-----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, KfQisZ1LJQACWvZH5BBuD+Sfc67Gylzls/raO/CNhnXCdvxAu9Sne5HnvsUvhTWY /c8jT1RalX+HKAwEfpjt9w== 0000026999-98-000030.txt : 19981218 0000026999-98-000030.hdr.sgml : 19981218 ACCESSION NUMBER: 0000026999-98-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981217 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-K SEC ACT: SEC FILE NUMBER: 001-07352 FILM NUMBER: 98771364 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-K 1 FY98 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 26, 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 incorporation or organization) Identification Number) 4400 Computer Drive, Westboro, Massachusetts 01580 - -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 898-5000 Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 New York Stock Exchange London Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange London Stock Exchange - ------------------------------- ----------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None --------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Aggregate market value of common stock held by non-affiliates of the registrant, as of November 30, 1998: $903,394,588 Number of shares outstanding of each of the registrant's classes of common stock, as of November 30, 1998: Common Stock, par value $.01 49,842,460 ---------------------------- -------------- (Title of each class) (Number of shares) Documents incorporated by reference: Parts I and II - Portions of registrant's Annual Report to Stockholders for the year ended September 26, 1998. Part III - Portions of registrant's Proxy Statement dated December 17, 1998. ================================================================================ AViiON, CLARalert, CLARiiON, Cluster-in-a-Box, DG/UX, DG/ViiSION, ECLIPSE, Navisphere, and VALiiANT are registered trademarks; AVFlex, DG/UX Cluster, Exchange-in-a-Box, Multidimensional Storage Architecture, NTerprise Manager, QuickClusters, TermServer-in-a-Box, and THiiN are trademarks; and OMNiiCARE, NTAlert and REPAIRiiON are service marks of Data General Corporation. Intel, the Intel Inside logo and Pentium are registered trademarks and Xeon is a trademark of Intel Corporation. Microsoft and Windows NT are registered trademarks of Microsoft Corporation. All other brand and product names may be trademarks or registered trademarks of their respective holders. PART I Item 1. Business. Data General, incorporated in Delaware on April 15, 1968, designs, manufactures, markets and supports a family of open computer systems including servers and mass storage products. As used herein, the terms "Data General" and the "Company" mean Data General Corporation, and, unless otherwise indicated, its consolidated subsidiaries. The Company's products provide solutions for high-performance customer applications such as database management, transaction processing, decision support, accounting and finance, healthcare information systems, telecommunications and video storage, manufacturing planning and control, human resources management and data warehousing. The Company focuses on providing enterprise-level solutions for businesses of all sizes, healthcare providers and government agencies, and has a worldwide sales, service and support network. Data General, founded as a minicomputer company, has a history of technology leadership in the computer industry. In 1988, the Company recognized the impact which commodity microprocessors would have on proprietary systems and on the overall economics of the computer business. To capitalize on this trend, in 1989 Data General introduced the AViiON line of open systems, and in 1991 the Company brought to market its first high-availability RAID (Redundant Array of Inexpensive Disks) storage systems. During fiscal 1998, AViiON servers and CLARiiON mass storage products constituted approximately 89 percent of the Company's product revenues. Strategy. Data General's objective is to be a worldwide leader in open server and mass storage products. The key elements of the Company's strategy are to: Develop Value-Added and Innovative Systems Technologies. Data General develops value-added and innovative systems technologies to provide a broad spectrum of business-critical, enterprise solutions. The Company believes its competitive position is strengthened by the differentiating features and enhancements that it provides by leveraging its design and engineering competencies with low cost commodity components and subassemblies, world class manufacturing and the expertise of its suppliers. Maintain Technology Leadership. Data General intends to continue to identify market opportunities and rapidly deliver advanced technological products that provide scalability, connectivity and price/performance advantages. The Company believes that its ability to combine open technologies with its own expertise in advanced systems architecture design, manufacturing processes, project management and product development provides it with a competitive advantage and enables it to be early to market with key products. In 1997 and 1998, the Company introduced next generation technologies, including AViiON NT Cluster-in-a-Box, TermServer-in-a-Box, AV 20000 and AV 25000 servers based on Non-Uniform Memory Architecture ("NUMA"), and CLARiiON Fibre Channel- based storage systems, to meet the future computing and information access needs of its customers. Utilize Multi-Channel Distribution and Strategic Alliances. The Company plans to continue using multiple channels of distribution to expand its worldwide market for enterprise server and storage solutions. In addition to expanding its direct sales force, the Company intends to continue to leverage and expand its extensive network of value-added resellers and its strong original equipment manufacturers ("OEM") and other third-party distribution relationships such as those with Dell, Hewlett-Packard, NEC, Silicon Graphics and Storage Technology. Because enterprise customers often seek integrated solutions, Data General has developed relationships with such companies as Intel, Microsoft, Oracle, Informix, PeopleSoft, SAP, Baan, HBO and Company, Meditech, and other selected component and software suppliers. Provide Superior Customer Service and Support. Data General intends to continue to provide superior customer service and support. Enterprise customers often require 24-hour, seven-day-a-week support, and prefer a single point of contact to ensure integrated hardware and software support and maintenance. This level of service is often a key factor in selection of a systems vendor. The Company believes that providing comprehensive, responsive service and support gives it a competitive advantage and is a differentiating factor in developing and maintaining customer relationships. Products and Technologies. Server Business AViiON computers function as servers and multi-user systems for a wide variety of applications providing solutions for businesses ranging from departments and small businesses to large commercial enterprises that need high availability systems to support large numbers of users, handle large volumes of transactions and support large databases. The AViiON family of computer systems includes two series: the newest series of AViiON servers, introduced in 1995, based on the Intel microprocessor architecture; and an earlier series, available since 1989, based on Reduced Instruction Set Computing ("RISC") microprocessors from Motorola. AViiON now has an installed base of approximately 56,000 systems. In fiscal 