment, of avoiding payment of the Early Termination Premium provided in Section 3.6, then, in view of the impracticability and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Foothill's lost profits as a result thereof, Borrower shall pay to Foothill upon the effective date of such termination, a premium in an amount equal to the Early Termination Premium. The Early Termination Premium shall be presumed to be the amount of damages sustained by Foothill as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Early Termination Premium provided for in this section shall be deemed included in the Obligations. 4. CREATION OF SECURITY INTEREST. 4.1 Grant of Security Interest. Borrower hereby grants to Foothill a continuing security interest in all right, title, and interest of Borrower in, to, and under all currently existing and hereafter acquired or arising Personal Property Collateral in order to secure prompt repayment of any and all Obligations and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. Foothill's security interests in the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Foothill or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrower has no authority, express or implied, to dispose of any item or portion of the Personal Property Collateral or the Real Property Collateral. Concurrent with the consummation of any Permitted Disposition, Foothill agrees to release its Liens on the subject property or asset (but not the proceeds from the Asset Disposition). (b) Anything in this Agreement and the other Loan Documents to the contrary notwithstanding, the foregoing grant of a security interest shall not extend to, and the term "Personal Property Collateral" shall not include, any General Intangible, Federal Account, or Permitted Other Investment that is now or hereafter held by Borrower as licensee, lessee, or otherwise, solely in the event and to the extent that: (i) as the proximate result of the foregoing grant of a security interest, Borrower's rights in or with respect to such General Intangible, Federal Account, or Permitted Other Investment would be forfeited or would become void, voidable, terminable, or revocable, or if Borrower would be deemed to have breached, violated, or defaulted the underlying license, lease, or other agreement that governs such General Intangible, Federal Account, or Permitted Other Investment, in each case, pursuant to the restrictions in the underlying lease, license, or other agreement that governs such General Intangible, Federal Account, or Permitted Other Investment; (ii) any such restriction shall be effective and enforceable under applicable law, including Section 9318(4) of the Code; and (iii) any such forfeiture, voidness, voidability, terminability, revocability, breach, violation, or default cannot be remedied by Borrower using its best efforts (but without any obligation to make any material expenditures of money or to commence legal proceedings); provided, however, that the foregoing grant of security interest shall extend to, and the term "Personal Property Collateral" shall include, (y) any and all proceeds of such General Intangible, Federal Account, or Permitted Other Investment to the extent that the assignment or encumbering of such proceeds is not so restricted, and (z) upon any such licensor, lessor, or other applicable party's consent with respect to any such otherwise excluded General Intangible, Federal Account, or Permitted Other Investment being obtained, thereafter such General Intangible, Federal Account, or Permitted Other Investment as well as any proceeds thereof that might theretofore have been excluded from such grant of a security interest and the term "Personal Property Collateral." (c) Anything in this Agreement or the other Loan Documents to the contrary notwithstanding and subject to Section 4.1(b), (i) the security interest granted in the Permitted Other Investments under Section 4.1(a) shall not attach unless and until a Triggering Event has occurred, at which time such security interest immediately and automatically shall attach without notice or demand or further act on the part of Foothill or Borrower, and (ii) Foothill agrees that Borrower need not deliver any Negotiable Collateral in respect of the Permitted Other Investments under Section 4.2 unless and until a Triggering Event has occurred. (d) Anything in this Agreement and the other Loan Documents to the contrary notwithstanding, the foregoing grant of a security interest shall not extend to, and the term "Personal Property Collateral" shall not include, any Excluded Foreign Subsidiary Securities or the assets or properties of any Foreign Subsidiary. 4.2 Negotiable Collateral. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, Borrower, immediately upon the request of Foothill, shall endorse and deliver (or cause to be endorsed and delivered) physical possession of such Negotiable Collateral to Foothill. The foregoing notwithstanding, Borrower need not deliver any Negotiable Collateral in respect of any Permitted Toehold Investment with a value less than or equal to $500,000 unless and until there is a Triggering Event. 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral. During a Triggering Event, Foothill or Foothill's designee may (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, or Negotiable Collateral have been assigned to Foothill or that Foothill has a security interest therein, and (b) collect the Accounts, General Intangibles, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for Foothill, as Foothill's trustee, any Collections that it receives and immediately will deliver said Collections to Foothill in their original form as received by it. 4.4 Delivery of Additional Documentation Required. At any time upon the request of Foothill, Borrower shall (and shall cause its Subsidiaries to) execute and deliver to Foothill all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, applications for title, affidavits, reports, notices, schedules of accounts, letters of authority, and all other documents (including documents required for compliance with the Assignment of Claims Act, 31 U.S.C. Section 3727 or any State's statutory counterpart thereto) that Foothill reasonably may request, in form reasonably satisfactory to Foothill, to perfect and continue perfected Foothill's security interests in the Collateral and the other properties and assets of Borrower and its Subsidiaries, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. (b) In respect of each of the Securities Accounts of Borrower, if any, Foothill, Borrower, and each applicable financial intermediary or depositary shall enter into a control agreement that, among other things, provides that, from and after the giving of notice by Foothill to such financial intermediary or depositary, it shall take instructions solely from Foothill with respect to the applicable Securities Account and related securities entitlements or deposit account, as applicable. Foothill agrees that it will not give such notice unless a Triggering Event has occurred. Borrower agrees that it will not transfer assets out of such Securities Accounts or deposit accounts other than in the ordinary course of business and, if to another financial intermediary or depositary, unless Borrower, Foothill, and the substitute financial intermediary or depositary have entered into a control agreement of the type described above. No arrangement contemplated hereby shall be modified by Borrower without the prior written consent of Foothill. Upon the occurrence of a Triggering Event, Foothill may elect to notify the financial intermediary to liquidate the securities entitlements in such Securities Account and may elect to notify the financial intermediary or depositary to remit the proceeds in the Securities Account or deposit account to the Foothill Account. (c) Anything in this Agreement to the contrary notwithstanding, Foothill agrees that: (i) so long as no Triggering Event has occurred and is continuing, (y) Borrower need not execute and deliver to Foothill documents required for compliance with the Assignment of Claims Act, 31 U.S.C. Section 3727 or any State's statutory counterpart thereto in respect of any one underlying contract or series of related underlying contracts giving rise to less than $1,000,000 of Accounts of Borrower, and (z) Foothill agrees not to file notices or copies of assignments under the Assignment of Claims Act or any State's statutory counterpart thereto; and (ii) after the occurrence and during the continuance of a Triggering Event, (y) Borrower shall execute and deliver to Foothill all documents that Foothill may request, in form satisfactory to Foothill, required for compliance with the Assignment of Claims Act or any State's statutory counterpart thereto, irrespective of the amount of Accounts arising out of any underlying contract, and (z) Foothill may file any notices or copies of assignments under the Assignment of Claims Act or any State's statutory counterpart thereto. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's officers, employees, or agents designated by Foothill) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of that Borrower on any of the documents described in Section 4.4, (b) if there is a Triggering Event, sign that Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's name on any Collection item that may come into Foothill's possession, (e) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Foothill, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (f) if there is a Triggering Event, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (g) if there is a Triggering Event, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms that Foothill determines to be reasonable, and Foothill may cause to be executed and delivered any documents and releases that Foothill determines to be necessary. The appointment of Foothill as Borrower's attorney, and each and every one of Foothill's rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Foothill's obligation to extend credit hereunder is terminated. 4.6 Right to Inspect. Foothill (through any of its officers, employees, or agents) shall have the right, from time to time hereafter to inspect Borrower's Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Foothill to enter into this Agreement, Borrower makes the following representations and warranties which shall be true, correct, and complete in all respects as of the Closing Date, and at and as of the date of the making of each Advance or Letter of Credit or F/X Line indemnity made thereafter, as though made on and as of the date of such Advance or Letter of Credit or F/X Line indemnity (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 No Encumbrances. Borrower has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 Eligible Accounts. The Eligible Accounts are bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to Account Debtors in the ordinary course of Borrower's business, unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. The property giving rise to such Eligible Accounts has been delivered to the Account Debtor, or to the Account Debtor's agent for immediate shipment to and unconditional acceptance by the Account Debtor (except for returns, in the ordinary course of business, of products that fail to conform with standard specifications). Borrower has not received notice of actual or imminent bankruptcy, insolvency, or material impairment of the financial condition of any Account Debtor regarding any Eligible Account. 5.3 [Intentionally Omitted] 5.4 Equipment. All of the Equipment is used or held for use in Borrower's business and is fit for such purposes. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on Schedule 6.12 or otherwise permitted by Section 6.12. 5.6 Inventory Records. Borrower keeps correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost therefor. 5.7 Location of Chief Executive Office; FEIN The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement. Borrower's FEIN is 63-0573222. 5.8 Due Organization and Qualification; Subsidiaries. (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its incorporation and qualified and licensed to do business in, and in good standing in, any state where the failure to be so licensed or qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.8, is a complete and accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization; (ii) the number of shares or units of each class of common and preferred stock or other equity securities authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares or units of each such class owned directly or indirectly by Borrower. All of the outstanding capital stock or other equity securities of each such Subsidiary has been validly issued and is fully paid and non-assessable. (c) Except as set forth on Schedule 5.8, no capital stock or other equity securities (or any securities, instruments, warrants, options, purchase rights, conversion or exchange rights, calls, commitments or claims of any character convertible into or exercisable for capital stock or other equity securities) of any direct or indirect Subsidiary of Borrower is subject to the issuance of any security, instrument, warrant, option, purchase right, conversion or exchange right, call, commitment or claim of any right, title, or interest therein or thereto. (d) Set forth on Schedule 5.8 are, with respect to each Subsidiary of Borrower that is not a Foreign Subsidiary: (i) a description of the direct and indirect stockholders (or holders of equivalent equity interests) of each such Subsidiary; (ii) the total assets of each such Subsidiary; (iii) the amount of the net value of Borrower's direct or indirect investment in such Subsidiary; and (iv) a true, correct, and complete statement regarding whether each such Subsidiary's assets are comprised principally of (x) foreign assets, (y) securities of other Subsidiaries of Borrower, or (z) other operating assets. 5.9 Due Authorization; No Conflict. (a) The execution, delivery, and performance by each Obligor of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action. (b) The execution, delivery, and performance by each Obligor of the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation (including Regulations T, U, and X of the Federal Reserve Board) applicable to such Obligor, the Governing Documents of such Obligor, or any order, judgment, or decree of any court or other Governmental Authority binding on such Obligor, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation or material lease of such Obligor, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of such Obligor, other than Permitted Liens, or (iv) require any approval of stockholders or any approval or consent of any Person under any material contractual obligation of such Obligor. (c) Other than the filing of appropriate financing statements, fixture filings, and mortgages, the execution, delivery, and performance by each Obligor of the Loan Documents to which such Obligor is a party do not and will not require any registration with, consent, or approval of, or (except for Borrower's filings with the Securities Exchange Commission in the ordinary course of Borrower's business) notice to, or other action with or by, any federal, state, foreign, or other Governmental Authority or other Person. (d) The Loan Documents to which each Obligor is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Obligor will be the legally valid and binding obligations of such Obligor, enforceable against such Obligor in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Liens granted by each Obligor to Foothill in and to its properties and assets pursuant to the Loan Documents are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. There are no actions or proceedings pending by or against Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, or prosecutions involving Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on Schedule 5.10; and (c) matters arising after the date hereof that, if decided adversely to Borrower, would not have a Material Adverse Change. 5.11 No Material Adverse Change. All financial statements relating to Borrower, any other Obligor, or any guarantor of the Obligations that have been delivered by Borrower to Foothill have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present Borrower's (or such other Obligor's or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower (or such other Obligor or such guarantor, as applicable) since the date of the latest financial statements submitted to Foothill. 5.12 Solvency. Borrower is Solvent. No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement, or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 5.13 Employee Benefits. None of Borrower, any of its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan, other than those listed on Schedule 5.13. Borrower, each of its Subsidiaries and each ERISA Affiliate have satisfied the minimum funding standards of ERISA and the IRC with respect to each Benefit Plan to which it is obligated to contribute. No ERISA Event has occurred nor has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Change. None of Borrower or its Subsidiaries, or any ERISA Affiliate, is subject to any direct or indirect liability with respect to any Plan under any applicable law, treaty, rule, regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA Affiliate is required to provide security to any Plan under Section 401(a)(29) of the IRC. 5.14 Environmental Condition. None of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, except in compliance with all applicable laws and regulations in respect thereof. None of Borrower's properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, or a candidate for closure pursuant to any environmental protection statute. No Lien arising under any environmental protection statute has attached to any revenues or to any real or personal property owned or operated by Borrower. Except as set forth on Schedule 5.14, Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 Securities Accounts. Borrower does not have or maintain any Securities Accounts. 5.16 Year 2000 Compliance. On the basis of a comprehensive inventory, review and assessment currently being undertaken by Borrower of Borrower's computer applications utilized by Borrower or contained in products produced or sold by Borrower, and upon inquiry made of Borrower's material suppliers and vendors, Borrower's management is of the considered view that: (a) Current and Future Generations of Hardware and Software. All of Borrower's hardware and software products listed in Borrower's `Year 2000 Price List' dated January 1, 1999 or any subsequent standard price list are certified as Year 2000 Compliant or will be so certified as new versions and utilities are released. (b) Prior Generation of Hardware and Software. Borrower reasonably anticipates that Borrower will make its prior generations of hardware and software Year 2000 Compliant except where it would be commercially impracticable or impossible to do so and where the failure to do so will not result in a Material Adverse Change. (c) Internal Business Systems. Borrower reasonably anticipates that Borrower will successfully implement all internal systems and programming changes necessary to make Borrower's internal business systems Year 2000 Compliant in all material respects on or before December 31, 1999. (d) Suppliers and Other Third Parties. Borrower is diligently conducting a program of investigation with Borrower's critical suppliers to ensure that such suppliers are, or become on a timely basis, Year 2000 Compliant in all material respects. Borrower includes in its new supplier agreements a provision relative to the relevant supplier's own status as, or program to become on a timely basis, Year 2000 Compliant in all material respects. Borrower also is diligently conducting discussions with other entities with which Borrower interacts electronically to ensure that such entities have appropriate plans to remediate Year 2000 Compliance issues where such entities' systems interface with Borrower's systems. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Foothill shall otherwise consent in writing, Borrower shall do all of the following: 6.1 Accounting System. Maintain one or more systems of accounting that enable Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Foothill. Borrower also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 Collateral Reporting. Provide Foothill with the following documents at the following times in form satisfactory to Foothill: (a) on a monthly basis and, in any event, by no later than the 25th day of each month during the term of this Agreement (or, in the event that Borrower's then Availability is less than $10,000,000, on such more frequent basis as Foothill may require), a monthly accounts receivable roll-forward report and a detailed calculation of the Borrowing Base as of such date; (b) on a monthly basis and, in any event, by no later than the 25th day of each month during the term of this Agreement, a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Foothill; (c) on such frequency (if any) as Foothill reasonably may require, a listing of Borrower's accounts payable, by vendor; (d) [intentionally omitted]; (e) upon Foothill's reasonable request, copies of invoices in connection with the Accounts, credit memos, and remittance advices and reports in connection with the Accounts and for Inventory and Equipment acquired by Borrower, purchase orders and invoices; (f) in the event that Borrower's then Availability is less than $10,000,000, on such frequent basis as Foothill may require, a sales journal, collection journal, and credit register since the last such schedule and copies of deposit slips, shipping and delivery documents in connection with the Accounts and for Inventory and Equipment acquired by Borrower; (g) on a quarterly basis, a detailed list of Borrower's customers; (h) on a monthly basis, a calculation of the Dilution for the prior month; (i) on a quarterly basis, a detailed report specifying each Permitted Toehold Investment, including the book value and market value thereof; (j) (1) on a monthly basis, with respect to each Permitted Appraised Asset Disposition with respect to which no replacement Equipment was purchased in respect thereof, a detailed report specifying each such Permitted Appraised Assets Disposition consummated since the last such report, and (2) with respect to each Permitted Appraised Asset Disposition with respect to which replacement Equipment was purchased in respect thereof, as requested by Foothill, a detailed report specifying each Permitted Appraised Assets Disposition and Equipment replacement in respect thereof consummated since the last such report; (k) on a quarterly basis, a detailed report specifying the aggregate amount of Permitted Subsidiary Loans and Capital Contributions made by Borrower to date during the then current calendar year and the aggregate amount of Indebtedness then outstanding and permitted under Section 7.1(b), and (l) such other reports as to the Collateral or the financial condition of Borrower as Foothill may request from time to time. Original sales invoices evidencing daily sales shall be mailed by Borrower to each Account Debtor and, at Foothill's direction if there is a Triggering Event, the invoices shall indicate on their face that the Account has been assigned to Foothill and that all payments are to be made directly to Foothill. 6.3 Financial Statements, Reports, Certificates. Deliver to Foothill: (a) as soon as available, but in any event within 30 days after the end of each month during each of Borrower's fiscal years, a company prepared balance sheet, income statement, and statement of cash flow covering Borrower's operations during such period, provided, however, that with respect to any such month that is the last month of any of Borrower's fiscal quarters, Borrower shall have until the date that is the earlier of (i) the date that is 5 Business Days after the date on which Borrower makes its quarterly earnings release with respect to such fiscal quarter, or (ii) the date that is 45 days after the end of such month, to deliver such balance sheet, income statement, and statement of cash flows to Foothill; and (b) as soon as available, but in any event within 120 days after the end of each of Borrower's fiscal years, financial statements of Borrower for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Foothill and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP, together with a certificate of such accountants addressed to Foothill stating that such accountants do not have knowledge of the existence of any Default or Event of Default. Such audited financial statements shall include a balance sheet, profit and loss statement, and statement of cash flow and, if prepared, such accountants' letter to management. In addition to the financial statements referred to above, Borrower agrees to deliver such other information relative to Borrower and any Subsidiaries or Affiliates thereof as Foothill reasonably may request and such financial statements on a consolidating basis so as to present Borrower and, solely to the extent available, each such related entity, separately. Together with the above, Borrower also shall deliver to Foothill Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Borrower with the Securities and Exchange Commission, if any, within 5 Business Days of the date that the same are filed, or any other information that is provided by Borrower to its shareholders, and any other report reasonably requested by Foothill relating to the financial condition of Borrower. Each month, together with the financial statements provided pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate signed by a Certifying Officer to the effect that: (i) all financial statements delivered or caused to be delivered to Foothill hereunder have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and fairly present the financial condition of Borrower, (ii) the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (iii) for each month that also is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in Section 7.20, and (iv) on the date of delivery of such certificate to Foothill there does not exist any condition or event that constitutes a Default or Event of Default (or, in the case of clauses (i), (ii), or (iii), to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto). Borrower shall have issued written instructions to its independent certified public accountants authorizing them to communicate with Foothill and to release to Foothill whatever financial information concerning Borrower that Foothill may request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties to deliver to Foothill, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Foothill any information they may have regarding Borrower's business affairs and financial conditions. Each year, together with the financial statements provided pursuant to Section 6.3(b), Borrower shall deliver to Foothill a certificate signed by a Certifying Officer specifying, as to each Foreign Subsidiary of Borrower, the amounts of assets and liabilities and stockholder's equity of such Foreign Subsidiary as of the end of the year then ended. Borrower hereby agrees that, in respect of any Foreign Subsidiary whose capitalization has materially improved (in Foothill's reasonable determination) and upon Foothill's reasonable request therefor, Borrower shall execute and deliver to Foothill a supplement to the Pledge Agreement pursuant to which Borrower shall pledge to Foothill all of Borrower's right, title, and interest in and to such Foreign Subsidiary's equity securities (other than the Excluded Foreign Portion) and deliver to Foothill all Negotiable Collateral, if any, in respect of same, unless and to the extent that doing so would, in any material respect, violate applicable law or cause a breach or default under any material contract, agreement, or arrangement binding on such Subsidiary. 6.4 Tax Returns. Deliver to Foothill copies of each of Borrower's future federal income tax returns, and any amendments thereto, within 30 days of the filing thereof with the Internal Revenue Service. 6.5 Guarantor Reports. Cause any guarantor of any of the Obligations to deliver its annual financial statements at the time when Borrower provides its audited financial statements to Foothill and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.6 Returns. Cause returns and allowances, if any, as between Borrower and its Account Debtors to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with, upon reasonable request, a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Foothill consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the appropriate amount to such Account Debtor. 6.7 Title to Equipment. Upon Foothill's request after the occurrence of an Event of Default, Borrower immediately shall deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment; provided, however, that the foregoing shall not be deemed to prevent Permitted Dispositions to the extent otherwise permitted hereunder. 6.8 Maintenance of Equipment. Maintain the Equipment in good operating condition and repair (ordinary wear and tear excepted), and make all necessary replacements thereto so that the value and operating efficiency thereof shall at all times be maintained and preserved. Other than those items of Equipment that constitute fixtures on the Original Closing Date, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.9 Taxes. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its property to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower shall make due and timely payment or deposit of all such federal, state, and local taxes, assessments, or contributions required of it by law, and will execute and deliver to Foothill, on demand, appropriate certificates attesting to the payment thereof or deposit with respect thereto. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Foothill with proof satisfactory to Foothill indicating that Borrower has made such payments or deposits. 