| INTERGRAPH CORP ITEM 1A RISK FACTORS Risks Relating to Our Business Failure to attract, train and retain skilled employees could adversely affect operating results |
| The availability of highly trained and skilled technical, professional and management personnel is critical to our future growth and profitability |
| Competition for scientists, engineers, technicians, professional and management personnel is intense and competitors aggressively recruit key employees |
| Because of increased competition for experienced personnel, particularly in highly specialized areas, it can be difficult to meet our employment needs in a timely manner |
| Additionally, many US Government programs require contractors to have security clearances |
| Security clearances can be difficult and time-consuming to obtain |
| If our employees are unable to obtain or retain necessary security clearances, we may not be able to win new business, and our existing customers could terminate their contracts or decide not to renew them |
| To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue anticipated from the contract, which could adversely affect our business and results of operations |
| Restructuring and cost reduction measures may fail to achieve anticipated results or cause undesirable consequences |
| Over the past several years, we have implemented restructuring plans and cost reduction measures, which have included, among other things, the sale of several non-core business units and assets, significant workforce reductions and consolidation of operations from four to two divisions |
| Our cost reduction initiatives may also yield unintended consequences, such as attrition beyond our planned reduction in workforce and reduced employee morale |
| As a result of these factors, our employees may seek alternate employment |
| Attrition beyond our planned reduction in workforce could have a material adverse effect on our financial performance |
| We depend on systems integrators for certain large projects |
| Large security projects often involve significant integration services beyond the scale and scope of that typically provided by Intergraph |
| As a result, in order to be successful in the sales of our security and public safety products into these markets, we rely on large systems integrators to be the prime contractor to the customer, providing integration services for these large projects |
| The inability to serve effectively and economically as a sub-contractor to large systems integrators could therefore limit our ability to grow our security systems revenue and may have a material adverse effect on our results of operations |
| International business operations create additional operational and legal risk |
| We derived approximately 47prca, 50prca, and 51prca of our total revenues from customers outside the United States in 2003, 2004 and 2005 respectively |
| We anticipate that revenues from customers outside the United States will continue to account for a significant portion of our total revenues for the foreseeable future |
| Our operations outside the United States are subject to additional risks, including: • changes in or interpretations of foreign law that may adversely affect our ability to sell our products, perform services or repatriate profits to the United States; • the imposition of tariffs; • hyperinflation or economic or political instability in foreign countries; • imposition of limitations on or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; • conducting business in places where business practices and customs are unfamiliar and unknown; • the imposition of restrictive trade policies, including export restrictions; • worldwide political conditions; • the imposition of inconsistent laws or regulations; • the imposition or increase of investment requirements and other restrictions by foreign governments; • longer collection cycles for account receivables; • uncertainties relating to foreign laws and legal proceedings; • having to comply with a variety of US laws, including the Foreign Corrupt Practices Act; • having to comply with US export control regulations and policies that restrict our ability to communicate with non-US employees and supply foreign affiliates and customers; Foreign currency fluctuations may affect financial results |
| Many of our transactions are denominated in foreign currencies and our foreign subsidiaries generally conduct business in foreign currencies |
| As a result, we are exposed to fluctuations in exchange rates |
| Our risks include the possibility of significant changes in exchange rates and the imposition or modification of foreign exchange controls by either the US or applicable foreign governments |
| Although we do not currently hedge against movements in exchange rates for contracts denominated in foreign currencies, we may decide to do so at some point in the future |
| Any hedging policies implemented by us may not be successful, and the cost of these hedging techniques may have a significant negative impact on our operating results |
| Furthermore, we cannot be certain that a significant fluctuation in exchange rates will not have a significant adverse impact on our operating results |
| One or more of our products could become obsolete and adversely impact operating results |
| Many of our products are sold in industries that demand advanced technologies |
| Without timely introduction of new products and enhancements, our products could become technologically obsolete, in which case our revenue and operating results would suffer |
| The success of our product offerings depend upon several factors, including our ability to: • accurately anticipate customer needs; • innovate and develop new technologies and applications; and • successfully commercialize new technologies in a timely manner; If we fail at any or all of these, we may invest heavily in research and development of products that do not lead to significant revenues |
| We regard our software as proprietary and rely on a combination of copyright, patent, trademark and trade secret laws, licenses, confidentiality agreements, and software security measures to protect our proprietary rights |