1998, revenues from the AViiON family were approximately $542 million. Intel processor-based AViiON servers presently constitute the vast majority of AViiON revenues. The Intel processor-based AViiON product family includes enterprise servers, high-end departmental and PC servers, and desk-side servers. The Company's enterprise servers combine high performance with extensive reliability, availability and serviceability features typically found on larger computers. Together with a scalable and expandable design, these features make AViiON servers suitable platforms for business-critical commercial applications from independent software vendors such as SAP, Baan, PeopleSoft and Oracle. These servers support several operating systems and are capable of running applications from leading suppliers of databases, languages, office automation and industry applications packages. Intel processor-based AViiON servers support the Microsoft Windows NT Server operating system, the SCO UnixWare System, various other open operating systems, and the DG/UX operating system, Data General's commercial implementation of the UNIX operating system. During 1997, the Company introduced the AV 20000 family and in 1998, the AV 25000 family of high-performance systems based on Intel Standard High Volume ("SHV") server boards and NUMA architecture. This class of product extends the high end of the AViiON product line and enables customers to capitalize on their existing investments in applications written for SMP (symmetric multiprocessing) systems. AViiON NUMA systems are sold by the Data General sales force and by channel distribution partners. Data General also sells a wide variety of peripheral equipment for use with its computers. Peripheral equipment sold by the Company includes video display terminals, printers, plotters, communication controllers, multiplexors, disk storage, memory, magnetic tape equipment, analog-to-digital converters and digital-to-analog converters. The total purchase price of any computer system varies depending upon the processing power, size of main memory and storage capacity, and upon the types and quantities of accessory, peripheral controller subassembly, and peripheral equipment ordered. Prices of the Company's various products range from less than $500 to over $1,000,000. Dollar volume discounts are offered on most products sold by the Company. The Company's new products and revisions to existing products have typically resulted in improved price/performance ratios for its customers. AViiON servers and related systems, including personal computers and earlier generation ECLIPSE MV computers, represented 43% of consolidated total revenues for the year ended September 26, 1998, 42% of consolidated total revenues for the fiscal year ended September 27, 1997, and 43% of consolidated total revenues for the fiscal year ended September 28, 1996. Storage Business The CLARiiON division supports a wide range of open systems computing platforms with a broad family of storage products ranging from disk arrays for the PC/local area network market to high-capacity, high-availability arrays for enterprise storage applications. CLARiiON mass storage disk arrays support the UNIX operating system, Windows NT Server, SCO UnixWare and OS/2, as well as Novell NetWare. CLARiiON products operate on a wide range of open systems computing platforms, including systems from IBM, Compaq/Digital Equipment, Sun Microsystems, Dell, Hewlett-Packard, Sequent and Silicon Graphics. The majority of CLARiiON revenues are derived through OEM relationships with major systems vendors and storage suppliers. However, CLARiiON products are also sold through CLARiiON's direct sales force and through systems integrators and distributors. Approximately 75,000 CLARiiON systems have been shipped since 1991. In the past two years, the Company introduced and began delivering a new generation of CLARiiON products based on "Fibre Channel" technology. Fibre Channel technology has distinct advantages over SCSI technology, which is used in the existing generation of CLARiiON and competitive storage systems. Fibre Channel advantages include increased bandwidth, enabling the movement of up to five times as much data, and greater scalability, permitting use of much larger disk arrays. Fibre Channel technology will also allow a significant increase in the permitted distance between servers and CLARiiON storage devices. Data General believes that Fibre Channel-based CLARiiON products will provide the Company with opportunities for incremental revenues with existing customers as the new Fibre Channel architecture emerges to complement existing SCSI products. The Company believes that Fibre Channel technology also will permit the Company to pursue new applications and to expand its sales into new markets such as telecommunications and video. Storage revenues represented 28% of consolidated total revenues for the year ended September 26, 1998, 33% of consolidated total revenues for the fiscal year ended September 27, 1997, and 27% of consolidated total revenues for the fiscal year ended September 28, 1996. Contract Manufacturing, Repair and Logistics Data General also provides contract manufacturing services through the VALiiANT business unit, and product repair and logistics services through the REPAIRiiON business unit. Both units take advantage of the Company's world class manufacturing expertise and facilities. Data General was the first U.S. computer company to have its worldwide manufacturing operations gain ISO 9000 certification. By leveraging its world class manufacturing and product repair capabilities, the Company believes VALiiANT and REPAIRiiON provide Data General with opportunities to realize incremental revenues and profits. Services. Data General offers services and support in three primary areas: customer service, professional services and customer training. Customer services consist of maintenance of computer and computer peripheral products, on both a contract and time-and-materials basis. The Company's professional services focus on providing customer-specific solutions, such as the development of specialized applications, configuration and installation of computer and network systems and applications, and system migration, rehosting, and database implementation. The Company also offers over 250 course titles of basic and advanced information technology training. The Company extends a limited service and/or parts warranty on substantially all equipment sold and offers several types of maintenance services and contracts at additional charges. Warranty and other maintenance services are generally performed by service employees located in various offices throughout the world. The Company offers a mail-in parts exchange and repair service and a cooperative maintenance program for qualified organizations, VARs, and other customers capable of performing maintenance services. The cooperative program includes spare parts, back-up support, depot service, diagnostics, training, documentation, tools and test equipment, and service planning and support. Data General supports thousands of products made by other vendors. The Company also offers an On-line Information Service, which provides customers with immediate access to support information and personnel. The majority of the Company's service revenues are related to the Company's AViiON systems business. Service revenues represented 27% of consolidated total revenues for the year ended September 26, 1998, 25% of consolidated total revenues for the fiscal year ended September 27, 1997, and 