-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FkjZdpc28FpGKr4eekWpT84/c8ztpnQ+oCsdSTw83R6yvI0p7PcbIUlJpcF87go1 nnp3rftZpDRlDjajacAY1g== 0000026999-98-000023.txt : 19980807 0000026999-98-000023.hdr.sgml : 19980807 ACCESSION NUMBER: 0000026999-98-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980806 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DATA GENERAL CORP CENTRAL INDEX KEY: 0000026999 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 042436397 STATE OF INCORPORATION: DE FISCAL YEAR END: 0925 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07352 FILM NUMBER: 98678677 BUSINESS ADDRESS: STREET 1: 4400 COMPUTER DR CITY: WESTBORO STATE: MA ZIP: 10580 BUSINESS PHONE: 5088985000 MAIL ADDRESS: STREET 1: 4400 COMPUTER DRIVE CITY: WESTBORO STATE: MA ZIP: 10580 10-Q 1 Q3 FY98 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (Mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 1998 ----------------- OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________________ to __________________________ Commission File Number 1-7352 ------------------------------ Data General Corporation ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 04-2436397 - ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 4400 Computer Drive, Westboro, Massachusetts 01580 - -------------------------------------------- --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 898-5000 -------------- Former name, former address and former fiscal year if changed since last report: Not Applicable ------------------------------ 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 --- --- Number of shares outstanding of each of the registrant's classes of common stock, as of July 24, 1998: Common Stock, par value $.01 49,502,402 ---------------------------- ------------------ (Title of each class) (Number of shares) ================================================================================ PART I -- FINANCIAL INFORMATION Item 1. Financial Statements. DATA GENERAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Quarter Ended Nine Months Ended Jun. 27, Jun. 28, Jun. 27, Jun. 28, in thousands, except net income (loss) per share 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Revenues: Product.................................................$ 253,802 $294,170 $ 784,723 $ 835,992 Service................................................. 97,468 97,087 293,632 293,098 -------- ---------- ---------- --------- Total revenues..................................... 351,270 391,257 1,078,355 1,129,090 -------- --------- ---------- --------- Costs and expenses: Cost of product revenues (Note A)....................... 244,270 199,422 624,139 563,178 Cost of service revenues................................ 59,881 61,392 183,171 187,967 Research and development................................ 31,655 27,783 88,048 81,065 Selling, general, and administrative.................... 84,736 85,531 254,190 251,584 Restructuring charge.................................... 82,400 -- 82,400 -- ------- --------- --------- --------- Total costs and expenses........................... 502,942 374,128 1,231,948 1,083,794 -------- -------- --------- --------- Income (loss) from operations............................... (151,672) 17,129 (153,593) 45,296 Interest Income............................................. 3,181 2,695 10,072 6,268 Interest Expense............................................ 3,599 4,479 10,814 10,823 Other Expense (income), net................................. 2,000 -- (240) -- -------- --------- --------- --------- Income (loss) before income taxes........................... (154,090) 15,345 (154,095) 40,741 Income tax provisions....................................... 1,000 600 2,000 1,800 -------- ----------- --------- --------- Net income (loss)...........................................$ (155,090) $14,745 $ (156,095) $ 38,941 ========== ========= ========== ========= Net income (loss) per share................................. $(3.15) $0.34 $(3.19) $0.91 ======= ===== ======= ===== Weighted average shares outstanding, including common stock equivalents, where applicable.................. 49,159 43,576 48,895 42,858 Note A: Included in the quarter and nine-month period ended June 27, 1998, is a one-time restructuring related charge of $52.6. No cash dividends have been declared or paid since inception. The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
DATA GENERAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) Jun. 27, Sept. 27, dollars in thousands 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Assets Current Assets Cash and temporary cash investments............................................ $ 112,146 $ 216,814 Marketable securities.......................................................... 175,426 151,455 Receivables, net............................................................... 270,315 296,375 Inventories.................................................................... 145,424 166,008 Other current assets........................................................... 34,191 27,584 ---------- ----------- Total current assets...................................................... 737,502 858,236 Property, plant, and equipment, net................................................ 184,657 180,410 Other assets....................................................................... 