##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
 FORM 10-Q/A Amendment 1
 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission file number 0-9722 INTERGRAPH CORPORATION 
  Delaware
    
    63-0573222(State or other jurisdiction of incorporation
or organization)
    
    I.R.S. Employer
Identification No.
 Huntsville, Alabama 35894-0001  
 (256) 730-2000   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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ] Common stock, par value $0.10 per share: 36,590,664 shares
outstanding as of June 30, 2004




---



##### Table of Contents



INTERGRAPH CORPORATION Explanatory Note The purpose of this Amendment No.1 on Form 10-Q/A to the Quarterly Report on
Form 10-Q of Intergraph Corporation (the Company) for the quarter ended June
30, 2004 is to restate the Companys consolidated financial statements and
related disclosures, including the selected financial data included herein for
the periods ended December 31, 2003, March 31, 3004, and as of the quarter
ended June 30, 2004. Generally, no attempt has been made in this Amendment No. 1 to modify or update
other disclosures presented in the original report on Form 10-Q except as
required to reflect the effects of the restatement. This Form 10-Q/A generally
does not reflect events occurring after the filing of the Form 10-Q or modify
or update those disclosures affected by subsequent events. Information not
affected by the restatement is unchanged and reflects the disclosures made at
the time of the original filing of the Form 10-Q on August 6, 2004.
Accordingly, this Form 10-Q/A should be read in conjunction with the Companys
filings made subsequent to the filing of the original Form 10-Q, including any
amendments to those filings, as well as the Annual Report on Form 10-K/A for
the year ended December 31, 2003. The following items have been amended as a
result of the restatement:  
    
    Part I - Item 1 - Financial Statements;  
    
    Part I - Item 2 - Managements Discussion and Analysis of Financial
Condition and Results of Operations;  
    
    Part I - Item 4 - Controls and Procedures; and  
    
    Part II - Item 6 - Exhibits and Reports on Form 8-K. Additional detail regarding
the restatement is included in Note 19 of the Notes to Consolidated
Financial Statements included in Part I - Item 1 of this Amendment
No. 1 on Form 10-Q/A.




---



INTERGRAPH CORPORATION
FORM 10-Q/A*
June 30, 2004 INDEX Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets at June 30, 2004, and December 31, 2003
    
    
    2Consolidated Statements of Income for the quarters and six months
ended June 30, 2004, and 2003
    
    
    3Consolidated Statements of Cash Flows for the six months
ended June 30, 2004, and 2003
    
    
    4Notes to Consolidated Financial Statements
    
    
    5 - 15Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16 - 23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23 - 24Item 4. Controls and Procedures
    
    
    24 - 25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25 - 27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 4. Submission of Matters to a Vote of Security Holders
    
    
    27 - 28Item 6. Exhibits and Reports on Form 8-K
    
    
    28SIGNATURES
    
    
    29EX-31.1  SECTION 302 CEO CERTIFICATIONEX-31.2  SECTION 302 CFO CERTIFICATIONEX-32.1  SECTION 906 CEO CERTIFICATIONEX-32.2  SECTION 906 CFO CERTIFICATION
  * Information contained in this Form 10-Q/A includes statements that are
forward-looking as defined in Section 21E of the Securities Exchange Act of
1934. Actual results may differ materially from those projected in the
forward-looking statements. Information concerning factors that could cause
actual results to differ materially from those in the forward-looking
statements is described in the Companys filings with the Securities and
Exchange Commission, including its most recent Annual Report on Form 10-K/A and
this Form 10-Q/A.




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements INTERGRAPH CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 June 30,
    
    December 31,2004
    
    2003(In thousands, except share and per share amounts)
    
    (restated)
    
    (restated)AssetsCash and cash equivalents
    
    $
    354,616
    
    
    $
    265,782Accounts receivable, net
    
    
    141,485
    
    
    
    150,927Inventories, net
    
    
    17,592
    
    
    
    15,443Receivables from IP-related litigation
    
    
    105,165
    
    
    
    Other current assets
    
    
    28,501
    
    
    
    37,673Total current assets
    
    
    647,359
    
    
    
    469,825Investments in affiliates
    
    
    9,499
    
    
    
    9,499Capitalized software development costs, net
    
    
    28,249
    
    
    
    29,520Other assets, net
    
    
    11,379
    
    
    
    12,500Property, plant, and equipment, net
    
    
    51,535
    
    
    
    51,099Total Assets
    
    $
    748,021
    
    
    $
    572,443Liabilities and Shareholders EquityTrade accounts payable
    
    $
    17,859
    
    
    $
    23,052Accrued compensation
    
    
    34,369
    
    
    
    38,726Other accrued expenses
    
    
    41,990
    
    
    
    40,835Billings in excess of sales
    
    
    53,445
    
    
    
    49,970Income taxes payable
    
    
    60,890
    
    
    
    26,912Total current liabilities
    
    
    208,553
    
    
    
    179,495Deferred income taxes
    
    
    12,364
    
    
    
    13,465Other noncurrent liabilities
    
    
    311
    
    
    
    548Total noncurrent liabilities
    
    
    12,675
    
    
    
    14,013Shareholders equity:Common stock, par value $0.10 per share - 100,000,000
shares authorized; 57,361,362 shares issued
    
    
    5,736
    
    
    
    5,736Additional paid-in capital
    
    
    197,011
    
    
    
    201,240Deferred compensation
    
    
    (6,779
    )
    
    
    (1,552
    )Retained earnings
    
    
    758,770
    
    
    
    608,308Accumulated other comprehensive income
    
    
    10,538
    
    
    
    12,790965,276
    
    
    
    826,522Less - cost of treasury shares (20,770,698 at June 30, 2004,
and 21,259,223 at December 31, 2003)
    
    
    (438,483
    )
    
    
    (447,587
    )Total shareholders equity
    
    
    526,793
    
    
    
    378,935Total Liabilities and Shareholders Equity
    
    $
    748,021
    
    
    $
    572,443
 The accompanying notes are an integral part of these consolidated financial
statements. 2




---



##### Table of Contents



INTERGRAPH CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 Quarter Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share amounts)
    
    (restated)
    
    
    
    
    
    (restated)RevenuesSystems
    
    $
    71,752
    
    
    $
    72,819
    
    
    $
    141,487
    
    
    $
    143,225Maintenance
    
    
    34,587
    
    
    
    34,053
    
    
    
    67,588
    
    
    
    64,110Services
    
    
    31,624
    
    
    
    20,475
    
    
    
    61,173
    
    
    
    40,565Total revenues
    
    
    137,963
    
    
    
    127,347
    
    
    
    270,248
    
    
    
    247,900Cost of revenuesSystems
    
    
    35,888
    
    
    
    37,917
    
    
    
    70,226
    
    
    
    74,377Maintenance
    
    
    10,578
    
    
    
    12,779
    
    
    
    21,056
    
    
    
    25,075Services
    
    
    21,943
    
    
    
    15,066
    
    
    
    42,970
    
    
    
    30,262Total cost of revenues
    
    
    68,409
    
    
    
    65,762
    
    
    
    134,252
    
    
    
    129,714Gross profit
    
    
    69,554
    
    
    
    61,585
    
    
    
    135,996
    
    
    
    118,186Operating expensesProduct development
    
    
    14,483
    
    
    
    14,605
    
    
    
    29,047
    
    
    
    26,477Sales and marketing
    
    
    28,174
    
    
    
    25,612
    
    
    
    54,212
    
    
    
    50,289General and administrative
    
    
    17,746
    
    
    
    18,509
    
    
    
    35,207
    
    
    
    34,326Restructuring charges
    
    
    
    
    
    
    
    
    
    
    826
    
    
    
    Total operating expenses
    
    
    60,403
    
    
    
    58,726
    
    
    
    119,292
    
    
    
    111,092Income from operations
    
    
    9,151
    
    
    
    2,859
    
    
    
    16,704
    
    
    
    7,094Intellectual property income (expense), net
    
    
    7,981
    
    
    
    (4,335
    )
    
    
    211,041
    
    
    
    995Gain (Loss) on sale of assets
    
    
    
    
    
    
    (65
    )
    
    
    
    
    
    
    1,155Interest income
    
    
    1,068
    
    
    
    1,676
    
    
    
    1,949
    
    
    
    3,599Other income (expense), net
    
    
    (504
    )
    
    
    (326
    )
    
    
    568
    
    
    
    (369
    )Income (Loss) before income taxes
    
    
    17,696
    
    
    
    (191
    )
    
    
    230,262
    
    
    
    12,474Income tax benefit (expense)
    
    
    (2,800
    )
    
    
    985
    
    
    
    (79,800
    )
    
    
    (3,565
    )Net income
    
    $
    14,896
    
    
    $
    794
    
    
    $
    150,462
    
    
    $
    8,909Net income per share - basic
    
    $
    0.41
    
    
    $
    0.02
    
    
    $
    4.13
    
    
    $
    0.19- diluted
    
    $
    0.39
    
    
    $
    0.02
    
    
    $
    3.96
    
    
    $
    0.18Weighted average shares outstanding - basic
    
    
    36,588
    
    
    
    46,275
    
    
    
    36,428
    
    
    
    46,238- diluted
    
    
    38,130
    
    
    
    48,404
    
    
    
    37,988
    
    
    
    48,412
 The accompanying notes are an integral part of these consolidated financial
statements. 3




---



##### Table of Contents



INTERGRAPH CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Six Months Ended June 30,
    
    2004
    
    2003(In thousands)
    
    (restated)Cash Provided By (Used For):Operating Activities:Net income
    
    $
    150,462
    
    
    $
    8,909Adjustments to reconcile net income to net cash
provided by (used for) operating activities:Depreciation
    
    
    4,250
    
    
    
    4,116Amortization
    
    
    10,094
    
    
    
    8,192Provisions for losses on accounts receivable
    
    
    871
    
    
    
    532Noncurrent portion of deferred taxes
    
    
    (1,099
    )
    
    
    (620
    )Income taxes payable
    
    
    34,063
    
    
    
    (38,975
    )Gain on sale of assets
    
    
    
    
    
    
    (1,155
    )Receivables from IP-related litigation
    
    
    (105,165
    )
    
    
    Net changes in other assets and liabilities
    
    
    2,204
    
    
    
    8,190Net cash provided by (used for) operating activities
    
    
    95,680
    
    
    
    (10,811
    )Investing Activities:Net proceeds from current year sales of assets
    
    
    103
    
    
    
    725Net proceeds from prior sales of assets
    
    
    8,395
    
    
    
    2,765Purchases of property, plant, and equipment
    
    
    (3,955
    )
    
    
    (3,658
    )Purchases of short-term investments
    
    
    
    
    
    
    (17,888
    )Proceeds from maturities of short-term investments
    
    
    
    
    
    
    16,857Capitalized software development costs
    
    
    (5,331
    )
    
    
    (5,691
    )Business acquisitions, net of cash acquired
    
    
    (1,326
    )
    
    
    (2,030
    )Other
    
    
    (1,723
    )
    
    
    (1,108
    )Net cash used for investing activities
    
    
    (3,837
    )
    
    
    (10,028
    )Financing Activities:Borrowings
    
    
    
    
    
    
    31Debt repayment
    
    
    
    
    
    
    (200
    )Treasury stock repurchase and payment of tender offer expenses
    
    
    (8,313
    )
    