30% of consolidated total revenues for the fiscal year ended September 28, 1996. Marketing and Distribution. The Company has two major divisions that are responsible for sales and marketing: AViiON Enterprise Server Division and CLARiiON Advanced Storage Division. The Company uses multiple distribution channels, including direct sales, mass merchandising, reseller channels, and OEM sales. Sales divisions are structured to cover the following major geographic areas: the United States, Europe, Asia/Pacific, Canada, and Latin America. The Company also has a sales division dedicated to the healthcare market. The Company sells its AViiON systems directly to end users by its sales force of approximately 900 sales representatives and systems engineers. In addition the Company uses indirect channels such as systems integrators, software suppliers, distributors and industry-specific VARs to broaden sales of its AViiON products into many specialized markets. The Company's CLARiiON Advanced Storage Division uses primarily third-party distribution channels such as OEMs, distributors and VARs. Major customers include Dell, Hewlett-Packard, NEC, Sequent, Silicon Graphics, and Storage Technology. The Company is also expanding its sales force to increase sales of CLARiiON directly to end users. The Company provides lease financing through various leasing and financing programs arranged with third parties. Data General Leasing provides flexible financing programs for all Data General products, as well as third- party hardware, software and services. These programs are available worldwide for resellers, distributors and end users. The largest single customer during fiscal 1998 was Hewlett-Packard, which purchases primarily CLARiiON storage systems for resale to its customers. Hewlett-Packard accounted for 13% of consolidated total revenues in fiscal 1998. The Company did not have any other customers with revenues exceeding 10% of the Company's consolidated total revenues during fiscal 1998. The Company's business is not subject to any unusual seasonal fluctuations. The Company generally attempts to minimize the time from receipt of a customer's order to shipment and virtually no orders are booked with shipment dates in excess of one year from the date of order. As the Company's product mix has shifted more towards industry-standard systems, the average time from order date to shipment date has decreased. In addition, a substantial portion of the orders received by the Company are subject to cancellation without significant penalty, at the option of the customer at any time prior to shipment. Therefore, the Company believes that disclosure of its backlog is not material to an understanding of the Company's business. Organization and Structure. The Company has two primary divisions: AViiON Enterprise Server Division and CLARiiON Advanced Storage Division. These divisions are supported by centralized operations for Manufacturing and Services, Finance and Administration, and Corporate Marketing. The AViiON Enterprise Server Division includes sales, marketing, development, and professional services activities. Worldwide sales operations are responsible for direct sales and reseller channels. Sales divisions are structured to cover the following major geographic areas: the United States, Europe, Asia, the Pacific Rim, Canada, and Latin America. The Worldwide Healthcare Division is responsible for sales and marketing activities in the healthcare market. The Company's AViiON Marketing activities are focused on providing enterprise software solutions. Professional Services provides customers with complete services to design, implement, and support commercial computing environments. The Company's Open Systems Training business provides lecture/lab courses, on-site training, and computer and video based training, and is a Microsoft Authorized Technical Education Center and offers the Microsoft Certified Professional Program. The CLARiiON Advanced Storage Division is responsible for development and marketing of the Company's CLARiiON family of open mass storage products. The division includes organizations focused on OEM sales, Solutions sales, marketing, product engineering, services, and advanced research and development. The Manufacturing, Customer Service, and Information Management Group ("IMG") organization encompasses several functions. Manufacturing is responsible for producing Data General systems; for procuring associated components, subassemblies, peripherals, and various other products which are incorporated into Data General systems or sold under the Data General label; for the operation of the VALiiANT contract manufacturing and REPAIRiiON repair and logistics business units; for Customer Order Fulfillment; and for overall corporate quality assurance. Customer Service encompasses the Customer Support Center, field engineering and other technical services. IMG is responsible for the Company's information management technology and operations. The Finance and Administration organization includes the Controller, the Treasurer, Legal, Investor Relations, Property Management, and Human Resources functions. Corporate Marketing is responsible for increasing the Company's visibility and awareness through public relations, advertising, tradeshows, and a number of marketing and lead generation activities spanning both the AViiON and CLARiiON divisions. Raw Materials. Data General's manufacturing operations employ a wide variety of mechanical and electronic components, raw materials and other supplies. In the design of its products, the Company routinely attempts to utilize multiple-sourced components. However, in some instances, the Company selectively uses sole-sourced components, such as microprocessors and gate arrays, in order to achieve desired system performance. These components are typically based on the manufacturer's proprietary underlying technology. In a few instances, the Company is dependent upon certain vendors for the manufacture of significant components of its server and mass storage systems. If these vendors were to become unwilling or unable to continue to manufacture these products in required volumes, the Company would have to identify and qualify acceptable alternative vendors. The inability to develop alternate sources, if required in the future, could result in delays or reductions in product shipments. With respect to sole-sourced materials, the Company has not experienced significant problems with either the quality or the sources and availability of materials. Patents. In November 1994 and in May 1996, the Company commenced patent infringement litigation against International Business Machines Corporation charging infringement of certain of the Company's patents (see "Item 3. Legal Proceedings," below). Although the Company believes its claims are valid, it cannot predict the outcome of the litigation. Should the Company prevail in the litigation, such patents could play a significant role in the conduct of its business and accordingly would be material. The Company believes that most of its remaining patents do not presently play a significant role in the conduct of its business or in its industry in general and most patents, granted or which may be granted to it, while anticipated to be of value, are not expected to be of material significance. The Company also owns certain copyrights, trademarks and proprietary information. From time to time, companies in the industry have claimed that products and components similar to those manufactured by the Company are covered by valid patents