66,310 96,222 ---------- ----------- $ 988,469 $ 1,134,868 ========= ========= Liabilities and stockholders' equity Current liabilities Accounts payable............................................................... $ 130,718 $ 154,624 Other current liabilities...................................................... 256,746 237,198 ----------- ----------- Total current liabilities................................................. 387,464 391,822 ----------- ----------- Long-term debt..................................................................... 212,750 212,750 ----------- ----------- Other liabilities.................................................................. 9,192 11,516 ----------- ----------- Stockholders' equity Common stock Outstanding - 49,218,000 shares at Jun. 27, 1998 and 48,588,000 shares at Sept. 27, 1997 (net of deferred compensation of $13,166 at Jun. 27, 1998 and $14,157 at Sept. 27, 1997)............................................ 619,931 607,130 Accumulated deficit................................................................ (235,676) (79,581) Unrealized gains on marketable securities.......................................... 7,995 2,812 Cumulative translation adjustment.................................................. (13,187) (11,581) ----------- ----------- Total stockholders' equity................................................ 379,063 518,780 ----------- ----------- $ 988,469 $ 1,134,868 =========== ========== The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
DATA GENERAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended Jun. 27, Jun. 28, in thousands 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities Net income (loss).................................................................. $ (156,095) $ 38,941 Adjustments to reconcile net income (loss) to net cash provided from operating activities Depreciation and write-down of fixed assets................................... 75,583 60,331 Amortization and write-down of capitalized software development costs....................................... 56,498 14,633 Other non-cash items, net..................................................... 14,664 12,721 Change in operating assets and liabilities.................................... 39,451 (62,647) ----------- -------- Net cash provided from operating activities................................... 30,101 63,979 ----------- -------- Cash flows from investing activities Expenditures for property, plant, and equipment.................................... (94,326) (82,629) Net proceeds from the sales (purchases) of marketable securities................... (15,916) (6,828) Capitalized software development costs ............................................ (28,709) (25,942) ---------- -------- Net cash used by investing activities......................................... (138,951) (115,399) --------- -------- Cash flows from financing activities Cash provided from stock plans..................................................... 5,853 8,099 Decrease in notes payable.......................................................... -- (1,794) Net proceeds from issuance of long-term debt....................................... -- 207,218 Repayment of long-term debt........................................................ -- (26,901) --------- -------- Net cash provided from financing activities................................... 5,853 186,622 --------- -------- Effect of foreign currency rate fluctuations on cash and temporary cash investments................................................ (1,671) (3,410) --------- -------- Increase (decrease) in cash and temporary cash investments............................. (104,668) 131,792 Cash and temporary cash investments - beginning of period.............................. 216,814 178,997 ---------- -------- Cash and temporary cash investments - end of period.................................... $ 112,146 $310,789 ========== ========= Supplemental disclosure of cash flow information Interest paid...................................................................... $ 13,502 $ 11,420 Income taxes paid.................................................................. $ 1,194 $ 5,590 The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
DATA GENERAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Consolidated Balance Sheet Details Jun. 27, Sept. 27, in thousands 1998 1997 - ------------------------------------------------------------------------------- Inventories Raw materials................................. $ 7,697 $ 16,169 Work in process............................... 64,174 78,335 Finished systems.............................. 48,538 44,349 Field engineering parts and components........ 25,015 27,155 ---------- ---------- $145,424 166,008 ======== ========= Property, plant, and equipment Property, plant, and equipment.................. $652,788 $657,351 Accumulated depreciation........................ (468,131) (476,941) --------- -------- $184,657 $180,410 ======== ======== Note 2. Accounting Policies In the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per Share". The following data show the amounts used in computing earnings per share and the effect on income and the weighted average number of shares of potentially dilutive common stock.