    
    (9,341
    )Proceeds of employee stock purchases and exercises of stock options
    
    
    5,418
    
    
    
    7,427Other
    
    
    
    
    
    
    9Net cash used for financing activities
    
    
    (2,895
    )
    
    
    (2,074
    )Effect of exchange rate changes on cash
    
    
    (114
    )
    
    
    2,499Net increase (decrease) in cash and cash equivalents
    
    
    88,834
    
    
    
    (20,414
    )Cash and cash equivalents at beginning of period
    
    
    265,782
    
    
    
    490,097Cash and cash equivalents at end of period
    
    $
    354,616
    
    
    $
    469,683
 The accompanying notes are an integral part of these consolidated financial
statements. 4




---



##### Table of Contents



INTERGRAPH CORPORATION AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1 - BASIS OF PRESENTATION The unaudited consolidated financial statements include the accounts of
Intergraph Corporation (the Company or Intergraph) and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim periods presented.
These unaudited interim financial statements should be read in conjunction
with the audited consolidated financial statements and related notes contained
in the Companys Annual Report on Form 10-K/A for the year ended December 31,
2003 (2003 Annual Report ). The operating results for the quarter ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004. The Companys operations are divided for operational and management purposes
into four separate business segments, along with a Corporate oversight function
(Corporate): Intergraph Process, Power & Marine (PPM), Intergraph Mapping
and Geospatial Solutions (IMGS), Intergraph Solutions Group (ISG), and
Intergraph Public Safety, Inc. (IPS). See Note 13 of Notes to Consolidated
Financial Statements contained in this Form 10-Q/A (Notes to Consolidated
Financial Statements) for a description of these business segments. Certain reclassifications have been made to the prior-year amounts to provide
comparability with the current-year presentation. NOTE 2 - STOCK-BASED COMPENSATION In accordance with the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, the Company has elected to apply Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations in accounting for its stock-based option plans. Accordingly,
the Company recognized no compensation expense for these plans during the
quarter and six-month periods ended June 30, 2004, and 2003. 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
reported net income and income per share for these periods would have been
impacted as indicated below. The effect of applying SFAS 123 on a pro forma
basis for the quarter and six-month periods ended June 30, 2004, and 2003, are
not likely to be representative of the effects on reported pro forma net income
for future periods as options vest over several years, and it is anticipated
that additional grants will be made in future years. 5




---



##### Table of Contents



Quarter Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except per share amounts)
    
    (restated)
    
    
    
    
    
    (restated)Net income
    
    As reported
    
    $
    14,896
    
    
    $
    794
    
    
    $
    150,462
    
    
    $
    8,909Deduct: Total stock-based
employee compensation
expense
determined under fair-value-
based method for all awards
(net
of income tax)
    
    
    
    
    (359
    )
    
    
    (450
    )
    
    
    (718
    )
    
    
    (751
    )Pro forma
    
    $
    14,537
    
    
    $
    344
    
    
    $
    149,744
    
    
    $
    8,158Basic income per share
    
    As reported
    
    $
    0.41
    
    
    $
    0.02
    
    
    $
    4.13
    
    
    $
    0.19Pro forma
    
    $
    0.40
    
    
    $
    0.01
    
    
    $
    4.11
    
    
    $
    0.18Diluted income per share
    
    As reported
    
    $
    0.39
    
    
    $
    0.02
    
    
    $
    3.96
    
    
    $
    0.18Pro forma
    
    $
    0.38
    
    
    $
    0.01
    
    
    $
    3.94
    
    
    $
    0.17
 For the quarter ended June 30, 2004, the Company issued 23,678 shares and 990
units of restricted stock. For the year-to-date ended June 30, 2004, the
Company issued 281,678 shares and 990 units of restricted stock, which was
recorded at the quoted market price at the date of grant. The total of all
restricted stock issued as of June 30, 2004, was 356,678 shares and 990 units.
The cost of the restricted stock and restricted stock units is being amortized
over a period of 4 years. The amortization expense for the quarter and
year-to-date ended June 30, 2004, was $463,000 and $679,000, respectively. NOTE 3 - INVENTORIES Inventories at June 30, 2004, and December 31, 2003, are summarized as follows: June 30,
    
    December 31,2004
    
    2003(In thousands)Raw materials
    
    $
    7,434
    
    
    $
    6,295Work-in-process
    
    
    4,694
    
    
    
    3,538Finished goods
    
    
    2,414
    
    
    
    2,939Service spares
    
    
    3,050
    
    
    
    2,671Totals
    
    $
    17,592
    
    
    $
    15,443
 Inventories on hand at June 30, 2004, and December 31, 2003, relate primarily
to continuing specialized hardware assembly activity in the Companys IMGS and
ISG business segments, and to the Companys continuing maintenance obligations
on computer hardware previously sold. Amounts reflected as work-in-process
relate to sales contracts accounted for under the percentage-of-completion
method. NOTE 4 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS Product development costs are charged to expense as incurred; however, the
costs incurred for the development of computer software that will be sold,
leased, or otherwise marketed are capitalized when technological feasibility of
the product has been established. Such capitalized costs are amortized on a
straight-line basis (which is greater than expected sales) over a period of two
to seven years. Amortization of these capitalized costs, included in Cost of
revenues  Systems in the consolidated statements of income, amounted to $3.3
million in second quarter 2004 compared to $2.6 million in second quarter 2003,
and $6.6 million and $4.5 6




---



##### Table of Contents



million in the first six months of 2004 and 2003, respectively. Due to net
realizable value concerns, the Company did not capitalize product development
expenses of $3.1 million in second quarter 2003 and $6 million in the first six
months of 2003 for costs otherwise eligible for capitalization. See Note 5 of
Notes to Consolidated Financial Statements for further information regarding
capitalized software development costs and accumulated amortization. NOTE 5 - INTANGIBLE ASSETS The Companys intangible assets include capitalized software development costs
(included as a separate line in the consolidated balance sheets) and other
intangible assets (included in Other assets, net in the consolidated balance
sheets). At June 30, 2004, and December 31, 2003, the Companys intangible assets and
related accumulated amortization consisted of the following: June 30, 2004
    
    December 31, 2003Accumulated
    
    
    
    
    
    
    
    
    
    AccumulatedGross
    
    Amortization
    
    Net
    
    Gross
    
    Amortization
    
    Net(In thousands)Capitalized software
development
    
    $
    59,754
    
    
    $
    (31,505
    )
    
    $
    28,249
    
    
    $
    54,423
    
    
    $
    (24,903
    )
    
    $
    29,520Other intangible assets
    
    
    49,798
    
    
    
    (43,186
    )
    
    
    6,612
    
    
    
    48,011
    
    
    
    (39,694
    )
    
    
    8,317Totals
    
    $
    109,552
    
    
    $
    (74,691
    )
    
    $
    34,861
    
    
    $
    102,434
    
    
    $
    (64,597
    )
    
    $
    37,837
 The Company recorded amortization expense of $5.1 million and $4.5 million for
second quarter 2004 and 2003, respectively, and $10.1 million and $8.2 million
for first half of 2004 and 2003, respectively. Based on the current intangible
assets subject to amortization, the estimated amortization expenses for the
remainder of 2004, each of the succeeding five years, and thereafter is as
follows: $11 million in 2004, $10 million in 2005, $4 million in 2006, $3
million in 2007, $3 million in 2008, $3 million in 2009, and $1 million
thereafter. The estimated amortization expenses do not include any amounts for
capitalized software development costs incurred or any intangible assets added
after June 30, 2004. NOTE 6 - PROPERTY, PLANT, AND EQUIPMENT, NET Property, plant, and equipment, net includes accumulated depreciation of
approximately $104.8 million and $102.2 million at June 30, 2004, and December
31, 2003, respectively. NOTE 7 - SUPPLEMENTARY CASH FLOW INFORMATION Changes in other assets and liabilities less cash, net of the effects of
business acquisitions and divestitures, in reconciling net income to net cash
used for operations are as follows: 7




---



##### Table of Contents



Six Months Ended June 30,
    
    2004
    
    2003(In thousands)
    
    (restated)(Increase) decrease in:Accounts receivable, net
    
    $
    6,470
    
    
    $
    5,256Inventories, net
    
    
    (3,286
    )
    
    
    1,880Other assets and liabilities
    
    
    830
    
    
    
    247Increase (decrease) in:Trade accounts payable
    
    
    (6,488
    )
    
    
    (353
    )Accrued compensation and other accrued expenses
    
    
    (259
    )
    
    
    (1,936
    )Refundable income taxes
    
    
    866
    
    
    
    (592
    )Billings in excess of sales
    
    
    4,071
    
    
    
    3,688Net changes in other assets and liabilities
    
    $
    2,204
    
    
    $
    8,190
 There were no significant non-cash investing and financing transactions in
second quarter 2004 or the six months ended June 30, 2004. Other non-cash investing and financing transactions in second quarter 2003 and
the six months ended June 30, 2003, include favorable mark-to-market
adjustments (net of tax) of $1.8 million and $812,000, respectively, on the
Companys investment in Creative Technology Ltd. (Creative). Subsequent to
June 30, 2003, all of the Companys 1.5 million shares of Creative were sold
for $12.5 million, resulting in a $1.8 million gain. NOTE 8 - EARNINGS PER SHARE Basic income per share is computed using the weighted average number of common
shares outstanding. Diluted income per share is computed using the weighted
average number of common and equivalent common shares outstanding. Employee
stock options are the Companys only common stock equivalent and are included
in the calculation only if dilutive. For the quarters ended June 30, 2004, and
2003, these dilutive common stock equivalents were 1,542,000 and 2,129,000,
respectively. For the six months ended June 30, 2004, and 2003, these dilutive
shares were 1,560,000 and 2,174,000, respectively. NOTE 9 - COMPREHENSIVE INCOME Comprehensive income differs from net income due to non-equity items that
include unrealized gains and losses on certain investments in debt and equity
securities and foreign currency translation adjustments. Comprehensive income is as follows: Quarter Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)
    
    (restated)
    
    
    
    
    
    (restated)Net income
    
    $
    14,896
    
    
    $
    794
    
    
    $
    150,462
    
    
    $
    8,909Unrealized holding
gains arising
during the period
    
    
    210
    
    
    
    1,958
    
    
    
    237
    
    
    
    932Translation
adjustment for
financial
statements
denominated in a
foreign currency
    
    
    (163
    )
    
    
    5,681
    
    
    
    (2,489
    )
    
    
    5,974Comprehensive income
    
    $
    14,943
    
    
    $
    8,433
    
    
    $
    148,210
    
    
    $
    15,815
 There was no income tax effect related to the items included in other
comprehensive income for second quarter and year-to-date 2004. Second quarter
and year-to-date 2003 unrealized holding gains are shown net of income taxes of
$974,000 and $437,000, respectively. 8




---



##### Table of Contents



NOTE 10 - RESTRUCTURING CHARGES In first quarter 2004, the Company recorded $826,000 in restructuring costs for
employee severance and operating lease terminations in an effort to realign
costs with revenues primarily in the Companys PPM business segment. These
expenses are reflected in Restructuring charges in the consolidated
statements of income. All restructuring activities were completed by March 31,
2004. One-time severance benefits totaled $819,000, and lease termination
costs totaled $7,000. The following table sets forth a reconciliation of the
ending liabilities for one-time severance and lease termination costs, all of
which are reflected in Other accrued expenses in the Companys consolidated
balance sheets: LeaseOne-time
    