6.10 Insurance. (a) At its expense, keep the Personal Property Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as are ordinarily insured against by other owners in similar businesses. Borrower also shall maintain business interruption, public liability, product liability, and property damage insurance relating to Borrower's ownership and use of the Personal Property Collateral, as well as insurance against larceny, embezzlement, and criminal misappropriation. (b) At its expense, obtain and maintain (i) insurance of the type necessary to insure the Improvements and Chattels (as such terms are defined in the Mortgages), for the full replacement cost thereof, against any loss by fire, lightning, windstorm, hail, explosion, aircraft, smoke damage, vehicle damage, earthquakes, elevator collision, and other risks from time to time included under "extended coverage" policies, in such amounts as Foothill may require, but in any event in amounts sufficient to prevent Borrower from becoming a co-insurer under such policies, (ii) combined single limit bodily injury and property damages insurance against any loss, liability, or damages on, about, or relating to each parcel of Real Property Collateral, in an amount satisfactory to Foothill; (iii) business rental insurance covering annual receipts for a 12 month period for each parcel of Real Property Collateral; and (iv) insurance for such other risks as Foothill may require. Replacement costs, at Foothill's option, may be redetermined by an insurance appraiser, satisfactory to Foothill, not more frequently than once every 12 months at Borrower's cost. (c) All such policies of insurance shall be in such form, with such companies, and in such amounts as may be reasonably satisfactory to Foothill. All hazard insurance and such other insurance as Foothill shall specify, shall contain a Form 438BFU mortgagee endorsement, or an equivalent endorsement satisfactory to Foothill, showing Foothill as sole loss payee thereof, and shall contain a waiver of warranties. Every policy of insurance referred to in this Section 6.10 shall contain an agreement by the insurer that it will not cancel such policy except after 30 days prior written notice to Foothill and that any loss payable thereunder shall be payable notwithstanding any act or negligence of Borrower or Foothill which might, absent such agreement, result in a forfeiture of all or a part of such insurance payment and notwithstanding (i) occupancy or use of the Real Property Collateral for purposes more hazardous than permitted by the terms of such policy, (ii) any foreclosure or other action or proceeding taken by Foothill pursuant to the Mortgages upon the happening of an Event of Default, or (iii) any change in title or ownership of the Real Property Collateral. Borrower shall deliver to Foothill certified copies of such policies of insurance and evidence of the payment of all premiums therefor. (d) Original policies or certificates thereof satisfactory to Foothill evidencing such insurance shall be delivered to Foothill at least 10 days prior to the expiration of the existing or preceding policies. Borrower shall give Foothill prompt notice of any loss in excess of $250,000 covered by such insurance, and, upon the occurrence and during the continuance of an Event of Default, Foothill shall have the right to adjust any loss. Foothill shall have the exclusive right to adjust all losses payable under any such insurance policies without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy including the insurance policies mentioned above, shall be paid over to Foothill to be applied at the option of Foothill either to the prepayment of the Obligations without premium, in such order or manner as Foothill may elect, or shall be disbursed to Borrower under stage payment terms satisfactory to Foothill for application to the cost of repairs, replacements, or restorations. All repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. Upon the occurrence of an Event of Default, Foothill shall have the right to apply all prepaid premiums to the payment of the Obligations in such order or form as Foothill shall determine. (e) Borrower shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this Section 6.10, unless Foothill is included thereon as named insured with the loss payable to Foothill under a standard California 438BFU (NS) Mortgagee endorsement, or its local equivalent. Borrower immediately shall notify Foothill whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and originals of such policies immediately shall be provided to Foothill. 6.11 No Setoffs or Counterclaims. Make payments hereunder and under the other Loan Documents by or on behalf of Borrower without setoff or counterclaim and free and clear of, and without deduction or withholding for or on account of, any federal, state, or local taxes. 6.12 Location of Inventory and Equipment. Keep the Inventory and Equipment only at the locations identified on Schedule 6.12; provided, however, that Borrower may amend Schedule 6.12 so long as such amendment occurs by written notice to Foothill not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests in such assets and also provides to Foothill a Collateral Access Agreement. 6.13 Compliance with Laws. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not have and could not reasonably be expected to have a Material Adverse Change. 6.14 Employee Benefits. (a) Promptly, and in any event within 10 Business Days after Borrower or any of its Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Change, a written statement of a Certifying Officer of Borrower describing such ERISA Event and any action that is being taken with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Benefit Plan of which it is the plan sponsor, (ii) promptly, and in any event within 3 Business Days after the filing thereof with the IRS, a copy of each funding waiver request filed with respect to any Benefit Plan and all communications received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect to such request, and (iii) promptly, and in any event within 3 Business Days after receipt by Borrower, any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to administer a Benefit Plan, copies of each such notice. (b) Cause to be delivered to Foothill, upon Foothill's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of Borrower or its Subsidiaries; (ii) the most recent determination letter issued by the IRS with respect to each Benefit Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Benefit Plan; (iv) all actuarial reports prepared for the last three plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Borrower or its Subsidiaries under any Retiree Health Plan. 6.15 Leases. Pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. To the extent that Borrower fails timely to make payment of such rents and other amounts payable when due under its leases, Foothill shall be entitled, in its discretion, to reserve an amount equal to such unpaid amounts against the Borrowing Base. 6.16 Year 2000 Compliance. Borrower will be Year 2000 Compliant in all material respects by December 31, 1999. 6.17 Copyright Registrations. As soon as practicable but in any event no less frequently than once every 6 months (or such more frequent basis as Foothill reasonably may require), unless Foothill otherwise agrees in writing, Borrower shall: (a) cause all copyrights in commercially significant software owned by Borrower (other than Exempt Copyrights) that are not already the subject of a registration with the United States Copyright Office (or an application therefor diligently prosecuted) to be registered with the United States Copyright Office in a manner sufficient to impart constructive notice of Borrower's ownership thereof; and (b) cause to be prepared, executed, and delivered to Foothill, with sufficient time to permit Foothill to record no later than the last Business Day within 10 days following the date that such copyrights have been registered or an application for registration has been filed, a Copyright Security Agreement or amendment thereto with supplemental schedules in respect thereof reflecting the security interest of Foothill in all such new copyrights in commercially significant software (other than Exempt Copyrights, which, although subject to the security interest of Foothill, shall not be required to be registered until such time, if any, as they cease to be Exempt Copyrights), which supplemental schedules shall be in form and content suitable for registration with the United States Copyright Office so as to give constructive notice, when so registered, of the transfer by Borrower to Foothill of a security interest in such copyrights. 6.18 Sale or Other Disposition of Borrower's Hardware Business. Within 60 days after the Closing Date Borrower shall retain the services of an investment banking firm to advise Borrower on the sale or other disposition of Borrower's Hardware Business. Within 120 days after the Closing Date, Borrower and such investment banking firm shall develop and deliver to Foothill a plan for the sale or other disposition of Borrower's Hardware Business, which plan (including, without limitation, the period of time within which to complete such sale or other disposition) shall be acceptable to Foothill in its sole discretion. Borrower shall complete the sale or other disposition of Borrower's Hardware Business in accordance with and within the period of time contained in such plan. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without Foothill's prior written consent: 7.1 Indebtedness. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement, together with Indebtedness to issuers of letters of credit that are the subject of L/C Guarantees and Indebtedness to F/X Bank under Permitted F/X Contracts (which Indebtedness outstanding as of the Closing Date is set forth in section (a) of Schedule 7.1); (b) (i) unsecured guarantees of indebtedness of Borrower's Subsidiaries, (ii) unsecured back-to-back letters of credit or letter of credit guarantees to issuers of underlying letters of credit, the account parties of which are Borrower's Foreign Subsidiaries, that are not the subject of L/C Guarantees, and (iii) guarantees of indebtedness of Z/I Imaging Corporation, a Delaware corporation, in an aggregate amount at any one time outstanding not to exceed $1,800,000, which guarantee may be secured solely by a letter of credit (which Indebtedness outstanding as of the Closing Date is set forth in section (b) of Schedule 7.1); provided, however, that the aggregate amount of such Indebtedness at any one time outstanding permitted under this Section 7.1(b) shall not exceed $50,000,000; (c) Indebtedness set forth in section (c) of Schedule 7.1; (d) unsecured Indebtedness of Borrower owing to one or more of its Subsidiaries; provided, however, that upon the request of Foothill, Borrower shall cause each of its Subsidiaries that is a holder of such Indebtedness to execute and deliver to Foothill a subordination agreement, in form and substance satisfactory to Foothill, in respect of such Indebtedness; (e) unsecured Indebtedness evidenced by Interest Rate Agreements and Currency Protection Agreements entered into by Borrower in the ordinary course of its business consistent with past practices and entered into in connection with the operational needs of Borrower's business and not for speculative purposes; (f) Indebtedness secured by Permitted Liens; and (g) refinancings, renewals, or extensions of Indebtedness permitted under clauses (c), (e), and (f) of this Section 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not materially impair the prospects of repayment of the Obligations by Borrower, (ii) the net cash proceeds of such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that Indebtedness that is refinanced was subordinated in right of payment to the Obligations, then the subordination terms and conditions of the refinancing Indebtedness must be at least as favorable to Foothill as those applicable to the refinanced Indebtedness. 7.2 Liens. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its property or assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced under Section 7.1(g) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). Without limiting the generality of the foregoing, Borrower agrees not to create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to the equity securities of any Subsidiary of Borrower and the equity securities evidencing any Permitted Toehold Investment (except for Liens thereon in favor of Foothill and Liens expressly permitted hereunder on the equity securities of IG Australia). 7.3 Restrictions on Fundamental Changes. (a) Other than the Restructuring Transactions, enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its capital stock; (b) liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution); or (c) except for Permitted Dispositions, convey, sell, assign, lease, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its property or assets. 7.4 Disposal of Assets. Except for Permitted Dispositions and Restructuring Transactions, make any Asset Disposition. 7.5 Change Name. Change Borrower's name, FEIN, corporate structure (within the meaning of Section 9402(7) of the Code), or identity, or add any new fictitious name. 7.6 [intentionally omitted]. 7.7 Nature of Business. Make any change in the principal nature of Borrower's business. 7.8 Prepayments and Amendments. (a) Except in connection with a refinancing permitted by Section 7.1(g), prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness owing to any third Person, other than the Obligations in accordance with this Agreement, and (b) Directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections 7.1(b), (c), (d), (e), or (f), except for any amendment, modification, waiver, or consent the effect of which would be to: (i) extend the maturity of all or part of the remaining scheduled payments of principal outstanding thereunder; (ii) make any covenant or default contained therein less stringent; (iii) decrease the interest rate or interest rate margin or the default interest rate or interest rate margin, or both; (iv) amends or modify any other terms thereof so long as the amendments or modifications referenced in this clause (iv) are not in the aggregate materially more expensive, burdensome, or otherwise adverse to Borrower or Foothill. 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 Consignments. Consign any Inventory or sell any Inventory to any Person that is not an Affiliate of Borrower on bill and hold, sale or return, sale on approval, or other conditional terms of sale; provided, however, that the foregoing shall not prevent Borrower from consigning Inventory with a value not to exceed $4,000,000 at any one time outstanding, in the ordinary course of Borrower's business, consistent with past practices, so long as at the time of any such consignment, Borrower shall take such steps as may be necessary to ensure that such consigned Inventory is not subject to the claims of the consignees' creditors or that Borrower has priority over any perfected security interests in the inventory of such consignee. 7.11 Distributions. Make any distribution or declare or pay any dividends (in cash or other property, other than capital stock) on, or purchase, acquire, redeem, or retire any of Borrower's capital stock, of any class, whether now or hereafter outstanding. 7.12 Accounting Methods. Modify or change significantly its method of accounting or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or Borrower's financial condition. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Foothill pursuant to or in accordance with this Agreement, and agrees that Foothill may contact directly any such accounting firm or service bureau in order to obtain such information. 7.13 Investments. Except for Permitted Investments, Permitted Dispositions, and the Restructuring Transactions directly or indirectly make, acquire, or incur any liabilities (including contingent obligations) for or in connection with (a) the acquisition of the securities (whether debt or equity) of, or other interests in, a Person, (b) loans, advances, capital contributions, or transfers of property to a Person, or (c) the acquisition of all or substantially all of the properties or assets of a Person. 7.14 Transactions with Affiliates. Except for Permitted Investments and the Restructuring Transactions, directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Foothill, and that are no less favorable to Borrower than would be obtained in a comparable arm's length transaction with a non-Affiliate. 7.15 Suspension. Suspend or go out of a substantial portion of its business. 7.16 [intentionally omitted]. 7.17 Use of Proceeds. Use the proceeds of the Advances and the Term Loan made hereunder for any purpose other than, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees. Relocate its chief executive office to a new location without providing 30 days prior written notification thereof to Foothill and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests and also provides to Foothill a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Foothill's prior written consent. 7.19 No Prohibited Transactions Under ERISA. Directly or indirectly: (a) engage, or permit any Subsidiary of Borrower to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor; (b) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC), whether or not waived; (c) fail, or permit any Subsidiary of Borrower to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (d) terminate, or permit any Subsidiary of Borrower to terminate, any Benefit Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of ERISA; (e) fail, or permit any Subsidiary of Borrower to fail, to make any required contribution or payment to any Multiemployer Plan; (f) fail, or permit any Subsidiary of Borrower to fail, to pay any required installment or any other payment required under Section 412 of the IRC on or before the due date for such installment or other payment; (g) amend, or permit any Subsidiary of Borrower to amend, a Plan resulting in an increase in current liability for the plan year such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (h) withdraw, or permit any Subsidiary of Borrower to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA; which, individually or in the aggregate, results in or reasonably would be expected to result in a claim against or liability of Borrower, any of its Subsidiaries or any ERISA Affiliate in excess of $1,500,000. 7.20 Financial Covenants. Fail to maintain: (a) Current Ratio. A ratio of Consolidated Current Assets divided by Consolidated Current Liabilities of at least 1.0:1.0, measured on a fiscal quarter-end basis; and (b) Net Worth. Net Worth, as of the end of each fiscal quarter set forth below of at least the minimum amount corresponding thereto: Fiscal Quarter Ending Minimum Net Worth December 31, 1999 $235,000,000 March 31, 2000 $216,000,000 June 30, 2000 and as $200,000,000 of the last day of each fiscal quarter thereafter 7.21 Capital Expenditures. Make capital expenditures in any fiscal year in excess of $50,000,000. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: 8.1 If Borrower fails to pay when due and payable or when declared due and payable, any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Foothill, reimbursement of Foothill Expenses, or other amounts constituting Obligations); 8.2 (a) If Borrower fails or neglects to perform, keep, or observe, in any material respect, any term, provision, condition, covenant, or agreement contained in Sections 6.2 (Collateral Reports) or 6.3 (Financial Statements) of this Agreement and such failure continues for a period of five (5) days from the date Foothill sends Borrower telephonic or written notice of such failure or neglect; (b) If Borrower fails or neglects to perform, keep, or observe, in any material respect, any term, provision, condition, covenant, or agreement contained in Sections 6.4 (Tax Returns), 6.5 (Guarantor Reports), 6.7 (Title to Equipment), 6.12 (Location of Inventory and Equipment), 6.13 (Compliance with Laws), 6.14 (Employee Benefits), or 6.15 (Leases) of this Agreement and such failure continues for a period of fifteen (15) days from the date of such failure or neglect; (c) If Borrower fails or neglects to perform, keep, or observe, in any material respect, any term, provision, condition, covenant, or agreement contained in Sections 6.1 (Accounting System), 6.6 (Returns), or 6.8 (Maintenance of Equipment) of this Agreement and such failure continues for a period of fifteen (15) days from the date Foothill sends Borrower telephonic or written notice of such failure or neglect; or (d) If Borrower fails or neglects to perform, keep, or observe, in any material respect, any other term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Foothill (other than any such term, provision, condition, covenant, or agreement that is the subject of another provision of this Section 8); 8.3 If there is a Material Adverse Change; 8.4 If any material portion of Borrower's properties or assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any third Person; 8.5 If an Insolvency Proceeding is commenced by Borrower; 8.6 If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) Borrower consents to the institution of the Insolvency Proceeding against it; (b) the petition commencing the Insolvency Proceeding is not timely controverted; (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Foothill shall be relieved of its obligation to extend credit hereunder; (d) an interim trustee is appointed to take possession of all or a substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7 If Borrower is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.8 (a) If a notice of Lien, levy, or assessment for more than $1,500,000 is filed of record with respect to any of Borrower's properties or assets by the United States, or if any taxes or debts owing for an amount in excess of $1,500,000 at any time hereafter to the United States becomes a lien, whether choate or otherwise, upon any of Borrower's properties or assets; provided, however, that Foothill shall be entitled to create a reserve against the Borrowing Base in an amount sufficient to discharge such lien, levy, or assessment and any and all penalties or interest payable in connection therewith; or (b) If a judgment or other claim for an amount in excess of $1,500,000 becomes a Lien or encumbrance upon any material portion of Borrower's properties or assets; 8.9 If there is a default in any material agreement to which Borrower is a party with one or more third Persons and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder or to terminate the subject agreement; 8.10 If Borrower makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to Foothill by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn; or 8.12 If the obligation of M&S, IG Delaware, or IPS under any Loan Document to which it is a party is limited or terminated by operation of law or by such Person thereunder, or any such Person becomes the subject of an Insolvency Proceeding. 9. FOOTHILL'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the continuation, of an Event of Default Foothill may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and Foothill; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Foothill, but without affecting Foothill's rights and security interests in the Personal Property Collateral or the Real Property Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Foothill considers advisable, and in such cases, Foothill will credit Borrower's Loan Account with only the net amounts received by Foothill in payment of such disputed Accounts after deducting all Foothill Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for Foothill, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Foothill; (f) Without notice to or demand upon Borrower, make such payments and do such acts as Foothill considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Personal Property Collateral if Foothill so requires, and to make the Personal Property Collateral available to Foothill as Foothill may designate. Borrower authorizes Foothill to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or Lien that in Foothill's determination appears to conflict with its security interests and to pay all expenses incurred in connection therewith. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Foothill a license to enter into possession of such premises and to occupy the same, without charge, for up to 120 days in order to exercise any of Foothill's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived by Borrower), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of Section 9505 of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Foothill (including any amounts received in the Lockbox Accounts), or (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Foothill; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Borrower hereby grants to Foothill a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to Foothill's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including any of Borrower's premises) as Foothill determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Foothill shall give notice of the disposition of the Personal Property Collateral as follows: (i) Foothill shall give the applicable Borrower and each holder of a security interest in the Personal Property Collateral who has filed with Foothill a written request for notice, a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, then the time on or after which the private sale or other disposition is to be made; (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least 5 days before the date fixed for the sale, or at least 5 days before the date on or after which the private sale or other disposition is to be made; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than Borrower claiming an interest in the Personal Property Collateral shall be sent to such addresses as they have furnished to Foothill; (iii) If the sale is to be a public sale, Foothill also shall give notice of the time and place by publishing a notice one time at least 5 days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (l) Foothill may credit bid and purchase at any public sale; (m) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Foothill to Borrower; and (n) Foothill may, at its option, require Borrower to deposit with Foothill funds in an amount equal to the F/X Line Reserve (if any), and, if Borrower fails to make such deposit promptly, Foothill may advance such amount as an Advance (whether or not an Overadvance is created thereby). Any such deposit or the proceeds of such Advance shall be held by Lender as a reserve to fund indemnity obligations owing to F/X Bank under the F/X Line. At such time (if ever) as all such indemnity obligations have been paid or terminated, any amounts remaining in such reserve shall be applied against any outstanding Obligations or, if all Obligations have been indefeasibly paid in full, returned to Borrower. 9.2 Remedies Cumulative. Foothill's rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Foothill shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Foothill of one right or remedy shall be deemed an election, and no waiver by Foothill of any Event of Default shall be deemed a continuing waiver. No delay by Foothill shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent that Foothill determines that such failure by Borrower could result in a Material Adverse Change, in its discretion and without prior notice to Borrower, Foothill may do any or all of the following: (a) make payment of the same or any part thereof; (b) set up such reserves in Borrower's Loan Account as Foothill deems necessary to protect Foothill from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type described in Section 6.10, and take any action with respect to such policies as Foothill deems prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses. Any such payments made by Foothill shall not constitute an agreement by Foothill to make similar payments in the future or a waiver by Foothill of any Event of Default under this Agreement. Foothill need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees at any time held by Foothill on which Borrower may in any way be liable. 11.2 Foothill's Liability for Collateral. So long as Foothill complies with its obligations, if any, under Section 9207 of the Code, Foothill shall not in any way or manner be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage thereto occurring or arising in any manner or fashion from any cause; (c) any diminution in the value thereof; or (d) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person. All risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold Foothill, each Participant, and each of their respective officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them in connection with or as a result of or related to the execution, delivery, enforcement, performance, and administration of this Agreement and any other Loan Documents or the transactions contemplated herein, and with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have no obligation to any Indemnified Person under this Section 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first- class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, or telefacsimile to Borrower or to Foothill, as the case may be, at its address set forth below: If to Borrower: INTERGRAPH CORPORATION One Madison Industrial Park Huntsville, Alabama 35894-0001 Mail Stop HQ 1200 Attn: Mr. Eugene H. Wrobel Fax No. 256.730.2742 with copies to: BALCH & BINGHAM 1710 Sixth Avenue North Birmingham, Alabama 35201 Attn: John F. Mandt, Esq. Fax No. 205.226.8799 If to Foothill: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard Suite 1500 Los Angeles, California 90025-3333 Attn: Business Finance Division Manager Fax No. 310.478.9788 with copies to: BROBECK, PHLEGER & HARRISON LLP 550 South Hope Street Los Angeles, California 90071 Attn: John Francis Hilson, Esq. Fax No. 213.745.3345 The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other. All notices or demands sent in accordance with this Section 12, other than notices by Foothill in connection with Sections 9504 or 9505 of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by Foothill in connection with Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted telefacsimile or other similar method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13. BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. DESTRUCTION OF BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to Foothill may be destroyed or otherwise disposed of by Foothill 4 months after they are delivered to or received by Foothill, unless the applicable Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. GENERAL PROVISIONS. 15.1 Effectiveness. This Agreement shall be binding and deemed effective when executed by Borrower and Foothill. 15.2 Successors and Assigns. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; provided, however, that Borrower may not assign this Agreement or any rights or duties hereunder without Foothill's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Foothill shall release Borrower from its Obligations. Foothill may assign this Agreement and its rights and duties hereunder and no consent or approval by Borrower is required in connection with any such assignment. Foothill reserves the right to sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in Foothill's rights and benefits hereunder. In connection with any such assignment or participation, Foothill may disclose all documents and information which Foothill now or hereafter may have relating to Borrower or Borrower's business, but such documents and information shall be subject to the confidentiality provisions of Section 15.10. To the extent that Foothill assigns its rights and obligations hereunder to a third Person, Foothill thereafter shall be released from such assigned obligations to the relevant Borrower and such assignment shall effect a novation between the relevant Borrower and such third Person. 