Quarter Ended --------------------------------------------------------------------------------- June 27, 1998 June 28, 1997 --------------------------------------- ------------------------------------- Loss Shares Per-Share Income Shares Per-Share in thousands, except per share amounts (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------- ----------- ------ --------- ----------- ------ Basic Earnings Per Share Net income (loss) available to common stockholders $(155,090) 49,159 $(3.15) $14,745 40,625 $0.36 ======= ===== Effect of Dilutive Securities Stock Options -- -- -- 2,951 -------- -------- -------- -------- Diluted Earnings Per Share Net income (loss) available to common stockholders and assumed conversions $(155,090) 49,159 $(3.15) $14,745 43,576 $0.34 ========= ======== ======= ======= ====== =====
Nine Months Ended --------------------------------------------------------------------------------- June 27, 1998 June 28, 1997 ----------------------------------- --------------------------------------- Loss Shares Per-Share Income Shares Per-Share in thousands, except per share amounts (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Basic Earnings Per Share Net income (loss) available to common stockholders $(156,095) 48,895 $(3.19) $38,941 40,155 $0.97 ===== ===== Effect of Dilutive Securities Stock Options -- -- -- 2,703 ---------- ------- ------- ------ Diluted Earnings Per Share Net income (loss) available to common stockholders and assumed conversions $(156,095) 48,895 $(3.19) $38,941 42,858 $0.91 ========== ======= ====== ======= ====== =====
For the quarter and nine-month periods ended June 27, 1998 and June 28, 1997, the assumed conversion of the convertible debentures, giving effect to the incremental shares and the adjustment to reduce interest expense, is anti-dilutive and has therefore been excluded from the computation. For the quarter and nine-month period ended June 27, 1998, the assumed exercise of stock options, giving effect to the incremental shares, is anti-dilutive and has therefore been excluded from the computation. Note 3. Basis of Presentation and Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation. The Company's accounting policies are described in the Notes to Consolidated Financial Statements in the Company's 1997 Annual Report. The results of operations for the quarter ended June 27, 1998 are not necessarily indicative of the results of the entire fiscal year. Note 4. Other Recent Pronouncements In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". This statement is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. The Company will implement this statement as required. The Company is evaluating the effect, if any, the future adoption of SFAS 133 will have on the consolidated financial position or results of operations. Note 5. Restructuring Charge In the quarter ended June 27, 1998, the Company approved and implemented a restructuring program designed to strengthen the Company's focus on storage and enterprise computing solutions and reduce costs in non-strategic areas. The restructuring was adopted in response to the increasing price competition within the computer hardware industry. The program included a net reduction of the Company's worldwide workforce by approximately 400 employees which included approximately 480 employee terminations, offset by additional employees hired to support the Company's storage business initiatives. The program also included the discontinuation of the Company's THiiN Line internet server products and of the development and manufacturing of certain low-end AViiON server products, a restructuring of research and development activities and the cancellation of certain development and vendor supply agreements with various third parties. As a result of the employee terminations and other actions noted above, the Company will also close certain offices related to sales and marketing activities. Accordingly, during the current quarter, the Company recorded a charge of approximately $135 million related to the restructuring program and certain asset write-downs resulting from the plan. The charge included approximately $82.4 million related to employee termination benefits, asset write-downs and other exit costs which the Company has recorded in operating expenses and approximately $52.6 million for capitalized software and inventory write-downs which are included in product cost of sales. This provision includes severance benefits for approximately 480 employees, of which approximately 65% were based in the United States and the remainder in Europe and Asia / Pacific. Of the 480 employees identified, approximately 270 were terminated during the quarter ended June 27, 1998 and the remaining terminations are expected to be substantially complete by the end of calendar year 1998. Asset write-downs are comprised primarily of fixed assets, including leasehold improvements and demonstration equipment which will be disposed of in connection with the restructuring program. The provision for lease abandonments relates to vacated lease properties, mainly in Europe and Asia, and includes a change in estimate of $1.3 million for lease abandonment costs accrued in prior years. In addition, the Company recorded charges related to the write-down of certain capitalized software costs ($43 million) and inventory ($10 million) which have been recorded in product cost of sales for the quarter ended June 27, 1998. Changes in the Company's focus for its server products resulting from the restructuring program significantly lowered the future gross revenue estimates for certain software-based solutions, requiring that these previously capitalized costs be reduced to their net realizable value. Also, the Company disposed of inventory related to its THiiN Line business and certain other discontinued products. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Financial Condition Cash and temporary cash investments as of June 27, 1998 were $112.1 million, a decrease of $104.7 million from the end of fiscal 1997. At the same date, the Company held $175.4 million in marketable securities, a net increase of $24 million during the current nine-month period. In total, cash and temporary cash investments along with marketable securities decreased $80.7 million for the current nine-month period. The decrease was mainly attributable to the purchases of equipment required for the Company's server and storage businesses and payments reducing employee-related accruals. The marketable securities held, which supplement cash and temporary cash investments, include United States treasury bills and notes, notes issued by U.S. government agencies, commercial paper and certificates of deposit, as well as equity securities recorded at their fair market value of $9.3 million and classified as available-for-sale. The unrealized gain on marketable