    Termination
    
    TotalSeverance
    
    Costs
    
    Restructuring(In thousands)Restructuring charges
    
    $
    819
    
    
    $
    7
    
    
    $
    826Costs paid or otherwise
settled - Q1 2004
    
    
    (746
    )
    
    
    (4
    )
    
    
    (750
    )Foreign currency exchange - Q1 2004
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Accrual balance, March 31, 2004
    
    
    70
    
    
    
    3
    
    
    
    73Costs paid or otherwise
settled - Q2 2004
    
    
    (67
    )
    
    
    (3
    )
    
    
    (70
    )Foreign currency
exchange - Q2 2004
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Accrual balance, June 30, 2004
    
    $
    2
    
    
    $
    
    
    
    $
    2
 In fourth quarter 2003, the Company recorded $4 million in restructuring
charges in an effort to realign costs with revenues in certain areas of the
Companys business. Corporate recorded $2.5 million in restructuring expenses
for employee severance and operating lease terminations. The IMGS business
segment recorded $1.5 million in restructuring expenses for employee severance.
All restructuring activities were completed by December 31, 2003. One-time
severance benefits totaled $2.9 million, lease termination costs totaled $1
million, and other associated costs were $23,000. The following table sets
forth a reconciliation of the 2004 activity for one-time severance, lease
termination costs, and other associated costs, all of which are reflected in
Other accrued expenses in the Companys consolidated balance sheets: Lease
    
    OtherOne-time
    
    Termination
    
    Associated
    
    TotalSeverance
    
    Costs
    
    Costs
    
    Restructuring(In thousands)Accrual balance, December 31, 2003
    
    $
    2,493
    
    
    $
    1,004
    
    
    $
    23
    
    
    $
    3,520Costs paid or otherwise settled -
Q1 2004
    
    
    (1,703
    )
    
    
    (336
    )
    
    
    (3
    )
    
    
    (2,042
    )Foreign currency
exchange - Q1 2004
    
    
    (19
    )
    
    
    (14
    )
    
    
    (1
    )
    
    
    (34
    )Accrual balance, March 31, 2004
    
    
    771
    
    
    
    654
    
    
    
    19
    
    
    
    1,444Costs paid or otherwise settled -
Q2 2004
    
    
    (617
    )
    
    
    (132
    )
    
    
    (4
    )
    
    
    (753
    )Foreign currency
exchange - Q2 2004
    
    
    5
    
    
    
    3
    
    
    
    1
    
    
    
    9Accrual balance, June 30, 2004
    
    $
    159
    
    
    $
    525
    
    
    $
    16
    
    
    $
    700
 In fourth quarter 2002, the Company recorded $2.1 million in restructuring
charges as a result of combining the Utilities and Communications business with
the IMGS division. Cash outlays related to these actions for second quarter
2004 and first six months 2004 approximated $28,000 and $59,000, respectively.
Cash outlays related to these actions for second quarter 2003 and first six
months 2003 approximated $236,000 and $1.3 million, respectively. At June 30,
2004, the total remaining accrued liability for restructuring was approximately
$56,000 compared to approximately $119,000 at December 31, 2003. These
liabilities are reflected in Other accrued expenses in the Companys
consolidated balance sheets. These accrued costs are expected to be paid
during 2004 and relate to liabilities for idle building space in Asia. 9




---



##### Table of Contents



For a complete discussion of the Companys restructuring activities in 2003 and
2002, see the Companys 2003 Annual Report. NOTE 11 - INTELLECTUAL PROPERTY INCOME, NET In second quarter 2004, net intellectual property income of $8.0 million
included $10.0 million in income from the Companys settlement with Advanced
Micro Devices (AMD) and $10.2 million from the Companys settlement and
royalties with Gateway, Inc. (Gateway) offset by $12.2 million in legal fees
and other related expenses associated with patent litigation. As per the
settlement agreement, Gateway paid $5.0 million in May 2004, $2.5 million in
July 2004, and $2.5 million is due in October 2004. AMD paid $10.0 million
during the quarter. In second quarter 2003, the Company recorded $4.3 million
in legal fees and other related expenses associated with protecting and
licensing the Companys intellectual property. For the first six months of 2004, net intellectual property income was $211.0
million. This included $225.0 million in income from the Companys settlement
with Intel Corporation (Intel), $10.0 million in income from the Companys
settlement with AMD, and $10.2 million from the Companys settlement and
royalties with Gateway. The Company received payments from Intel of $125.0
million in April 2004 and $25.0 million in July 2004. The remainder is payable
in quarterly installments through April 2005. Year-to-date legal fees and
patent litigation expenses were $34.1 million. For the first six months of
2003, net intellectual property income of $1.0 million included $10.0 million
in income from a cross-licensing agreement with International Business Machines
Corporation (IBM), offset by $9.0 million in legal fees and other related
expenses. For a complete discussion of litigation matters, see Note 16 of Notes to
Consolidated Financial Statements and Item I. Legal Proceedings in Part II of
Managements Discussion and Analysis of Financial Condition and Results of
Operations section contained in this Form 10-Q/A (MD&A). NOTE 12 - GAIN ON SALE OF ASSETS During the six months ended June 30, 2003, IMGS reported a gain of
approximately $1.2 million from the first quarter 2003 sale of its aeronautical
intellectual property assets to Ingegneria Dei Sistemi S.p.A. in Rome, Italy.
In second quarter 2003, IMGS incurred additional expenses of $65,000 related to
this transaction. For a complete discussion, see the Companys 2003 Annual
Report. NOTE 13 - SEGMENT REPORTING The Companys current operations are divided into four business segments along
with a Corporate oversight function. The four core business segments are PPM,
IMGS, ISG, and IPS. The Companys reportable segments are strategic business
units that are organized by the types of products sold and the specific markets
served. Each is discussed in further detail below. PPM supplies integrated lifecycle software solutions for the design,
construction, and operation of process and power plants, offshore rigs, and
ships. This division offers applications that span shipbuilding, plant design
and visualization, materials procurement and management, plant operations, and
engineering information management. IMGS is a geospatial solutions provider for the following markets: local,
regional, federal, and national governments; transportation; utilities;
communications; commercial remote sensing and photogrammetry; and military and
intelligence. ISG provides professional services, specially developed software and hardware,
and commercial off-the-shelf products to federal, state, and local governments,
and to commercial customers. IPS develops computer graphics-based systems designed for public safety
agencies, commercial fleet operations, campus, military base, and airport
security. IPS systems are complete, integrated solutions for command and
control, deployment, tracking, information gathering, analysis, and records
management. 10




---



##### Table of Contents



Corporate includes revenues and costs for Teranetix (a provider of commercial
repair and logistics services), international hardware maintenance, and general
corporate functions. Operating expenses for Corporate consist of oversight
costs associated with the offices of Chief Executive Officer, Chief Financial
Officer, Treasurer, Strategic Planning, General Counsel, the Board of
Directors, internal and external audit, other costs that are directly the
result of Intergraph being a publicly held company, and residual costs of
exiting the hardware business, including management of warranty reserves and a
repair depot. The Company evaluates the performance of its business segments based on revenue
and income (loss) from operations. The accounting policies of the reportable
segments are consistent across segments and are the same as those used in
preparation of the consolidated financial statements of the Company (see Note 1
of Notes to Consolidated Financial Statements included in the Companys 2003
Annual Report). Sales between the business segments are accounted for under a
transfer pricing policy. Transfer prices approximate prices that would be
charged for the same or similar products and services to unrelated buyers. The following table sets forth revenues and operating income (loss) by business
segment for the quarters and six months ended June 30, 2004, and 2003. Quarter Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(In thousands)
    
    (restated)
    
    
    
    
    
    (restated)Revenues:PPM:Unaffiliated customers
    
    $
    34,838
    
    
    $
    32,228
    
    
    $
    67,506
    
    
    $
    62,023Intersegment revenues
    
    
    322
    
    
    
    465
    
    
    
    700
    
    
    
    1,18235,160
    
    
    
    32,693
    
    
    
    68,206
    
    
    
    63,205IMGS:Unaffiliated customers
    
    
    53,659
    
    
    
    46,950
    
    
    
    104,483
    
    
    
    92,070Intersegment revenues
    
    
    1,206
    
    
    
    1,592
    
    
    
    2,396
    
    
    
    3,23554,865
    
    
    
    48,542
    
    
    
    106,879
    
    
    
    95,305ISG:Unaffiliated customers
    
    
    29,097
    
    
    
    29,682
    
    
    
    58,717
    
    
    
    56,657Intersegment revenues
    
    
    2,431
    
    
    
    396
    
    
    
    2,906
    
    
    
    89831,528
    
    
    
    30,078
    
    
    
    61,623
    
    
    
    57,555IPS:Unaffiliated customers
    
    
    17,525
    
    
    
    16,071
    
    
    
    34,090
    
    
    
    32,054Intersegment revenues
    
    
    185
    
    
    
    784
    
    
    
    552
    
    
    
    1,32517,710
    
    
    
    16,855
    
    
    
    34,642
    
    
    
    33,379Corporate:Unaffiliated customers
    
    
    2,848
    
    
    
    2,416
    
    
    
    5,456
    
    
    
    5,096Intersegment revenues
    
    
    300
    
    
    
    608
    
    
    
    533
    
    
    
    1,3973,148
    
    
    
    3,024
    
    
    
    5,989
    
    
    
    6,493142,411
    
    
    
    131,192
    
    
    
    277,339
    
    
    
    255,937Eliminations
    
    
    (4,448
    )
    
    
    (3,845
    )
    
    
    (7,091
    )
    
    
    (8,037
    )Total Revenues
    
    $
    137,963
    
    
    $
    127,347
    
    
    $
    270,248
    
    
    $
    247,900Operating income (loss):PPM
    
    $
    5,405
    
    
    $
    4,306
    
    
    $
    8,092
    
    
    $
    8,475IMGS
    
    
    2,531
    
    
    
    (1,232
    )
    
    
    6,197
    
    
    
    (1,046
    )ISG
    
    
    4,677
    
    
    
    2,844
    
    
    
    8,508
    
    
    
    3,980IPS
    
    
    2,753
    
    
    
    3,562
    
    
    
    4,849
    
    
    
    7,031Corporate
    
    
    (6,215
    )
    
    
    (6,621
    )
    
    
    (10,942
    )
    