15.3 Section Headings. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each section applies equally to this entire Agreement. 15.4 Interpretation. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Foothill or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. 15.5 Severability of Provisions. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 15.6 Amendments in Writing. This Agreement can only be amended by a writing signed by both Foothill and Borrower. 15.7 Counterparts; Telefacsimile Execution. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. 15.8 Revival and Reinstatement of Obligations. If the incurrence or payment of the Obligations by Borrower or any guarantor of the Obligations or the transfer by either or both of such parties to Foothill of any property of either or both of such parties should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, and other voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if Foothill is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Foothill is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Foothill related thereto, the liability of Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 15.9 Integration. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 15.10 Confidentiality. Foothill agrees to treat all material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrower that in any event Foothill may make disclosures (a) to counsel for and other advisors, accountants, and auditors to Foothill, (b) reasonably required by any bona fide potential or actual assignee, transferee, or participant in connection with any contemplated or actual assignment or transfer by Foothill of an interest herein or any participation interest in Foothill's rights hereunder, (c) of information that has become public by disclosures made by Persons other than Foothill, or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, however, that, unless prohibited by applicable law, statute, regulation, or court order, Foothill shall notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof. [Remainder of page left intentionally blank.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. INTERGRAPH CORPORATION, a Delaware corporation By /s/ John Wilhoite ------------------------------ Title: Executive Vice President -------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By /s/ Victor Barwig ------------------------------ Title: Vice President -------------------------- EXHIBIT C-1 (form of Compliance Certificate) [on Borrower's letterhead] To: Foothill Capital Corporation, as Agent 11111 Santa Monica Boulevard, Suite 1500 Los Angeles, California 90025-3333 Attn: Business Finance Division Manager Re: Compliance Certificate dated ___________, 199_ Ladies and Gentlemen: Reference is made to that certain Amended and Restated Loan and Security Agreement, dated as of November 30, 1999 (as the same may from time to time be amended, modified, supplemented or restated, the "Loan Agreement") by and between Intergraph Corporation, a Delaware corporation ("Borrower"), and Foothill Capital Corporation, a California Corporation ("Foothill"). The initially capitalized terms used in this Compliance Certificate have the meanings set forth in the Loan Agreement unless specifically defined herein. Pursuant to Section 6.3 of the Loan Agreement, the undersigned officer of Borrower hereby certifies that: 1. The financial information of Borrower furnished in Schedule 1 attached hereto, has been prepared in accordance with GAAP (except for year-end adjustments and the lack of footnotes, in the case of financial statements delivered under Section 6.3(a) of the Loan Agreement) and fairly presents the financial condition of Borrower. 2. Such officer has reviewed the terms of the Loan Agreement and has made, or caused to be made under his/her supervision, a review in reasonable detail of the transactions and condition of Borrower during the accounting period covered by financial statements delivered pursuant to Section 6.3 of the Loan Agreement. 3. Such review has not disclosed the existence on and as of the date hereof, and the undersigned does not have knowledge of the existence as of the date hereof of any event or condition that constitutes a Default or Event of Default, except for such conditions or events listed on Schedule 2 attached hereto, specifying the nature and period of existence thereof and what action Borrower has taken, is taking or proposes to take with respect thereto. 4. Borrower is in timely compliance with all representations, warranties, and covenants set forth in the Loan Agreement and the other Loan Documents, except as set forth on Schedule 2 attached hereto. Without limiting the generality of the foregoing, Borrower is in compliance with the covenants contained in Sections 7.20 and 7.21 of the Loan Agreement as demonstrated on Schedule 3 hereof. IN WITNESS WHEREOF, this Compliance Certificate is executed by the undersigned this _____ day of _______________, _________. Intergraph Corporation A Delaware corporation By:_________________________ Name: Title: Exhibit F-1 (TO BE ATTACHED) Exhibit F-2 F/X RESERVE REDUCTION CERTIFICATE Today's date:__________________ (1) FROM INTERGRAPH TO: [NORWEST BANK MINNESOTA] ATTENTION: FACSIMILE: (2) FROM [NORWEST] TO: FOOTHILL CAPITAL CORPORATION ATTENTION: FACSIMILE: (3) FROM FOOTHILL TO INTERGRAPH AND NORWEST: Reference hereby is made to that certain Amended and Restated Loan and Security Agreement, dated as of November __, 1999 (as amended, supplemented, and modified, the "Loan Agreement"), between Foothill Capital Corporation ("Foothill") and Intergraph Corporation ("Borrower"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the loan Agreement. Pursuant to Section 2.4 of the Loan Agreement, Borrower hereby requests a reduction in the F/X Reserve from the current amount of $___________ to the new amount of $___________, such reduction to become effective on ______________________, ______. INTERGRAPH CORPORATION By Title: Facimile: Attn: FOOTHILL CAPITAL CORPORATION By Title: [NORWEST BANK, Minnesota, N.A.] By Title: Exhibit F-3 F/X RESERVE INCREASE CERTIFICATE -------------------------------- Today's date:__________________ (1) FROM INTERGRAPH TO: FOOTHILL CAPITAL CORPORATON ATTENTION: FACSIMILE: (2) FROM FOOTHILL TO: [NORWEST BANK MINNESOTA] ATTENTION: FACSIMILE: (3) FROM [NORWEST] TO INTERGRAPH AND FOOTHILL: Reference hereby is made to that certain Amended and Restated Loan and Security Agreement, dated as of November __, 1999 (as amended, restated, supplemented, and modified from time to time, the "Loan Agreement"), between Foothill Capital Corporation ("Foothill") and Intergraph Corporation ("Borrower"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the loan Agreement. Pursuant to Section 2.4 of the Loan Agreement, Borrower hereby requests an increase in the F/X Reserve from the current amount of $___________ to the new amount of $___________, such increase to become effective on ______________________, ______. INTERGRAPH CORPORATION By Title: Facimile: Attn: FOOTHILL CAPITAL CORPORATION By Title: [NORWEST BANK, Minnesota, N.A.] By Title: EX-13 6 Five Year Financial Summary
- ---------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------- (In thousands except per share amounts) Revenues $914,880 $1,005,007 $1,095,625 $1,065,806 $1,097,978 Nonrecurring operating charges 15,596 15,343 1,095 10,545 6,040 Loss from operations (67,440) (100,998) (38,242) (52,556) (54,145) Gains on sales of assets 11,505 112,533 4,858 11,173 6,493 Loss from continuing operations (78,561) (6,728) (53,490) (54,246) (45,348) Discontinued operations (1) 6,984 (12,906) (16,747) (14,866) --- Net loss (71,577) (19,634) (70,237) (69,112) (45,348) Net loss from continuing operations per share, basic and diluted ( 1.60) ( .14) ( 1.11) ( 1.15) ( .98) Net loss per share, basic and diluted ( 1.46) ( .41) ( 1.46) ( 1.46) ( .98) Working capital 168,307 216,520 204,534 230,804 261,140 Total assets 584,944 695,974 720,989 756,347 826,045 Total debt 62,926 83,213 104,665 65,644 69,541 Shareholders' equity $276,700 $ 355,332 $ 368,783 $ 447,263 $ 504,064
(1) On October 31, 1999, the Company sold its VeriBest, Inc. operating segment. Accordingly, the gain on sale as well as the results of operations for this operating segment have been classified as discontinued operations in the consolidated statements of operations from the date of the segment's inception in January 1996 through the date of sale. VeriBest provided software design tools and services to the electronics design automation market. See Note 4 of Notes to Consolidated Financial Statements contained in this annual report for a complete discussion of this transaction and its impact on the Company's results of operations and financial position. Information contained in this 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Summary. In fourth quarter 1999, the Company sold its VeriBest operating segment. Accordingly, the Company's consolidated statements of operations for the three years ended December 31, 1999 reflect VeriBest's business as a discontinued operation. As such, except where noted otherwise, the following discussion of the Company's results of operations addresses only results of continuing operations. VeriBest's results of operations for the three years ended December 31, 1999 are discussed separately in "Discontinued Operation" below. The following summarized financial data sets forth the results of operations of the Company for each year in the three year period ended December 31, 1999. The complete consolidated financial statements of the Company, including footnote disclosures, are presented on pages 33 to 56 of this annual report. - ---------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------- (In millions except per share amounts) Revenues $ 915 $1,005 $1,096 Cost of revenues 625 694 709 - ---------------------------------------------------------------------------- Gross profit 290 311 387 Operating expenses 342 397 424 Nonrecurring operating charges 15 15 1 - ---------------------------------------------------------------------------- Loss from operations ( 67) ( 101) ( 38) Interest expense ( 6) ( 8) ( 7) Arbitration settlements ( 9) --- ( 6) Gains on sales of assets 12 113 5 Other income (expense) - net ( 3) ( 5) ( 3) - ---------------------------------------------------------------------------- Loss from continuing operations before income taxes ( 73) ( 1) ( 49) Income tax expense ( 6) ( 6) ( 4) - ---------------------------------------------------------------------------- Loss from continuing operations ( 79) ( 7) ( 53) Discontinued operation (VeriBest) 7 ( 13) ( 17) - ---------------------------------------------------------------------------- Net loss $( 72) $( 20) $( 70) ============================================================================ Net loss from continuing operations per share, basic and diluted $(1.60) $( .14) $(1.11) Net loss per share, basic and diluted $(1.46) $( .41) $(1.46) ============================================================================ In 1993, the Company began the process of transformation of its proprietary, closed-system product offerings to the open computing environment of products based on Intel Corporation hardware and Microsoft Corporation software. The dedication of significant Company resources to hardware, software, and system implementation for this new environment contributed substantially to the Company's operating losses for the years 1993 through 1996. For hardware implementation, the Company chose to use only Intel processors and to focus its efforts and image creation on its core capabilities, specifically very high performance computational and graphics capabilities. This high-end market in the Windows NT operating system environment is supported only by Intel-based hardware products. The Company expected that its four year hardware development effort and investment in the high-end graphics market would result in substantially increased revenues and profits in 1997, but these benefits were not realized due primarily to actions of Intel described separately in the "Intel Litigation" section of this report. In addition, demand for the Company's software products did not meet expectations and gross margin on product sales continued to decline due primarily to price competition in the industry. In 1998, the Company's revenues and operating results continued to be impacted by its dispute with Intel, as resulting delays in new product releases eliminated the potential for revenue growth and increased the Company's inventory obsolescence charges. Additionally, price competition continued to adversely affect the Company's margins. Operating expenses were reduced in reaction to lower sales volumes and through various restructuring actions, but were offset to a degree by increased legal expenses related to Intel and other matters. Revenues and operating results in 1999 were negatively impacted by increasingly weak demand for the Company's hardware product offerings, as the Company was unable to recover completely from the loss of momentum caused by Intel's actions. As a result, in third quarter 1999 the Company was forced to exit the personal computer ("PC") and generic server businesses and narrow the focus of its Intergraph Computer Systems ("ICS") business unit to workstations, specialty servers, digital video products and 3D graphics cards. The Company also implemented several cost-cutting measures, primarily in the form of direct reductions in workforce, during 1999 in an effort to align its expenses with the lower revenue levels being generated. (See "Nonrecurring Operating Charges" following.) The Company is actively engaged in discussions with potential business partners for ICS and is considering all other available alternatives to help stem the losses in this business unit. The Company expects that the industry will continue to be characterized by higher performance and lower priced products, intense competition, rapidly changing technologies, shorter product cycles, and development and support of software standards that result in less specific hardware and software dependencies by customers. 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. To achieve and maintain profitability, the Company must substantially increase sales volume and/or continue to align its operating expenses with the level of revenue and gross margin being generated. Discontinued Operation. On October 31, 1999, the Company sold its VeriBest, Inc. operating segment to Mentor Graphics Corporation, a global provider of electronic hardware and software design solutions and consulting services, for approximately $11 million, primarily in the form of cash received at closing. The resulting gain on this transaction of $14.4 million is reflected in "Gain on sale of discontinued operation, net of income taxes" in the 1999 consolidated statement of operations. The VeriBest business unit served the electronic design automation market, providing software design tools, design processes, and consulting services for developers of electronic systems. For the period in 1999 prior to sale, VeriBest incurred an operating loss of $7.3 million on revenues of $23.7 million. Similarly, VeriBest incurred operating losses of $13.2 million and $16.7 million in 1998 and 1997, on revenues of $27.8 million and $28.7 million, respectively. VeriBest's operating losses for 1999 and 1998 include nonrecurring operating charges of $.9 million and $.5 million, respectively, incurred for employee terminations as part of various company-wide restructurings (see "Nonrecurring Operating Charges" following.) Systems revenues declined by 11% and 17%, respectively, in 1997 and 1998, reflecting weakening demand for the subsidiary's software products. In 1998, the decline in systems revenues was partially offset by a 21% increase in maintenance revenues as the result of sales force focus on increasing the subsidiary's maintenance revenue base. Results for 1997 were negatively impacted by a 6 point decline in gross margin, primarily the result of declining systems revenues, partially offset by a 5% decline in operating expenses. Losses for 1998 were reduced by a 5 point improvement in gross margin as the result of declining royalty costs, and by an additional 10% reduction in operating expenses. In 1999, VeriBest realized improvements in its revenues, margins, and operating expenses as it directed its selling efforts toward a newly developed line of proprietary products and realized the benefits of its reduced headcount and revised selling strategy toward indirect methods. VeriBest's headcount declined by approximately 40% from the subsidiary's inception in January 1996 through its sale in October 1999. For further information regarding VeriBest, including summarized financial information for all periods presented, see Note 4 of Notes to Consolidated Financial Statements. Nonrecurring Operating Charges. In first quarter 1998, the Company reorganized its European operations to reflect the organization of the Company into distinct business units and to align operating expenses more closely with revenue levels in that region. The cost of this reorganization was originally estimated and recorded at $5.4 million, primarily for employee severance pay and related costs. During the remainder of 1998, approximately $2.2 million of the costs recorded in first quarter were reversed as the result of incurrence of lower severance costs than originally anticipated. In fourth quarter, additional European reorganization costs of $2 million were recorded for further headcount reductions. The net year to date charge of $5.2 million is included in "Nonrecurring operating charges" in the 1998 consolidated statement of operations. Approximately 80 European positions were eliminated in the sales and marketing, general and administrative, and pre- and post- sales support areas. Cash outlays related to this charge approximated $3.1 million in 1998, with the remainder paid in 1999. The Company estimates this European reorganization has resulted in annual savings of approximately $7 million. In fourth quarter 1998, the Company took further actions, principally in the form of direct workforce reductions, to align the operating expenses of its unprofitable businesses with their respective revenue levels. Approximately 100 positions were eliminated, primarily in the Company's ICS and VeriBest business units. The costs of this reduction in force totaled approximately $1.3 million, $.8 million of which is included in "Nonrecurring operating charges" in the 1998 consolidated statement of operations. The remainder of the costs relate to reductions in force in the Company's VeriBest business unit and, accordingly, they are reflected in "Loss from discontinued operation, net of income taxes" in the 1998 consolidated statement of operations. Related cash outlays approximated $.8 million in 1998, with the remainder paid in 1999. The Company estimates that these headcount reductions have resulted in an annual savings of approximately $7 million. The remainder of 1998 nonrecurring operating charges consists primarily of write-offs of a) certain intangible assets, primarily capitalized business system software no longer in use, b) goodwill recorded on a prior acquisition of a domestic subsidiary and determined to be of no value, and c) a noncompete agreement with a former third party consultant. Prior to the write-off, amortization of these intangibles accounted for approximately $3.4 million of the Company's annual operating expenses. In second quarter 1999, in response to continued operating losses in its ICS operating segment, the Company implemented a resizing of its European computer hardware sales organization. This resizing involved closing most of the Company's ICS subsidiaries in Europe and consolidating the European hardware sales effort within the Intergraph subsidiaries in that region. The associated cost of $2.5 million, primarily for employee severance pay, is included in "Nonrecurring operating charges" in the 1999 consolidated statement of operations. Approximately 46 European positions were eliminated, all in the sales and marketing area. Related cash outlays approximated $1.4 million in 1999, with the remainder expected to be paid in 2000. The Company estimates that this resizing will result in annual savings of approximately $3 million. In third quarter 1999, the Company took further actions to reduce expenses in its unprofitable business units and restructure the Company to fully support the vertical markets in which the Company operates. These actions included eliminating approximately 400 positions worldwide, consolidating offices, completing the worldwide vertical market alignment of the sales force, and narrowing the focus of the Company's ICS business unit to workstations, specialty servers, digital video products and 3D graphics cards. As a result of these actions, the Company recorded a nonrecurring charge to operations of approximately $20.1 million, $7 million of which is recorded as a component of "Cost of revenues - Systems" in the consolidated statement of operations. This $7 million charge represents the costs of inventory write-offs incurred as a result of ICS's exit from the PC and generic server business. The Company estimates that this change in ICS's product offerings will reduce its annual systems revenues by approximately $70 to $80 million. The associated margins for these products range from 15.5% to 17.5%. The Company has announced a new line of workstations and specialty servers and is endeavoring to replace revenue associated with its discontinued products with increased sales volume of its new offerings. Severance costs associated with third quarter 1999 restructuring totaled approximately $8.7 million, $7.8 million of which is included in "Nonrecurring operating charges" in the 1999 consolidated statement of operations. The remaining severance costs relate to headcount reductions in the Company's VeriBest operating segment and, accordingly, they are reflected in "Loss from discontinued operation, net of income taxes" in the Company's 1999 consolidated statement of operations. Approximately 400 positions company-wide were eliminated through direct reductions in workforce. All employee groups were affected, but the majority of eliminated positions derived from the sales and marketing, general and administrative, and customer support areas. Related cash expenditures totaled approximately $5.7 million in 1999, with the remainder expected to be paid in 2000. The Company estimates the annual savings resulting from this reduction in force will approximate $22 million. The remainder of third quarter 1999 nonrecurring operating charges consists of write-offs of capitalized business system software no longer required as a result of the verticalization of the Company's business units and resulting decentralization of portions of the corporate financial and administrative functions. At December 31, 1999, the total remaining accrued liability for severance related to 1999 reductions in force was approximately $5 million and is included in "Other accrued expenses" in the December 31, 1999 consolidated balance sheet. These costs are expected to be paid in 2000 and relate primarily to severance liabilities in European countries, which typically take several months to settle. Severance payments to date have been funded from existing cash balances and from proceeds from the sale of VeriBest. For further discussion regarding the Company's liquidity, see "Liquidity and Capital Resources" following. Gains on Sales of Assets. As part of the effort to focus on its core competencies, in 1998 the Company sold its Solid Edge and Engineering Modeling system product lines at a gain of $102.8 million and its printed circuit board manufacturing facility at a gain of $8.3 million. Similarly, in 1999 the Company sold its InterCAP subsidiary at a gain of $11.5 million. The Company's gains on these transactions are included in "Gains on sales of assets" in the consolidated statements of operations. See "Nonoperating Income and Expense" following for further details. SCI. Reflecting the trend toward outsourcing in the industry, in fourth quarter 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. In addition, the Company licensed certain related intellectual property to SCI, and SCI employed approximately 300 of the Company's manufacturing employees. The total purchase price for the assets was approximately $62.4 million, $42.5 million of which was received during the fourth quarter of 1998. The final purchase price installment of $19.9 million was received in January 1999. Proceeds from the sale have been utilized primarily to retire debt. The Company's $1.5 million gain on this transaction is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. As part of this transaction, SCI retained the option to sell to the Company any inventory included in the initial purchase which had not been utilized in the manufacture and sale of finished goods within six months of the date of the sale (the "unused inventory"). On June 30, 1999, SCI exercised this option and sold to the Company unused inventory having a value of approximately $10.2 million in exchange for a cash payment of $2 million and a short-term installment note payable in the principal amount of $8.2 million. This note was paid in three monthly installments concluding October 1, 1999 and bore interest at a rate of 9%. The Company's payments to SCI were funded primarily with existing cash balances. Significant contingencies related to this arrangement include 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 benefits from lower employee headcount and lower per unit costs for materials and overhead expenses if higher volumes are achieved. The Company is subject to forecasting risk, and 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. Litigation and Other Risks and Uncertainties. The Company has extensive ongoing litigation with Intel Corporation, and its business is subject to certain other risks and uncertainties, including those described below. Intel Litigation. 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 attempted 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 required 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"). On November 5, 1999, the Appeals Court vacated the preliminary injunction that had been entered by the Alabama Court. This ruling by the Appeals Court is not expected to impact Company operations as Intel is bound by an Agreement and Consent Order with the Federal Trade Commission entered March 17, 1999 not to restrict microprocessor sales to the Company and not to take coercive actions that were identified by the Company in its legal action against Intel. 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" was 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. On September 15, 1998, the Company filed a cross motion with the Alabama Court requesting summary adjudication in favor of the Company. 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. On June 4, 1999, the Alabama Court granted the Company's September 15, 1998 motion and ruled that Intel has no license to use the Company's Clipper patents as Intel had claimed in its motion for summary judgment. On October 12, 1999, the Alabama Court reversed its June 4, 1999 order and dismissed the Company's patent claims against Intel. The Company is confident that Intel has no license to use the Clipper patents and believes that the court's original decision on this issue was correct. On October 15, 1999, the Company appealed the Alabama Court's October 12, 1999 order. No decision has been entered. The Company believes that Intel's counterclaims, including the alleged infringement of seven Intel patents, will not result in material adverse consequences for the Company. At an oral hearing held February 25, 2000, the Alabama Court indicated that the trial date for this case, previously scheduled for June, 2000, will be continued. A formal schedule has not been entered, but the Company believes it likely that trial will be rescheduled for the Summer of 2001. On March 10, 2000 the Alabama Court entered an order dismissing the antitrust claims of the Company against Intel, based in part upon a February 17, 2000 decision by the Appeals Court in another case (CSU v. Xerox). The Company considers this dismissal to be in error and intends to vigorously pursue its antitrust case against Intel. At present, the Company is considering a number of possible options which may include bringing an immediate appeal of the order of the Alabama Court or an appeal following the end of trial and judgment on the merits of the Company's case in chief. At the present time, the Company is unable to determine the effect, if any, of this dismissal on the Company's overall case against Intel. Effects. The Company ceased further design of its Clipper microprocessor at the end of 1993, and made a substantial investment in redesign of its hardware platform for utilization of Intel microprocessors. The Company relied on the assurances, representations, and commitments of Intel that they would supply Intergraph's microprocessor needs on fair and reasonable terms, and would provide Intergraph with the essential technical information, assistance, and advice necessary to utilize the microprocessors to be developed and supplied by Intel. As a result of the assurances of Intel and its transition to Intel-based workstations, Intergraph is technologically and economically bound to the use of Intel's microprocessors. Successful participation in the high-end workstation market requires involvement in Intel product development programs that provide advance information for the development of new products to be sold by Intergraph and others and permit formulation of standards and specifications for those new products. During 1997, Intergraph's product design and release cycle was severely impacted by Intel's refusal to provide Intergraph with advance technology and product information and immediate information on Intel defects and corrections. Yet, Intel continued to provide this information to the Company's competitors. Intel's refusal to provide this vital information delayed the Company's new product releases by one to six months, resulting in lost sales for the Company as well as increased discounting on available products, severely impacting the Company's revenues and margins. While the April 1998 ruling of the Alabama Court required Intel to provide Intergraph with advance product samples and technical information, the Company lost considerable sales momentum and continued to feel residual effects from the dispute through the end of 1998, including shipment problems resulting from a non-Intel chipset used in certain of the Company's workstations. In late 1997, when the dispute looked as if it might jeopardize the Company's supply of Intel components, an alternate chipset supplier was selected for some designs. In the third quarter of 1998, that vendor had difficulty delivering enough parts to the Company, resulting in a significant backlog that could not be shipped until the fourth quarter. It was not until October 1998 that all of the Company's hardware product offerings contained the latest Intel technology and were technologically back in line with industry competition. Additionally, while Intel is supplying the Company with advance product samples and technical information, the Company believes that their responsiveness is not at the same level as prior to the dispute. In 1999, demand for the Company's hardware products continued to decline as the Company was unable to recover completely from the loss of momentum caused by Intel's actions. As a result, in the third quarter, the Company exited the personal computer and generic server businesses and narrowed the focus of its ICS business unit to workstations, specialty servers, digital video products and 3D graphics cards. The Company is also actively engaged in discussions with potential business partners for ICS and is considering all other available alternatives to help stem the losses in this business unit. Damages. During the course of the Intel litigation, the Company has employed a variety of experts to prepare estimates of the damages suffered by the Company under various claims of injury brought by the Company. The following damage estimates were provided to Intel in the August/September 1999 time frame in due course of the litigation process: estimated damages for injury covered under non-patent claims through June 1999 - $100 million; estimated additional damages for injury covered under non-patent claims through December 2003 - $400 million, subject to present-value reduction. These numbers are estimates only and any recovery of damages in this litigation could be substantially less than these estimates or substantially greater than these estimates depending on a variety of factors that cannot be determined at this time. Factors that could lead to recovery of substantially less that these estimates include, but are not limited to, the failure of the Alabama Court or the Appeals Court to sustain the legal basis for one or more of the Company's claims, the failure of the jury to award amounts consistent with these estimates, the failure of the Alabama Court or the Appeals Court to sustain any jury award in amounts consistent with these estimates, the settlement by the Company of the Intel litigation in an amount inconsistent with these estimates, and the failure of the Company to successfully defend itself from Intel's patent counterclaims in the Alabama Court and in the Appeals Court and a consequential recovery by Intel for damages and/or a permanent injunction against the Company. Factors that could lead to recovery substantially greater than these estimates include, but are not limited to, success by the Company in recovering punitive damages on one or more of its non-patent claims. 