securities of $8 million is recorded as a separate component of stockholders' equity. During the current nine-month period, the Company recorded a gain of $2.2 million on the sale of an equity security. Net cash provided from operations for the nine months ended June 27, 1998 totaled $30.1 million; expenditures for property, plant, and equipment were $94.3 million; capitalized software development costs totaled $28.7 million; and cash provided from stock plans totaled $5.9 million. The effect of foreign currency exchange rate fluctuations on cash and temporary cash investments was a decrease of $1.7 million. Net receivables at June 27, 1998 were $270.3 million, a decrease of $26.1 million from $296.4 million at September 27, 1997, primarily as a result of decreasing revenues. Total inventories at June 27, 1998 were $145.4 million, a decrease of $20.6 million from September 27, 1997, primarily as a result of the write-down of inventory related to the Company's restructuring program and improved supply management. Net property, plant, and equipment increased $4.2 million from September 27, 1997, principally due to the purchases of equipment and capital expenditures for developing both operating and financial systems and to support the new product initiatives in the server and storage businesses offset, in part, by the write-down of non-strategic assets which will be disposed of in connection with the restructuring program. Fixed asset dispositions related to the sale of demonstration equipment totaled $5.6 million for the current nine-month period. Management expects that sales of demonstration equipment will continue. The decrease of $29.9 million in other assets from September 27, 1997 was attributed mainly to the write-down to net realizable value of previously capitalized software development costs due to changes in the Company's focus for certain server products' software-based solutions. The decrease of $23.9 million in accounts payable from September 27, 1997 levels was attributed mainly to the timing of payments related to material purchases. Other current liabilities increased $19.5 million from September 27, 1997, primarily as a result of charges related to employee termination benefits and provisions for lease abandonments related to vacated lease properties resulting from the Company's restructuring program. Long-term debt of $212.8 million remained unchanged from September 27, 1997. Results of Operations The Company reported a net loss of $155.1 million for the current quarter ended June 27, 1998, compared with net income of $14.7 million for the same period of the prior year. The net loss was $156.1 million for the nine-month period ended June 27, 1998, compared with net income of $38.9 million for the same nine-month period ended June 28, 1997.
Revenues (in millions) - ------------------------------------------------------------------------------------------------------------------------------- Quarter ended Nine months ended ---------------------------------------------- ------------------------------------------- 6/27/98 Change 6/28/97 6/27/98 Change 6/28/97 ---------------------------------------------- ------------------------------------------- Product $253.8 (14%) $294.2 $ 784.7 (6%) $ 836.0 % of Total Revenues 72% 75% 73% 74% Service 97.5 -- 97.1 293.7 -- 293.1 % of Total Revenues 28% 25% 27% 26% Total $351.3 (10%) $391.3 $1,078.4 (4%) $1,129.1 - -------------------------------------------------------------------------------------------------------------------------------
In the fiscal quarter ended June 27, 1998, product revenues were $131.4 million from the Company's AViiON family of open systems server products compared with product revenues of $131.1 million in the comparable period of the prior year. In the current quarter, revenues from the Company's Intel-based AViiON systems increased 41%, while revenues from the Motorola-based AViiON systems declined by 71% compared with the same period of the prior year. The Company anticipates that the percentage of server product revenues generated by the Intel-based AViiON products will continue to increase in fiscal 1998, while the Motorola-based AViiON system revenues are expected to continue to decline. Product revenues from the Company's CLARiiON storage systems decreased 31% from the comparable prior-year period and accounted for 38% of total product revenues in the current quarter. This decline is primarily the result of the longer than anticipated product transition from SCSI-based systems to the Company's newer fibre-based storage products. CLARiiON is sold primarily through the Company's original equipment manufacturer and distributor channels; thus sales in any given period are subject to sales cycles and inventory levels of the Company's customers. CLARiiON product revenues have been concentrated in a limited number of customers, with a significant portion of the Company's CLARiiON product sales to a single OEM customer. Product revenues from personal computers and other equipment decreased 36% from the same period in the prior year and represented 6% of total product revenues compared to 9% for the comparable prior-year period. In fiscal 1996, the Company formed the VALiiANT Business Unit, a contract manufacturing operation, to take advantage of the Company's manufacturing expertise and facilities. VALiiANT product revenues for the quarter ended June 27, 1998 represented 4% of total product revenues. For the nine-month period ended June 27, 1998, product revenues of $398.2 million from the Company's AViiON family of open systems server products increased 5% from $379.5 million for the first nine-month period of fiscal 1997. For the current nine-month period, the Company's Intel-based AViiON revenues increased 51%, while product revenues from the Motorola-based AViiON systems declined by 62% as compared with the first nine-month period of fiscal 1997. Product revenues from the Company's CLARiiON storage systems decreased 22% compared to the same nine-month period in fiscal 1997. Product revenues from personal computers and other equipment decreased by 20% from the same nine-month period in the prior year and represent 8% of total product revenues for the current nine-month period compared to 10% for the comparable prior-year period. The VALiiANT product revenues for the nine-month period ended June 27, 1998 represented 4% of total product revenues. In the service business, the Company experienced an 8% and 12% increase in professional service revenues in the current quarter and nine-month period ended June 27, 1998, respectively, as compared with the same periods in fiscal 1997. This increase was completely offset by a 2% and 3% decline in contract maintenance revenues in the current quarter and nine-month periods ended June 27, 1998, respectively, as compared with the quarter and nine-month periods ended June 28, 1997.