    
    (11,346
    )Eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    9,151
    
    
    $
    2,859
    
    
    $
    16,704
    
    
    $
    7,094
 11




---



##### Table of Contents



Significant profit and loss items that were not allocated to the segments and
not included in the analysis above include intellectual property income and
expense and gains and losses on sales of assets. See Notes 11 and 12 of Notes
to Consolidated Financial Statements for comparative details of these items. The Company does not evaluate performance or allocate resources based on
assets. For further information, see Results by Operating Segment in MD&A. NOTE 14 - LETTERS OF CREDIT In September 2002, in order to reduce the cost of issuing letters of credit,
the Company established a $12.5 million credit line with Wells Fargo Bank to
cover its outstanding letters of credit secured by $15.0 million of
interest-bearing securities. This credit line was reduced on January 20, 2004,
to $6.0 million secured by $8.2 million of interest-bearing securities. Under
this arrangement, the Company earns interest on the securities and withdrawal
of securities is allowed, but the Company is required to maintain a level of
securities sufficient to cover total outstanding letters of credit (which
totaled $4.6 million at June 30, 2004 and $4.9 million at December 31, 2003). NOTE 15 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46 (revised December 2003) Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
51, Consolidation of Financial Statements, which addresses consolidation of
variable interest entities (VIEs) by business enterprises. This statement is
required in financial statements of public entities that have interests in VIEs
or potential VIEs commonly referred to as special-purpose entities for periods
ending after December 15, 2003. Application by public entities (other than
small business issuers) for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The adoption of
FIN 46 in first quarter 2004 has not resulted in the consolidation of any VIEs
as of June 30, 2004. In December 2003, FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits  an Amendment of FASB Statements
No. 87, 88, and 106. This statement revises employers disclosures about
pension plans and other postretirement benefit plans to provide more
information about pension plan assets, obligations, benefit payments,
contributions, and net benefit cost. This statement retains the disclosures
required by the originally issued Statement 132 and requires further
disclosures, including information describing the types of plan assets,
investment strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim periods.
SFAS No. 132 (revised 2003) is effective for financial statements with fiscal
years ending after December 15, 2003, except for disclosure of information
about foreign plans and disclosure of estimated future benefit payments, which
are effective for fiscal years ending after June 15, 2004. The adoption of
this statement did not have a significant impact on the Companys consolidated
results of operations or financial position. NOTE 16 - LITIGATION As further described in the Companys 2003 Annual Report, the Company continues
to protect its intellectual property portfolio by engaging in both licensing
discussions and patent infringement litigation. The following is a discussion
of the 2004 developments for patent and other litigation. Litigation is
subject to known and unknown risks and uncertainties. See Cautionary Note
Regarding Forward-Looking Statements in MD&A for further discussion of these
risks and uncertainties. Intel Litigation:On July 29, 2001, the Company filed a patent infringement
case against Intel in the U.S. District Court for the Eastern District of Texas
(the Texas case). The Texas case pertained to the Companys parallel
instruction computing (PIC) patents and went to trial on July 2, 2002. On March 29, 2004, the Company resolved its dispute with Intel regarding its
PIC patents, and both parties agreed to dismiss all outstanding patent
infringement claims and lawsuits against each other. Per the terms of the
settlement agreement, Intel paid the Company $125.0 million in April 2004,
$25.0 million in July 2004, and 12




---



##### Table of Contents



an additional $75.0 million is due in three quarterly installments over the
following year. In addition, the Company granted Dell, Inc. (Dell) certain
licenses to its patents and dismissed its separate pending litigation against
Dell in the OEM case discussed below. OEM Litigation:On December 16, 2002, the Company filed a patent infringement
action against Dell, Gateway and Hewlett-Packard Co./Compaq (HP) in the U.S.
District Court for the Eastern District of Texas (the OEM case). The
Companys complaint alleges that products from the three computer vendors
infringe U.S. Patent Numbers 4,899,275 and 4,933,835 and 5,091,846. These
computer system-level patents relate to memory management technology. The OEM
action seeks an unspecified amount of damages for past infringement from the
OEM defendants. The OEMs asserted various defenses, pre-trial motions and
countersuits against the Company, including a counterclaim alleging the
Companys patent assertions to be in violation of the Sherman Antitrust Act. Per the terms of the March 29, 2004 settlement agreement with Intel, the
Company dismissed Dell and all related claims from the pending OEM litigation. On May 10, 2004, the Company reached a settlement with Gateway, wherein Gateway
agreed to pay $5.0 million within 10 days of the settlement and an additional
$2.5 million on July 1 and October 1, 2004. Gateway also agreed to make future
royalty payments of $1.25 per unit for certain U.S. sales of Gateway and
eMachines computer systems through February 2009. As a result, Gateway
obtained a Clipper license for itself and eMachines through February 2009, and
was dismissed from the pending OEM litigation. The $5.0 million payment and
first $2.5 million payment were paid timely. Second quarter royalties of
$165,000 were paid on July 30, 2004. HP is the only remaining defendant in the OEM litigation. In addition to its
affirmative defenses and counterclaim asserted in the OEM litigation, on May
28, 2003, HP filed a patent countersuit against the Company in the Northern
District of California, alleging that a variety of Intergraph products,
including SmartPlant 3D, IntelliShip, SmartPlant, SmartSketch®, I/Mobile TC,
and IntelliWhere infringe four separate HP patents. Thereafter, on April 1, 2004, HP filed a patent countersuit against the Company
in Mannheim, Germany accusing the Companys SmartPlant 3D products of
infringing two foreign patents related to the automated dimensioning
technology. On April 19, 2004, HP filed three separate legal actions against
the Company, including separate patent infringement actions in Delaware and the
Eastern District of Texas, as well as an action in the German patent office to
invalidate the German Clipper patents. HPs Delaware action accuses the
Companys Z/I Imaging® digital camera of infringing a patent related to
scanning technology. HPs new Texas case accuses the Companys SmartPlant 3D,
IntelliShip, SmartPlant Offshore, and SmartSketch® products of infringing a
patent related to dimensional conversions in computer-aided design software. On May 7, 2004, the Companys IP division filed a second patent infringement
suit against HP, accusing HP of infringing U.S. Patent 6,374,329 B1,
High-Availability Super Server (SuperServer). The Companys SuperServer
patent pertains to the clustering of large numbers of processors in server
systems. The Companys complaint alleges that its SuperServer technology is
employed in HPs DNA Memory Subsystem Technology, including HPs SX1000
chipset, and Superdome, HP9000, 8400, and 7410 families of servers, and
requests an injunction to stop HP from selling the infringing server systems.
HP has responded by asserting a number of affirmative defenses, as well as a
patent counterclaim asserting two HP Computer Aided Design (CAD) patents
against Intergraph. A scheduling conference is set for August 10, 2004. The Court conducted the Markman hearing on May 7, 2004, and issued its Markman
construction on July 1, 2004. On July 13, 2004, the Court issued a new
scheduling order setting jury selection for February 7, 2005, and rescheduling
the trial to begin on February 21, 2005. The Company has not determined what impact, if any, HPs counterclaims and
countersuits may have on the Companys operations and cash flows, but plans to
vigorously defend against the same. 13




---



##### Table of Contents



AMD Litigation:On January 15, 2004, AMD filed a Declaratory Judgment Act
patent action against the Company in the Northern District of California. AMD
asserted that the Companys family of Clipper patents (U.S. Patent Nos.
4,860,192 and 4,884,197 and 4,899,275 and 4,933,835 and 5,091,846) is either
invalid, or not infringed by AMDs microprocessor products. On April 9, 2004,
AMD agreed to settle its patent lawsuit against the Company and to take a
license to the Companys Clipper patents. Under the terms of this license, AMD
agreed to pay the Company $10 million by May 7, 2004, and agreed to make
additional cash payments equal to 2% of the AMD Computation Product Groups
pre-tax operating profits, if any, for the 2005 through 2007 calendar years,
subject to a limit of $5 million per year. The Company received the $10
million payment as agreed. BSI Litigation:In December 2002, the Company filed a declaratory judgment
action in Madison County, Alabama, against Bentley Systems, Inc. (BSI). The
action sought the interpretation and enforcement of an asset purchase agreement
and promissory note, which were executed in conjunction with the sale of the
Companys civil, plotting, and raster software product lines to BSI in 2000.
BSI subsequently filed an initial action against the Company in Philadelphia,
Pennsylvania, and thereafter filed a second action in Delaware alleging that
the Company breached certain terms of the asset purchase agreement. BSIs
Pennsylvania action was dismissed in March 2003, and BSIs Delaware action was
stayed pending the Alabama action. Thereafter BSI asserted counterclaims in
the Alabama action, which were substantially the same as those claims asserted
in its Delaware action. BSI did not specify an amount of damages in its
claims. The case was submitted to the Court for determination in April 2004,
and the Court issued its judgment in early May. The Court ruled in favor of
Intergraph on both Intergraphs claims as well as BSIs counterclaims.
However, the judgment entered against BSI was actually less than the balance
that the Company had carried on its books with regard to the BSI note. As a
result, the Company took a charge of $885,000 in second quarter 2004. BSI has
since appealed the court decision, which is expected to take between 18-24
months. Other Litigation: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 adverse developments in any of these proceedings
could materially adversely affect the Companys results of operations,
financial condition, or cash flows. NOTE 17. INCOME TAXES Income tax expense of $79.8 million for the first half of 2004 is attributable
to taxes on patent litigation income, U.S. operations, and individually
profitable majority-owned subsidiaries, partially offset by net operating loss
utilization and favorable audit settlements with the Internal Revenue Service
(IRS). The 2004 second quarter tax expense of $2.8 million was reduced by
lowering the Companys effective tax rate from 36.2% to 35.5% as a result of
the Companys ability to utilize foreign net operating losses for a benefit of
$1.6 million, or $0.04 per share (basic and diluted). Also, the Company had a
favorable resolution of audit issues with the IRS which resulted in an
additional $2.0 million benefit, or $0.05 per share (basic and diluted). See
Income Taxes in MD&A for further discussion of the Companys tax position. NOTE 18. SUBSEQUENT EVENTS On July 28, 2004, the Company announced that it had repurchased 3.8 million
shares from a financial intermediary in a private transaction in connection
with an Accelerated Stock Buyback (ASB) at a price of $26.33 per share or an
aggregate of $100 million (before transaction costs), subject to a market price
adjustment provision based on the volume weighted market trading price over the
next nine months. With the execution of the ASB on July 28, 2004, the
Companys $250 million open market repurchase plan has $28.3 million remaining
(subject to any ASB adjustments) that can be used for future repurchases of
stock. The termination date for the current stock repurchase program is
December 31, 2005. 14




---



##### Table of Contents



NOTE 19. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to filing the Form 10-Q for the quarter ended June 30, 2004,
management determined that it was appropriate to restate its financial
statements for the periods ended December 31, 2003, March 31, 2004, and June
30, 2004, to defer previously recorded revenues to a later date. The Early Adopter Program (EAP) was a limited release of SmartPlant 3D
Version 4. PPMs internal accounting staff determined that the accounting for
the Early Adopter Program should be reviewed after becoming aware that certain
maintenance obligations and a specified upgrade to SmartPlant 3D Version 5 were
included in the program. Paragraph 10 of SOP 97-2 allows for the establishment of vender specific
objective evidence (VSOE) of fair value on new products based on managements
established price, that once established, will not change before the separate
introduction of the product into the marketplace. VSOE of the fair value of the
specified upgrade has to be established or the Company would be required to
defer all revenue on customer orders that included a purchase of SP3D Version 4
under the EAP until the SP3D Version 5 upgrade is delivered. In the case of
the EAP, management never intended to sell separately an upgrade to SP3D
Version 5. The Company concluded that VSOE of the fair value of the
upgrade could not be established according
to paragraph 12 of SOP 98-9 without this requisite intent to sell upgrades
separately. As a result, the accompanying consolidated financial statements have been
restated from the amounts previously reported. A summary of the significant
effects of the restatement is as follows: Quarter Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2004As
    
    
    
    
    
    AsReported
    
    Restated
    
    Reported
    
    Restated(in thousands except per share amounts)Consolidated Statement of Operations Data:Revenue
    
    $
    138,357
    
    
    $
    137,963
    
    
    $
    271,326
    
    
    $
    270,248Gross profit
    
    
    69,943
    
    
    
    69,554
    
    
    
    137,054
    
    
    