| The steps we have taken to protect our proprietary rights may not be adequate to protect our technology from misappropriation or from independently developed competitive technologies that are substantially equivalent to our technology |
| The misappropriation of our technology or development of competitive technologies could harm our business and could force us to incur substantial costs in protecting and enforcing our intellectual property rights |
| There is a risk of violating the rights of others, which may prevent us from competing successfully |
| We may be sued for infringing the intellectual property rights of others, or may find it necessary to initiate a lawsuit seeking to prove that we do not infringe on the proprietary rights of others, or that such rights are invalid or unenforceable |
| Intellectual property litigation is costly, and, even if successful, the cost of such litigation could affect the results of our operations |
| Furthermore, litigation is time consuming and could divert managementapstas attention and resources away from our business |
| We may be found to infringe anotherapstas intellectual property rights and may have to pay damages, stop the infringing activity or obtain a license |
| If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which could have a material adverse effect on our business, financial condition and results of operations |
| Our software is complex and may contain undetected errors |
| Complex software products may contain undetected errors or "e bugs "e |
| These errors could result in delayed market acceptance or claims against us by customers, which could lead to increased insurance costs |
| Liability claims can result in significant expenses and damages |
| The sale and implementation of our software and services may entail the risk of product liability and other claims |
| A failure of such software or services could result in significant claims against us for damages or for violations of environmental, safety and other laws and regulations |
| Our agreements with our customers are generally designed to limit our exposure to potential product liability claims |
| It is possible, however, that the limitation of liability provisions in our agreements may not be effective as a result of federal, state, local or foreign laws or ordinances or unfavorable judicial decisions |
| A product liability claim in excess of our insurance coverage or claim that is outside or exceeds the indemnity protections in our agreements or a recall of one of our products would have to be paid out of our cash reserves and could harm our operating results or financial condition |
| Some customers may have difficulty in implementing or be unable to integrate these products successfully |
| As a result, customers may make claims against us relating to the functionality, performance, or implementation of our products |
| Such claims may limit our ability to expand our revenues, harm our reputation, and result in customer unwillingness to pay the fees associated with these products and services |
| Fixed price contracts may create risk of cost overruns |
| While firm, fixed price contracts allow us to benefit from cost savings and other efficiencies, they may also expose us to potential cost overruns |
| If estimates used for calculating a contract price are incorrect, we can incur losses on those contracts |
| Lower earnings caused by cost overruns could have an adverse effect on our financial results |
| Inability to achieve or manage our growth could adversely affect future prospects and results of operations |
| We plan to further develop our existing lines of business in our current markets and to expand into new markets |
| To do this, we will need to enhance our sales and operations, while managing the restructuring of legacy systems, products and organizations |
| Our inability to manage and administer these requirements, as needed, may have an adverse effect on our business |
| We also expect to supplement our internal growth through acquisitions |
| It is likely that some portion of our planned growth will continue to come from such transactions |
| We evaluate potential acquisitions on an ongoing basis |
| Our acquisitions pose many risks, including: • we may not be able to compete successfully for available acquisition candidates, complete future acquisitions and investments or accurately estimate the financial effect of acquisitions and investments on our business; • future acquisitions may require us to issue capital stock or spend significant cash or may result in a decrease in our operating income or operating margins; • we may have trouble integrating acquired businesses or retaining their personnel or customers; • acquisitions may disrupt our business and distract our management from other responsibilities |
| We may not be able to continue to identify attractive acquisitions |
| If our acquisitions or investments fail or perform poorly, our business could be adversely affected |
| Increased financial expectations may not materialize |
| The charter of the US Department of Homeland Security has created increased interest in our security and detection products; however, we are not certain whether the level of demand will continue to be as high as anticipated |
| We do not know what solutions will be adopted as a result of public safety concerns, and whether our products will be a part of the solution |
| These factors may adversely impact us and create unpredictability in revenues and operating results |
| Events beyond our control may disrupt operations and harm operating results |
| Our business may be adversely affected by a war, terrorist attack, third party acts, natural disaster or other catastrophe |
| A catastrophic event could have a direct negative impact on us, our customers, the financial markets or the overall economy |
| It is impossible to fully anticipate and protect against all potential catastrophes |
| A security breach, criminal act, military action, power or communication failure, flood, hurricane, severe storm or the like could lead to service interruptions, data losses for customers, disruptions to our operations, or damage to our facilities |
| In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage |
| Reputation and relationships with governmental entities can affect business operations, financial condition and operating results |
| We depend upon the US Government as one of our customers and we believe that the success and development of our business will continue to depend on our successful participation in US Government contract programs |
| Total revenue from the US Government was approximately dlra137dtta1 million in 2003, dlra124dtta9 million in 2004 and dlra119dtta6 million in 2005, representing approximately 26prca of total revenue in 2003, 23prca of total revenue in 2004 and 21prca of total revenue in 2005 |
| We expect to continue to derive a substantial portion of our revenues from work performed under Government contracts |
| If our reputation or relationship with the US Government, and in particular agencies of the Department of Defense (DoD) or the US intelligence community, were negatively affected, or if we were suspended or debarred from contracting with government agencies or if the US Government decreased the amount of business with us, our business, financial condition and operating results could be adversely affected |
| The US Government also has the right to modify, curtail or terminate the contracts and subcontracts at its convenience |
| Any decision by the US Government not to exercise contract options or to modify, curtail or terminate our major programs or contracts could adversely affect our results of operations and financial condition |
| Employee misconduct or our failure to comply with applicable laws or regulations may impact the ability to contract with the US Government |
| Misconduct, fraud or other improper activities by our employees or our failure to comply with laws or regulations could have a significant negative impact on our business and reputation |
| Such misconduct could include the failure to comply with US Government procurement regulations, regulations regarding the protection of classified information, legislation regarding the pricing of labor and other costs in US Government contracts, environmental laws and any other applicable laws or regulations |
| Many of our products are used to manage and protect information relating to national security and other sensitive government functions |
| A security breach in one of these systems could prevent us from having access to such critically sensitive systems |
| Other examples of potential employee misconduct include time card fraud and violations of the Anti-Kickback Act |
| The precautions we take to prevent and detect these activities may not be effective, and we could face unknown risks or losses |
| Our failure to comply with applicable laws or regulations or misconduct by any of our employees could subject us to fines and penalties, loss of security clearance and suspension or debarment from contracting with the US Government, any of which would adversely affect our business |
| Backlog is our estimate of the amount of revenue we expect to realize over the remaining life of definitive contracts and task orders in effect as of the measurement date |
| Backlog represents the portion of backlog for which funding currently is appropriated or otherwise authorized and is payable to us upon completion of a specified portion of work, less revenues previously recognized |
| Certain orders may be cancelled by customers at their convenience |
| If we fail to realize revenue amounts included in our backlog, our operating results may be adversely affected |
| Contractors or subcontractors who fail to satisfy their obligations to us or the customer can adversely impact our operating results and future business prospects |
| There is a risk that we may have disputes with our subcontractors about the quality and timeliness of work performed by the subcontractor, customer concerns about the subcontractor, our failure to extend existing task orders or issue new task orders under a subcontract, or our hiring of a subcontractorapstas personnel |
| Additionally, if any of our subcontractors fail to deliver and/or perform the agreed-upon products or services, our ability to fulfill our obligations as a prime contractor may be jeopardized |
| Subcontractor performance could result in a customer terminating our contract for default |
| A termination for default could expose us to liability and have an adverse effect on our ability to compete for future contracts and orders |
| PP&M revenues include sales to customers in the chemical, petrochemical and petroleum industries, which can impair operating results in an economic downturn |
| A large percentage of our PP&M revenues are derived from companies in the chemicals, petrochemicals and petroleum industries |
| Accordingly, our future success depends, in part, upon the continued demand from companies in these process-manufacturing industries |
| The chemicals, petrochemicals and petroleum industries are cyclical and subject to fluctuations in the price of oil |
| In the past, worldwide economic downturns and pricing pressures experienced by chemical, petrochemical and petroleum companies have led to consolidations and reorganizations |
| Such downturns, pricing pressures and restructurings have caused delays and reductions in expenditures by many of these companies and reduced demand for our products and services |
| A recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in these industries, could harm our operating results in the future |
| Long sales cycles make it difficult to predict quarterly revenue levels and operating results |
| The sales process for our solutions is lengthy and can exceed one year |
| Accordingly, it is difficult to predict the timing of our revenues |
| The delay of an order could cause our quarterly revenues to fall substantially below expectations |
| Moreover, should our customers desire to purchase integrated solutions in lieu of individual software products, our sales cycle may lengthen, which could increase the likelihood of delays and cause the effect of a delay to become more pronounced |
| Delays in sales could cause significant shortfalls in our revenues and operating results for any particular period |
| We face aggressive competition |
| Our markets are highly competitive |