Revenues by Geographic Marketplace - --------------------------------------------------------------------------------------------------------------------------- Percentage of Percentage Change of Consolidated Revenues $ of Revenues ---------------------------------------------------- --------------------------------------- Quarter ended Nine months ended 6/27/98 - 6/28/97 ---------------------------------------------------- --------------------------------------- 6/27/98 6/28/97 6/27/98 6/28/97 Quarter ended Nine months ended ---------------------------------------------------- --------------------------------------- Domestic Product 65% 68% 61% 64% (17%) (10%) Service 60% 59% 60% 58% 1% 3% Total 64% 65% 61% 63% (13%) (7%) Europe Product 22% 20% 24% 22% (8%) 1% Service 31% 30% 31% 32% 4% (2%) Total 24% 23% 26% 24% (4%) -- Other International Product 13% 12% 15% 14% (5%) 3% Service 9% 11% 9% 10% (13%) (10%) Total 12% 12% 14% 13% (7%) -- - ---------------------------------------------------------------------------------------------------------------------------
The decrease in domestic product revenues for the current quarter and nine-month periods ended June 27, 1998 was primarily a result of decreased shipments of CLARiiON, Motorola-based AViiON systems, and personal computer and other equipment product revenues, which was partly offset by the increase in the Company's Intel-based AViiON systems and product revenues from VALiiANT. The decrease in European product revenues, including U.S. direct export sales, for the current quarter was mainly attributable to decreases in CLARiiON and personal computer and other equipment product revenues, which is partly offset by increases in Intel-based AViiON product revenues. The increase in European product revenues, including U.S. direct export sales, for the nine-month period ended June 27, 1998 was mainly attributable to the increase in Intel-based AViiON product revenues, partially offset by decreases in CLARiiON product revenues. Other international product revenues, including U.S. direct export sales, for the current quarter decreased 5% as compared with the same fiscal quarter in 1997. The increase in other international product revenues for the nine-month period ended June 27, 1998 was primarily due to an increase in revenues from the CLARiiON product line. For the current nine-month period, total revenues in the European marketplace decreased by approximately 3% due to a stronger U.S. dollar as compared to the nine-month period ended June 28, 1997.
Cost of Revenues (in millions) - --------------------------------------------------------------------------------------------------------------------------------- Quarter ended Nine months ended --------------------------------------------------- ------------------------------------------- 6/27/98 Change 6/28/97 6/27/98 Change 6/28/97 --------------------------------------------------- ------------------------------------------- Product $244.3 23% $199.4 $624.2 11% $563.2 % of Product Revenues 96% 68% 80% 67% Service 59.9 (2%) 61.4 183.2 (3%) 188.0 % of Service Revenues 61% 63% 62% 64% Total Cost of Revenues $304.2 17% $260.8 $807.4 7% $751.2 % of Total Revenues 87% 67% 75% 67% - ---------------------------------------------------------------------------------------------------------------------------------
During the quarter ended June 27, 1998, the Company recorded certain one-time charges of $52.6 million related to the Company's restructuring plan which are included in product cost of sales. These charges are primarily related to the write-down of capitalized software development costs related to products no longer considered to be part of the Company's core strategy. As a result of the change in the Company's strategic focus, the evaluation of the recoverability of the capitalized software development costs resulted in a write-down of its carrying value to its net realizable value. Also included in the one-time charge is the write-down of certain inventory associated with the Company's THiiN Line business unit and the refocused server strategy. Without these special one-time charges, the pro-forma product cost of sales as a percentage of product revenues was 76% and 73% for the quarter and nine-month period ended June 27, 1998, respectively. The increase in the pro-forma product cost as a percentage of product revenues from the comparable year-ago periods was primarily caused by competitive pricing pressures and a shift in product mix. The decrease in the service cost as a percentage of service revenues for the current quarter and nine months ended June 27, 1998 was the result of continued improvements in spare parts inventory management and improved gross margins in the professional service business related to cost savings from the Company's restructuring program.