    135,996Operating income
    
    
    9,520
    
    
    
    9,151
    
    
    
    17,699
    
    
    
    16,704Net income
    
    
    15,165
    
    
    
    14,896
    
    
    
    151,157
    
    
    
    150,462Net income per shareBasic
    
    $
    0.41
    
    
    $
    0.41
    
    
    $
    4.15
    
    
    $
    4.13Diluted
    
    $
    0.40
    
    
    $
    0.39
    
    
    $
    3.98
    
    
    $
    3.96
 December 31, 2003
    
    June 30, 2004As
    
    
    
    
    
    AsReported
    
    Restated
    
    Reported
    
    Restated(in thousands)Consolidated Balance Sheet DataAccrued compensation
    
    $
    38,871
    
    
    $
    38,726
    
    
    $
    34,487
    
    
    $
    34,369Other accrued expenses
    
    
    40,855
    
    
    
    40,835
    
    
    
    42,030
    
    
    
    41,990Billings in excess of sales
    
    
    48,711
    
    
    
    49,970
    
    
    
    51,108
    
    
    
    53,445Income taxes payable
    
    
    27,177
    
    
    
    26,912
    
    
    
    61,455
    
    
    
    60,890Retained earnings
    
    
    609,227
    
    
    
    608,308
    
    
    
    760,384
    
    
    
    758,770
 15




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements (all statements other than
those made solely with respect to historical fact) within the meaning of the
Private Securities Litigation Reform Act of 1995 including, but not limited to,
the business outlook and strategies of Intergraph Corporation (the Company or
Intergraph), financial guidance, including any projections about revenues,
operating income levels, margins, costs, and market conditions, and their
anticipated impact on the Company and its vertical business segments;
expectations regarding Intergraphs various ongoing litigation proceedings;
expectations regarding future results and cash flows; information regarding the
development, timing of introduction, and performance of new products; the
Companys ability to win new orders and any statements of the plans,
strategies, expectations and objectives of management for future operations.
These forward-looking statements are subject to known and unknown risks and
uncertainties (some of which are beyond the Companys control) that could cause
actual results to differ materially and adversely from those anticipated in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, potential adverse outcomes or
rulings in our ongoing efforts to protect our intellectual property, including
the Companys claims against Hewlett-Packard Co./Compaq (HP) or their
countersuits against the Company, and other ongoing and potential litigation
and patent enforcement efforts, the ability, timing, and costs (including the
calculation of success and other fees) to enforce and protect the Companys
intellectual property rights; the ability of the Company to obtain required
product certifications and timely deliver SP3D Version 5; potential adverse
outcomes in our efforts to improve our operating performance (including
uncertainties with respect to the timing and magnitude of any expected
improvements); material changes with respect to our business, litigation
prospects, or the securities markets, including the market for Intergraph
common stock and any adjustment relating to the Accelerated Stock Buyback
(ASB); risks associated with doing business internationally (including
foreign currency fluctuations); worldwide political and economic conditions and
changes; the ability to attract or retain key personnel; increased competition;
rapid technological change; unanticipated changes in customer requirements; the
ability to access the technology necessary to compete in the markets served;
risks associated with various ongoing litigation proceedings; and other risks
detailed in our press releases or in our annual, quarterly, or other filings
with the Securities and Exchange Commission (SEC). OVERVIEW Intergraph is a pioneer of computer graphics software and services in the
commercial and government sectors. Founded in 1969, the Company has delivered
numerous innovations in interactive graphics solutions. Today, Intergraphs
core mission is to enable businesses and governments to make better and faster
operational decisions, and through software and services, help its customers
organize vast amounts of complex data into understandable visual
representations. Intergraphs technology enables our customers to create
intelligent maps, manage assets and infrastructure, build and operate better
plants and ships, and dispatch emergency services to those in need. Over the past six years, the Company has taken significant measures to reduce
its losses and return to profitability, including extensive reductions in its
workforce, the sale of several non-core business units and assets, and the exit
of the Companys hardware design and manufacturing operations in 2000. These
actions allowed the Company to return to profitability in 2001. The Company
was profitable again in 2002, 2003, and first half 2004. Management is focused on improving the Companys operating margins. The
overall strategic goal in the next two to three years is the expansion of
operating margin percentages (income from operations divided by revenue) to be
more in line with peer companies. While primarily focused on operating
margins, management also monitors revenue, gross margins, and operating
expenses for each business unit and the Company as a whole. While second
quarter 2004 revenue grew 8.3% over second quarter 2003, the Company
anticipates modest annual revenue growth for 2004 as a whole. The Company
believes any improvement in income from 16




---



##### Table of Contents



operations for 2004 will primarily be due to expense reductions as a result of
the recent restructuring initiatives and anticipated slight improvements in
gross margins. Income from operations was 6.6% of revenue for Q2 2004 compared to 5.7% for Q1
2004 and 2.2% for Q2 2003. The increase in operating income as a percentage of
revenue is primarily due to the Companys higher gross margins as a result of
better cost controls in the professional services projects, and higher software
content in the maintenance contracts. Variations in quarterly results are
expected; however, the Company remains optimistic regarding its goal of
bringing annual operating margins more in line with those of its peer group
over time. The Company completed a strategic planning process in late July. The results
of the process are intended to serve as the foundation for the Companys
strategy as it pursues growth. The Companys strategy emphasizes leveraging
its existing assets and capabilities, identifying and capitalizing on
attractive market opportunities, exiting non-core businesses, and making
prudent investments in new products and acquisitions. As a result of this
analysis, the Company identified three positive themes in the business that the
Company intends to leverage over the coming years and identified several
challenges it must address. First, the Company believes that Intergraph is more relevant today in the world
than it was five years ago. The current global environment is characterized by
heightened security concerns relating to terrorist activity. Intergraph can
help its customers address these threats with its public safety first responder
software solution from IPS, its location-based GeoSpatial software applications
from IMGS, and its integration capabilities and government contacts from ISG. Second, the Company believes its core addressable market opportunities are
growing and present the Company with opportunities to seek growth. The
Companys strategy is to pursue opportunities in its markets through organic
growth and investments in research and development. Also, the Company will
consider acquiring companies or technologies, particularly within the public
safety and plant design markets. Third, the Company believes its customers recognize the commitment that the
Company has made to the markets that its serves. As a result, the Company has
customer relationships that in many cases span decades. The Company intends to
leverage these durable customer relationships over the coming years by bringing
additional products to market organically, as well as seeking to acquire
companies and/or product offerings that have appeal to the Companys customer
base. The Company has also identified some areas for improvement. First, the Company
believes it sells too little software for its current level of development
spending. Across its three software units, the Company spends approximately
14% of revenue on research and development. However, software related revenues
for these same divisions comprise substantially less than half of their
revenues. The Company believes the combination of this revenue mix and the
difference in gross margins between software sales and services projects
contributes to the Companys relatively lower operating performance. As part
of its efforts to improve performance, the Company is seeking to increase the
software related components of its revenue and to improve the efficiency of its
research and development efforts by emphasizing expected returns, strategic
importance, and innovation. Second, the Company believes its organizational structure of four separate
business units can impede inter-company synergies and cross-selling. The
Company believes that certain of its sales and marketing efforts were too
business unit focused and failed to take advantage of the complete set of
capabilities that Intergraph has to offer to the marketplace. The Company is
seeking to emphasize teamwork, productivity, and cross-selling among business
units. Third, the Company believes its general and administrative costs are too high
given its goal to improve operating performance. As a result, the Company
intends to review its general and administrative processes in an effort to
reduce costs. The Companys ability to execute its strategies and improve its
operating results is subject to known and unknown risks and uncertainties. See
Cautionary Note Regarding Forward-Looking Statements in MD&A. 17




---



##### Table of Contents



The Company has intellectual property that resulted from its hardware design
and manufacturing operations that the Company exited in 2000. This
intellectual property is used in a variety of industries, including computers,
consumer electronics, telecommunications, and electronics design. The Company
defends the value of its intellectual property portfolio through licensing and
litigation. The Company remains actively engaged in licensing discussions, as
well as patent litigation with several companies. In second quarter 2004, net
intellectual property income of $8.0 million included $20.0 million in income
for the Gateway Inc. (Gateway) and Advanced Micro Devices (AMD) settlements
and $165,000 in royalties from Gateway. This is offset by $12.2 million in
legal expenses and other related expenses associated with patent litigation.
In second quarter 2003, net intellectual property expense of $4.3 million was
composed of legal fees and other related expenses associated with protecting
and licensing the Companys intellectual property. The Companys current operations are divided into four business segments along
with a Corporate oversight function (Corporate). The Companys business
segments are Intergraph Process, Power & Marine (PPM); Intergraph Mapping and
Geospatial Solutions (IMGS); Intergraph Solutions Group (ISG); and
Intergraph Public Safety, Inc. (IPS). For a complete discussion, see the
Companys Annual Report on Form 10-K/A for the year ended December 31, 2003
(2003 Annual Report). RESULTS OF OPERATIONS Revenues Total revenues for second quarter and first half 2004 were $138.0 million and
$270.2 million, respectively, up 8.3% and 9.0% from the comparable prior-year
periods. Sales outside the United States represented approximately 48% of total revenues
in first half 2004, up slightly from the comparable period in 2003. European
revenues were 31% of total revenues for first half 2004, also up slightly from
the first half 2003 level. The Company reports revenue in three categories, consisting of systems,
maintenance, and services revenues. The following discussions detail each of
these revenue categories. Systems:Systems revenue for second quarter and first half 2004 was $71.8
million and $141.5 million, down slightly from the comparable prior-year
periods. The decrease in revenues for the second quarter 2004 over second
quarter 2003 is primarily the result of $6.9 million in lower product and
professional service sales in the ISG business segment from contracts completed
between the reported periods, offset by an increase in revenues of $4.8 million
at the IMGS business segment due to the delivery of products associated with a
large international mapping customer and a favorable currency impact of 1.9%
due to a weakening of the U.S. dollar. The decrease in revenues for the first
half 2004 compared to the first half 2003 is due to the IPS and ISG business
segments, where revenues declined $2.5 million and $7.8 million, respectively,
as several contracts were completed or neared completion in 2003, offset by a
3.2% increase due to a weakening of the U.S. dollar and $7.3 million increase
due to the delivery of products associated with a large international mapping
customer for the IMGS business segment. Maintenance:Maintenance revenues totaled $34.6 million in second quarter 2004
and $67.6 million for first half 2004, up 1.6% and 5.4%, respectively, from the
comparable prior-year periods. Revenues increased 3.3% for second quarter 2004
as compared to second quarter 2003 due to a weakening of the U.S. dollar, and
software revenues increased approximately $583,000 for new shipbuilding
products offered by the PPM business segment. These increases were offset by a
$1.2 million decrease in the ISG business segment as hardware continued to
expire on maintenance contracts related to the Companys exit from the hardware
business. First half 2004 maintenance revenues increased approximately 5.6%
due to a weakening of the U.S. dollar. Other increases include $1.8 million
and $2.5 million for the IPS and PPM business segments, respectively, for new
business. These increases were offset by a decrease of $2.2 million in the ISG
business segment, for expiration of hardware maintenance contracts, and also by
a decrease of $1.2 million in the IMGS business segment, for non-renewal of
maintenance contracts of older Intergraph software product lines. 18