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. The Company does expect, however, that adverse effects on its operations will continue in the near term, including increased legal and administrative expenses associated with the lawsuit. See "Other Risks and Uncertainties" below for additional information regarding Intel's actions. 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. Other Risks and Uncertainties. 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 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, which is used in the Company's workstation and server products, is widely available, and many companies, including Intergraph, are attempting to develop patent positions concerning technological improvements related to personal computers, workstations and servers. With the possible exception of its ongoing litigation with Intel (in which the Company expects to prevail), it does not appear that 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. In addition, computer software technology is increasingly being protected by patents, and many companies, including Intergraph, are developing patent positions for software innovations. It is unknown at the present time whether patented software technology will be made generally available under license or whether specific innovations will be held by their inventors and not made available to others. In many cases, it may be possible to employ software techniques that avoid the patents of others, but the possibility exists that some features needed to compete successfully in a particular segment of the software market may be unavailable or may demand unacceptable costs due to royalty requirements. Patented software techniques that become de facto industry standards are among those that are likely to raise costs or prevent the Company from competing successfully in particular markets. 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, 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. These 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. Year 2000 Issue. Until recently, most computer programs were written to store only two digits of date-related information. Such programs may be unable to distinguish between the year 1900 and the year 2000, potentially causing data processing malfunctions and computer system failures. The Company has successfully completed all aspects of its Year 2000 readiness program with respect to both its internal systems and its products. As of the date of this filing, the Company has encountered no significant Year 2000 problems; however, there can be no assurance that the Company has detected all of the problems that could lead to a potential system failure or disruption of operations. Additionally, any undetected errors or defects in the current product offerings of the Company or its suppliers could result in increased costs for the Company and potential litigation over Year 2000 compliance issues. The Company employed no additional resources to complete its Year 2000 readiness program, and as a result, the related costs, which were funded from operations and expensed as incurred, did not have a material impact on its results of operations or financial condition. Year 2000 related changes in customer spending patterns have not had, and are not anticipated to have, a material impact on the Company's orders or revenues. See Notes 1, 5, 7, 8, and 12 to Consolidated Financial Statements for further discussion of risks and uncertainties related to the Company. Arbitration Settlements. The Company maintains an equity ownership position in Bentley Systems, Incorporated ("BSI"), the developer and owner of MicroStation, a software product utilized in many of the Company's software applications and for which the Company serves as a nonexclusive distributor. In May 1997, the Company received notice of the adverse determination of an arbitration proceeding with BSI in which the Company had alleged that BSI inappropriately and without cause terminated a contractual arrangement with the Company, and in which BSI had filed a counterclaim against the Company seeking significant damages as the result of the Company's alleged failure to use best efforts to sell software support services pursuant to terms of the contractual arrangement terminated by BSI. The arbitrator's award against the Company was in the amount of $6.1 million and is included in "Arbitration settlements" in the 1997 consolidated statement of operations. Approximately $5.8 million in fees otherwise owed the Company by BSI were offset against the amount awarded to BSI. 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 BSI have entered into a new agreement which establishes single support services between the two companies. In a second proceeding brought in March 1996, BSI commenced arbitration against the Company with the American Arbitration Association, Atlanta, Georgia, relating to the respective rights of the companies under their April 1987 Software License Agreement and other matters, including the Company's alleged failure to properly account for and pay to BSI certain royalties on its sales of BSI software products, and seeking significant damages. On March 26, 1999, the Company and BSI executed a Settlement Agreement and Mutual General Release ("the Agreement") to settle this arbitration and mutually release all claims related to the arbitration or otherwise, except for a) certain litigation between the companies that is the subject of a separate settlement agreement and b) payment for products and services obtained or provided in the normal course of business since January 1, 1999. Both the Company and BSI expressly deny any fault, liability, or wrongdoing concerning the claims that were the subject matter of the arbitration and have settled solely to avoid continuing litigation with each other. Under the terms of the Agreement, the Company on April 1, 1999 made payment to BSI of $12 million and transferred to BSI ownership of three million of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3.5 million on the Company's books, and the Company's investment in BSI (reflected in "Investments in affiliates" in the Company's consolidated balance sheets) was reduced accordingly. As a result of the settlement, Intergraph's equity ownership in BSI was reduced from approximately 50% to 33%. Additionally, the Company had a $1.2 million net receivable from BSI relating to business conducted prior to January 1, 1999 which was written off in connection with the settlement. In first quarter 1999, the Company accrued a nonoperating charge to earnings of approximately $8.6 million in connection with the settlement, representing the portion of settlement costs not previously accrued. This charge is included in "Arbitration settlements" in the 1999 consolidated statement of operations. The $12 million payment to BSI was funded primarily from existing cash balances. For further discussion regarding the Company's liquidity, see "Liquidity and Capital Resources" following. Orders. Systems orders for 1999 were $605 million, down 24% from the prior year after increases of 3% and 7% in 1998 and 1997, respectively, including $10.3 million in orders of the Company's discontinued VeriBest operation. Order levels in 1997 were characterized by less than anticipated demand for the Company's hardware product offerings, due in part to the slow customer and market acceptance of the Windows NT/Intel strategy, and by weakened demand for its software products. The previously described actions of Intel also adversely impacted hardware orders in both 1997 and 1998. In the last half of 1997, the Company experienced a two month delay in shipment of the Company's TDZ 2000 line of workstations as the result of Intel's wrongful conduct and delays. Order levels in 1998 were further reduced by the first quarter sale of the Company's Solid Edge and Engineering Modeling System product lines. In 1999, order volumes declined worldwide, primarily in the Company's hardware business as demand continued to weaken, though some weakness has been noted in the Company's software segments as well, particularly in the Company's international markets. Geographic Regions. U.S. systems orders, including federal government orders, totaled $313 million for the year, down 30% from the prior year after increases of 11% and 24% in 1998 and 1997, respectively. The increases in both 1997 and 1998 were attributable to growth in the Company's hardware business and in orders received from the federal government. Federal orders were up 25% and 5%, respectively, in 1997 and 1998. Orders growth in 1998, both federal and commercial, was concentrated primarily in the fourth quarter as the U.S. hardware business began to recover slightly from the effects of the Intel dispute. However, in 1999, demand for the Company's hardware product offerings weakened significantly, accounting for the majority of the decline in U.S. orders. International orders for 1999 totaled $292 million for the year, down 15% from the prior year after declines of 6% and 7% in 1998 and 1997, respectively. Order levels have declined significantly in all of the Company's international markets. Asia Pacific orders totaled $61 million in 1999, down 6% from the 1998 level after declines of 11% in 1998 and 35% in 1997. Orders in 1996 included several individually significant orders for the Company's public safety products and related consulting services which did not recur in 1997. Additionally, devaluation of Asian currencies, most notably the Korean won, had a negative impact on orders for the region during the fourth quarter of 1997 and throughout 1998. This strengthening of the dollar in Asian markets reduced 1998 orders by approximately 9%. In 1999, weakening of the dollar against Asian currencies improved order levels in that region by approximately 5%; however, this positive impact was more than offset by weakened demand for the Company's hardware products. European orders totaled $190 million, down 10% from the prior year level, after declining 5% in 1998 and remaining flat in 1997. European order levels in terms of U.S. dollars were reduced by approximately 3% and 2% in 1999 and 1998, respectively, due to strengthening of the U.S. dollar against the currencies of the region. Revenues. Total revenues from continuing operations for 1999 were $915 million, down 9% from the prior year level after an 8% decline in 1998 and a 3% increase in 1997. Systems. Systems revenue from continuing operations was $623 million in 1999, down 13% from the previous year after a decrease of 7% in 1998 and an increase of 9% in 1997. Factors previously cited as affecting systems orders in total and on a geographic basis, including the actions of Intel in 1997 and 1998, also affected systems revenues over the three year period. Competitive conditions manifested in declining per unit sales prices continue to adversely affect the Company's systems revenues and margin. In addition, the Company's hardware revenues remain low as the Company has lost momentum in this market due to the actions of Intel. Geographic Regions. Systems revenues have declined in all geographic markets served by the Company. U.S. systems sales from continuing operations, including sales to the federal government, declined by 12% in 1999, after decreasing by 1% in 1998 and increasing by 16% in 1997. Growth in U.S. systems sales was depressed in 1997 due to the sale of one of the Company's unprofitable business units early in the year. Excluding this business unit, U.S. sales growth was 21% in 1997. The revenue decline in 1998 was due primarily to a 7% decrease in sales to the federal government, partially offset by growth in the Company's public safety business. During the second half of 1997 and the first quarter of 1998, Intergraph Public Safety secured several large U.S. installations, significantly increasing the subsidiary's revenue base. The 1999 revenue decline is primarily attributable to weakened demand for the Company's hardware products and a 6% decline in sales to the federal government. International sales totaled $288 million for the year, down 14% from the prior year level after a 14% decline in 1998 and a 3% increase in 1997. European sales were down 11%, after a decline of 13% in 1998 and an increase of 6% in 1997. Asia Pacific systems sales were down 9%, after declines of 25% and 11% in 1998 and 1997, respectively. Software. Sales of the Company's software applications declined by 10% in 1999 after a 16% decline in 1998 and a 1% decline in 1997. Sales of MicroStation declined by 43%, 46%, and 34% in 1999, 1998 and 1997, respectively (see "MicroStation" below for further discussion). In 1997 and 1998, sales of the Company's plant design software applications increased by 21% and 19%, respectively (such sales declined by 8% in 1999), partially offsetting the effect of the loss in MicroStation sales. However, 1998 revenues were further reduced as a result of the sale of the Company's Solid Edge and Engineering Modeling System product lines in early 1998 (these revenues for 1997 were $18.7 million). See "Nonoperating Income and Expense" below for further discussion. In 1999, sales declined for all applications, with the exception of substantial increase in sales of Geomedia and in sales of federal software applications. Plant design remains the Company's highest volume software offering, representing 28% of total software sales for 1999. In terms of broad market segments, the Company's mapping/geographic information systems and process and building applications continue to dominate the Company's product mix at approximately 50% and 19% of total systems sales in 1999, respectively (47% and 19%, respectively, in 1998 and 57% and 27%, respectively, in 1997). Due to the sale of the Company's Solid Edge and Engineering Modeling System product lines in March 1998, 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. Hardware. Total hardware revenue decreased by 27% in 1999, after decreasing by 10% in 1998 and increasing by 22% in 1997. Workstation and server unit volume decreased 17% in 1999, after increases of 6% and 67% in 1998 and 1997, respectively, while workstation and server revenue declined by 28% and 9% in 1999 and 1998, respectively, and increased by 6% in 1997. Price competition continues to erode per unit selling prices, and volumes in 1998 and 1999 were suppressed by the aforementioned factors associated with the Intel lawsuit. Sales of peripheral hardware products decreased by 25% and 11% in 1999 and 1998, respectively, after increasing by 64% in 1997. Both the 1997 increase and the 1998 decline relate to sales of graphics cards and storage devices. Sales of the Company's first add-in 3D graphics cards, which began shipping during the third quarter of 1996, were initially strong and grew throughout 1997. However, 1998 sales were below the Company's expectations as the products approached the end of their life cycle. Graphics sales increased by 9% in 1999 with the availability of new products based upon the Company's Wildcat 3D graphics technology; however, this increase was more than offset by significant declines in the Company's sales of storage devices and memory and of Intel options and upgrades. The Company's systems are Windows NT/Intel-based and have been since 1994. Federal Government Sales. Total revenue from the United States government was approximately $149 million in 1999, $166 million in 1998, and $177 million in 1997, representing approximately 16% of total revenues in all three years. In 1998 and 1999, U.S. government orders and revenues were characterized by weakened demand for the Company's hardware product offerings, due partially to increasing price competition within the industry. 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 52% of the Company's 1999 federal government revenues were 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 the Company. MicroStation. Through the end of 1994, the Company had an exclusive license agreement with BSI, an approximately 33%-owned affiliate of the Company, under which the Company distributed MicroStation, a software product developed and maintained by BSI and utilized in many of the Company's software applications. As a result of settlement of a dispute between the companies relative to the exclusivity of the Company's distribution license, effective January 1, 1995, the Company has a nonexclusive license to sell MicroStation via its direct sales force and to sell MicroStation via its indirect sales channels if MicroStation is sold with other Intergraph products. See "Arbitration Settlements" preceding for a description of past arbitration proceedings between the Company and BSI. The Company's sales of MicroStation have declined each year since the 1994 change in the license agreement, by approximately 34% in 1997, 46% in 1998, and 43% in 1999. In 1998 and 1999, MicroStation sales represented 8% and 5% of total software revenue, respectively. The Company is unable to predict the level of MicroStation sales that will occur in the future, but it is likely that such sales will be further reduced. Maintenance and Services. Maintenance and services revenue consists of revenues from maintenance of Company systems and from Company provided services, primarily training and consulting. These forms of revenue from continuing operations totaled $291 million in 1999, flat with the 1998 level after declines of 10% and 9% in 1998 and 1997, respectively. Maintenance revenues totaled $187 million in 1999, down 8% after declines of 15% and 13% in 1998 and 1997, respectively. The trend in the industry toward lower priced products and longer warranty periods has resulted in reduced levels of maintenance revenue, and the Company believes this trend will continue in the future. Services revenue represented 11% of total revenues in 1999, an increase of two percentage points from the previous year. Growth in services revenue has partially offset the decline in maintenance revenue. The Company is endeavoring to grow its services business and has redirected the efforts of its hardware maintenance organization to focus increasingly on systems integration. Revenues from these services, however, typically produce lower gross margins than maintenance revenues. Gross Margin. The Company's total gross margin on revenues from continuing operations was 31.7% in 1999, up .7 points after declines of 4.3 points and 1.1 points in 1998 and 1997, respectively. Margin on systems revenues from continuing operations improved 1.4 points in 1999 after declining 5.6 points and 1.1 points in 1998 and 1997, respectively. Competitive pricing conditions in the industry have acted to reduce systems margins generally. In 1997 and 1998, margins were also negatively impacted by an increasing hardware content in the product mix. Margin was further reduced in 1997 by a decrease in the mix of international systems revenues to total Company systems revenues, due in part to strengthening of the U.S. dollar in international markets, primarily Europe and Asia. In 1998, margin was negatively impacted by unfavorable volume related manufacturing variances and inventory revaluations incurred prior to the outsourcing of the Company's manufacturing to SCI in fourth quarter 1998. In 1999, the impact of a $7 million inventory write- off incurred in connection with the Company's decision to exit the PC and generic server business (see "Nonrecurring Operating Charges" preceding) was offset by an increased software content in the product and a decline in unfavorable manufacturing variances as the result of the outsourcing to SCI. Systems margins continue to be negatively impacted by strengthening of the U.S. dollar in international markets, primarily Europe, and by the loss of volume resulting from its dispute with Intel. In general, the Company's systems margin may be improved by a higher software content in the product, a weaker dollar in international markets, a higher mix of international systems sales to total systems sales, and reductions in prices of component parts, which generally tend to decline over time in the industry. Systems margins may be lowered by price competition, a higher hardware content in the product mix, a stronger U.S. dollar in international markets, the effects of technological changes on the value of existing inventories, and a higher mix of federal government sales, which generally produce lower margins than commercial sales. While the Company is unable to predict the effects that many of these factors may have on its systems margin, it expects continuing pressure on its systems margin as the result of increasing industry price competition. Margin on maintenance and services revenues from continuing operations declined by 1.4 points in 1999 after declines of 1.3 points in 1998 and .6 points in 1997. The margin declines over the past three years have resulted primarily from declining maintenance revenues. In 1999, declining maintenance revenues and margins were partially offset by improved professional services margins. Professional services revenues have increased by 17% from the 1998 level without a proportional increase in costs. The Company continues to monitor its maintenance and services costs closely and has taken certain measures, including reductions in headcount, to align these costs with current revenue levels. The Company believes that the trend in the industry toward lower priced products and longer warranty periods will continue to curtail its maintenance revenue, which will pressure maintenance margin in the absence of corresponding cost reductions. The industry in which the Company competes is characterized by rapid technological change. This technological change is an important consideration in the Company's overall inventory management program, in which the Company endeavors to purchase only inventory supported by firm customer orders and parts as spares for the customer contracted maintenance of systems in its installed customer base. In fourth quarter 1998, the Company sold substantially all of its U.S. manufacturing assets to SCI, and SCI assumed responsibility for the manufacturing of substantially all of the Company's hardware products. (See "SCI" preceding for a complete description of this transaction). Effective inventory and purchasing management remains necessary in order for the Company to provide SCI with accurate and timely information regarding its needs. Any unanticipated change in technology or an inability of the Company to accurately forecast its manufacturing needs could significantly and adversely affect gross margins and reported results of operations. Operating Expenses (exclusive of nonrecurring operating charges). Operating expenses for continuing operations declined by 14% in 1999, 6% in 1998, and 1% in 1997. In response to the level of its operating losses, the Company has reduced the total number of its employees by 32% during the three year period ended December 31, 1999. Product development expense declined by 18% in 1999 after declines of 15% and 4% in the two preceding years. Employee headcount in the development area has been significantly reduced over the last three years through reductions in force, attrition, and sales of unprofitable business operations. Additionally, 1998 and 1999 expenses were reduced due to additional software development projects whose cost qualifies for capitalization. The Company capitalizes certain costs incurred after the technological feasibility of new software products has been established and amortizes those costs against revenues later generated by those products. Though the Company regularly reviews its capitalized development costs to ensure recognition of any decline in value, it is possible that for any given product revenues will not materialize in amounts anticipated due to industry conditions that include intense price and performance competition, or that product lives will be reduced due to shorter product cycles. Should these events occur, the carrying amount of capitalized development costs would be reduced, producing adverse effects on the Company's systems margin and results of operations. Sales and marketing expense declined by 22% in 1999, after declining by 6% in 1998 and 2% in 1997. Expenses in all three years were reduced by the strengthening of the U.S. dollar against international currencies, primarily in Europe. In 1997, expenses were significantly reduced due to the sale of two unprofitable business units, but the resulting benefits were partially offset by increased trade show activity and advertising expenses for the Company's new products. The 1998 decline was primarily due to across the board expense reductions in Europe resulting from restructuring actions taken in the first quarter (see "Nonrecurring Operating Charges" preceding.) Additional headcount reductions in late 1998 and throughout 1999 have resulted in significant across the board expense declines worldwide. General and administrative expense increased by 8% in 1999 after remaining basically flat for the previous two years. In 1997 and 1998, increases in the Company's legal expenses (see "Litigation and Other Risks and Uncertainties" preceding) were offset by strengthening of the U.S. dollar in the Company's international markets and, in 1998, by benefits resulting from European headcount reductions. The expense increase in 1999 resulted from increased bad debt expenses in the U.S. and continuing growth in the Company's legal fees, partially offset by across the board declines in all other expense categories. The Company expects its general and administrative expense to remain high in 2000 as additional legal expenses are incurred in preparation for the Intel trial. Additionally, the Company is anticipating a temporary duplication of administrative expenses in connection with its efforts to verticalize its operating segments and decentralize portions of the corporate finance and administrative function. The Company expects that these expenses will decline by the end of 2000. Nonoperating Income and Expense. Interest expense for continuing operations was $5.7 million in 1999, $7.4 million in 1998, and $6.6 million in 1997. In 1999, the Company's average outstanding debt declined due primarily to repayment of borrowings under the Company's revolving credit facility utilizing proceeds from sales of various businesses and assets. See "Liquidity and Capital Resources" following for a discussion of the Company's current financing arrangements. In 1997, the Company sold a stock investment in a publicly traded affiliate, resulting in a gain of $4.9 million. This gain is included in "Gains on sales of assets" in the 1997 consolidated statement of operations. In first quarter 1998, the Company sold its Solid Edge and Engineering Modeling System product lines to Electronic Data Systems Corporation and its Unigraphics Solutions, Inc. subsidiary for $105 million in cash. The Company recorded a gain on this transaction of $102.8 million. This gain is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. Full year 1997 revenues and operating loss for these product lines were $35.2 million and $4.1 million, respectively. The Company estimates the sale of this business has resulted in an annual improvement in its operating results of approximately $5 million. In second quarter 1998, the Company sold the assets of its printed circuit board manufacturing facility for $16 million in cash. The Company recorded a gain on this transaction of $8.3 million. This gain is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. The Company is now outsourcing its printed circuit board needs. This operational change did not materially impact the Company's results of operations in 1998. In second quarter 1999, the Company sold InterCAP Graphics Systems, Inc., a wholly-owned subsidiary, to Micrografx Inc., a global provider of enterprise graphics software, for $12.2 million, consisting of $3.9 million in cash received at closing, deferred payments received in September and October 1999 totaling $2.5 million, and a $5.8 million convertible subordinated debenture due in March, 2002. The resulting gain on this transaction of $11.5 million is included in "Gains on sales of assets" in the 1999 consolidated statement of operations. InterCAP's revenues and losses for 1998 were $4.7 million and $1.1 million, respectively ($3.6 million and $1.9 million for 1997). Assets of the subsidiary at December 31, 1998 totaled $1.6 million. InterCAP did not have a material effect on the Company's results of operations for the period in 1999 prior to the sale. "Other income (expense) - net" in the consolidated statements of operations consists primarily of interest income, foreign exchange gains (losses), equity in the earnings of investee companies, and other miscellaneous items of nonoperating income and expense. Impact of Currency Fluctuations and Currency Risk Management. International markets, particularly Europe and Asia, continue in importance to the industry and to each of the Company's operating segments. 