Operating Expenses (in millions) - ------------------------------------------------------------------------------------------------------------------------- Quarter ended Nine months ended ------------------------------------- ------------------------------------ 6/27/98 Change 6/28/97 6/27/98 Change 6/28/97 ------------------------------------- ------------------------------------ Research & Development $31.7 14% $27.8 $ 88.1 9% $ 81.1 % of Total Revenues 9% 7% 8% 7% Selling, general & administrative $84.7 (1%) $85.5 $254.2 1% $251.6 % of Total Revenues 24% 22% 24% 22% Restructuring charge $82.4 -- $ 82.4 -- % of Total Revenues 23% -- 8% -- - -------------------------------------------------------------------------------------------------------------------------
The Company continued to focus its research and development efforts on its core business technology: multi-user computer systems, servers, and mass storage devices. In the current nine-month period, gross expenditures on research and development and software development before capitalization were $116.8 million, an increase of 9% from $107 million for the comparable prior-year period. The increase in research and development expenditures was driven by investment in CLARiiON fibre products and in the Company's Non-Uniform Memory Access (NUMA) architecture for high-end servers. Additionally, in the current quarter, changes in the strategic focus for the Company's server products resulted in the expensing of software development costs that had previously been capitalized. For the current quarter ended June 27, 1998, the decrease in selling, general, and administrative expenses over the comparable quarter, is a result of the impact of the Company's restructuring program. The increase in selling, general, and administrative expenses for the nine-month period ended June 27, 1998 was the result of increased marketing efforts in the server and storage businesses. It is anticipated that savings as a result of the Company's restructuring program in the server business will result in decreases in selling, general, and administrative expenses in the second half of calendar year 1998, offset, in part, by increases from the continued investment in the Clariion storage business. At June 27, 1998, the number of employees totaled 4,784, a net decrease of 339 and 280 employees from September 27, 1997 and June 28, 1997, respectively. In the quarter ended June 27, 1998, the Company approved and implemented a restructuring program designed to strengthen the Company's focus on storage and enterprise computing solutions and reduce costs in non-strategic areas. The restructuring was adopted in response to the increasing price competition within the computer hardware industry. The program included a net reduction of the Company's worldwide workforce by approximately 400 employees which included 480 employee terminations, offset by additional employees hired to support the Company's storage business initiatives. The plan also included the discontinuation of the Company's THiiN Line internet server products and of the development and manufacturing of certain low-end AViiON server products, a restructuring of research and development activities and the cancellation of certain development and vendor supply agreements with various third parties. As a result of the employee terminations and other actions noted above, the Company will also close certain offices related to sales and marketing activities. Accordingly, during the current quarter, the Company recorded a charge of approximately $135 million related to the restructuring program and certain asset write-downs resulting from the plan. The charge included approximately $82.4 million related to employee termination benefits, asset write-downs and other exit costs which the Company has recorded in operating expenses and approximately $52.6 million for capitalized software and inventory write-downs which are included in product cost of sales. A summary of the restructuring charge included in operating expense and the related accrued liability balance at June 27, 1998 is as follows: - -------------------------------------------------------------------------------------------------------------------------- Restructuring Less: Charge Cash payments and Jun. 27, 1998 in millions June 27, 1998 Asset write-downs Balance - -------------------------------------------------------------------------------------------------------------------------- Employee termination benefits $ 43.7 $ 5.8 $ 37.9 Asset write-downs 19.9 7.4 12.5 Lease abandonments 11.3 .1 11.2 Other exit costs 7.5 1.3 6.2 ----- ----- ----- Total $ 82.4 $ 14.6 $ 67.8 ====== ====== ====== - --------------------------------------------------------------------------------------------------------------------------