---



##### Table of Contents



Services:Services revenue, consisting of revenues from implementation and
consulting services, totaled $31.6 million for second quarter 2004 and $61.2
million for first half 2004, up approximately 54.5% and 50.8%, respectively,
from the comparable prior-year periods. While all business segments showed
improvement for both second quarter and first half 2004, the increase is
primarily due to the effect of a large U.S. government project that began
mid-2003 in the ISG business segment for $5.5 million and $11.0 million,
respectively, for second quarter and first half 2004. In addition, the
weakening of the U.S. dollar contributed to the overall increases in services
revenues, 3.4% for second quarter 2004 and 6.3% for first half 2004. Gross Margin The Companys total gross margin for second quarter 2004 was 50.4%, compared to
48.4% for second quarter 2003. The Companys total gross margin for first half
2004 was 50.3%, compared to 47.7% for first half 2003. Systems:Systems margin was 50.0% for second quarter 2004, up from 47.9% for
second quarter 2003. First half 2004 systems margin was 50.4%, up from 48.1%
for the first half 2003. The margin improvement for second quarter 2004 over
second quarter 2003 resulted from a lower mix of third-party products, mainly
in the ISG business segment, and a 2003 $1.2 million non-recurring adjustment
in the IMGS business segment. The margin for first half 2004 improved over
first half 2003, primarily from the completion of several lower margin
contracts in the IMGS and ISG business segments and a weakening of the U.S.
dollar. These improvements are offset by increased amortization of capitalized
software development costs of $1.5 million in the PPM business segment. In
general, the Company believes its systems margins are improved by higher
software content in the product mix, a weaker U.S. dollar in international
markets, and less discounting. Also, systems margins are lowered by price
competition, a higher services and third-party content in the product mix, a
stronger U.S. dollar in international markets, and a higher mix of federal
government sales, which generally produce lower margins than commercial sales. Maintenance:Maintenance margin for second quarter 2004 was 69.4%, up from
62.5% for second quarter 2003. First half 2004 maintenance margin was 68.8%,
up from 60.9% for the first half 2003. The improvement in margin for both
periods is mainly due to higher software content in new maintenance contracts,
an increase in cost savings from headcount reductions, primarily in the ISG
business segment, as well as a decrease in excess and obsolete spares inventory
provisions in the Corporate business segment. Services:Services margin was 30.6% for second quarter 2004, up from 26.4% for
second quarter 2003. First half 2004 services margin was 29.8%, up from 25.4%
for the first half 2003. The improvement in services margin for both periods
is the result of higher revenues and the corresponding personnel efficiency in
this area. Also, the PPM business segment was able to reduce discounting in
the current year as compared to 2003 when initial product offerings led to
lower than normal pricing. In addition, also in the PPM business segment, an
existing large contract was renewed with more market-based prices. Significant
fluctuations in services revenues and margins from period to period are not
unusual and can be caused by new or completed large orders, delayed progress on
existing projects, and employee utilization rates. Operating Expenses Operating expenses were $60.4 million for second quarter 2004, up 2.9% from
second quarter 2003. Operating expenses, including restructuring charges of
$826,000, were $119.3 million for first half 2004, up 7.4% from first half
2003. Product Development Expenses:Product development expenses were $14.5 million
for second quarter 2004, flat with second quarter 2003 levels. Product
development expenses were $29.0 million for first half 2004, an increase of
9.7% from first half 2003 levels. This increase was primarily the result of
the $1.4 million increase in shipbuilding product development costs in the PPM
business segment, unfavorable currency impact of $549,000 from a weakening U.S.
dollar, and a $490,000 decrease in software development costs qualifying for
capitalization in the IMGS business segment. 19




---



##### Table of Contents



Sales and Marketing Expenses:Sales and marketing expenses were $28.2 million
for second quarter 2004, up 10.0% from the second quarter 2003 level. This
increase resulted from the weakening U.S. dollar for $851,000, an increase in
incentive compensation of $702,000 related to higher revenue, an increase in
headcount in the IPS business segment for $358,000 in an effort to grow orders
and increase future revenue, and an increase of $420,000 for expenses resulting
since the acquisition of new businesses. Sales and marketing expenses were
$54.2 million for first half 2004, up 7.8% from the first half 2003 level.
This increase was primarily due to the estimated $2.8 million unfavorable
currency impact, an increase of $1.1 million for costs resulting since the
acquisition of new businesses, an increase of $792,000 resulting from expanding
headcount in the IPS business segment, and an increase in incentive
compensation of $534,000 related to higher revenue. These increases were
offset $1.1 million for a reallocation of resources from marketing activities
to billable service projects. General and Administrative Expenses:General and administrative expenses were
$17.7 million for second quarter 2004, down 4.1% from the second quarter 2003
level. This decrease is the result of cost savings from headcount reductions
of $573,000, 2003 retention bonuses of $433,000, a decrease in legal fees of
approximately $348,000, and $262,000 for reduced occupancy expense. These
decreases were offset by $1.0 million in expense related to Sarbanes-Oxley
compliance and an unfavorable currency impact of $368,000. General and
administrative expenses were $35.2 million for first half 2004, up 2.6% from
the first half 2003 level. This increase included increases from the weakening
of the U.S. dollar for approximately $1.2 million and $1.0 million of expense
related to Sarbanes-Oxley compliance, offset by 2003 retention bonuses of
$433,000 and $368,000 costs savings for reduced occupancy expense. Restructuring Charges:In first quarter 2004, the Company recorded $826,000 in
restructuring charges primarily in its PPM business segment in an effort to
realign costs with revenues. For a complete discussion of restructuring
charges, see the Companys 2003 Annual Report and Note 10 of Notes to
Consolidated Financial Statements. Non-Operating Income and Expense Intellectual Property:Intellectual property income (expense), net in the
consolidated statements of income consists of income resulting from settlements
and licensing of the Companys intellectual property, net of legal fees and
other expenses associated with maintaining and defending the Companys
intellectual property. Income and expenses associated with the intellectual
property division, including related legal expenses, are classified and
reported in this section of the consolidated statements of income in order to
more clearly show the operating results of the Companys business units. In second quarter 2004, net intellectual property income of $8.0 million
included $20.2 million in income from the Companys settlements with Gateway
and AMD and royalties from Gateway, offset by $12.2 million in legal fees and
other related expenses associated with patent litigation. In second quarter
2003, net intellectual property expense of $4.3 million consisted of legal fees
and related expenses. For the first six months of 2004, net intellectual property income was $211.0
million, including $245.2 million from the Companys settlements with Intel
Corporation (Intel), Gateway, and AMD, and royalties from Gateway, offset by
$34.1 million in legal fees and related expenses. Net intellectual property
income in the first six months of 2003 was $1.0 million, comprised of $10.0
million income from a cross-licensing agreement with International Business
Machines Inc. (IBM) net of $9.0 million in legal fees and related expenses.
See Notes 11 and 16 of Notes to Consolidated Financial Statements and the
Companys 2003 Annual Report for complete details of these transactions. Gain on Sale of Assets:In first quarter 2003, IMGS reported a gain of $1.2
million from the March 2003 sale of its aeronautical intellectual property
assets to Ingegneria Dei Sistemi S.p.A. in Rome, Italy. This gain was offset
slightly by a $65,000 loss in second quarter 2003. Interest Income:Interest income was $1.1 million in second quarter 2004 and
$1.7 million in second quarter 2003. For the first six months of 2004,
interest income was $1.9 million, compared to $3.6 million for the same period
2003. Interest income from short-term investments decreased during 2004 due to
declines in investments as 20




---



##### Table of Contents



a result of the Companys fourth quarter 2003 modified Dutch auction tender
offer that returned $260.0 million to shareholders. Other:Other income (expense), net in the consolidated statements of income
consists of interest expense, foreign exchange gains and losses, and other
miscellaneous items of non-operating income and expense. In second quarter
2004, net other expense of $504,000 included an $885,000 loss related to the
Bentley Systems, Inc. (BSI) litigation. In second quarter 2003, net other
expense of $326,000 included a $580,000 loss from an inventory of fixed assets.
Net other income of $568,000 for the first six months of 2004 included foreign
exchange gain of $958,000, partially offset by the $885,000 loss related to the
BSI litigation. The net other expense of $369,000 for the first six months of
2003 included foreign exchange loss of $375,000. See Note 16 of Notes to
Consolidated Financial Statements and Item 1. Legal Proceedings in Part II of
MD&A for further discussion of the BSI litigation. Income Taxes The Company recorded income tax expense of $2.8 million for second quarter 2004
and $79.8 million for the first half of 2004, compared to a benefit of $1.0
million for second quarter 2003 and expense of $3.6 million for the first half
of 2003. The Company had income before taxes of $17.7 and $230.3 million in
the second quarter and first half of 2004, respectively, compared to $200,000
loss before taxes in the second quarter of 2003 and $12.5 million income before
taxes for the first half of 2003. Income tax expense of $79.8 million for the first half of 2004 is attributable
to taxes on patent litigation income, U.S. operations, and individually
profitable majority-owned subsidiaries, partially offset by net operating loss
utilization and favorable audit settlements with the Internal Revenue Service
(IRS). The 2004 second quarter tax expense of $2.8 million was reduced by
lowering the Companys effective tax rate from 36.2% to 35.5% as a result of
the Companys ability to utilize foreign net operating losses for a benefit of
$1.6 million, or $0.04 per share (basic and diluted). Also, the Company had a
favorable resolution of audit issues with the IRS which resulted in an
additional $2.0 million benefit, or $0.05 per share (basic and diluted). Income tax expense for the first half of 2003 of $3.6 million was attributable
to taxes on patent litigation income, U.S. operations, and individually
profitable majority-owned subsidiaries, partially offset by a favorable
resolution of a disputed issue with the IRS. The second quarter 2003 tax
benefit of $1.0 million was primarily the result of a favorable resolution of a
disputed issue with the IRS. See the Companys 2003 Annual Report for details of the Companys tax position,
including its net operating loss carryforwards. Results by Operating Segment PPM:In second quarter 2004, PPM earned operating income of $5.4 million on
revenues of $35.2 million, compared to second quarter 2003 operating income of
$4.3 million on revenues of $32.7 million. The increase in operating income is
primarily the result of increased maintenance and services revenue on new
products, partially offset by higher operating expenses. For the first half of
2004, operating income was $8.1 million on revenues of $68.2 million, compared
to operating income of $8.5 million on revenues of $63.2 million for the first
half of 2003. Operating income decreased primarily due to higher product
development and sales and marketing expense, and restructuring charges of
$823,000. Revenues improved due to increased shipbuilding maintenance revenue
associated with the Global Research and Development (GRAD) shipbuilding
contract signed in April 2003 and increasing maintenance and services revenue
from new products. IMGS:In second quarter 2004, IMGS earned operating income of $2.5 million on
revenues of $54.9 million, compared to a second quarter 2003 operating loss of
$1.2 million on revenues of $48.5 million. For the first half of 2004,
operating income was $6.2 million on revenues of $106.9 million, compared to
operating loss of $1.0 million on revenues of $95.3 million for the first half
of 2003. The significant increase in operating income for both the second
quarter and first half of 2004 is primarily the result of higher revenue driven
by the delivery of 21