| Our PP&M division competes in the plant creation, life cycle management, and operations and maintenance software |
| Primary competitors are AVEVA and BSI (an approximately 28prca basic or 25prca fully diluted, owned affiliate of the Company) |
| Our SG&I division competes with ESRI in the geospatial industry and Motorola Integrated Solutions, Northrop Grumman, Compudyne, TriTech Software Systems, SunGard Data Systems, New World, Visionair, Interact, and Positron in providing software applications and systems integration services |
| SG&I also competes with an estimated 3cmam000 companies in providing IT services to the US Government |
| Some of our current competitors have significantly greater financial, marketing and other resources than we have |
| In addition, many of our current competitors have established, and may in the future continue to establish, cooperative relationships with third parties to improve their product offerings and to increase the availability of their products to the marketplace |
| The entry of new competitors or alliances into our market could reduce our market share, require us to lower our prices, or both |
| Many of these factors are outside our control, and we may not be able to maintain or enhance our competitive position against current and future competitors |
| Our revenues, operating results and cash flow have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control, including: • our customers &apos purchasing patterns; • the length of our sales cycle; • changes in the mix of our license revenues and service revenues; • the timing of introductions of new solutions and enhancements by us and our competitors; • weakness in the first quarter of each fiscal year, primarily caused by a slowdown in business in some of our international markets; • the timing of our investments in new product development; • failure to estimate costs or control costs under firm fixed price contracts; • expenses related to acquisitions, mergers or joint ventures; • decisions by the US Government not to exercise contract options or to modify, curtail or terminate our major programs or contracts; • instability in the United States and other financial markets and the ongoing and possible escalation of the war in Iraq, other armed hostilities or further acts or threats of terrorism in the United States or elsewhere; • a reduction of government funding or delay in the completion of the US Governmentapstas budget process; • changes in our operating expenses; and • fluctuating economic conditions, particularly as they affect companies in the chemicals, petrochemicals and petroleum industries |
| If, due to one or more of the foregoing factors or an unanticipated cause, our operating results fail to meet the expectations of public market analysts and investors in a future quarter, the market price of our common stock would likely decline |
| Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance |
| Factors that could cause fluctuations in our stock price include, among other things: • actual or anticipated variations in quarterly operating results from historical results or estimates of results prepared by us or financial analysts; • changes in financial estimates by us, by investors or by any financial analysts who might cover our stock; • our ability to meet the performance expectations of financial analysts or investors; • changes in market valuations of other companies in our industry; • general market and economic conditions; • announcements by us or our competitors of significant acquisitions, strategic partnerships or divestitures; • announcements of technological innovations or new products or services by us or our competitors; • retention or departures of key personnel; and • sales of our common stock, including sales by our directors, officers or principal stockholders |
| Fluctuations caused by factors such as these may negatively affect the market price of our common stock |
| Sales of a significant number of shares of our common stock by existing shareholders could cause the market price of our common stock to decline |
| If our shareholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, the market price of our common stock may decline |
| These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate |
| We are unable to predict the effect that sales may have on the then prevailing market price of our common stock |
| Anti-takeover provisions in our stockholder rights plan and Delaware law could make a third party acquisition of us difficult |
| Our stockholder rights plan contains provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders |
| We are also subject to certain provisions of Delaware law that could delay, deter or prevent a change in control |
| These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock |
| The ultimate amount of cash payment or share settlement in connection with an ASB could materially impact our financial condition and results of operations |
| On March 22, 2005, the Company repurchased approximately 5dtta4 million shares from Goldman Sachs in a private transaction in connection with an ASB program |
| The shares were repurchased for an upfront payment of approximately dlra150dtta3 million or dlra27dtta74 per share, subject to a market price adjustment provision based on the volume weighted average market trading price over the period from May 2, 2005 through March 21, 2006 |
| The Companyapstas volume weighted average trading price has been approximately dlra41dtta10 per share from May 2, 2005 through March 3, 2006 |
| If the Companyapstas share price continues to trade in the range of dlra36dtta00 to dlra39dtta00 per share throughout the remainder of the ASB period, then the volume weighted average trading price would be approximately dlra40dtta80 to dlra41dtta00 per share, and if Intergraph were to settle in cash, the Company would make an additional payment of approximately dlra70dtta5 to dlra72 million to Goldman Sachs, or if Intergraph were to settle in shares, it would issue approximately 1dtta8 to 2dtta0 million shares to Goldman Sachs |
| The ultimate amount of any additional cash payment or share settlement may vary substantially depending on the final volume weighted average price of the common stock for the applicable period |