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 policy restrictions, currency exchange fluctuations, and other factors. 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 1999, approximately 52% of the Company's revenues were derived from customers outside the United States, primarily through subsidiary operations. Most subsidiaries sell to customers and incur and pay operating expenses in local currency. These local currency revenues and expenses are translated 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. Currency fluctuations did not have a significant impact on the Company's 1999 results of operations as strengthening of the U.S. dollar in Europe and other international regions was offset by weakening of the dollar in the Company's Asian markets. The Company estimates that the net strengthening of the U.S. dollar in its international markets adversely impacted its results of operations by approximately $.02, $.10, and $.30 per share in 1999, 1998, and 1997, respectively. To illustrate the sensitivity of the Company's results of operations to changes in international currency exchange rates, the Company estimates that the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's sales are denominated would result in a decrease in earnings of approximately $10 million for the year ended December 31, 2000. Likewise, a uniform 10% weakening in the value of the dollar would result in increased earnings of approximately $9 million. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, exchange rate fluctuations may also affect the volume of sales and foreign currency sales prices. The Company's estimation of the effects of changes in foreign currency exchange rates does not consider potential changes in sales levels or local currency prices. The Company's income statement exposure to currency fluctuations has declined by approximately 18% from the prior year level as the result of declining activity levels in its international regions, related to the sales volume decline in 1999. See note 12 of Notes to Consolidated Financial Statements for a summary of the Company's revenues by geographic area. 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 possibly 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. In 1999 and 1997, the Company incurred net foreign exchange losses from its continuing operations of $1.3 million and $2.2 million, respectively. (In 1998, the Company realized a net exchange gain of $.4 million from its continuing operations.) At December 31, 1999 and 1998, the Company had outstanding forward exchange contracts with values of approximately $.8 million and $7.6 million, respectively. The fair values of those contracts approximated the original contract amounts based on the insignificant amounts the Company would have paid or received upon transferring the contracts to a third party at those dates. Net cash flow from forward contract activity, consisting of realized gains and losses from settlement of exposed assets and liabilities at exchange rates in effect at the settlement date rather than at the time of recording, settlement of the forward contracts purchased to mitigate these exposures, and payment of bank fees on the forward contracts was not significant for any year in the three year period ended December 31, 1999. Deferred gains and losses as of December 31, 1999 and 1998 were not significant. At December 31, 1999 and 1998, the Company's only outstanding forward exchange contracts related to formalized intercompany loans between the Company's European subsidiaries and are immaterial to the Company's present financial position. The Company is not currently hedging any of its foreign currency risks in the Asia Pacific region or its U.S. exposures related to foreign currency denominated intercompany loans. To illustrate the sensitivity of the Company's result of operations to changes in exchange rates for international currencies underlying its intercompany loans, the Company estimates that a uniform 10% strengthening or weakening in the value of the dollar relative to the currencies in which such intercompany loans are denominated at December 31, 1999 would not result in a significant loss or improvement in earnings. This calculation assumes that each exchange rate would change in the same direction relative to the U.S. dollar. The Company is exposed to foreign currency risks related to certain of its financial instruments, primarily debt securities held by its European subsidiaries, long-term mortgages on certain of its European facilities, and an Australian term loan. The net effect of a uniform 10% change in exchange rates relative to the currencies in which these financial instruments are denominated would not have a material impact on the Company's results of operations. Euro Conversion. On January 1, 1999, eleven member countries of the European Monetary Union (EMU) fixed the conversion rates of their national currencies to a single common currency, the "Euro". The national currencies of the participating countries will continue to exist through July 1, 2002, and Euro currency will begin to circulate on January 1, 2002. All of the Company's financial systems currently accommodate the Euro, and during 1999 the Company conducted business in Euros with its customers and vendors who chose to do so without encountering significant problems. While the Company continues to evaluate the potential impacts of the common currency, it at present has not identified significant risks related to the Euro and does not anticipate that full Euro conversion in 2002 will have a material impact on its results of operations or financial condition. To date, the conversion to one common currency has not impacted the Company's pricing in its European markets. See Notes 1 and 5 of Notes to Consolidated Financial Statements for further information related to management of currency risk. Income Taxes. The Company incurred pretax losses from continuing operations of $73.1 million in 1999, $.7 million in 1998 and $49.5 million in 1997. Income tax expense for these years resulted primarily from taxes on individually profitable subsidiaries. Note 9 of Notes to Consolidated Financial Statements contains a reconciliation of statutory income tax benefit to actual income tax expense for each year in the three year period ended December 31, 1999 and includes further details of the Company's tax position, including net operating loss and tax credit carryforwards. Results by Operating Segment: Effective January 1, 1998, the Company divided its business into four reporting segments for operational and management purposes: Intergraph Computer Systems ("ICS"), Intergraph Public Safety, Inc. ("IPS"), the Software and Federal Systems ("Federal") business (collectively, the Software and Federal businesses form what is termed "Intergraph"), and VeriBest, Inc. ("VeriBest"). In fourth quarter 1999, the Company sold VeriBest to Mentor Graphics Corporation. Accordingly, VeriBest's results of operations through the date of sale have been classified as discontinued operations in the Company's consolidated statements of operations for each year in the three year period ended December 31, 1999 and have been excluded from the Company's segment disclosures. For further information regarding this sale and VeriBest's operating results for the periods presented, see "Discontinued Operation" preceding and Note 4 of Notes to Consolidated Financial Statements. See Note 12 of Notes to Consolidated Financial Statements for details of the Company's segment reporting. ICS supplies high performance Windows NT-based graphics workstations, 3D graphic subsystems, and specialty servers. IPS develops, markets, and implements systems for the public safety and utilities industries. Intergraph supplies software and solutions, including hardware purchased from ICS, consulting, and services to the process and building and infrastructure industries and provides services and specialized engineering and information technology to support Federal government programs. The Company evaluates performance of its operating segments based on revenue and income from operations. Sales among the operating segments, the most significant of which are sales of hardware products and maintenance from ICS to the other segments, are accounted for under a transfer pricing policy. Transfer prices approximate prices that would be charged for the same or similar property to similarly situated unrelated buyers. In the U.S., intersegment sales of products and services to be used for internal purposes are charged at cost. For international subsidiaries, transfer price is charged on intersegment sales of products and services to be used for either internal purposes or sale to customers. Certain expenses, primarily general and administrative expenses, not directly attributable to an operating segment are considered corporate in nature and are not charged to any operating segment. In addition, gains on sales of assets and nonrecurring charges to operations (see "Summary" section above), which were significant in 1999 and 1998, are not credited or charged to the operating segments. Effective January 1, 1999, the Utilities business of Intergraph Software was merged into IPS. Additionally, in 1999, hardware maintenance revenues, previously attributed exclusively to ICS, were attributed to the selling segment entities with ICS receiving transfer price revenue for services provided to other operating segments. The Company's 1998 segment information has been restated to reflect both of these operational changes. Prior to 1998, the Company utilized several variations of the current model for evaluation of the performance of its operating segments, depending on the Company's structure and its business environment at the time. Segment financial information for years prior to 1998 has not been restated to conform to the current model because it is impractical to do so. In 1999, ICS incurred an operating loss of $44.8 million on revenues of $332.1 million, compared to a 1998 operating loss of $71.2 million on revenues of $447.1 million. These operating losses exclude the impact of certain nonrecurring income and operating expense items associated with ICS's operations, including 1998 gains totaling $9.8 million on the sales of its printed circuit board facility and manufacturing inventory and assets, and nonrecurring operating charges of $.8 million and $4.5 million in 1998 and 1999, respectively, primarily for employee termination costs. ICS's operating loss for 1999 included a $7 million inventory write-off resulting from the segment's exit from the PC and generic server business. Excluding this charge, the 1999 operating loss was $37.8 million, reflecting a $33.4 million improvement from the prior year. This improvement resulted primarily from a 32% decline in operating expenses as the result of headcount reductions achieved in 1998 and 1999. ICS's headcount was reduced by approximately 52% during the two year period ended December 31, 1999. ICS's 1998 and 1999 results of operations were significantly adversely impacted by factors associated with the Company's dispute with Intel, the effects of which included lost momentum, lost revenue and margin, and increased operating expenses, primarily for marketing and public relations expenses. (See "Litigation and Other Risks and Uncertainties" preceding for a complete discussion of the Company's dispute with Intel and its effects on the operations of ICS and the Company). ICS's 1998 margins were also severely impacted by volume and inventory value related manufacturing variances incurred prior to the outsourcing of its manufacturing to SCI in fourth quarter 1998. In 1999, improvements in ICS's expense levels were more than offset by declining sales volume as demand weakened for the segment's hardware products. In response to its continuing operating losses, in third quarter 1999, ICS exited the PC and generic server businesses and narrowed its focus to workstations, specialty servers, digital video products and 3D graphics cards. The Company estimates that this change in ICS's product offerings will reduce its annual systems revenues by approximately $70 to $80 million. The associated margins for these products range from 15.5% to 17.5%. The segment has announced a new line of workstations and specialty servers and is endeavoring to replace revenue associated with its discontinued products with increased sales volume of its new offerings. The Company is also actively engaged in discussions with potential business partners for ICS and is considering all other available alternatives to help stem the losses in this business unit. In 1999, IPS earned operating income of $10.8 million on revenues of $96.3 million, compared to 1998 operating income of $6.2 million on revenues of $93.4 million. The improvement in 1999 resulted primarily from a 6 point increase in gross margin, largely due to improved margins on professional services projects. This margin improvement was partially offset by a 10% increase in operating expenses, due in part to increased headcount. Growth in IPS's revenues and operating income was limited somewhat in 1999 due to a slowdown in large installations resulting from customer and market concerns about potential year 2000 computing problems generally. Additional growth is expected in 2000 as more of these systems are brought online. In 1999, the Software business earned operating income of $9.2 million on revenues of $476.4 million, compared to 1998 operating income of $13.8 million on revenues of $531.5 million. The declines in revenues and operating income from the 1998 level resulted primarily from a 17% decline in systems revenue, due in part to weakened demand for ICS hardware products, while margins earned on systems sales remained relatively flat with the 1998 level at 39%. The negative impact of the revenue decline was partially offset by a 16% decline in sales and marketing expenses as the operating segment reduced and reorganized it sales force to align expenses with the volume of revenue generated. Current year operating income excludes the impact of certain nonrecurring income and operating expense items associated with Software operations, including the arbitration settlement charge of $8.6 million, the gain on sale of InterCAP of $11.5 million, and nonrecurring operating charges of approximately $5.8 million, primarily for employee severance costs. Operating income for 1998 excludes the $102.8 million gain on sale of the business unit's Solid Edge and Engineering Modeling System product lines and nonrecurring operating charges of $14.6 million, primarily for asset write-offs and employee terminations. In 1999, Federal earned operating income of $12.4 million on revenues of $159.8 million, compared to a 1998 operating loss of $3.0 million on revenues of $171.5 million. The improvement in 1999 resulted primarily from a 30% decline in operating expenses, due in part to headcount reductions and to an increase in shipbuilding software development costs qualifying for capitalization. Despite the revenue decline, margins improved by 4 points from the 1998 level due primarily to a 4 point increase in margins earned on systems sales. Revenues and margins in both 1998 and 1999 were adversely impacted by weakened demand for the Company's hardware product offerings. Effective March 2000, the Federal business was renamed Intergraph Government Solutions. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, cash totaled $88.5 million, down $7 million from year-end 1998. Cash consumed by operations totaled $9.7 million in 1999, $31.1 million in 1998, and $20.9 million in 1997, primarily reflecting the negative cash flow effects of operating losses. Operating cash consumption in 1999 included the payment of $12 million to Bentley Systems, Inc. (see "Arbitration Settlements" preceding), payments to SCI of $10.2 million to purchase unused inventory (see "SCI" preceding), and severance payments to employees of approximately $9 million. In 1997, an inventory build-up consumed approximately $16 million as a result of an anticipated increase in hardware unit sales volume and customer demand for faster delivery of products. Net cash provided by investing activities totaled $25.5 million and $99.6 million in 1999 and 1998, respectively, compared to a net investing consumption of cash of $30.7 million in 1997. Investing activities in 1999 included $54.1 million in proceeds from sales of various businesses and assets. Investing activities in 1998 included $160.5 million in proceeds from sales of various businesses and assets, including the Company's Solid Edge and Engineering Modeling System product lines, its manufacturing inventory and assets, and its printed circuit board manufacturing facility, and an investment of $26.3 million for the purchase of Zydex software rights. Other significant investing activities in 1999 included capital expenditures of $10.2 million ($17.3 million in 1998 and $24.8 million in 1997), primarily for Intergraph products used in hardware and software development and sales and marketing activities, expenditures for capitalizable software development of $20.7 million ($15.7 million in 1998 and $10.6 million in 1997), and $11.7 million contributed by the minority interest partner to the start-up of the Z/I Imaging business. (See Note 15 of Notes to Consolidated Financial Statements.) Net cash used for financing activities totaled $21 million and $19.3 million in 1999 and 1998, respectively, compared to a net financing generation of cash of $48.4 million in 1997. Net debt repayments were $23.6 million and $22.3 million in 1999 and 1998, respectively, while 1997 sources of cash included net borrowings of $44.9 million. The Company's average collection period for accounts receivable in 1999 was approximately 84 days, representing a slight increase from the prior year. Approximately 68% of the Company's 1999 revenues were derived from international customers and the U.S. government, both of which traditionally carry longer collection periods. The Company continues to experience slow collections throughout the Middle East region, particularly in Saudi Arabia. Total accounts receivable from Middle Eastern customers was approximately $20 million at December 31, 1999 and $23 million at December 31, 1998. Total U.S. government accounts receivable was $33 million at December 31, 1999 ($55 million at December 31, 1998). The Company endeavors to enforce its payment terms with these and other customers, and grants extended payment terms only in very limited circumstances. The Company expects that capital expenditures will require $10 million to $15 million in 2000, primarily for Intergraph products used in product development and sales and marketing activities. The Company's revolving credit agreement, among other restrictions, limits the level of the Company's capital expenditures. Under the Company's January 1997 six year fixed term loan and revolving credit agreement, as amended, available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, primarily accounts receivable, with maximum availability of $100 million. The $25 million term loan portion of the agreement is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. and certain international receivables. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.5% at December 31, 1999) plus .625%. The amended agreement contains provisions which will lower the interest rate upon achievement of sustained profitability by the Company. The agreement requires the Company to pay a facility fee at an annual rate of .15% of the amount available under the credit line, an unused credit line fee at an annual rate of .25% of the average unused portion of the revolving credit line, a letter of credit fee at an annual rate of 1.5% of the undrawn amount of all outstanding letters of credit, and a monthly agency fee. At December 31, 1999, the Company had outstanding borrowings of $27.5 million, the $25 million term loan portion of which was classified as long-term debt in the consolidated balance sheet, and an additional $32.4 million of the available credit line was allocated to support the Company's letters of credit and forward exchange contracts. As of this same date, the borrowing base, representing the maximum available credit under the line, was approximately $69.3 million ($68.5 at February 29, 2000). The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures, and restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes without approval. The amended agreement has reduced the Company's net worth covenant to $235 million at December 31, 1999, with subsequent reductions to $216 million at March 31, 2000 and $200 million at June 30, 2000. Additionally, the amended agreement requires the Company to retain the services of an investment banking firm to advise the Company regarding potential partnering arrangements and other alternatives for its computer hardware business. In fourth quarter 1999, the Company entered into an agreement for the sale and leaseback of its European headquarters office building in the Netherlands. The lease has an initial term of ten years with an early termination option after five years. The lease is accounted for as an operating lease in accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases. The gain realized on the sale of approximately $4.2 million has been deferred and will be credited to income over the ten year lease term. Payments under the lease, which are denominated in Dutch Guilders, approximate $1.2 million per year. Proceeds from the sale approximated $13.7 million, $4.2 million of which was used to pay off the mortgage on the building. At December 31, 1999, the Company had approximately $53 million in debt on which interest is charged under various floating rate arrangements, primarily its six year term loan and revolving credit agreement, mortgages, and an Australian term loan (see Note 8 of Notes to Consolidated Financial Statements). The Company is exposed to market risk of future increases in interest rates on these loans, with the exception of the Australian term loan, on which the Company has entered into an interest rate swap agreement. To illustrate the sensitivity of the Company's results of operations to changes in interest rates on its debt, the Company estimates that its results of operations would not be materially affected by a two point increase or decrease in the average interest rates related to its floating rate debt. This hypothetical change in rates was determined based on the trend of the Company's actual rates over the past four years. The Company's estimate assumes a level of debt consistent with the December 31, 1999 level and does not consider the effects that further operating losses, if any, will have on the balance of debt outstanding. The Company's interest rate exposure has not changed significantly from the December 31, 1998 level as the decline in its floating rate debt resulted primarily from payments on its revolving credit facility which, due to its short term nature, does not represent a material interest rate exposure for the Company. Although the Company did not generate adequate cash to fund its operations for 1999, it did begin to generate positive cash flow from operations in fourth quarter 1999 as the result of improved accounts receivable collections and operating expense declines. The Company expects continued improvement in its operating cash flows in 2000 as a result of headcount reductions and other expense savings actions taken during 1999. The Company believes that the combination of improved cash flow from operations, its existing cash balances, and cash available under its amended revolving credit agreement will be adequate to meet cash requirements for 2000. However, the Company must increase sales volume and continue to align its operating expenses with the level of revenue being generated if it is to fund its operations and build cash reserves without reliance on funds from external financing. For the longer term, the Company anticipates no significant nonoperating issues that will require the use of cash, and correspondingly the adequacy of its cash reserves will be dependent on improvement in its operating results. FOURTH QUARTER 1999 Revenues from continuing operations in the fourth quarter were $222.6 million, down 20% from fourth quarter 1998. The Company earned net income of $3.6 million ($.07 per share) for the quarter, compared to a fourth quarter 1998 net loss of $20.9 million ($.43 per share). Loss from continuing operations per share improved from $.40 in fourth quarter 1998 to $.20 in fourth quarter 1999 due to a 3.4 point increase in gross margin and a 17% decline in operating expenses. Fourth quarter 1998 systems margin was negatively impacted by expenses of approximately $7 million ($.14 per share) related to the Company's transition to outsourcing its manufacturing operations. The operating expense decline was concentrated primarily in the sales and marketing area and correlates directly to the 15% decline in headcount from the prior year level. The fourth quarter 1999 loss from continuing operations was offset by the $14.4 million ($.29 per share) gain on the sale of VeriBest. Exchange rate fluctuations did not have a significant impact on fourth quarter 1999 results of operations. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ---------------------------------------------------------------------- December 31, 1999 1998 - ---------------------------------------------------------------------- (In thousands except share and per share amounts) Assets Cash and cash equivalents $ 88,513 $ 95,473 Accounts receivable, net 258,768 312,123 Inventories 35,918 38,001 Other current assets 28,744 48,928 - ---------------------------------------------------------------------- Total current assets 411,943 494,525 Investments in affiliates 9,940 12,841 Other assets 68,154 61,240 Property, plant, and equipment, net 94,907 127,368 - ---------------------------------------------------------------------- Total Assets $584,944 $695,974 ====================================================================== Liabilities and Shareholders' Equity Trade accounts payable $ 50,963 $ 64,545 Accrued compensation 35,848 42,445 Other accrued expenses 71,052 75,038 Billings in excess of sales 66,051 68,137 Income taxes payable 8,175 4,122 Short-term debt and current maturities of long-term debt 11,547 23,718 - ---------------------------------------------------------------------- Total current liabilities 243,636 278,005 Deferred income taxes 2,620 3,142 Long-term debt 51,379 59,495 Other noncurrent liabilities 10,609 --- - ---------------------------------------------------------------------- Total liabilities 308,244 340,642 - ---------------------------------------------------------------------- Shareholders' equity: Common stock, par value $.10 per share -- 100,000,000 shares authorized; 57,361,362 shares issued 5,736 5,736 Additional paid-in capital 216,943 222,705 Retained earnings 178,231 249,808 Accumulated other comprehensive income (loss) - cumulative translation adjustment (5,506) 4,161 - ---------------------------------------------------------------------- 395,404 482,410 Less -- cost of 8,145,149 treasury shares at December 31, 1999, and 8,719,612 treasury shares at December 31, 1998 (118,704) (127,078) - ---------------------------------------------------------------------- Total shareholders' equity 276,700 355,332 - ---------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $584,944 $695,974 ====================================================================== The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - ----------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- (In thousands except per share amounts) Revenues Systems $623,451 $ 712,916 $ 770,384 Maintenance and services 291,429 292,091 325,241 - ----------------------------------------------------------------------------- Total revenues 914,880 1,005,007 1,095,625 - ----------------------------------------------------------------------------- Cost of revenues Systems 436,254 508,836 506,752 Maintenance and services 188,691 185,028 201,655 - ----------------------------------------------------------------------------- Total cost of revenues 624,945 693,864 708,407 - ----------------------------------------------------------------------------- Gross profit 289,935 311,143 387,218 Product development 62,638 76,818 90,298 Sales and marketing 169,805 219,044 233,041 General and administrative 109,336 100,936 101,026 Nonrecurring operating charges 15,596 15,343 1,095 - ----------------------------------------------------------------------------- Loss from operations (67,440) (100,998) (38,242) Gains on sales of assets 11,505 112,533 4,858 Arbitration settlements ( 8,562) --- ( 6,126) Interest expense ( 5,663) ( 7,441) ( 6,579) Other income (expense) -- net ( 2,901) ( 4,822) ( 3,401) - ----------------------------------------------------------------------------- Loss from continuing operations before income taxes (73,061) ( 728) (49,490) Income tax expense ( 5,500) ( 6,000) ( 4,000) - ----------------------------------------------------------------------------- Loss from continuing operations (78,561) ( 6,728) (53,490) Gain on sale of discontinued operation, net of income taxes 14,384 --- --- Loss from discontinued operation, net of income taxes ( 7,400) ( 12,906) (16,747) - ----------------------------------------------------------------------------- Net loss $(71,577) $ ( 19,634) $ (70,237) ============================================================================= Income (loss) per share-basic and diluted: Continuing operations $( 1.60) $ ( .14) $ ( 1.11) Discontinued operations .14 ( .27) ( .35) - ----------------------------------------------------------------------------- Net loss $( 1.46) $ ( .41) $ ( 1.46) ============================================================================= Weighted average shares outstanding-basic and diluted 48,906 48,376 47,945 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ----------------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------------- (In thousands) Cash Provided By (Used For): Operating Activities: Net loss $(71,577) $( 19,634) $(70,237) Adjustments to reconcile net loss to net cash used for operating activities: Depreciation 21,228 29,446 37,283 Amortization 26,878 25,274 23,049 Noncash portion of arbitration settlements 3,530 --- 5,835 Noncash portion of nonrecurring operating charges 9,614 11,506 --- Deferred income tax expense 45 95 1,555 Gains on sales of assets (25,889) (112,533) ( 4,858) Net changes in current assets and liabilities 26,490 34,738 (13,573) - ----------------------------------------------------------------------------- Net cash used for operating activities ( 9,681) ( 31,108) (20,946) - ----------------------------------------------------------------------------- Investing Activities: Net proceeds from sales of assets 54,056 160,487 5,749 Contributions from minority interest partner 11,732 --- --- Purchases of property, plant, and equipment (10,221) ( 17,264) (24,785) Capitalized software development costs (20,656) ( 15,738) (10,592) Capitalized internal use software costs ( 5,875) ( 802) ( 644) Purchase of software rights --- ( 26,292) --- Other ( 3,579) ( 757) ( 394) - ----------------------------------------------------------------------------- Net cash provided by (used for) investing activities 25,457 99,634 (30,666) - ----------------------------------------------------------------------------- Financing Activities: Gross borrowings --- 10,689 75,896 Debt repayment (23,605) ( 32,949) (30,950) Proceeds of employee stock purchases and exercises of stock options 2,612 2,940 3,483 - ----------------------------------------------------------------------------- Net cash provided by (used for) financing activities (20,993) ( 19,320) 48,429 - ----------------------------------------------------------------------------- Effect of exchange rate changes on cash ( 1,743) ( 378) ( 846) - ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents ( 6,960) 48,828 ( 4,029) Cash and cash equivalents at beginning of year 95,473 46,645 50,674 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 88,513 $ 95,473 $ 46,645 ============================================================================= The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------- Accumulated Total Additional Other Share- Common Paid-in Retained Comprehensive Treasury holders' Stock Capital Earnings Income (Loss) Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- (In thousands except share amounts) Balance at January 1, 1997 $5,736 $229,675 $339,679 $12,907 $(140,734) $447,263 Comprehensive loss: Net loss --- --- (70,237) --- --- (70,237) Other comprehensive loss: Net unrealized holding loss on securities of affiliate --- --- --- (6,858) --- ( 6,858) Foreign currency translation adjustments --- --- --- (4,959) --- ( 4,959) -------- Comprehensive loss --- --- --- --- --- (82,054) ======== Issuance of 432,263 shares under employee stock purchase plan --- (3,149) --- --- 6,301 3,152 Issuance of 40,187 shares upon exercise of stock options --- ( 255) --- --- 586 331 Other --- 91 --- --- --- 91 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 5,736 226,362 269,442 1,090 (133,847) 368,783 Comprehensive income (loss): Net loss --- --- (19,634) --- --- (19,634) Other comprehensive income - foreign currency translation adjustments --- --- --- 3,071 --- 3,071 -------- Comprehensive loss --- --- --- --- --- (16,563) ======== Issuance of 464,230 shares under employee stock purchase plan --- (3,829) --- --- 6,769 2,940 Other --- 172 --- --- --- 172 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 5,736 222,705 249,808 4,161 (127,078) 355,332 Comprehensive loss: Net loss --- --- (71,577) --- --- (71,577) Other comprehensive loss: Foreign currency translation adjustments --- --- --- (9,340) --- --- Less: Net translation gain realized upon sales of subsidiaries --- --- --- ( 327) --- --- ------- Net foreign currency translation adjustments --- --- --- (9,667) --- ( 9,667) ------- -------- Comprehensive loss --- --- --- --- --- (81,244) ======== Issuance of 557,713 shares under employee stock purchase plan --- (5,539) --- --- 8,130 2,591 Issuance of 16,750 shares upon exercise of stock options --- ( 223) --- --- 244 21 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $5,736 $216,943 $178,231 $(5,506) $(118,704) $276,700 ===================================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. INTERGRAPH CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES. Basis of Presentation: The consolidated financial statements include the accounts of Intergraph Corporation and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. As discussed in Note 4, the Company sold its VeriBest, Inc. operating segment on October 31, 1999 and, accordingly, its operating results have been removed from continuing operations and are reported as discontinued operations for all years presented. The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from the resolution currently anticipated by management and on which the financial statements are based. The Company's continuing operations are divided into three separate business units for operational and management purposes: Intergraph Computer Systems ("ICS"), Intergraph Public Safety, Inc. ("IPS"), and the Software and Federal Systems ("Federal") business (collectively, the Software and Federal businesses form what is termed "Intergraph"). Effective March 2000, the Federal business was renamed Intergraph Government Solutions. ICS supplies high performance Windows NT-based graphics workstations, 3D graphics subsystems, and specialty servers. IPS develops, markets, and implements systems for the public safety and utilities industries. Intergraph supplies software and solutions, including hardware, consulting, and services, to the federal government and to the process and building and infrastructure industries. The Company's products are sold worldwide, with United States and European revenues representing approximately 79% of total revenues for 1999. See Note 12 for further information regarding the Company's operating segments and the geographic markets it serves. The Company's hardware products and software applications are used for computer-aided design and engineering, mapping and geographic information services, and technical information management in industries such as process plant design, shipbuilding, utilities, communications, transportation, public safety, and local and federal government. Cash Equivalents: The Company's excess funds are generally invested in short-term, highly liquid, interest-bearing securities, which may include short-term municipal bonds, time deposits, money market preferred stocks, commercial paper, and U.S. government securities. The Company's investment policy limits the amount of credit exposure to any single issuer of securities. Cash equivalents are stated at fair market value based on quoted market prices. Investments with original maturities of three months or less are considered to be cash equivalents for purposes of financial statement presentation. The Company's investments in debt securities are valued at fair market value with any unrealized gains and losses reported as a component of shareholders' equity, net of tax. At December 31, 1999 and 1998, the Company held various debt securities within three months of maturity at those dates, with fair market values of approximately $33,000,000 and $54,000,000, respectively. Gross realized gains and losses on debt securities sold during the years ended December 31, 1999 and 1998 were not significant, and there were no unrealized holding gains or losses on debt securities at December 31, 1999 or 1998. The Company's December 31, 1999 consolidated cash balance includes approximately $13,000,000 held by a 60%-owned consolidated subsidiary. Inventories: Inventories are stated at the lower of average cost or market and are summarized as follows: - ---------------------------------------------------------- December 31, 1999 1998 - ---------------------------------------------------------- (In thousands) Raw materials $ 4,982 $ 2,739 Work-in-process 13,645 3,594 Finished goods 5,895 15,597 Service spares 11,396 16,071 - ---------------------------------------------------------- Totals $35,918 $38,001 ========================================================== On November 13, 1998, the Company sold substantially all of its U.S. manufacturing assets (including inventories with a book value of approximately $60,000,000) 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. On June 30, 1999, the Company repurchased inventory from SCI having a value of approximately $10,200,000, the majority of which is classified as raw materials and work-in-process. For a complete description of these transactions, see "SCI" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 of this annual report. In third quarter 1999, as a result of the Company's exit from the personal computer ("PC") and generic server business, the Company recorded an inventory write-down of approximately $7,000,000, primarily related to its finished goods inventory. See "Nonrecurring Operating Charges" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 17 to 19 of this annual report for further discussion. The industry in which the Company competes is characterized by rapid technological change. This technological change is an important consideration in the Company's overall inventory management program, in which the Company endeavors to carry only parts and systems utilizable with the technology of its current product offerings and as spares for the contracted maintenance of systems in its installed customer base. The Company regularly estimates the degree of technological obsolescence in its inventories and provides inventory reserves on that basis. Though the Company believes it has adequately provided for any such declines in inventory value to date, any unanticipated change in technology could significantly affect the value of the Company's inventories and thereby adversely affect gross margins and results of operations. In addition, an inability by the Company to accurately forecast its manufacturing requirements of SCI could adversely affect gross margin and results of operations. Investments in Affiliates: Investments in companies in which the Company believes it has the ability to influence operations or finances are accounted for by the equity method. Investments in companies in which the Company does not exert such influence are accounted for at fair value if such values are readily determinable, and at cost if such values are not readily determinable. Effective January 1, 1998, the Company ceased accounting for its investment in Bentley Systems, Inc. ("BSI") under the equity method due to a lack of significant influence. On April 1, 1999, as the result of an arbitration settlement with BSI, the Company's equity ownership in BSI was reduced from approximately 50% to 33%, and the book value of the Company's investment in BSI was reduced accordingly. See Note 13 and "Arbitration Settlements" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 22 to 23 of this annual report for further discussion of the Company's arbitration proceedings and business relationship with BSI. The book value of the Company's investment in BSI was approximately $9,190,000 at December 31, 1999. The Company is unable to determine the fair value of this investment. During 1997, the Company sold its stock investment in a publicly traded affiliate at a gain of $4,858,000. At January 1, 1997, the unrealized gain on this investment resulting from periodic mark-to- market adjustments totaled $6,858,000. This unrealized gain is included in "Accumulated Other Comprehensive Income (Loss)" in the consolidated statements of shareholder's equity as of that date. Property, Plant, and Equipment: Property, plant, and equipment, summarized below, is stated at cost. Depreciation is provided using the straight line method over the estimated useful lives described below. - ------------------------------------------------------------------- December 31, 1999 1998 - ------------------------------------------------------------------- (In thousands) Land and improvements (15-30 years) $ 11,278 $ 13,948 Buildings and improvements (30 years) 113,455 132,759 Equipment, furniture, and fixtures (3-8 years) 184,393 239,735 - ------------------------------------------------------------------- 309,126 386,442 Allowances for depreciation (214,219) (259,074) - ------------------------------------------------------------------- Totals $ 94,907 $127,368 =================================================================== Significant dispositions of property, plant, and equipment in 1999 include the sale-leaseback of a European office building having a net book value of approximately $9,000,000 at the date of sale (see Note 8). The remaining decline in net property, plant, and equipment is due primarily to depreciation expense and write-offs of internal systems no longer in use as the result of reductions in force and other actions taken to downsize the Company. Other Noncurrent Liabilities: Other noncurrent liabilities of $10,609,000 reflected in the Company's December 31, 1999 consolidated balance sheet consist of liabilities incurred in connection with a business acquisition in January 1999 (see Note 15), deferred gain on the sale-leaseback of a European office building (see Note 8), and minority interest in the equity of a 60%-owned subsidiary of the Company (see Note 15). Treasury Stock: Treasury stock is accounted for by the cost method. The Board of Directors of the Company has authorized the purchase of up to 20,000,000 shares of the Company's common stock in the open market. As of December 31, 1999, the Company had purchased approximately 18,800,000 shares for the treasury with the last purchase occurring in 1994. Further purchases of stock for the treasury are restricted by terms of the Company's term loan and revolving credit agreement. See Note 8. Treasury stock activity is presented in the consolidated statements of shareholders' equity. Revenue Recognition: Revenues from systems sales with no significant post-shipment obligations are recognized as equipment and/or software are shipped, with any post-shipment costs accrued at that time. Revenues on systems sales with significant post- shipment obligations, including the production, modification, or customization of software, are recognized by the percentage-of- completion method, with progress to completion measured on the basis of completion of milestones, labor costs incurred currently versus the total estimated cost of performing the contract over its term, or other factors appropriate to the individual contract of sale. The total amount of revenues to be earned under contracts accounted for by the percentage-of-completion method are generally fixed by contractual terms. The Company regularly reviews its progress on these contracts and revises the estimated costs of fulfilling its obligations. Due to uncertainties inherent in the estimation process, it is possible that completion costs will be further revised on some of these contracts, which could delay revenue recognition and decrease the gross margin to be earned. Any losses identified in the review process are recognized in full in the period in which determined. Revenues from certain contracts with the U.S. government, primarily cost-plus award fee contracts, are recognized monthly as costs are incurred and fees are earned under the contracts. Maintenance and services revenues are recognized ratably over the lives of the maintenance contracts or as services are performed. Effective January 1, 1998, the Company adopted American Institute of Certified Public Accountants Statement of Position 97-2, Software Revenue Recognition. The Statement requires each element of a software sale arrangement to be separately identified and accounted for based on the relative fair value of each element. Revenue cannot be recognized on any element of the sale arrangement if undelivered elements are essential to the functionality of delivered elements. Adoption of this new accounting standard did not significantly affect the Company's results of operations for 1998 and 1999 as the Company's revenue recognition policies have historically been in substantial compliance with the practices required by the new pronouncement. Billings may not coincide with the recognition of revenue. Unbilled accounts receivable occur when revenue recognition precedes billing to the customer, and arise primarily from commercial sales with predetermined billing schedules, U.S. government sales with billing at the end of a performance period, and U.S. government cost-plus award fee contracts. Billings in excess of sales occur when billing to the customer precedes revenue recognition, and arise primarily from maintenance revenue billed in advance of performance of the maintenance activity and systems revenue recognized on the percentage-of-completion method. Product Development Costs: The Company capitalizes certain costs of computer software development incurred after the technological feasibility of the product has been established. Such capitalized costs are amortized on a straight line basis over a period of two to five years. Amortization of these capitalized costs, included in "Cost of revenues - Systems" in the consolidated statements of operations, amounted to $14,600,000 in 1999, $12,700,000 in 1998, and $10,500,000 in 1997. Amortization included in discontinued operations amounted to $2,400,000 in 1999, $2,900,000 in 1998, and $3,100,000 in 1997. The unamortized balance of these capitalized costs, included in "Other assets" in the consolidated balance sheets, totaled $23,500,000 and $23,000,000 at December 31, 1999 and 1998, respectively. Although the Company regularly reviews its capitalized development costs to ensure recognition of any decline in value, it is possible that for any given product revenues will not materialize in amounts anticipated due to industry conditions that include intense price and performance competition, or that product lives will be reduced due to shorter product cycles. Should either of these events occur, the carrying amount of capitalized development costs would be reduced, producing adverse effects on systems cost of revenues and results of operations. Foreign Currency Exchange and Translation: 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. Foreign currency gains and losses resulting from remeasurement or settlement of receivables and payables denominated in a currency other than the functional currency, together with gains and losses and fees paid in connection with the Company's forward exchange contracts, are included in "Other income (expense) - net" in the consolidated statements of operations. Net exchange gains (losses) from continuing operations totaled ($1,300,000) in 1999, $400,000 in 1998, and ($2,200,000) in 1997. Translation gains and losses resulting from translation of subsidiaries' financial statements from the functional currency into dollars for U.S. reporting purposes and foreign currency gains and losses resulting from remeasurement of intercompany advances of a long-term investment nature are included in the "Accumulated other comprehensive income (loss) - cumulative translation adjustment" component of shareholders' equity. Derivative Financial Instruments: Derivatives utilized by the Company consist of forward exchange contracts and interest rate swap agreements. The Company is prohibited by policy from taking derivative positions exceeding its known balance sheet exposures and from otherwise trading in derivative financial instruments. 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. 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 significant 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 are purchased with maturities reflecting the expected settlement dates of the balance sheet items being hedged, which are generally less than three months, and only in amounts sufficient to offset possibly significant currency rate related changes in the recorded values of these balance sheet items. The Company does not generally hedge the exposures related to other foreign currency denominated assets and liabilities unless a significant risk has been identified. Forward exchange contracts are accounted for under the fair value method. Under this method, realized and unrealized gains and losses on forward exchange contracts are recognized as offsets to gains and losses resulting from the underlying hedged transactions in the period in which exchange rates change and are included in "Other income (expense) - net" in the consolidated statements of operations. Bank fees charged on the contracts are amortized over the period of the contract. Gain or loss on termination of a forward exchange contract is recognized in the period in which the contract is terminated. In the event of early settlement of a hedged intercompany asset or liability, the related forward exchange contract gains or losses are recognized in the period in which exchange rates change. The Company enters into interest rate swap agreements to reduce the risk of increases in interest rates on certain of its outstanding floating rate debt. The Company enters into agreements in which the principal and term of the interest rate swap match those of the specific debt obligation being hedged. The Company pays a fixed rate of interest and receives payment based on a variable rate of interest, and is thus exposed to market risk of potential decreases in interest rates. Interest rate swap agreements are accounted for under the accrual method. Under this method, the differences in amounts paid and received under interest rate swap agreements are recognized in the period in which the payments and receipts occur and are included in "Interest expense" in the consolidated statements of operations. Gain or loss on termination of an interest rate swap agreement is deferred and amortized as an adjustment to interest expense over the remaining term of the original contract life of the terminated swap agreement. In the event of early extinguishment of a debt obligation, any realized or unrealized gain or loss on the related swap agreement is recognized in income coincident with the extinguishment gain or loss. Amounts payable to or receivable from counterparties related to derivative financial instruments are included in "Other accrued expenses" or "Other current assets" in the consolidated balance sheets. These amounts were not significant at December 31, 1999 or 1998. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), requiring companies to recognize all derivatives as either assets or liabilities on the balance sheet and to measure the instruments at fair value. In July 1999, the FASB delayed the implementation of this new accounting standard to fiscal years beginning after June 15, 2000 (calendar year 2001 for the Company). The Company is evaluating the effects of adopting SFAS 133 but does not anticipate a significant impact on its consolidated operating results or financial position. See Note 5 for further details of the Company's derivative financial instruments. Stock-Based Compensation Plans: The Company maintains a stock purchase plan and two fixed stock option plans for the benefit of its employees. Under the stock purchase plan, employees purchase stock of the Company at 85% of the closing market price of the Company's stock as of the last pay date of each calendar month. No compensation expense is recognized for the difference in price paid by employees and the fair market value of the Company's stock at the date of purchase. Under the fixed stock option plans, stock options may be granted to directors and other employees at fair market value or at a price less than fair market value at the date of grant. No compensation expense is recognized for options granted at fair market value. Expense associated with grants at less than fair market value, equal to the difference in exercise price and fair market value at the date of grant, is recognized over the vesting period of the options. In accordance with the disclosure provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company has provided pro forma basis information to reflect results of operations and earnings per share had compensation expense been recognized for employee stock purchases and for stock options granted at market value at date of grant. See Note 10. Income Taxes: The provision for income taxes includes federal, international, and state income taxes currently payable or refundable and income taxes deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. See Note 9. Net Loss Per Share: Basic loss per share is computed using the weighted average number of common shares outstanding. Diluted loss per share is computed using the weighted average number of common and equivalent common shares outstanding. Employee stock options are the Company's only common stock equivalent and are included in the calculation only if dilutive (see Note 10). Comprehensive Income: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. Under this Statement, all nonowner changes in equity during a period are reported as a component of comprehensive income (loss). With respect to the Company, such nonowner equity items include foreign currency translation adjustments and unrealized gains and losses on certain investments in debt and equity securities. The Company's comprehensive losses for each year in the three year period ended December 31, 1999 are displayed in the Consolidated Statements of Shareholders' Equity. Accumulated other comprehensive income (loss) at the end of each of these three years consisted of foreign currency translation adjustments. There was no income tax effect related to any of the items included in other comprehensive income (loss) for any year in the three year period ended December 31, 1999. See Note 9 for details of the Company's tax position, including net operating loss carryforwards, and its policy for reinvestment of subsidiary earnings. Reclassifications: Certain reclassifications have been made to the previously reported consolidated statements of operations and cash flows for the years ended December 31, 1998 and 1997 to provide comparability with the current year presentation. NOTE 2 -- LITIGATION AND OTHER RISKS AND UNCERTAINTIES. In addition to those described in Notes 1, 5, 7, 8, and 12, the Company has certain risks related to its business and economic environment and has extensive ongoing litigation with Intel Corporation, as further described in "Litigation and Other Risks and Uncertainties" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 19 to 22 of this annual report. NOTE 3 -- NONRECURRING OPERATING CHARGES. The Company recorded nonrecurring operating charges from continuing operations totaling $22,596,000 (including a $7,000,000 inventory write-down recorded as a component of "Cost of revenues - Systems") in 1999, $15,343,000 in 1998, and $1,095,000 in 1997. For a complete description of these charges, see "Nonrecurring Operating Charges" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 17 to 19 of this annual report. NOTE 4: -- DISCONTINUED OPERATIONS. On October 31, 1999, the Company sold its VeriBest, Inc. operating segment to Mentor Graphics Corporation, a global provider of electronic hardware and software design solutions and consulting services, for approximately $11,000,000, primarily in the form of cash received at closing. The resulting gain on this transaction of $14,384,000 is reflected in "Gain on sale of discontinued operation, net of income taxes" in the consolidated statement of operations for the year ended December 31, 1999. The Company's consolidated statements of operations for each year in the three year period ended December 31, 1999 have been restated to reflect VeriBest's business as a discontinued operation. Discontinued operations have not been presented separately in the consolidated balance sheet for December 31, 1998 or in the consolidated statements of cash flows. Other than their operating losses for the periods presented, the discontinued operations did not have a significant impact on the Company's consolidated cash flow or financial position. Summarized financial information for VeriBest is presented below. For this presentation, VeriBest's operating and net losses for each year in the three year period ended December 31, 1999 have been adjusted to exclude the impact of intercompany revenue and expense items. - ------------------------------------------------------------------------ Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------ (In thousands) Revenues from unaffiliated customers $23,704 $27,783 $28,680 Operating loss before nonrecurring charges (6,460) (12,708) (16,674) Nonrecurring operating charges 871 500 --- Net loss $(7,400) $(12,906) $(16,747) ======================================================================== VeriBest's assets and liabilities at December 31, 1998 totaled $15,274,000 and $11,064,000, respectively. NOTE 5 -- FINANCIAL INSTRUMENTS. Information related to the Company's financial instruments, other than cash equivalents and stock investments in less than 50%-owned companies, is summarized below. Short- and Long-Term Debt: The balance sheet carrying amounts of the Company's floating rate debt (approximately $53,000,000 at December 31, 1999), consisting primarily of loans under a revolving credit agreement, mortgages, and a term loan (see Note 8), approximate fair market values since interest rates on the debt adjust periodically to reflect changes in market rates of interest. With the exception of the Australian term loan (see Note 8), the Company is exposed to market risk of future increases in interest rates on these loans. The carrying amounts of fixed rate debt approximate fair market values based on current interest rates for debt of the same remaining maturities and character. Convertible debenture: As part of the proceeds of the April 1999 sale of its InterCAP subsidiary (see Note 15), the Company received a $5,797,000 convertible subordinated debenture from Micrografx, Inc. due on March 31, 2002. The conversion feature allows the Company to convert the debenture into shares of Micrografx common stock in multiples of $500,000 at a conversion price of $10. This conversion price may be adjusted, at Micrografx's option, based on the twenty day average closing price of Micrografx stock on three reset dates specified in the agreement. Micrografx also has an option to convert