---



##### Table of Contents



products associated with a large international mapping customer and an
adjustment to the value of the hardware inventory that occurred in second
quarter 2003. ISG:In second quarter 2004, ISG earned operating income of $4.7 million on
revenues of $31.5 million, compared to second quarter 2003 operating income of
$2.8 million on revenues of $30.1 million. The increase in operating income is
primarily the result of higher gross margins due to revenue growth in ISGs
services business and $421,000 in operating expense reductions. The increase
in services revenue was primarily attributable to the U.S. Air Force Enhanced
Technical Information Management System (ETIMS) contract. ISG reported
operating income of $8.5 million on revenues of $61.6 million for the first
half of 2004, compared to operating income of $4.0 million on revenues of $57.6
million for the same period in 2003. The year-to-date increase in operating
income is primarily due to increases in higher gross margin services revenues
attributable to the ETIMS contract mentioned above and cost savings from
headcount reductions in the maintenance business. IPS:In second quarter 2004, IPS earned operating income of $2.8 million on
revenues of $17.7 million, compared to second quarter 2003 operating income of
$3.6 million on revenues of $16.9 million. In first half 2004, IPS earned
operating income of $4.8 million on revenues of $34.6 million, compared to
first half 2003 operating income of $7.0 million on revenues of $33.4 million.
Operating income in the second quarter and first half of 2004 decreased
primarily due to increased sales and marketing expenses resulting from
headcount additions in an effort to increase orders and future revenues. Corporate:In second quarter 2004, Corporate reported an operating loss of
$6.2 million on revenues of $3.1 million, compared to a second quarter 2003
operating loss of $6.6 million on revenues of $3.0 million. For the first six
months of 2004, Corporate reported an operating loss of $10.9 million on
revenues of $6.0 million compared to an operating loss of $11.3 million on
revenues of $6.5 million for the same period in 2003. Revenues are primarily
associated with hardware repair, logistics, and international hardware
maintenance services. Operating expenses include costs associated with
worldwide corporate oversight functions, including those related to being a
publicly held company, corporate marketing, and management of residual hardware
functions. See Note 13 of Notes to Consolidated Financial Statements for further
explanation of the Companys segment reporting. Litigation As further described in the Companys 2003 Annual Report, the Company continues
to protect its intellectual property portfolio by engaging in both licensing
discussions and patent infringement litigation. Litigation is subject to known
and unknown risks and uncertainties. See Cautionary Note Regarding
Forward-Looking Statements in MD&A. See Note 16 of Notes to Consolidated
Financial Statements and Item 1. Legal Proceedings in Part II of MD&A for a
discussion of the 2004 developments for patent and other litigation. Remainder of the Year The Company expects that the markets in which it competes will continue to be
characterized by intense competition, rapidly changing technologies, and
shorter product cycles. Further improvement in the Companys annual operating
results will depend on accurately anticipating customer requirements and
technological trends, and rapidly and continuously developing and delivering
new products that are competitively priced, offer enhanced performance, and
meet customers requirements for standardization and interoperability. Better
annual operating results will also depend on global political events and
worldwide economic improvement in the markets served. To increase operating
profitability, the Company must achieve revenue growth and continue to align
operating expenses with the projected level of revenue. As the Company
continues to evaluate its markets and operating performance, it may determine
that there are other actions needed to seek improved performance. In addition,
the Company continues to face legal expenses of unknown duration and amount as
it licenses its intellectual property and otherwise asserts its intellectual
property rights and defends related countersuits. The ultimate impact of these
initiatives is subject to known and unknown risks and uncertainties. See
Cautionary Note Regarding Forward-Looking Statements in MD&A. 22




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES At June 30, 2004, cash and cash equivalents totaled $354.6 million compared to
$265.8 million at December 31, 2003. The Company had no debt at June 30, 2004,
or December 31, 2003. Non-operating events that may require the use of cash
include the Companys patent litigation and enforcement program, including
defending related countersuits, and its stock repurchase program. In second quarter 2004, the Company spent approximately $6.4 million to
repurchase 250,000 shares of its common stock under its stock repurchase
program. As of June 30, 2004, the Company had repurchased approximately 16.6
million shares (including 10 million shares in a separate modified Dutch
auction tender offer in December 2003) at a cost of $384.4 million since the
program was initiated in late 2001. On July 28, 2004, the Company announced
that it had repurchased 3.8 million shares from a financial intermediary in a
private transaction in connection with an ASB at a price of $26.33 per share or
an aggregate of $100 million (before transaction costs), subject to a market
price adjustment provision based on the volume weighted market trading price
over the next nine months. With the execution of the ASB on July 28, 2004, the
Companys $250 million open market repurchase plan has $28.3 million remaining
(subject to any ASB adjustments) that can be used for future repurchases of
stock. The termination date for the current stock repurchase program is
December 31, 2005. In September 2002, in order to reduce the cost of issuing letters of credit,
the Company established a $12.5 million credit line with Wells Fargo Bank to
cover its outstanding letters of credit secured by $15 million of
interest-bearing securities. This credit line was reduced on January 20, 2004,
to $6 million secured by $8.2 million of interest-bearing securities. Under
this arrangement, the Company earns interest on the securities and withdrawal
of securities is allowed, but the Company is required to maintain a level of
securities sufficient to cover total outstanding letters of credit (which
totaled $4.6 million at June 30, 2004, and $4.9 million at December 31, 2003). CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management use
judgments to make estimates and assumptions that affect the amounts reported in
the financial statements. As a result, there is some risk that reported
financial results could have been materially different had different methods,
assumptions, and estimates been used. The Company believes that of its
significant accounting policies, those related to revenue recognition,
capitalized software, deferred taxes, bad debt reserves, and inventory may
involve a higher degree of judgment and complexity as used in the preparation
of its consolidated financial statements. Management believes there have been no significant changes during the six
months ended June 30, 2004, to the items disclosed as Critical Accounting
Policies in MD&A in the Companys 2003 Annual Report. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has experienced no material changes in market risk exposures that
affect the quantitative and qualitative disclosures presented in the Companys
2003 Annual Report. Impact of Currency Fluctuations and Currency Risk Management Fluctuations in the value of the U.S. dollar in international markets can have
a significant impact on the Companys results of operations. For first half
2004, approximately 48% of the Companys revenues were derived from customers
outside the United States, primarily through subsidiary operations, compared to
46% for first half 2003. Most subsidiaries sell to customers and incur and pay
operating expenses in local currencies. These local currency revenues and
expenses are translated into U.S. dollars for reporting purposes. A weaker
U.S. dollar increases the level of reported U.S. dollar orders and revenues,
increases the dollar gross margin, and increases reported dollar operating
expenses of the international subsidiaries. The Company estimates that the
weakening of the U.S. dollar 23




---



##### Table of Contents



in its international markets, primarily in Europe, improved its first half 2004
results of operations by approximately $0.05 per share (basic and diluted) in
comparison to first half 2003 results. The Company conducts business in all major markets outside the United States,
but the most significant of these operations with respect to currency risk are
located in Europe and Asia. Local currencies are the functional currencies for
the Companys Canadian subsidiaries, a Japanese subsidiary, and all but one of
the Companys European subsidiaries. The U.S. dollar is the functional
currency for all other international subsidiaries. The Company had no forward
contracts outstanding at June 30, 2004, or December 31, 2003, and does not
currently hedge any of its foreign currency risks. Impact of Interest Rates on Investment Earnings The Companys cash and cash equivalents are generally invested in short-term,
highly liquid, interest-bearing securities, which may include short-term
municipal bonds, time deposits, money market funds, commercial paper, and U.S.
government securities. The Company limits the amount of credit exposure from
any single issuer of securities. The Company is subject to earnings
fluctuations due to market changes in interest rates. The Company estimates
that pre-tax earnings could be affected by approximately $0.03 per share
(diluted) on an annualized basis, should interest rates of invested funds
change by 0.5%. 
 ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934,
as amended, (the Exchange Act), that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in the SECs rules and forms and that such information
is accumulated and communicated to the Companys management, including its CEO
and CFO, as appropriate, to allow timely decisions regarding required
disclosure. R. Halsey Wise, CEO, and Larry J. Laster, CFO, conducted an
evaluation of the effectiveness of Intergraphs disclosure controls and
procedures as of June 30, 2004. Based upon their evaluation, they each found
the Companys disclosure controls and procedures were adequate to ensure that
information required to be disclosed in the reports that Intergraph files and
submits under the Exchange Act is recorded, processed, summarized and reported
as and when required, and that information required to be disclosed is
accumulated and communicated to them as appropriate to allow timely decisions
regarding required disclosure. As described in Note 17 of the Notes to Consolidated Financial Statements,
subsequent to the issuance of Intergraphs consolidated financial statements
for the quarter ended June 30, 2004, management determined that it was
appropriate to restate the consolidated financial statements for the periods
ended December 31, 2003, March 31, 2004, and June 30, 2004, to defer recorded
revenues and to recognize them at a later date. Due to the matters identified, the CEO and CFO, with the participation of other
management, re-evaluated the effectiveness of disclosure controls and
procedures as of the end of the period covered by this report. As part of the
disclosure controls and procedures over the selection and application of
accounting principles, in particular software revenue recognition under SOP
97-2, the Companys accounting officers independently reviewed SOP 97-2
together with other accounting literature and consulted with the Companys
Independent Registered Public Accounting Firm regarding certain revenue recognition and accounting
developments. Based on the re-evaluation of the effectiveness of the disclosure controls and
procedures by our CEO and CFO, they concluded that, as of the end of the period
covered by this report, there was a material weakness in the controls and
procedures used to identify and determine the appropriate accounting for the
matter that was the subject of the restatement. Specifically, the controls and
procedures did not result in proper recognition of revenue related to the EAP
program. The Company has taken steps to strengthen further control processes and
procedures to identify, rectify and prevent the recurrence of the circumstances
that resulted in the determination that it was appropriate to restate certain
prior period financial statements. The Company is taking the following steps,
among others: 24




---



##### Table of Contents




    
    Establishing procedures to perform an on-going analysis of the
appropriate accounting for new products, marketing programs and
promotions to ensure proper revenue recognition with respect to such
matters;
    
    Establishing procedures to document the review of transactions
involving maintenance, discounts, and specified upgrades prior to
recognizing revenue with respect to such transactions, and requiring
that this documentation be reviewed and approved by one or more
specified accounting personnel prior to recording revenue;
    
    Establishing procedures requiring certain documentation, together with
Corporate Controller written approval, of all programs involving any
no-cost product or service or specified product upgrade; and
    