held by others. It may be necessary or desirable to obtain further patent licenses in addition to those which the Company now holds. Although there is no assurance that such additional patent licenses could be obtained, the Company is of the opinion, based on industry practice and information presently available, that such licenses could be obtained and on terms which would not have a material effect on the Company's consolidated financial position or results of operations. Competition. The computer industry has been characterized by rapid technological change, product improvement, and price reductions. During fiscal 1998, the Company experienced revenue growth in the AViiON business due to increased sales of Intel processor-based servers, particularly for Microsoft Windows NT-based applications, and revenue decline in the CLARiiON storage business due to the transition from SCSI-based systems to new Fibre Channel-based systems. The Company believes that the CLARiiON transition to Fibre Channel-based systems is progressing smoothly. Data General's future may be adversely affected by new technology developed by others or by price reductions initiated by competitors. Some of the Company's competitors are larger companies and have substantially greater resources than the Company. The Company also competes with a number of smaller manufacturers. The Company believes that it is a significant manufacturer of multi-user computer systems, servers, and mass storage devices for commercial applications. The Company's AViiON systems have become increasingly competitive since they were introduced in fiscal 1989. The Company believes its AViiON systems compete favorably with standards-based systems from other industry-leading vendors based upon a wide range of features and performance, including high availability and clustering; the ability to run multiple operating systems, including Windows NT Server, the Company's DG/UX operating system, and SCO UnixWare; and the availability of an extensive range of applications software. The Company believes its AViiON systems also compete favorably as a result of their ability to connect with a variety of desktop systems manufactured by the Company and by other vendors. The Company's worldwide service and support capability, which includes service for certain products manufactured by other vendors (such as PCs and workstations), also enhances the competitive strength of the Company's product families. The Company believes that its CLARiiON product was the first open, RAID-based mass storage product. The CLARiiON product supports leading open systems platforms, including Hewlett-Packard, IBM/AIX, Microsoft Windows NT, and Sun Microsystems. The Company believes it is a leader in developing Fibre Channel-based storage products. Research and Development. The Company believes that if it is to compete successfully in the industry it will require a continuing commitment to research and development. Research and development expenses were $118.7 million in fiscal 1998, $110.0 million in fiscal 1997, and $98.0 million in fiscal 1996. Gross expenditures on research and development and software development in fiscal 1998, before capitalization, increased 5% compared to fiscal 1997. Research and development work contracted to third parties during fiscal 1997 was insignificant. During fiscal 1998, the Company focused its research and development efforts on its core business technology, multi-user computer systems, servers, and mass storage devices, including related software and services. This includes development work on systems based on NUMA architecture for high-end computer systems and Fibre Channel storage systems. Continued emphasis on applied research and development programs is anticipated in order to improve existing products and to expand product line capabilities. Research and development work is done primarily in the following areas: general purpose computer systems, open mass storage devices, systems and applications software, integrated circuit technology, network services and products, and contracted special product design. Environmental Conditions. The Company's various manufacturing facilities are subject to numerous laws and regulations designed to protect the environment, particularly from plant wastes and emissions. In the Company's opinion, it is in material compliance with such laws and regulations. Compliance has not had, and is not expected to have, a material effect upon the Company's capital expenditures, results of operations, or competitive position. Employees. The Company had approximately 4,700 employees as of September 26, 1998, compared with 5,100 employees as of September 27, 1997, and 4,900 employees as of September 28, 1996. The Company's employees are not covered under any collective bargaining agreements, and the Company has not experienced any significant labor problems. The Company believes that its relationship with its employees is good. International Operations. Foreign business is conducted through Company owned subsidiaries and through a network of representatives and distributors. International revenues, including U.S. direct export sales, amounted to approximately 38% of consolidated total revenues in fiscal 1998, and 37% and 40% of consolidated total revenues in fiscal 1997 and 1996, respectively. The majority of Data General's international revenues are derived from western Europe, Asia and Canada. In view of the locations and diversification of its international activities, the Company does not believe that there are any special risks beyond the normal business risks attendant to activities abroad. The Company maintains a hedging program to minimize its exposure to foreign currency fluctuations. Additional information relating to the Company's international operations, including financial information by major geographic area, is included in "Note 12. Geographic Segment Data" on page 40 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998. RISK FACTORS This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ materially from those projected or contemplated in the forward-looking statements as a result of certain of the risk factors set forth below and incorporated by reference in this Report. In addition to the other information contained and incorporated by reference in this Report, the following risk factors should be considered carefully in evaluating the Company and its business. Changing Technologies. To compete effectively in the server and mass storage markets, the Company must continue to introduce new products and features that address the needs and preferences of its target markets. The server and storage markets are characterized by short development cycles that are driven by rapidly changing technology as well as declining product prices. There can be no assurance that the Company will be able to continue to introduce new competitively priced products, that the market will be receptive to its products or features, or that competitors will not introduce advancements ahead of Data General. Furthermore, there can be no assurance that the Company will develop or have access to new competitive technology to permit it to introduce new products and features for its target markets. In addition, the Company must make strategic decisions from time to time as to which new technologies will result in products for sale to markets that will experience future growth, and must form and maintain strategic alliances for the design and marketing of its products. If the Company is not successful in continuing to introduce new products