This provision includes severance benefits for approximately 480 employees, of which approximately 65% were based in the United States and the remainder in Europe and Asia / Pacific. Of the 480 employees identified, approximately 270 were terminated during the quarter ended June 27, 1998 and the remaining terminations are expected to be substantially complete by the end of calendar year 1998. Asset write-downs are comprised primarily of fixed assets, including leasehold improvements and demonstration equipment which will be disposed of in connection with the restructuring plan. The provision for lease abandonments relates to vacated lease properties, mainly in Europe and Asia, and includes a change in estimate of $1.3 million for lease abandonment costs accrued in prior years. In addition, the Company recorded charges related to the write-down of certain capitalized software costs ($43 million) and inventory ($10 million) which have been recorded in product cost of sales for the quarter ended June 27, 1998. Changes in the Company's focus for its server products resulting from the restructuring program significantly lowered the future gross revenue estimates for certain software based solutions, requiring that these previously capitalized costs be reduced to their net realizable value. Also, the Company disposed of inventory related to its THiiN Line business and certain other discontinued products. The Company expects cost savings of approximately $40 to $45 million annually from the restructuring program. The Company does not expect to realize the full benefit of the expense reductions until the first quarter of calendar year 1999. Based on current forecasts, the Company believes that such cost reductions will benefit future operations. While the Company does not currently foresee any significant additional restructuring charges in the near future, the successful implementation of the action plans associated with this restructuring is critical to achieving improved operating results in future periods. There can be no assurance that the Company's restructuring activities will be successful or sufficient to allow the Company to generate improved operating results in future periods. During fiscal year 1995, the Company recorded a restructuring charge of $43 million. No material changes in estimates to prior provisions or additional charges were recorded during the first nine-month period of fiscal 1998. All charges, excluding asset write-downs and certain other charges, are cash in nature and are funded from operations. The remaining reserves of $4.6 million at June 27, 1998 are for excess vacant rental properties, primarily located in Europe. Interest income for the current quarter was $3.2 million, an 18% increase from $2.7 million for the comparable period of fiscal 1997, due to higher levels of invested cash. Interest expense for the current quarter was $3.6 million, a 20% decrease from $4.5 million for the comparable period of fiscal 1997 due to interest expense savings from the retirement in fiscal 1997 of the 7 3/4% Convertible Subordinated Debentures due 2001. Other expense for the current quarter includes a loss of $2 million from the write-off of an equity investment in a non-affiliated company which had been previously carried at cost. For the nine-month period ended June 27, 1998, the write-off is offset by a gain on the sale of an equity security. The income tax provision for the current quarter was $1.0 million compared to $.6 million for the comparable prior-year period. The current year tax provision relates primarily to foreign, state, and federal alternative minimum taxes. The Company has a valuation allowance which offsets substantially all deferred tax assets as of June 27, 1998 and June 28, 1997. The amount of the deferred tax assets considered realizable is subject to change based on estimates of future income during the carryforward period. The Company will assess the need for the valuation allowance at each balance sheet date based on all available evidence and may adjust the level of the valuation allowance, if appropriate. Statements concerning the Company's business outlook or future economic performance; anticipated profitability, revenues, expenses or other financial items; product or service line growth, plans or objectives; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are "forward-looking statements", as that term is defined under the Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, fluctuations in customer demand, order patterns and inventory levels, changes and delays in product development plans and schedules, customer acceptance of new products, changes in pricing or other actions by competitors, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including Data General's Report on Form 10-K for the 1997 fiscal year ended September 27, 1997 and this Quarterly Report on Form 10-Q for the third fiscal quarter of 1998, which ended June 27, 1998. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. The Company has been engaged in patent infringement litigation against IBM Corporation since November 1994. Two lawsuits, both in the discovery stages, are pending in the United States District Court for the District of Massachusetts in Worcester. The Company alleges that several IBM products including the AS/400 midrange systems and the AS/400 RISC-based computer product line infringe various Company's patents. Both suits seek compensatory damages and, where appropriate, injunctive relief. IBM has answered both complaints, has denied the Company's infringement claims and has interposed counterclaims alleging that the Company's CLARiiON storage products infringe IBM patents. Although the Company believes its claims are valid, it cannot predict the outcome of the litigation. In the opinion of management, based on preliminary evaluation of the IBM patents covered in the counterclaims and subject to the risks of litigation, the counterclaims are without merit, the Company will prevail thereon and the counterclaims will not have a material adverse impact on the results of operations or the financial position of the Company. The Company and certain