    Supplementing the Companys existing revenue recognition policies and
procedures to clarify certain complex areas, including software
revenue recognition, to promote a broader understanding of the
applicable policies among Company personnel. The Company believes these changes to internal controls and disclosure controls
and procedures will be adequate to provide reasonable assurance that the
objectives of these control systems will be met. However, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues, if any, within the Company
have been detected. 
 PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS As further described in the Companys 2003 Annual Report, the Company continues
to protect its intellectual property portfolio by engaging in both licensing
discussions and patent infringement litigation. The following is a discussion
of the 2004 developments for patent and other litigation. Litigation is
subject to known and unknown risks and uncertainties. See Cautionary Note
Regarding Forward-Looking Statements in MD&A for further discussion of these
risks and uncertainties. Intel Litigation:On July 29, 2001, the Company filed a patent infringement
case against Intel in the U.S. District Court for the Eastern District of Texas
(the Texas case). The Texas case pertained to the Companys parallel
instruction computing (PIC) patents and went to trial on July 2, 2002. On March 29, 2004, the Company resolved its dispute with Intel regarding its
PIC patents, and both parties agreed to dismiss all outstanding patent
infringement claims and lawsuits against each other. Per the terms of the
settlement agreement, Intel paid the Company $125.0 million in April 2004,
$25.0 million in July 2004, and an additional $75.0 million is due in three
quarterly installments over the following year. In addition, the Company
granted Dell, Inc. (Dell) certain licenses to its patents and dismissed its
separate pending litigation against Dell in the OEM case discussed below. OEM Litigation:On December 16, 2002, the Company filed a patent infringement
action against Dell, Gateway and Hewlett-Packard Co./Compaq (HP) in the U.S.
District Court for the Eastern District of Texas (the OEM case). The
Companys complaint alleges that products from the three computer vendors
infringe U.S. Patent Numbers 4,899,275 and 4,933,835 and 5,091,846. These
computer system-level patents relate to memory management technology. The OEM
action seeks an unspecified amount of damages for past infringement from the
OEM defendants. The OEMs asserted various defenses, pre-trial motions and
countersuits against the Company, including a counterclaim alleging the
Companys patent assertions to be in violation of the Sherman Antitrust Act. Per the terms of the March 29, 2004, settlement agreement with Intel, the
Company dismissed Dell and all related claims from the pending OEM litigation. 25




---



##### Table of Contents



On May 10, 2004, the Company reached a settlement with Gateway, wherein Gateway
agreed to pay $5.0 million within 10 days of the settlement and an additional
$2.5 million on July 1 and October 1, 2004. Gateway also agreed to make future
royalty payments of $1.25 per unit for certain U.S. sales of Gateway and
eMachines computer systems through February 2009. As a result, Gateway
obtained a Clipper license for itself and eMachines through February 2009, and
was dismissed from the pending OEM litigation. The $5.0 million payment and
first $2.5 million payment were paid timely. Second quarter royalties of
$165,000 were paid on July 30, 2004. HP is the only remaining defendant in the OEM litigation. In addition to its
affirmative defenses and counterclaim asserted in the OEM litigation, on May
28, 2003, HP filed a patent countersuit against the Company in the Northern
District of California, alleging that a variety of Intergraph products,
including SmartPlant 3D, IntelliShip, SmartPlant, SmartSketch®, I/Mobile TC,
and IntelliWhere infringe four separate HP patents. Thereafter, on April 1, 2004, HP filed a patent countersuit against the Company
in Mannheim, Germany accusing the Companys SmartPlant 3D products of
infringing two foreign patents related to the automated dimensioning
technology. On April 19, 2004, HP filed three separate legal actions against
the Company, including separate patent infringement actions in Delaware and the
Eastern District of Texas, as well as an action in the German patent office to
invalidate the German Clipper patents. HPs Delaware action accuses the
Companys Z/I Imaging® digital camera of infringing a patent related to
scanning technology. HPs new Texas case accuses the Companys SmartPlant 3D,
IntelliShip, SmartPlant Offshore, and SmartSketch® products of infringing a
patent related to dimensional conversions in computer-aided design software. On May 7, 2004, the Companys IP division filed a second patent infringement
suit against HP, accusing HP of infringing U.S. Patent 6,374,329 B1,
High-Availability Super Server (SuperServer). The Companys SuperServer
patent pertains to the clustering of large numbers of processors in server
systems. The Companys complaint alleges that its SuperServer technology is
employed in HPs DNA Memory Subsystem Technology, including HPs SX1000
chipset, and Superdome, HP9000, 8400, and 7410 families of servers, and
requests an injunction to stop HP from selling the infringing server systems.
HP has responded by asserting a number of affirmative defenses, as well as a
patent counterclaim asserting two HP Computer Aided Design (CAD) patents
against Intergraph. A scheduling conference is set for August 10, 2004. The Court conducted the Markman hearing on May 7, 2004, and issued its Markman
construction on July 1, 2004. On July 13, 2004, the Court issued a new
scheduling order setting jury selection for February 7, 2005, and rescheduling
the trial to begin on February 21, 2005. The Company has not determined what impact, if any, HPs counterclaims and
countersuits may have on the Companys operations and cash flows, but plans to
vigorously defend against the same. AMD Litigation:On January 15, 2004, AMD filed a Declaratory Judgment Act
patent action against the Company in the Northern District of California. AMD
asserted that the Companys family of Clipper patents (U.S. Patent Nos.
4,860,192 and 4,884,197 and 4,899,275 and 4,933,835 and 5,091,846) is either
invalid, or not infringed by AMDs microprocessor products. On April 9, 2004,
AMD agreed to settle its patent lawsuit against the Company and to take a
license to the Companys Clipper patents. Under the terms of this license, AMD
agreed to pay the Company $10 million by May 7, 2004, and agreed to make
additional cash payments equal to 2% of the AMD Computation Product Groups
pre-tax operating profits, if any, for the 2005 through 2007 calendar years,
subject to a limit of $5 million per year. The Company received the $10
million payment as agreed. BSI Litigation:In December 2002, the Company filed a declaratory judgment
action in Madison County, Alabama, against Bentley Systems, Inc. (BSI). The
action sought the interpretation and enforcement of an asset purchase agreement
and promissory note, which were executed in conjunction with the sale of the
Companys civil, plotting, and raster software product lines to BSI in 2000.
BSI subsequently filed an initial action against the Company in Philadelphia,
Pennsylvania, and thereafter filed a second action in Delaware alleging that
the Company breached certain terms of the asset purchase agreement. BSIs
Pennsylvania action 26




---



##### Table of Contents



was dismissed in March 2003, and BSIs Delaware action was stayed pending the
Alabama action. Thereafter BSI asserted counterclaims in the Alabama action,
which were substantially the same as those claims asserted in its Delaware
action. BSI did not specify an amount of damages in its claims. The case was
submitted to the Court for determination in April 2004, and the Court issued
its judgment in early May. The Court ruled in favor of Intergraph on both
Intergraphs claims as well as BSIs counterclaims. However, the judgment
entered against BSI was actually less than the balance that the Company had
carried on its books with regard to the BSI note. As a result, the Company
took a charge of $885,000 in second quarter 2004. BSI has since appealed the
court decision, which is expected to take between 18-24 months. Other Litigation: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 adverse developments in any of these proceedings
could materially adversely affect the Companys results of operations,
financial condition, or cash flows. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The stock repurchase activity for the second quarter of 2004 is as follows: ISSUER PURCHASES OF EQUITY SECURITIES Total
    
    
    
    
    
    Total Number ofNumber of
    
    
    
    
    
    Shares Purchased
    
    Approximate Dollar ValueShares
    
    Average
    
    as Part of Publicly
    
    of Shares that May Yet BePurchased
    
    Price Paid
    
    Announced Plans
    
    Purchased Under thePeriod
    
    (1)
    
    per Share (2)
    
    or Programs (3)
    
    Plans or Programs ($000)04/1/04 - 04/30/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    134,95905/1/04 - 05/31/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    134,95906/1/04 - 06/30/04
    
    
    250,000
    
    
    
    25.73
    
    
    
    250,000
    
    
    
    128,527Total Second Quarter
    
    
    250,000
    
    
    
    25.73
    
    
    
    250,000
    
    
    $
    128,527
 (1) All share repurchases were effected in accordance with the safe harbor
provisions of Rule 10b-18. (2) Average price includes transaction costs. (3) The share repurchase program, originally authorized on October 30, 2000,
and most recently amended on April 29, 2003, authorizes the purchase of up to
$250 million of the Companys common stock. The expiration date for this
program is December 31, 2005. On July 28, 2004, the Company announced that it had repurchased 3.8 million
shares from a financial intermediary in a private transaction in connection
with an ASB at a price of $26.33 per share or an aggregate of $100 million
(before transaction costs), subject to a market price adjustment provision
based on the volume weighted market trading price over the next nine months.
With the execution of the ASB on July 28, 2004, the Companys $250 million open
market repurchase plan has $28.3 million remaining (subject to any ASB
adjustments) that can be used for future repurchases of stock. The termination
date for the current stock repurchase program is December 31, 2005. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Intergraph Corporations Annual Meeting of Shareholders was held May 13, 2004.
The results of the meeting follow. (1) Eight directors were elected to the Board of Directors to serve for the
ensuing year and until their successors are duly elected and qualified. All
nominees were serving as Directors of the Company at the time of their
nomination for the current year. 27




---



##### Table of Contents



VotesFor
    
    Against/WithheldR. Halsey Wise
    
    
    31,942,611
    
    
    
    365,558Larry J. Laster
    
    
    32,145,465
    
    
    
    162,704Sidney L. McDonald
    
    
    32,187,542
    
    
    
    120,627Thomas J. Lee
    
    
    31,744,647
    
    
    
    563,522Lawrence R.
Greenwood
    
    
    31,746,039
    
    
    
    562,130Linda L. Green
    
    
    31,793,329
    
    
    
    514,840Richard W. Cardin
    
    
    31,747,013
    
    
    
    561,156Michael D. Bills
    
    
    32,252,542
    
    
    
    55,627
 (2) The Intergraph Corporation 2004 Equity Incentive Plan was approved by a
vote of 19,137,094 for, 4,797,734 against, 43,449 withheld, and 8,329,892
broker non-votes. (3) The Amended and Restated Intergraph Corporation 1997 Stock Option Plan was
approved by a vote of 20,928,090 for, 3,002,036 against, 48,151 withheld, and
8,329,892 broker non-votes. (4) The Second Amended and Restated Intergraph Corporation 2002 Stock Option
Plan was approved by a vote of 20,760,332 for, 3,169,642 against, 48,303
withheld, and 8,329,892 broker non-votes. (5) The Amended and Restated Intergraph Corporation Nonemployee Director Stock
Option Plan was approved by a vote of 20,773,588 for, 3,156,651 against, 48,038
withheld, and 8,329,892 broker non-votes. (6) The ratification of the appointment of Ernst & Young LLP as the Companys
independent auditors for the current fiscal year was approved by a vote of
30,797,060 for, 1,488,891 against, and 22,218 abstentions. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits ExhibitNumber
    
    Description31.1
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by R. Halsey Wise dated November 8, 200431.2
    
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Larry J. Laster dated November 8, 200432.1
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by R. Halsey Wise dated November 8, 200432.2
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 by Larry J. Laster dated November 8, 2004
  (b)
    
    Reports on Form 8-K  Form 8-K dated April 12, 2004, filed pursuant to Item 5,
reporting the licensing agreement between Intergraph Corporation
and Advanced Micro Devices, Inc.Form 8-K dated April 28, 2004, reporting the Companys first
quarter 2004 earningsForm 8-K dated May 13, 2004, filed pursuant to Item 5, reporting
the licensing agreement between Intergraph Corporation and
Gateway, Inc. 28




---



##### Table of Contents



INTERGRAPH CORPORATION AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. INTERGRAPH CORPORATION   By:
    
    /s/ R. Halsey Wise
    
    By:
    
    /s/ Larry J. LasterR. Halsey Wise
    
    
    
    Larry J. LasterPresident and
    
    
    
    Executive Vice President andChief Executive Officer
    
    
    
    Chief Financial Officer(Principal Financial Officer)Date:
    
    November 8, 2004
    
    Date:
    
    November 8, 2004By:
    
    /s/ Larry T. MilesLarry T. MilesVice President andCorporate Controller(Chief Accounting Officer)Date:
    
    November 8, 2004
 29