the debenture into shares of their common stock if the twenty day average closing price is at least 120% of the applicable conversion price. The Company is unable to estimate the fair value of the conversion option, but does not anticipate conversion of the debenture by either party in the near term. Accordingly, at December 31, 1999, the debenture is recorded at its face value of $5,797,000 and included in "Other assets" in the Company's consolidated balance sheet as of that date. Stock warrant: As part of the proceeds of the October 1999 sale of its VeriBest operating segment (see Note 4), the Company received a warrant to purchase 500,000 shares of the common stock of Mentor Graphics, Inc. at a price of $15 per share. The warrant becomes exercisable on October 31, 2001 and expires on October 31, 2002. The Company's estimated value of the warrant is included in "Investments in affiliates" in the Company's December 31, 1999 consolidated balance sheet. This value was determined using the Black-Scholes option pricing model as of the date of the sale and as such, does not represent the actual value, if any, that will be realized upon exercise of the warrant. Forward exchange contracts: Outstanding notional amounts of the Company's forward exchange contracts were $808,000 and $7,586,000 at December 31, 1999 and 1998, respectively, both reflecting a net commitment to purchase currencies. These notional amounts were determined by translating the foreign currency amounts to dollars at the rates in effect at each balance sheet date. They do not necessarily represent amounts to be exchanged between the Company and the counterparties to the forward exchange contracts, and as such they do not represent the amount of the Company's currency related exposures at those dates. The amounts potentially subject to risk, arising from the possible inability of the counterparties to meet the terms of the contracts, are generally limited to the amounts, if any, by which the counterparties' obligations exceed those of the Company. Net receivables from/payables to counterparties related to forward exchange contracts were not significant at December 31, 1999 or 1998. The carrying amounts approximated fair value at those dates due to the short duration (generally three months or less) of the contracts. Forward exchange contracts outstanding at December 31, 1999 and 1998 relate solely to formalized intercompany loans between the Company's European subsidiaries. As of first quarter 1998, the Company is no longer hedging its U.S. exposures related to foreign currency denominated intercompany loans. Based on the terms of outstanding forward exchange contracts and the amount of the related balance sheet exposures at December 31, 1999, the Company's results of operations would not be materially affected by a 10% increase or decrease in exchange rates underlying the contracts and the exposures hedged. Cash requirements of forward exchange contracts are limited to receipt of an amount equal to the exchange gain or payment of an amount equal to the exchange loss at the contract settlement date, and payment of bank fees related to the contracts. Net cash flow from forward contract activity, consisting of realized gains and losses from settlement of exposed assets and liabilities at exchange rates in effect at the settlement date rather than at the time of recording, settlement of the forward contracts purchased to mitigate the exposures, and payment of bank fees on the forward contracts, was not significant for any year in the three year period ended December 31, 1999. Interest rate swap agreements: In 1996, the Company entered into an interest rate swap agreement in the principal amount of its Australian term loan agreement (approximately $8,100,000 at December 31, 1999). The agreement is for a period of approximately six years, and its expiration date coincides with that of the term loan. Under the agreement, the Company pays a 9.18% fixed rate of interest and receives payment based on a variable rate of interest. The weighted average receive rate of the agreement at December 31, 1999 and 1998 was 5.84% and 6.54%, respectively. The fair market value of this interest rate swap agreement at December 31, 1999 was approximately $300,000 ($600,000 at December 31, 1998). Fair market value was determined by obtaining a bank quote and represents the amount the Company would pay should the Company's obligation under the instrument be transferred to a third party at the reporting date. Cash requirements of the Company's interest rate swap agreement are limited to the differential between the fixed rate paid and the variable rate received. NOTE 6 -- SUPPLEMENTARY CASH FLOW INFORMATION. Changes in current assets and liabilities, net of the effects of business acquisitions and divestitures and nonrecurring operating charges, in reconciling net loss to net cash used for operations are as follows: - ------------------------------------------------------------------------------ Cash Provided By (Used For) Operations Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------ (In thousands) (Increase) decrease in: Accounts receivable $47,418 $16,939 $(25,624) Inventories 3,994 7,580 (21,296) Other current assets 5,426 8,706 9,905 Increase (decrease) in: Trade accounts payable (17,194) 2,600 11,449 Accrued compensation and other accrued expenses (11,433) (2,527) 5,258 Income taxes payable 1,876 878 ( 1,135) Billings in excess of sales ( 3,597) 562 7,870 - ------------------------------------------------------------------------------ Net changes in current assets and liabilities $26,490 $34,738 $(13,573) ============================================================================== Cash payments for income taxes totaled $9,300,000, $5,200,000, and $6,100,000 in 1999, 1998, and 1997, respectively. Cash payments for interest in those years totaled $5,700,000, $7,700,000, and $6,400,000, respectively. Significant noncash investing and financing transactions in 1999 included the acquisition of a business in part for future obligations totaling approximately $3,300,000 and the sale of a subsidiary of the Company in part for a convertible subordinated debenture with a value of $5,797,000. See Note 15. Investing and financing transactions in 1998 that did not require cash included the sale of assets in part for a deferred installment payment of approximately $20,000,000 (see Note 15). Investing and financing transactions in 1997 that did not require cash included the sale of two noncore business units of the Company in part for notes receivable and future royalties totaling $3,950,000. NOTE 7 -- ACCOUNTS RECEIVABLE. Concentrations of credit risk with respect to accounts receivable are limited due to the diversity of the Company's customer base. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Historically, the Company has not experienced significant losses related to trade receivables from individual customers or from groups of customers in any geographic area, with the exception of the 1994 write-off of a $5,500,000 receivable from a Middle Eastern customer. The Company's total accounts receivable from Middle Eastern customers approximated $20,100,000 at December 31, 1999, and $22,900,000 at December 31, 1998. Revenues from the U.S. government were $149,300,000 in 1999, $166,100,000 in 1998, and $177,100,000 in 1997, representing approximately 16% of total revenue in all three years. Accounts receivable from the U.S. government was approximately $33,300,000 and $55,200,000 at December 31, 1999 and 1998, respectively. 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 52% of the Company's 1999 federal government revenues were 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 the Company. Accounts receivable includes unbilled amounts of $64,400,000 and $77,400,000 at December 31, 1999 and 1998, respectively. These amounts include amounts due under long-term contracts of approximately $16,400,000 and $25,000,000 at December 31, 1999 and 1998, respectively. The Company maintained reserves for uncollectible accounts, included in "Accounts receivable" in the consolidated balance sheets at December 31, 1999 and 1998, of $16,100,000 and $13,800,000, respectively. NOTE 8 -- DEBT AND LEASES. Short- and long-term debt is summarized as follows: - -------------------------------------------------------------------- December 31, 1999 1998 - -------------------------------------------------------------------- (In thousands) Revolving credit agreement and term loan $27,470 $39,461 Australian term loan 8,141 9,963 Long-term mortgages 13,402 20,712 Other secured debt 9,800 9,210 Short-term credit facilities 3,690 3,312 Other 423 555 - -------------------------------------------------------------------- Total debt 62,926 83,213 Less amounts payable within one year 11,547 23,718 - -------------------------------------------------------------------- Total long-term debt $51,379 $59,495 ==================================================================== Under the Company's January 1997 six year fixed term loan and revolving credit agreement, as amended, available borrowings are determined by the amounts of eligible assets of the Company (the "borrowing base"), as defined in the agreement, primarily accounts receivable, with maximum availability of $100,000,000. The $25,000,000 term loan portion of the agreement is due at expiration of the agreement. Borrowings are secured by a pledge of substantially all of the Company's assets in the U.S. and certain international receivables. The rate of interest on all borrowings under the agreement is the greater of 7% or the Norwest Bank Minnesota National Association base rate of interest (8.5% at December 31, 1999) plus .625%. The amended agreement contains provisions which will lower the interest rate upon achievement of sustained profitability by the Company. The average effective rate of interest for the period of time in 1999 during which the Company had outstanding borrowings under this agreement was 8.7% (9.1% in 1998). The agreement requires the Company to pay a facility fee at an annual rate of .15% of the amount available under the credit line, an unused credit line fee at an annual rate of .25% of the average unused portion of the revolving credit line, a letter of credit fee at an annual rate of 1.5% of the undrawn amount of all outstanding letters of credit, and a monthly agency fee. At December 31, 1999, the Company had outstanding borrowings of $27,470,000, the $25,000,000 term loan portion of which was classified as long-term debt in the consolidated balance sheet, and an additional $32,400,000 of the available credit line was allocated to support the Company's letters of credit and forward exchange contracts. As of this same date, the borrowing base, representing the maximum available credit under the line, was approximately $69,300,000 ($68,500,000 at February 29, 2000). The term loan and revolving credit agreement contains certain financial covenants of the Company, including minimum net worth, minimum current ratio, and maximum levels of capital expenditures, and restrictive covenants that limit or prevent various business transactions (including repurchases of the Company's stock, dividend payments, mergers, acquisitions of or investments in other businesses, and disposal of assets including individual businesses, subsidiaries, and divisions) and limit or prevent certain other business changes without approval. The amended agreement has reduced the Company's net worth covenant to $235,000,000 at December 31, 1999, with subsequent reductions to $216,000,000 at March 31, 2000 and $200,000,000 at June 30, 2000. Additionally, the amended agreement requires the Company to retain the services of an investment banking firm to advise the Company regarding potential partnering arrangements and other alternatives for its computer hardware business. In August 1995, the Company entered into a term loan agreement with an Australian bank totaling 35,000,000 Australian dollars (approximately $23,000,000). The loan is payable in varying installments through August 2002 and bears interest at the bank's variable short-term lending rate, which ranged from 5% to 5.15% in 1999 (4.9% to 5.36% in 1998). Letters of credit totaling approximately $8,100,000 are pledged as security under the loan agreement. During 1996, the Company entered into a six year interest rate swap agreement in the amount of the term loan to reduce the risk of increases in interest rates, effectively converting the interest rate on this loan to a fixed rate of 9.58%. In 1998, the fixed pay rate was lowered to 9.18%. The Company has two long-term mortgages on certain of its European facilities, payable in varying installments through the year 2010. One of the mortgages bears interest at the floating Euro Interbank Offered Rate ("Euribor") plus 1%. Prior to January 1, 1999, interest on this mortgage was based on the Amsterdam Interbank Offering Rate ("AIBOR"). Rates paid on this mortgage ranged from 3.9% to 4.6% in 1999 (4.3% to 4.6% in 1998). The second mortgage, which was entered into in December 1998, bears interest at the United Kingdom base rate plus 1%. Rates paid on this mortgage ranged from 6% to 7.25% in 1999. In November 1999, the Company entered into an agreement for the sale and leaseback of its European headquarters office building in the Netherlands. The lease has an initial term of ten years with an early termination option after five years. The lease is accounted for as an operating lease in accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases. The net book value of the building of approximately $9,000,000 has been removed from the Company's books, and the gain realized on the sale of approximately $4,200,000 has been deferred and will be credited to income over the ten year lease term. Payments under the lease, which are denominated in Dutch Guilders, approximate $1,200,000 per year and are included in the future minimum lease payments presented below for the first five years of the lease. A portion of the proceeds from the sale was used to pay off the mortgage on the building. At the date of payment, the outstanding principal on the mortgage was approximately $4,200,000. Interest rates paid on this mortgage, which were based on Euribor in 1999 and AIBOR in 1998, ranged from 3.7% to 4.3% for the period in 1999 during which the mortgage was outstanding and from 4.3% to 4.8% in 1998. Other secured debt consists of debt to various financial institutions payable in varying installments through 2017 and secured by certain assets of the Company, including facilities and internally used computer software and equipment. In March of 1997, the Company entered into an agreement for the sale and leaseback of one of its facilities. The amount borrowed totals approximately $8,300,000 and is payable over a period of 20 years at an implicit rate of interest of 10.7%. The weighted average interest rate on this and all other secured debt was approximately 10.5% for 1999 and 11% for 1998. In February 2000, the Company entered into a lease termination agreement with the owner of this facility and vacated the premises. See Note 5 for discussion of fair values of the Company's debt and interest rate swap agreements. The Company leases various property, plant, and equipment under operating leases as lessee. Rental expense for operating leases was $25,100,000 in 1999, $26,600,000 in 1998, and $30,400,000 in 1997. Subleases and contingent rentals are not significant. Future minimum lease payments, by year and in the aggregate, under noncancelable operating leases with initial or remaining terms of one year or more are as follows: - -------------------------------------------------------- Operating Lease Commitments - -------------------------------------------------------- (In thousands) 2000 $18,800 2001 12,800 2002 9,100 2003 6,100 2004 4,100 Thereafter 21,700 - -------------------------------------------------------- Total future minimum lease payments $72,600 ======================================================== NOTE 9 -- INCOME TAXES. The components of loss from continuing operations before income taxes are as follows: - ----------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------- (In thousands) U.S. $(68,150) $ 6,301 $(43,035) International ( 4,911) ( 7,029) ( 6,455) - ----------------------------------------------------------------------- Loss from continuing operations before income taxes $(73,061) $( 728) $(49,490) ======================================================================= Income tax expense consists of the following: - ----------------------------------------------------------------------- Year Ended December 31, 1999 1998 1997 - ----------------------------------------------------------------------- (In thousands) Current benefit (expense): Federal $(1,327) $(3,353) $ 1,400 International (4,128) (2,552) (3,845) - ----------------------------------------------------------------------- Total current (5,455) (5,905) (2,445) - ----------------------------------------------------------------------- Deferred benefit (expense): Federal --- --- (1,726) International ( 45) ( 95) 171 - ----------------------------------------------------------------------- Total deferred ( 45) ( 95) (1,555) - ----------------------------------------------------------------------- Total income tax expense $(5,500) $(6,000) $(4,000) ======================================================================= Deferred income taxes included in the Company's balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax return purposes. Significant components of the Company's deferred tax assets and liabilities are as follows: - -------------------------------------------------------------------------- December 31, 1999 1998 - -------------------------------------------------------------------------- (In thousands) Current Deferred Tax Assets (Liabilities): Inventory reserves $ 13,066 $ 13,348 Vacation pay and other employee benefit accruals 5,841 5,705 Other financial statement reserves, primarily allowances for doubtful accounts and warranty 9,142 10,333 Profit on uncompleted sales contracts ( 806) 3,074 Other current tax assets and liabilities, net 3,435 ( 1,298) - -------------------------------------------------------------------------- 30,678 31,162 Less asset valuation allowance ( 28,445) (28,344) - -------------------------------------------------------------------------- Total net current asset (1) 2,233 2,818 - -------------------------------------------------------------------------- Noncurrent Deferred Tax Assets (Liabilities): Net operating loss and tax credit carryforwards: U.S. federal and state 69,895 56,636 International operations 39,446 43,555 Depreciation ( 1,495) ( 8,116) Capitalized software development costs ( 7,704) ( 7,281) Other noncurrent tax assets and liabilities, net 3,639 3,194 - -------------------------------------------------------------------------- 103,781 87,988 Less asset valuation allowance (106,401) (91,130) - -------------------------------------------------------------------------- Total net noncurrent liability ( 2,620) ( 3,142) - -------------------------------------------------------------------------- Net deferred tax liability $( 387) $( 324) ========================================================================== (1) Included in "Other current assets" in the consolidated balance sheets. The valuation allowance for deferred tax assets, which consists primarily of reserves against the tax benefit of net operating loss carryforwards, increased by $15,372,000 in 1999 due to increases in deferred tax assets of $6,159,000 arising from changes in deductible temporary differences and an increase of $9,150,000 in the benefit from net operating loss carryforwards. If realized, these reserved tax benefits will be applied to reduce income tax expense in the year of realization. Net operating loss carryforwards are available to offset future earnings within the time periods specified by law. At December 31, 1999, the Company had a U.S. federal net operating loss carryforward of approximately $159,000,000 expiring from 2009 through 2020. International net operating loss carryforwards total approximately $107,000,000 and expire as follows: - ------------------------------------------------------- International Net Operating Loss December 31, 1999 Carryforwards - ------------------------------------------------------- (In thousands) Expiration: 3 years or less $ 21,000 4 to 5 years 16,000 6 to 10 years 3,000 Unlimited carryforward 67,000 - ------------------------------------------------------- Total $107,000 ======================================================= Additionally, the Company has $3,500,000 of U.S. alternative minimum tax credit carryforward which has no expiration date. U.S. research and development tax credit carryforwards of $7,800,000 are available to offset regular tax liability through 2012. A reconciliation from income tax benefit at the U.S. federal statutory tax rate of 35% to the Company's income tax expense for continuing operations is presented below. There was no material income tax benefit or expense related to the Company's discontinued operation. - ------------------------------------------------------------------------------ Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------ (In thousands) Income tax benefit at federal statutory rate $ 25,571 $ 255 $ 17,322 Alternative minimum tax 453 ( 453) --- Tax effects of international operations, net (10,417) (6,760) ( 4,828) Tax effect of U.S. tax loss carried forward (20,607) 5,107 (18,019) Prior year taxes ( 762) (2,482) 1,165 Other - net 262 (1,667) 360 - ------------------------------------------------------------------------------ Income tax expense $( 5,500) $(6,000) $( 4,000) ============================================================================== The Company does not provide for federal income taxes or tax benefits on the undistributed earnings or losses of its international subsidiaries because earnings are reinvested and, in the opinion of management, will continue to be reinvested indefinitely. At December 31, 1999, the Company had not provided federal income taxes on earnings of individual international subsidiaries of approximately $22,000,000. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in the various international jurisdictions. Determination of the related amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. Withholding taxes of approximately $600,000 would be payable if all previously unremitted earnings as of December 31, 1999 were remitted to the U.S. company. NOTE 10 -- STOCK-BASED COMPENSATION PLANS. The Intergraph Corporation 1997 Stock Option Plan was approved by shareholders in May 1997. Under this plan, the Company reserved a total of 3,000,000 shares of common stock to grant as options to key employees. In May 1999, the plan was amended to increase the number of shares of common stock that may be issued pursuant to the plan by 2,000,000 shares. Options may be granted at fair market value or at a price less than fair market value on the date of grant. Options are not exercisable prior to twenty four months from the date of grant or later than ten years after the date of grant. At December 31, 1999, 2,654,937 shares were available for future grants. The Intergraph Corporation Nonemployee Director Stock Option Plan was approved by shareholders in May 1998. The Company has reserved a total of 250,000 shares of common stock to grant as options under this plan. The exercise price of each option granted is the fair market value on the date of grant. Options are not exercisable prior to one year from the date of grant or later than ten years after the date of grant. Upon approval of this plan, members of the Company's Board of Directors who were not otherwise employed by the Company were granted options to purchase 3,000 shares of the Company's common stock. Any new nonemployee director will similarly be granted an option to purchase 3,000 shares of common stock upon his or her first election to the Board. At each annual meeting of shareholders, each nonemployee director re-elected to the Board is granted an option to purchase 1,500 shares of the Company's common stock. Options to purchase 4,500 and 12,000 shares of the Company's common stock were granted in 1999 and 1998, respectively, under this plan. At December 31, 1999, 233,500 shares were available for future grants. Under the 1995 Employee Stock Purchase Plan, 3,200,000 shares of common stock were made available for purchase through a series of five consecutive annual offerings each June beginning June 1, 1995. In order to purchase stock, each participant may have up to 10% of his or her pay, not to exceed $25,000 in any offering period, withheld through payroll deductions. All full time employees, except members of the Administrative Committee of the Plan, are eligible to participate. The purchase price of each share is 85% of the closing market price of the Company's common stock on the last pay date of each calendar month. Employees purchased 557,713, 464,230, and 432,263 shares of stock in 1999, 1998, and 1997, respectively, under the 1995 plan. At December 31, 1999, 1,201,521 shares were available for future purchases. The Company's Board of Directors has approved a successor plan with substantially the same terms as the 1995 plan which will be voted upon at the Annual Meeting of Shareholders in May 2000. As allowed under the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), the Company has elected to apply Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock-based plans. Accordingly, the Company has recognized no compensation expense for these plans. Had the Company accounted for its stock-based compensation plans based on the fair value of awards at grant date consistent with the methodology of SFAS 123, the Company's net loss and loss per share would have been increased as indicated below. The effects of applying SFAS 123 on a pro forma basis for the three year period ended December 31, 1999 are not likely to be representative of the effects on reported pro forma net income (loss) for future years as options vest over several years and as it is anticipated that additional grants will be made in future years. - ------------------------------------------------------------------------ Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------ (In thousands except per share amounts) Net loss As reported $(71,577) $(19,634) $(70,237) Pro forma $(74,018) $(21,496) $(72,497) Basic and diluted loss per share As reported $( 1.46) $( .41) $( 1.46) Pro forma $( 1.51) $( .44) $( 1.51) ======================================================================== Under the methodology of SFAS 123, the fair value of the Company's fixed stock options was estimated at the date of grant using the Black-Scholes option pricing model. The multiple option approach was used, with assumptions for expected option life of 1.38 years after vest date in all three years and 48% expected volatility for the market price of the Company's stock in 1999 (45% in 1998 and 43% in 1997). Dividend yield is excluded from the calculation since it is the present policy of the Company to retain all earnings to finance operations. Risk free interest rates were determined separately for the grants in each year and are as follows: - ---------------------------------------------- Risk Free Interest Rates Expected Life ------------------------ (in years) 1999 1998 1997 - ---------------------------------------------- 2.38 5.64% 4.13% --- 3.38 5.73% 4.19% 6.28% 4.38 5.87% 4.28% 6.38% 5.38 6.00% 4.40% 6.34% 6.38 6.07% 4.53% 6.46% ============================================== The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because the subjectivity of assumptions can materially affect estimates of fair value, the Company believes the Black-Scholes model does not necessarily provide a reliable single measure of the fair value of its employee stock options. Shares issued under the Company's stock purchase plan were valued at the difference between the market value of the stock and the discounted purchase price of the shares on the date of purchase. The date of grant and the date of purchase coincide for this plan. The weighted average grant date fair values of options granted to employees during 1999, 1998, and 1997 were $2.49, $2.37, and $3.66, respectively, under the 1997 and Nonemployee Director stock option plans and $.82, $1.12, and $1.29, respectively, under the 1995 stock purchase plan. Activity in the Company's fixed stock option plans for each year in the three year period ended December 31, 1999 is summarized as follows:
- ---------------------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------- ---------------------- ----------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 3,587,173 $ 7.63 2,259,923 $ 9.61 1,831,417 $10.38 Granted at fair value 220,500 5.17 1,733,000 5.41 672,250 7.99 Exercised ( 16,750) 1.27 --- --- ( 40,187) 8.23 Expired --- --- --- --- ( 30,000) 16.00 Forfeited (240,627) 8.34 (405,750) 9.21 (173,557) 10.65 - ---------------------------------------------------------------------------------------------------------- Outstanding at end of year 3,550,296 $ 7.46 3,587,173 $ 7.63 2,259,923 $ 9.61 ========================================================================================================== Exercisable at end of year 1,044,111 $10.22 728,171 $10.22 540,922 $ 9.62 ==========================================================================================================
Further information relating to stock options outstanding at December 31, 1999 is as follows:
- ---------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------ ------------------------ Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Prices Number Contractual Life Exercise Price Number Exercise Price - ---------------------------------------------------------------------------------------------- $ 5.063 to $ 6.969 1,878,500 8.87 years $ 5.36 --- --- $ 7.00 to $ 9.50 841,786 6.37 years 8.52 422,976 $ 8.87 $10.125 to $12.25 830,010 5.60 years 11.12 621,135 11.15 - ---------------------------------------------------------------------------------------------- 3,550,296 7.51 years $ 7.46 1,044,111 $10.22 ==============================================================================================