in the growing segments of the market or in forming and maintaining critical strategic relationships, there could be a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Suppliers. Certain components and products that meet the Company's requirements are available only from a limited number of suppliers. Among those components are disk drives, microprocessors and certain proprietary integrated circuits. The Company purchases each of these components from a single supplier or a small number of qualified suppliers. The rapid rate of technological change, and the necessity of developing and manufacturing products with short life-cycles may intensify these risks. The inability to obtain components and products as required, or to develop alternative sources if and as required in the future, could result in delays or reductions in product shipments, which in turn could have a material adverse effect on the Company's business, financial condition and results of operations. Indirect Channels of Distribution. Substantially all of the Company's CLARiiON sales, and a significant portion of the Company's AViiON sales, are derived from reseller and OEM channels. A single OEM channel customer during fiscal 1998 accounted for approximately 13% of the Company's consolidated revenues. The Company's financial results could be adversely affected if this customer or any other material reseller or OEM were to substantially decrease its orders, or change configurations, or terminate its relationship with the Company. Further, the utilization of indirect channels of distribution tends to limit the Company's ability to predict customer orders. Concentrated Manufacturing Operations. Over the last several years, the Company has consolidated its various manufacturing operations into three facilities where the Company conducts most of its assembly, test, systems integration, and distribution operations. The Company's ability to ship products and the Company's business, financial condition and results of operations could be adversely affected were these facilities not able to operate at required levels. Capitalization of Software Development Costs. The Company has made and continues to make significant investments in software development efforts. The amount of expenditures that qualify for capitalization under Statement of Financial Accounting Standards Number 86 ("SFAS 86"), "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," may vary from period to period as software projects progress through the development life cycle. These variations could impact the Company's operating results in any given period. Unamortized software development costs were $51.5 million at September 26, 1998. If technological developments or other factors were to jeopardize the realizability of such assets, the Company could be required to write off all or a substantial portion of such capitalized values, which would have a material adverse effect on the Company's results of operations for the period in which the write-off occurred. Year 2000 Information and Readiness Disclosure Act. The "Year 2000 issue" arises because many computer hardware and software systems use only two digits to represent the year. As a result, these systems and programs may not correctly handle dates beyond 1999, resulting in errors in information or program or systems failures. As well, notwithstanding any preparations taken by the Company, the Year 2000 issue presents risks and uncertainties that could affect the Company's business, financial condition or results of operations. The information and statements contained under the heading "Year 2000 Information and Readiness Disclosure Act" on pages 24 to 26 of the Company's Annual Report to Stockholders for the fiscal year ended September, 26, 1998, are incorporated here by reference. Item 2. Properties. The Company's executive offices are located in Westborough, Massachusetts. Manufacturing, research and development, service, marketing, and administrative support facilities are located in various states and countries throughout the world. All buildings are modern, air conditioned, and suitable and adequate for the present activities of the Company. Substantially all manufacturing equipment is owned by the Company and is well maintained. Additional information regarding the Company's principal plants and properties is included under the heading "Facilities" on page 42 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998. Item 3. 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 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 AViiON and CLARiiON computer systems 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 4. Submission of Matters to a Vote of Security Holders. Not applicable. Executive Officers of the Registrant. Frederick R. Adler(1), Age 72, Chairman of the Executive Committee of the Board of Directors since July 1982; Managing General Partner of Adler & Company, a venture capital investment firm, and a general partner of its related investment funds for more than five years; of counsel to Fulbright & Jaworski L.L.P., Attorneys, and until December 1995, Senior Partner of such firm. Ronald L. Skates(1), Age 57, President and Chief Executive Officer of the Company since November 1989; Executive Vice President and Chief Operating Officer of the Company from August 1988 to November 1989; Senior Vice President of the Company from November 1986 to August 1988; Chief Financial Officer of the Company from November 1986 to August 1987; Partner, Price Waterhouse from July 1976 to November 1986. William J. Cunningham, Age 60, Senior Vice President of the Company since November 1996; Vice President of the Company from August 1989 to October 1996; prior positions at Apollo Computer Inc. included Vice President and General Manager, Manufacturing and Research and Development, from October 1988 to June 1989; and Vice President and General Manager, Manufacturing and Distribution, from September 1987 to September 1988; Vice President, U.S. Manufacturing, for Honeywell Bull from March 1986 to September 1987. Arthur W. DeMelle (2), Age 58, Senior Vice President of the Company since November 1996; Vice President of the Company from March 1992 to October 1996 and Chief Financial Officer of the Company since March 1992; prior positions included Senior Vice President of Finance and Administration at Chep USA from November 1989 to March 1992; Executive Vice President and Chief Financial Officer at Emery Air Freight Corporation from April 1987 to May 1989; and Executive Vice President and Chief Financial Officer at Purolator Courier Corporation from July 1980 to April 1987. Joel Schwartz, Age 56, Senior Vice President of the Company since November 1996; Vice President of the Company from February 1989 to October 1996; President and Chief Operating Officer of Polygen Corp. from August 1986 to February 1989. Ethan Allen, Age 51, Senior Vice President of the Company since November 1998; Vice President of the Company from January 1992 to November 1998; Division Vice President of the Company from January 1990 to January 1992. Executive officers of the Company are elected annually and hold office until the first meeting of the Board of Directors following the Annual Meeting of Stockholders or until their successors have been elected and have duly qualified. (1) Member of Board of Directors and Executive Committee thereof. (2) Arthur W. DeMelle died on December 10, 1998. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The information contained under the headings "Stock Price Range" on page 41; and "Number of Stockholders," "Dividend Policy," and "Stock Exchange Listing" on page 43 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998 is incorporated herein by reference. Item 6. Selected Financial Data. The information contained under the heading "Five Year Summary of Selected Financial Data" on page 18 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 through 26 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998 is incorporated herein by reference. This information should be read in conjunction with the related consolidated financial statements incorporated by reference under Item 8. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. The information contained under the heading "Market Risk" on page 26 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998, is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The information contained in the consolidated financial statements, notes to consolidated financial statements, and report of independent accountants, under the heading "Quarterly Financial Data (Unaudited)," and "Facilities," on pages 27 through 42 of the Company's Annual Report to Stockholders for the fiscal year ended September 26, 1998 is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. The information contained under the heading "Proposal No. 1 - Election of Seven Directors" on pages 4 through 7 of the Company's Proxy Statement dated December 17, 1998 is incorporated herein by reference. See also "Executive Officers of the Registrant" appearing in Part I hereof. Item 11. Executive Compensation. The information contained under the headings "Summary Compensation Table," "Option Grants in the 1998 Fiscal Year," "Option Exercises in the 1998 Fiscal Year and Fiscal Year-End Option Values," "Compensation Pursuant to Plans," "Employee Agreements" and "Compensation of Directors" on pages 9 through 20 of the Company's Proxy Statement dated December 17, 1998 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information contained under the heading "Beneficial Ownership of Common Stock" and in the second paragraph and related table under the heading "Proposal No. 1 - Election of Seven Directors" on pages 2 through 7 of the Company's Proxy Statement dated December 17, 1998 is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Not applicable. PART IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K. (a) 1 and 2. Index to financial statements and related schedule: Page Five-year summary of selected financial data ................................18* Management's discussion and analysis of financial condition and results of operations ..........................................................19-26* Consolidated balance sheets at September 26, 1998 and September 27, 1997 ..28* For fiscal years ended September 26, 1998, September 27, 1997, and September 28, 1996: Consolidated statements of operations..............................27* Consolidated statements of cash flows..............................29* Consolidated statements of stockholders' equity....................30* Notes to consolidated financial statements................................31-40* Report of independent accountants............................................41* Supplemental financial information...........................................41* Facilities...................................................................42* Report of independent accountants on financial statement schedules...........23 Financial statement schedule: Schedule II - Valuation and qualifying accounts....................24 The financial statement schedule should be read in conjunction with the financial statements in the 1998 Annual Report to Stockholders. All other schedules have been omitted as they are not applicable, not required, or the information is included in the consolidated financial statements or notes thereto. - ---------------------- * Page references are to the 1998 Annual Report to Stockholders. The 1998 Annual Report to Stockholders is not to be deemed filed as part of this Report except for those parts thereof specifically incorporated by reference into this Report. EXHIBITS 3. (a) Restated Certificate of Incorporation of the Company, as amended, including the Company's Certificate of Designation dated October 17, 1986, previously filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1986, which is incorporated herein by reference. (b) Amendment to Certificate of Incorporation of the Company, filed January 29, 1987, previously filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1987, which is incorporated herein by reference. (c) By-Laws of the Company, as amended, previously filed as Exhibit 3 (c) to 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. (a) Rights Agreement Renewed and Restated as of October 19, 1996 between the Company and The Bank of New York, as Rights Agent, previously filed on June 27, 1996, as Exhibit 1 to the Company's Amendment to Registration Statement on Form 8-A/A, which is incorporated herein by reference. (b) Indenture, dated as of May 21, 1997, between the Company and The Bank of New York, previously filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997, which is incorporated herein by reference. (c) Registration Rights Agreement dated as of May 15, 1997, between and among the Company and Morgan Stanley and Co. Incorporated and Dillon, Read & Co. Inc. previously filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997, which is incorporated herein by reference. (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. (a) Restricted Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 33-19759, which is incorporated herein by reference. (b) Forms of Restricted Stock Option Agreement, previously filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1990, which is incorporated herein by reference. (c) Form of Amendment to Restricted Stock Option Agreement, previously filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 25, 1988, which is incorporated herein by reference. (d) Form of Amendments to Key Executive Restricted Stock Option Agreements, previously filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (e) Form of Amended and Restated Restricted Stock Option Agreement, between the Company and Ronald L. Skates, previously filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (f) Form of Amendment to Restricted Stock Option Agreements, between the Company and Frederick R. Adler, previously filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (g) Amendment to Restricted and Employee Incentive Stock Option Agreements, between the Company and Ronald L. Skates, dated November 14, 1988, previously filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1988, which is incorporated herein by reference. (h) Forms of Incentive Stock Option Agreement, previously filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1987, which is incorporated herein by reference. (i) Form of Amendment to Employee Incentive Stock Option Agreement, previously filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 25, 1988, which is incorporated herein by reference. (j) Form of Amended and Restated Employee Stock Option Agreement, between the Company and Ronald L. Skates, previously filed as Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (k) Form of Amendments to Key Executive Stock Option Agreements, previously filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (l) Non-Employee Director Restricted Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 2-91481, which is incorporated herein by reference. (m) Form of Non-Employee Director Restricted Stock Option Agreement, previously filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1990, which is incorporated herein by reference. (n) Form of Employment Agreements between the Company and its full-time officers, previously filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (o) Form of Amendment dated September 1, 1993, to various Employment Agreements between the Company and its full-time officers, previously filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended September 25, 1993, which is incorporated herein by reference. (p) Form of Amendment dated November 5, 1997 to various Employment Agreements between the Company and its full-time officers, previously filed as Exhibit 10(mm) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (q) Form of Indemnity Agreement between the Company and its officers and directors, previously filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1987, which is incorporated herein by reference. (r) Form of Amendment dated November 5, 1997 to various Indemnity Agreements between the Company and its officers and directors, previously filed as Exhibit 10(ll) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (s) Data General Corporation Supplemental Retirement Benefit Plan dated as of October 1, 1989, between the Company and its highly compensated employees, previously filed as Exhibit 10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, which is incorporated herein by reference. (t) Form of Supplemental Pension and Retiree Medical Agreement dated as of December 7, 1994, between the Company and its current President and Chief Executive Officer, previously filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, which is incorporated herein by reference. (u) 1994 Non-Employee Director Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 33-53039, which is incorporated herein by reference. (v) Form of 1994 Non-Employee Director Stock Option Agreement, previously filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, which is incorporated herein by reference. (w) Employee Qualified Stock Purchase Plan, previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration Number 333-31159, which is incorporated herein by reference. (x) Employee Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 33-58237, which is incorporated herein by reference. (y) Summary of 1998 Fiscal Year Bonus Opportunity for Chief Executive Officer, previously filed as Exhibit 10(jj) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (z) Summary of Retention Bonus for Chief Executive Officer, previously filed as Exhibit 10(kk) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (aa) Stock Compensation Plan for Non-Employee Directors, previously filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration Number 333-31159, which is incorporated herein by reference. (bb) Credit Agreement dated September 30, 1997 between the Company and NationsBank of Texas, N.A., et al, previously filed as Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1997, which is incorporated herein by reference. (cc) 1997 Non-Officer Employee Stock Option Plan, previously filed as Exhibit 10(ff) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1997, which is incorporated herein by reference. (dd) Form of 1997 Non-Officer Employee Stock Option Agreement, previously filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1997, which is incorporated herein by reference. (ee) Amendment No. 1 to Credit Agreement dated as of January 28, 1998, amending the Credit Agreement between the Company and NationsBank of Texas, N.A., et al. (ff) Amendment No. 2 to Credit Agreement dated as of August 28, 1998, amending the Credit Agreement between the Company and NationsBank of Texas, N.A., et al. (gg) Deferred Compensation Plan dated January 1, 1998, previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration Number 333-45153, which is incorporated herein by reference. (hh) 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. (ii) Grant of Common Stock to Non-Employee Directors dated November 5, 1997, previously filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration Number 333-45153, which is incorporated herein by reference. 11. Computation of basic and diluted earnings per share. 13. Annual report to stockholders for the fiscal year ended September 26, 1998, certain portions of which have been incorporated herein by reference. 21. Subsidiaries of the registrant. 23. Consent of independent accountants. Exhibits, other than those incorporated by reference, have been included in copies of this Report filed with the Securities and Exchange Commission. Stockholders of the Company will be provided with copies of these exhibits upon written request to the Company. b) Reports on Form 8-K There were no reports on Form 8-K filed during the fiscal year ended September 26, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATA GENERAL CORPORATION (Registrant) By: /s/ Ronald L. Skates ------------------------------- Ronald L. Skates President and Chief Executive Officer December 17, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Ronald L. Skates President and Chief - -------------------------------- Executive Officer; Ronald L. Skates Director December 17, 1998 /s/ Frederick R. Adler Chairman of Executive - -------------------------------- Committee of Board of Frederick R. Adler Directors; Director December 17, 1998 /s/ Jeffrey M. Cunningham Director December 17, 1998 - -------------------------------- Jeffrey M. Cunningham Senior Vice President; - -------------------------------- Chief Financial Officer; Arthur W. DeMelle Chief Accounting Officer /s/ Ferdinand Colloredo-Mansfeld Director December 17, 1998 - -------------------------------- Ferdinand Colloredo-Mansfeld /s/ Donald H. Trautlein Director December 17, 1998 - -------------------------------- Donald H. Trautlein /s/ Richard L. Tucker Director December 17, 1998 - -------------------------------- Richard L. Tucker /s/ W. Nicholas Thorndike Director December 17, 1998 - -------------------------------- W. Nicholas Thorndike /s/ John J. Gavin Jr. Vice President; December 17, 1998 - --------------------------------- Controller; John J. Gavin Jr. Acting Chief Financial Officer /s/ Robert C. McBride Vice President; Treasurer December 17, 1998 - --------------------------------- Acting Chief Accounting Robert C. McBride Officer DATA GENERAL CORPORATION REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Data General Corporation Our audits of the consolidated financial statements referred to in our report dated October 28, 1998 appearing on page 41 of the 1998 Annual Report to Stockholders of Data General Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts October 28, 1998
SCHEDULE II DATA GENERAL CORPORATION VALUATION AND QUALIFYING ACCOUNTS (In thousands) Balance at Previous End Balance at Description of Year Additions Deductions End of Year - --------------------------------- ------------ --------- ---------- ----------- SEPTEMBER 26, 1998 Allowance for doubtful accounts . . . . . . . . . $ 16,588 $ 11,814(a) $ (8,978)(b) $ 19,424 Valuation allowance on deferred tax asset (c) . . 195,071 82,492 (17,328) 260,235 SEPTEMBER 27, 1997 Allowance for doubtful accounts . . . . . . . . . 14,480 11,211(a) (9,103)(b) 16,588 Valuation allowance on deferred tax asset (c) . . 204,017 11,504 (20,450) 195,071 SEPTEMBER 28, 1996 Allowance for doubtful accounts . . . . . . . . . 14,079 10,276(a) (9,875)(b) 14,480 Valuation allowance on deferred tax asset (c) . . . 201,255 19,827 (17,065) 204,017 - -------------------------------------------------------------------------------------------------------------------------- (a) Charged to costs and expenses. (b) Accounts deemed uncollectable. (c) SFAS 109 "Accounting for Income Taxes" adopted September 26, 1993.