of its subsidiaries are involved in various other patent infringement, contractual, and proprietary rights suits. In the opinion of management, the conclusion of these suits will not have a material adverse effect on the financial position or results of operations and cash flows of the Company and its subsidiaries. Item 5. Other Matters Stockholder Proposals August 17, 1998 is the deadline for submitting stockholder proposals for inclusion in the Board of Directors' proxy statement and form of proxy relating to the January, 1999 Annual Meeting of Stockholders (the "1999 Proxy Statement"). Further, proxies received in connection with the January 1999 Annual Meeting of Stockholders will confer on the Company discretionary authority (i) to vote on any stockholder proposal which is received by the Company after November 2, 1998, and (ii) to vote on any stockholder proposal which is received by the Company on or before November 2, 1998 if the proxy statement includes advice on the nature of the matter and how the Company intends to vote. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 3. (c) By-Laws of the Company, as amended, previously filed on Form 10-K/A dated April 21, 1998, which is incorporated herein by reference. (d) Certificate of Increase dated November 26, 1997, previously filed on March 16, 1998 as Exhibit 4 to the Company's Registration Statement on Form 8-A, which is incorporated herein by reference. 4. (d) Form of 6% Convertible Subordinated Note due 2004, previously filed on March 16, 1998 as Exhibit 2 to the Company's Registration Statement on Form 8-A, which is incorporated herein by reference. 10. (nn) Deferred Compensation Plan Trust Agreement dated January 2, 1998, previously filed as Exhibit 10(nn) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1998, which is incorporated herein by reference. 11. Computation of basic and diluted earnings per share. (b) No reports on Form 8-K were filed during the current quarter ended June 27, 1998. SIGNATURE 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. DATA GENERAL CORPORATION (Registrant) /s/ Arthur W. DeMelle -------------------------------- Arthur W. DeMelle Senior Vice President Chief Financial Officer Dated: August 6, 1998 EXHIBITS Index to Exhibits. 3. (c) By-Laws of the Company, as amended, previously filed on Form 10-K/A dated April 21, 1998, which is incorporated herein by reference. (d) Certificate of Increase dated November 26, 1997, previously filed on March 16, 1998 as Exhibit 4 to the Company's Registration Statement on Form 8-A, which is incorporated herein by reference. 4. (d) Form of 6% Convertible Subordinated Note due 2004, previously filed on March 16, 1998 as Exhibit 2 to the Company's Registration Statement on Form 8-A, which is incorporated herein by reference. 10.(nn) Deferred Compensation Plan Trust Agreement dated January 2, 1998, previously filed as Exhibit 10(nn) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1998, which is incorporated herein by reference. 11. Computation of basic and diluted earnings per share. EX-11 2 COMPUTATION OF BASIC AND DILUTED EPS EXHIBIT 11 DATA GENERAL CORPORATION COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (Unaudited) (In thousands except per share amounts) Quarter Ended Nine Months Ended ---------------------------------- --------------------------- Jun. 27, Jun. 28, Jun. 27, Jun. 28, 1998 1997 1998 1997 -------- -------- -------- -------- Basic earnings per share: Net income (loss)........................................... $(155,090) $ 14,745 $(156,095) $ 38,941 ========== ======== ========= ========= Weighted average shares outstanding......................... 49,159 40,625 48,895 40,155 ====== ====== ====== ====== Net income (loss) per share................................. $(3.15) $0.36 $(3.19) 0.97 ======= ===== ======= ===== Earnings per share assuming full dilution: (a) Net income (loss)........................................... $(155,090) $ 14,745 $(156,095) $ 38,941 ========== ======== ========== ========= Weighted average shares outstanding......................... 49,159 40,625 48,895 40,155 Incremental shares from use of treasury stock method for stock options............................ -- 2,951 -- 2,703 ----------- -------- ----------- --------- Common and common equivalent shares, assuming full dilution, where applicable.................. 49,159 43,576 48,895 42,858 ====== ====== ======= ======= Net income (loss) per share................................. $(3.15) $0.34 $(3.19) $0.91 ======= ===== ======= ===== (a) For the quarters and nine-month periods ended June 27, 1998 and June 28, 1997, the assumed conversion of convertible debentures, giving effect to the incremental shares and the adjustment to reduce interest expense, results in anti-dilution and has therefore been excluded from the computation. For the quarter and nine-month period ended June 27, 1998, the assumed exercise of stock options, giving effect to the incremental shares, results in anti-dilution and has been excluded from the calculation.
EX-27 3 ART.5 FDS FOR 3ND QUARTER 1998 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE Q3 FY98 CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS SEP-26-1998 JUN-27-1998 112,146 175,426 270,315 0 145,424 737,502 652,788 468,131 988,469 387,464 212,750 0 0 619,931 (240,868) 988,469 253,802 351,270 244,270 304,151 198,791 0 3,599 (154,090) 1,000 (155,090) 0 0 0 (155,090) (3.15) (3.15)
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