Options exercised during 1999 with a weighted average exercise price of $1.27 per share were granted in 1995 as the result of a business acquisition in which the Company assumed the total shares and price obligations under the acquired company's stock option plans. As of December 31, 1999, all of the options assumed as a result of this business acquisition have either been exercised or cancelled. All option grants during the three year period ended December 31, 1999 were at the fair market value of the Company's stock on the date of grant. NOTE 11 -- EMPLOYEE BENEFIT PLANS. The Intergraph Corporation Stock Bonus Plan was established in 1975 to provide retirement benefits to substantially all U.S. employees. Effective January 1, 1987, the Company amended the Plan to qualify it as an employee stock ownership plan (ESOP). The Company made contributions to the Plan in amounts determined at the discretion of the Board of Directors, and the contributions were funded with Company stock. Amounts were allocated to the accounts of participants based on compensation. Benefits are payable to participants subject to the vesting provisions of the Plan. The Company has not made a contribution to the Plan since 1991. In 1990, the Company established the Intergraph Corporation SavingsPlus Plan, an employee savings plan qualified under Section 401(k) of the Internal Revenue Code, covering substantially all U.S. employees. Employees can elect to contribute up to 15% of their compensation to the Plan. The Company matches 50% of employee contributions up to 6% of each employee's compensation. Cash contributions by the Company to the Plan were $4,143,000, $5,082,000, and $5,148,000, in 1999, 1998, and 1997, respectively. The Company maintains various retirement benefit plans for employees of its international subsidiaries, primarily defined contribution plans that cover substantially all employees. Contributions to the plans are made in cash and are allocated to the accounts of participants based on compensation. Benefits are payable based on vesting provisions contained in each plan. Contributions to the plans were $2,873,000, $3,110,000, and $3,244,000 in 1999, 1998, and 1997, respectively. NOTE 12 -- SEGMENT INFORMATION. The Company's operating segments are Intergraph Computer Systems ("ICS"), Intergraph Public Safety, Inc. ("IPS"), and the Software and Federal Systems ("Federal") business (collectively, the Software and Federal businesses form what is termed "Intergraph"). On October 31, 1999, the Company sold its VeriBest operating segment and, accordingly, its operating results are reflected in "Loss from discontinued operation, net of income taxes" in the Company's consolidated statements of operations for each year in the three year period ended December 31, 1999. A complete description of this transaction and its impact on the Company's results of operations and financial position, including summarized financial information for each year in the three year period ended December 31, 1999, is included in Note 4. The Company's reportable segments are strategic business units which are organized by the types of products sold and the specific markets served. They are managed separately due to unique technology and marketing strategy resident in each of the Company's markets. ICS supplies high performance Windows NT-based graphics workstations, 3D graphics subsystems, and specialty servers. IPS develops, markets, and implements systems for the public safety and utilities industries. Intergraph supplies software and solutions, including hardware purchased from ICS, consulting, and services to the process and building and infrastructure industries and provides services and specialized engineering and information technology to support Federal government programs. The Company evaluates performance of the operating segments based on revenue and income from operations. The accounting policies of the reportable segments are the same as those described in Note 1. Sales among the operating segments, the most significant of which are sales of hardware products and maintenance from ICS to the other segments, are accounted for under a transfer pricing policy. Transfer prices approximate prices that would be charged for the same or similar property to similarly situated unrelated buyers. In the U.S., intersegment sales of products and services to be used for internal purposes are charged at cost. For international subsidiaries, transfer price is charged on intersegment sales of products and services to be used for either internal purposes or sale to customers. The following table sets forth revenues and operating income (loss) by operating segment for the years ended December 31, 1999 and 1998, together with supplementary information related to depreciation and amortization expense attributable to the operating segments. - -------------------------------------------------------------- Year Ended December 31, 1999 1998 - -------------------------------------------------------------- (In thousands) Revenues: ICS: Unaffiliated customers $ 214,476 $ 229,005 Intersegment revenues 117,631 218,103 - -------------------------------------------------------------- 332,107 447,108 - -------------------------------------------------------------- IPS: Unaffiliated customers 84,932 87,881 Intersegment revenues 11,333 5,537 - -------------------------------------------------------------- 96,265 93,418 - -------------------------------------------------------------- Intergraph Software: Unaffiliated customers 462,492 520,714 Intersegment revenues 13,860 10,819 - -------------------------------------------------------------- 476,352 531,533 - -------------------------------------------------------------- Intergraph Federal: Unaffiliated customers 152,980 167,407 Intersegment revenues 6,817 4,081 - -------------------------------------------------------------- 159,797 171,488 - -------------------------------------------------------------- 1,064,521 1,243,547 - -------------------------------------------------------------- Eliminations (149,641) (238,540) - -------------------------------------------------------------- Total revenues $ 914,880 $1,005,007 ============================================================== - -------------------------------------------------------------- Year Ended December 31, 1999 1998 - -------------------------------------------------------------- (In thousands) Operating income (loss) before nonrecurring charges: ICS (1) $(44,808) $(71,166) IPS 10,759 6,236 Intergraph Software 9,157 13,792 Intergraph Federal 12,371 ( 2,953) Corporate (39,323) (31,564) - -------------------------------------------------------------- Total $(51,844) $(85,655) ============================================================== (1) ICS's 1999 operating loss includes a $7,000,000 nonrecurring charge for an inventory write-down which is included as a component of "Cost of revenues - systems" in the consolidated statement of operations. - -------------------------------------------------------------- Depreciation and amortization expense: ICS $ 5,239 $10,314 IPS 5,915 5,099 Intergraph Software 28,873 30,171 Intergraph Federal 2,886 3,003 Corporate 2,180 2,294 - -------------------------------------------------------------- Total depreciation and amortization expense from continuing operations $45,093 $50,881 ============================================================== Amounts included in the "Corporate" category consist of general corporate expenses, primarily general and administrative expenses remaining after charges to the operating segments based on segment usage of those services. Included in these amounts are legal fees of $18,470,000 and $10,650,000, respectively, for 1999 and 1998. Significant profit and loss items for 1999 that were not allocated to the segments and not included in the analysis above include an $8,562,000 charge for an arbitration settlement with Bentley Systems, Inc. (see Note 13), an $11,505,000 gain on the sale of a subsidiary (see Note 15), and nonrecurring operating charges of $15,596,000 (see Note 3). Such items for 1998 include gains on sales of assets of $112,533,000 (see Note 15) and nonrecurring operating charges of $15,343,000 (see Note 3). The Company does not evaluate performance or allocate resources based on assets and, as such, it does not prepare balance sheets for its operating segments, other than those of its wholly-owned subsidiaries. Effective January 1, 1999, the Utilities business of Intergraph Software was merged into IPS. Additionally, in 1999, hardware maintenance revenues, previously attributed exclusively to ICS, were attributed to the selling segment entities with ICS receiving transfer price revenue for services provided to other operating segments. The Company's 1998 segment information has been restated to reflect both of these operational changes. The operating segment information model used for 1998 and 1999 differs significantly from those utilized in prior years, specifically in the institution of a transfer pricing system in 1998 and in the attribution of revenues to its ICS and Software operating segments in sales transactions where both hardware and software, and perhaps attendant services, are sold to a single customer. The Company has found it impractical to restate segment information for years prior to 1998 to reflect the current reporting model, since such a restatement would involve a transaction-by-transaction analysis. Revenues from the U.S. government were $149,300,000 in 1999, $166,100,000 in 1998, and $177,100,000 in 1997, representing approximately 16% of total revenue in all three years. The majority of these revenues are attributed to the Federal unit of the Intergraph operating segment. The U.S. government was the only customer accounting for more than 10% of consolidated revenue in each year in the three year period ended December 31, 1999. International markets, particularly Europe and Asia, continue in importance to the industry and to each of the Company's operating segments. 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. Following is a summary of external revenues and long-lived assets by principal geographic area. For purposes of this presentation, revenues are attributed to geographic areas based on customer location. Long- lived assets include property, plant, and equipment, investments in affiliates, and other noncurrent assets. Assets have been allocated to geographic areas based on their physical location. - ------------------------------------------------------------------------------ Revenues Long-lived Assets - ------------------------------------------------------------------------------ 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------ (In thousands) United States $438,649 $ 488,908 $ 512,429 $130,762 $139,128 $152,184 Europe 285,548 308,118 345,167 24,194 40,878 41,467 Asia Pacific 98,773 105,860 131,178 14,167 17,975 21,304 Other International 91,910 102,121 106,851 3,878 3,468 4,010 - ------------------------------------------------------------------------------ Total $914,880 $1,005,007 $1,095,625 $173,001 $201,449 $218,965 ============================================================================== NOTE 13 -- RELATED PARTY TRANSACTIONS. Bentley Systems, Inc.: The Company maintains an equity ownership position in Bentley Systems, Inc. ("BSI"), the developer and owner of MicroStation, a software product utilized in many of the Company's software applications and for which the Company serves as a nonexclusive distributor. Under the Company's distributor agreement with BSI, the Company purchases MicroStation products for resale to third parties. The Company's purchases from BSI totaled $2,978,000 in 1999, $1,339,000 in 1998, and $5,656,000 in 1997. Net receivables from or payables to BSI at December 31, 1999 and 1998 were insignificant. In second quarter 1997, the Company received notice of the adverse determination of an arbitration proceeding with BSI. The arbitrator's award against the Company was in the amount of $6,126,000 and is included in "Arbitration settlements" in the consolidated statement of operations for the year ended December 31, 1997. Approximately $5,835,000 in fees otherwise owed the Company by BSI were offset against the amount awarded to BSI. In first quarter 1999, the Company entered into an arbitration settlement agreement with BSI under which the Company made payment of $12,000,000 and transferred to BSI ownership of three million of the shares of BSI's Class A common stock owned by the Company. The transferred shares were valued at approximately $3,500,000 on the Company's books, and the Company's investment in BSI (reflected in "Investments in affiliates" in the Company's consolidated balance sheets) was reduced accordingly. As a result of the settlement, Intergraph's equity ownership in BSI was reduced from approximately 50% to 33%. Additionally, the Company had a $1,200,000 net receivable from BSI relating to business conducted prior to January 1, 1999 which was written off in connection with the settlement. The Company recorded a nonoperating charge to earnings of $8,562,000 in connection with this settlement, representing the portion of settlement costs not previously accrued. This charge is included in "Arbitration settlements" in the consolidated statement of operations for the year ended December 31, 1999. See "Arbitration Settlements" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 22 to 23 of this annual report for further discussion of the Company's arbitration proceedings and business relationship with BSI. Carl Zeiss B.V: Carl Zeiss B.V. ("Carl Zeiss"), a manufacturer of aerial cameras and photogrammetric scanning systems, has a 40% ownership interest in Z/I Imaging Corporation ("Z/I Imaging"), a 60%-owned and consolidated subsidiary of the Company which was formed on October 1, 1999. See Note 15 for a discussion of the formation of Z/I Imaging. Z/I Imaging and Carl Zeiss are party to various license, supply, and reseller agreements, under which the two companies sell products and services to each other. During the three month period ended December 31, 1999, Z/I Imaging's inventory purchases from Carl Zeiss totaled $1,770,000. Sales to Carl Zeiss during this period were not material. Z/I Imaging's net payable to Carl Zeiss at December 31, 1999 was $2,946,000. Loan Program for Executive Officers: In order to encourage retention of Company stock by executive officers, the Company adopted a loan program effective January 1993, under which executive officers could borrow from the Company, on an unsecured basis, an amount not exceeding (1) the market value of the common stock of the Company owned by any such executive officer, and/or (2) the net value (market price less exercise price) of exercisable stock options owned by any such executive officer. Interest was charged on these loans at the prevailing prime rate. Prior to the April 30, 1998 expiration of the loan program, James W. Meadlock, Chairman of the Board and former Chief Executive Officer of the Company, was indebted to the Company in the maximum amount of $6,129,000 under the program. Mr. Meadlock repaid his loan in full on November 21, 1997. NOTE 14 -- SHAREHOLDER RIGHTS PLAN. On August 25, 1993, the Company's Board of Directors adopted a Shareholder Rights Plan. As part of this plan, the Board of Directors declared a distribution of one common stock purchase right (a "Right") for each share of the Company's common stock outstanding on September 7, 1993. Each Right entitles the holder to purchase from the Company one common share at a price of $50, subject to adjustment. The Rights are not exercisable until the occurrence of certain events related to a person or a group of affiliated or associated persons acquiring, obtaining the right to acquire, or commencing a tender offer or exchange offer, the consummation of which would result in beneficial ownership by such a person or group of 15% or more of the outstanding common shares of the Company. Rights will also become exercisable in the event of certain mergers or an asset sale involving more than 50% of the Company's assets or earnings power. Upon becoming exercisable, each Right will allow the holder, except the person or group whose action has triggered the exercisability of the Rights, to either buy securities of Intergraph or securities of the acquiring company, depending on the form of the transaction, having a value of twice the exercise price of the Rights. The Rights trade with the Company's common stock. The Rights are subject to redemption at the option of the Board of Directors at a price of $.01 per Right until the occurrence of certain events, and are exchangeable for the Company's common stock at the discretion of the Board of Directors under certain circumstances. The Rights expire on September 7, 2003. NOTE 15 -- ACQUISITIONS AND DIVESTITURES. In January 1999, the Company acquired the assets of PID, an Israeli software development company, for $5,655,000. At closing, the Company paid $2,180,000 in cash, with the remainder due in varying installments through February 2002. The accounts and results of operations of PID have been combined with those of the Company since the date of acquisition using the purchase method of accounting. This acquisition did not materially affect the Company's results of operations for 1999. In April 1999, the Company sold InterCAP Graphics Systems, Inc., a wholly-owned subsidiary, to Micrografx Inc., a global provider of enterprise graphics software, for $12,150,000, consisting of $3,853,000 in cash received at closing, deferred payments received in September and October 1999 totaling $2,500,000, and a $5,797,000 convertible subordinated debenture due March 2002 (included in "Other assets" in the December 31, 1999 consolidated balance sheet). The resulting gain on this transaction of $11,505,000 is included in "Gains on sales of assets" in the consolidated statement of operations for the year ended December 31, 1999. InterCAP's revenues and losses for 1998 were $4,660,000 and $1,144,000, respectively, ($3,600,000 and $1,853,000 for 1997). Assets of the subsidiary at December 31, 1998 totaled $1,550,000. The subsidiary did not have a material effect on the Company's results of operations for the period in 1999 prior to its sale. Effective October 1, 1999, the Company contributed operating and financial assets with a total net book value of approximately $5,000,000 (including cash of $1,800,000) to Z/I Imaging Corporation, a newly formed corporation which supplies end-to-end photogrammetry solutions for front-end data collection to mapping related and engineering markets, in exchange for a 60% ownership interest in the new company. Additionally, Carl Zeiss B.V. contributed assets and liabilities with a net book value of approximately $4,000,000 (including cash of $11,732,000) to the new company in exchange for a 40% ownership interest. Z/I Imaging's assets, liabilities and results of operations are included in the Company's consolidated financial statements. Carl Zeiss's minority interest in earnings and equity of this subsidiary are immaterial to the Company's consolidated operating results and financial position. See Note 13 for a discussion of transactions between Z/I Imaging and Carl Zeiss during the fourth quarter of 1999. See Note 4 for a discussion of the Company's October 1999 sale of VeriBest, Inc. The Company filed a legal action in August 1995 seeking to dissolve and wind up its business arrangement with Zydex, Inc., a company with which it jointly developed its plant design software application ("PDS"), and seeking an order allowing the Company to continue the business of that arrangement without further responsibility or obligation to Zydex. In November 1995, Zydex filed a counterclaim against the Company alleging wrongful dissolution of the business relationship and seeking both sole ownership of PDS and significant compensatory and punitive damages. In September 1997, the Court issued an order resolving all disputed issues and requiring the parties to settle, and dismissed the case. A closing of the final settlement agreement occurred on January 15, 1998. The final settlement included the purchase by Intergraph of 100% of the common stock of Zydex for $26,300,000, with $16,000,000 paid at closing of the agreement and the remaining amount payable in 15 equal monthly installments, including interest. In March 1998, the Company prepaid in full the remaining amount payable to Zydex. The former owner of Zydex retains certain rights to use, but not sell or sublicense, PDS products for a period of 15 years following the date of closing. In addition to the purchase price of the common stock, the Company was required to pay additional royalties to Zydex in the amount of $1,000,000 at closing of the agreement. These royalties were included in the Company's 1997 results of operations. The first quarter 1998 cash payments to Zydex were funded by the Company's primary lender and by proceeds from the sale of the Company's Solid Edge and Engineering Modeling System product lines. The Company accounted for the acquisition as the purchase of PDS software rights and is amortizing those rights over an estimated useful life of seven years. The unamortized balance, approximately $18,800,000 at December 31, 1999, is included in "Other assets" in the consolidated balance sheet. PDS is currently the Company's highest volume software offering, representing approximately 28% of total software sales for 1999. 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 for $105,000,000 in cash. The Company's gain on this transaction of $102,767,000 is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. Full year 1997 revenues and operating losses for these product lines were $35,200,000 and $4,100,000, respectively. Based on 1997 performance, the Company estimates that the sale of this business resulted in an improvement in its 1998 operating results of approximately $5,000,000, excluding the impact of the gain on the sale. In April 1998, the Company sold its printed circuit board manufacturing facility for $16,002,000 in cash. The Company's gain on this transaction of $8,275,000 is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. The Company is now outsourcing its printed circuit board needs. This operational change did not materially impact the Company's results of operations in 1998. In November 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. The total purchase price was $62,404,000, $42,485,000 of which was received during the fourth quarter of 1998. The final purchase price installment of $19,919,000 (included in "Other current assets" in the December 31, 1998 consolidated balance sheet) was received on January 12, 1999. The Company's gain on this transaction of $1,491,000 is included in "Gains on sales of assets" in the 1998 consolidated statement of operations. As part of this transaction, SCI retained the option to sell to the Company any inventory included in the initial purchase which had not been utilized in the manufacture and sale of finished goods within six months of the date of the sale (the "unused inventory"). On June 30, 1999, SCI exercised this option and sold to the Company unused inventory having a value of approximately $10,200,000 in exchange for a cash payment of $2,000,000 and a short-term installment note payable in the principal amount of $8,200,000. This note was paid in three monthly installments concluding October 1, 1999 and bore interest at a rate of 9%. The Company's payments to SCI were funded primarily with existing cash balances. For a complete description of the SCI transaction and its impact on operating results and cash flows, see "SCI" included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 19 of this annual report. NOTE 16 - SUMMARY OF QUARTERLY INFORMATION - UNAUDITED. - ----------------------------------------------------------------------------- Quarter Ended March 31 June 30 Sept. 30 Dec. 31 - ----------------------------------------------------------------------------- (In thousands except per share amounts) Year ended December 31, 1999: Revenues $244,610 $227,076 $220,548 $222,646 Gross profit 78,926 75,420 57,585 78,004 Loss from continuing operations (15,475) ( 9,648) (43,534) ( 9,904) Net income (loss) (17,558) (12,092) (45,501) 3,574 Loss from continuing operations per share - basic and diluted ( .32) ( .20) ( .89) ( .20) Net income (loss) per share - basic and diluted ( .36) ( .25) ( .93) .07 Weighted average shares outstanding - basic and diluted 48,697 48,831 48,971 49,121 Year ended December 31, 1998: Revenues $238,913 $240,567 $247,089 $278,438 Gross profit 75,108 73,351 74,700 87,984 Income (loss) from continuing operations 54,324 (17,305) (24,379) (19,368) Net income (loss) 49,442 (20,988) (27,173) (20,915) Income (loss) from continuing operations per share - basic and diluted 1.13 ( .36) ( .50) ( .40) Net income (loss) per share - basic and diluted 1.03 ( .43) ( .56) ( .43) Weighted average shares outstanding - basic and diluted 48,219 48,311 48,416 48,547 ========================================================================== On October 31, 1999, the Company sold its VeriBest, Inc. operating segment. Accordingly, the gain on the sale as well as the results of operations for this operating segment have been excluded from continuing operations for all periods presented. First quarter 1999 losses included an $.18 per share charge for settlement of the Company's arbitration proceedings with Bentley Systems, Inc. Second quarter 1999 results included a $.24 per share gain on the sale of a subsidiary company and a $.05 per share nonrecurring operating charge for the resizing of the Company's European computer hardware sales organization. Third quarter 1999 losses included nonrecurring operating charges of $.43 per share for the cost of actions taken during the quarter to reduce expenses in the Company's unprofitable business units and restructure the Company to fully support the vertical markets in which the Company operates. These actions included eliminating approximately 400 positions worldwide, consolidating offices, completing the worldwide vertical market alignment of the sales force, and narrowing the focus of the Company's ICS business unit to high-end workstations, specialty servers, digital video products and 3D graphics cards. The fourth quarter 1999 loss from continuing operations was offset by the $.29 per share gain on the sale of VeriBest. First quarter 1998 earnings included a $2.13 per share gain on the sale of the Company's Solid Edge and Engineering Modeling System product lines and a $.31 per share charge for nonrecurring operating expenses, primarily for employee termination costs and write-off of certain intangible assets. Second quarter 1998 losses were reduced by a $.17 per share gain on the sale of the Company's printed circuit board manufacturing facility. Fourth quarter 1998 losses included expenses of approximately $.14 per share relating to the Company's transition to outsourcing of its manufacturing operation and a $.04 per share charge for nonrecurring operating expenses, primarily for employee terminations. REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Intergraph Corporation We have audited the accompanying consolidated balance sheets of Intergraph Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intergraph Corporation and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Birmingham, Alabama January 27, 2000 DIVIDEND POLICY The Company has never declared or paid a cash dividend on its common stock. It is the present policy of the Company's Board of Directors to retain all earnings to finance the Company's operations. In addition, payment of dividends is restricted by the Company's term loan and revolving credit agreement. PRICE RANGE OF COMMON STOCK Since April 1981, Intergraph common stock has traded on The Nasdaq Stock Market under the symbol INGR. As of January 31, 2000, there were 49,252,406 shares of common stock outstanding, held by 4,427 shareholders of record. The following table sets forth, for the periods indicated, the high and low sale prices of the Company's common stock as reported on The Nasdaq Stock Market. - ---------------------------------------------------------------- 1999 1998 Period High Low High Low - ---------------------------------------------------------------- First Quarter $ 7 1/4 $4 29/32 $10 3/16 $8 1/4 Second Quarter 10 1/4 6 10 9/16 7 3/16 Third Quarter 7 15/16 4 3/8 8 5/8 5 1/2 Fourth Quarter 5 13/16 3 3/16 7 4 11/16 ================================================================ TRANSFER AGENT AND REGISTRAR Harris Trust and Savings Bank Shareholder Services Division 311 W. Monroe Street, 11th Floor P. O. Box A3504 Chicago, IL 60690-3504 (312) 360-5116 CORPORATE COUNSEL Lanier Ford Shaver & Payne P.C. 200 West Side Square, Suite 5000 Huntsville, AL 35801 INDEPENDENT AUDITORS Ernst & Young LLP 1900 AmSouth/Harbert Plaza Birmingham, AL 35203 FORM 10-K A copy of the Company's Form 10-K filed with the Securities and Exchange Commission is available without charge upon written request to Shareholder Relations, Intergraph Corporation, Huntsville, AL 35894-0001. ANNUAL MEETING The annual meeting of Intergraph Corporation will be held May 18, 2000, at the Corporate offices in Huntsville, Alabama. BOARD MEMBERS AND OFFICERS - --------------------------------------------------------------------------- Board of Directors Executive Vice Presidents Vice Presidents James W. Meadlock Graeme J. Farrell Theron E. Anders Chairman of the Board Penman R. Gilliam Henry J. Dipietro James F. Taylor Jr. Chief Executive Officer Lewis N. Graham Jr. Thomas J. Doran Robert E. Thurber Stephen J. Phillips Aggie L. Frizzell Executive Vice President Preetha R. Pulusani Rune Kahlbom Larry J. Laster William E. Salter Robert L. Kuehlthau Thomas J. Lee K. David Stinson Jr. Robert Patience Sidney L. McDonald John W. Wilhoite Gerhard Sallinger Chief Financial Officer James H. Slate Edward A. Wilkinson Richard L. Watson Manfred Wittler Eugene H. Wrobel Treasurer SECRETARY John R. Wynn EX-27 7
5 This schedule contains summary financial information extracted from the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1999 DEC-31-1999 88,513 0 274,834 16,066 35,918 411,943 309,126 214,219 584,944 243,636 51,379 0 0 5,736 270,964 584,944 623,451 914,880 436,254 624,945 357,375 6,900 5,663 (73,061) (5,500) (78,561) 6,984 0 0 (71,577) (1.46) (1.46) Accounts receivable in the Consolidated Balance Sheet is shown net of allowances for doubtful accounts. Other expenses include Product development expenses, Sales and marketing expenses, General and administrative expenses, and Nonrecurring operating charges. The provision for doubtful accounts is included in Other expenses above.
EX-99.A 8 CONSENT I, the undersigned, hereby consent to being named as nominee to the Intergraph Corporation Board of Directors in the Proxy Statement relative to the Annual Meeting of Shareholders to be held May 18, 2000, and hereby consent to serve as a director of Intergraph Corporation, if elected. Dated this 20th day of March 2000. Signature: /s/ Lawrence R. Greenwood ------------------------- Lawrence R. Greenwood EX-99.B 9 CONSENT I, the undersigned, hereby consent to being named as nominee to the Intergraph Corporation Board of Directors in the Proxy Statement relative to the Annual Meeting of Shareholders to be held May 18, 2000, and hereby consent to serve as a director of Intergraph Corporation, if elected. Dated this 20th day of March 2000. Signature: /s/ Joseph C. Moquin ---------------------- Joseph C. Moquin -----END PRIVACY-ENHANCED MESSAGE-----