EXHIBITS Index to Exhibits. 3. (a) Restated Certificate of Incorporation of the Company, as amended, including the Company's Certificate of Designation dated October 17, 1986, previously filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1986, which is incorporated herein by reference. (b) Amendment to Certificate of Incorporation of the Company, filed January 29, 1987, previously filed as Exhibit 3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1987, which is incorporated herein by reference. (c) By-Laws of the Company, as amended, previously filed as Exhibit 3(c) to 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. (a) Rights Agreement Renewed and Restated as of October 19, 1996 between the Company and The Bank of New York, as Rights Agent, previously filed on June 27, 1996, as Exhibit 1 to the Company's Amendment to Registration Statement on Form 8-A/A, which is incorporated herein by reference. (b) Indenture, dated as of May 21, 1997, between the Company and The Bank of New York, previously filed as Exhibit 4(d) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997, which is incorporated herein by reference. (c) Registration Rights Agreement dated as of May 15, 1997, between and among the Company and Morgan Stanley and Co. Incorporated and Dillon, Read & Co. Inc. previously filed as Exhibit 4(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 28, 1997, which is incorporated herein by reference. (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. (a) Restricted Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 33-19759, which is incorporated herein by reference. (b) Forms of Restricted Stock Option Agreement, previously filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1990, which is incorporated herein by reference. (c) Form of Amendment to Restricted Stock Option Agreement, previously filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 25, 1988, which is incorporated herein by reference. (d) Form of Amendments to Key Executive Restricted Stock Option Agreements, previously filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (e) Form of Amended and Restated Restricted Stock Option Agreement, between the Company and Ronald L. Skates, previously filed as Exhibit 10(f) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (f) Form of Amendment to Restricted Stock Option Agreements, between the Company and Frederick R. Adler, previously filed as Exhibit 10(g) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (g) Amendment to Restricted and Employee Incentive Stock Option Agreements, between the Company and Ronald L. Skates, dated November 14, 1988, previously filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1988, which is incorporated herein by reference. (h) Forms of Incentive Stock Option Agreement, previously filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 26, 1987, which is incorporated herein by reference. (i) Form of Amendment to Employee Incentive Stock Option Agreement, previously filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended June 25, 1988, which is incorporated herein by reference. (j) Form of Amended and Restated Employee Stock Option Agreement, between the Company and Ronald L. Skates, previously filed as Exhibit 10(e) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (k) Form of Amendments to Key Executive Stock Option Agreements, previously filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (l) Non-Employee Director Restricted Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 2-91481, which is incorporated herein by reference. (m) Form of Non-Employee Director Restricted Stock Option Agreement, previously filed as Exhibit 10(n) to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1990, which is incorporated herein by reference. (n) Form of Employment Agreements between the Company and its full-time officers, previously filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the quarter ended March 25, 1989, which is incorporated herein by reference. (o) Form of Amendment dated September 1, 1993, to various Employment Agreements between the Company and its full-time officers, previously filed as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal year ended September 25, 1993, which is incorporated herein by reference. (p) Form of Amendment dated November 5, 1997 to various Employment Agreements between the Company and its full-time officers, previously filed as Exhibit 10(mm) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (q) Form of Indemnity Agreement between the Company and its officers and directors, previously filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 28, 1987, which is incorporated herein by reference. (r) Form of Amendment dated November 5, 1997 to various Indemnity Agreements between the Company and its officers and directors, previously filed as Exhibit 10(ll) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (s) Data General Corporation Supplemental Retirement Benefit Plan dated as of October 1, 1989, between the Company and its highly compensated employees, previously filed as Exhibit 10(x) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, which is incorporated herein by reference. (t) Form of Supplemental Pension and Retiree Medical Agreement dated as of December 7, 1994, between the Company and its current President and Chief Executive Officer, previously filed as Exhibit 10(y) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, which is incorporated herein by reference. (u) 1994 Non-Employee Director Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 33-53039, which is incorporated herein by reference. (v) Form of 1994 Non-Employee Director Stock Option Agreement, previously filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the fiscal year ended September 24, 1994, which is incorporated herein by reference. (w) Employee Qualified Stock Purchase Plan, previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration Number 333-31159, which is incorporated herein by reference. (x) Employee Stock Option Plan, Appendix A to the prospectus included in the Company's Registration Statement on Form S-8, Registration Number 33-58237, which is incorporated herein by reference. (y) Summary of 1998 Fiscal Year Bonus Opportunity for Chief Executive Officer, previously filed as Exhibit 10(jj) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (z) Summary of Retention Bonus for Chief Executive Officer, previously filed as Exhibit 10(kk) to the Company's Quarterly Report on Form 10-Q for the quarter ended December 27, 1997, which is incorporated herein by reference. (aa) Stock Compensation Plan for Non-Employee Directors, previously filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration Number 333-31159, which is incorporated herein by reference. (bb) Credit Agreement dated September 30, 1997 between the Company and NationsBank of Texas, N.A., et al, previously filed as Exhibit 10(ee) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1997, which is incorporated herein by reference. (cc) 1997 Non-Officer Employee Stock Option Plan, previously filed as Exhibit 10(ff) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1997, which is incorporated herein by reference. (dd) Form of 1997 Non-Officer Employee Stock Option Agreement, previously filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1997, which is incorporated herein by reference. (ee) Amendment No. 1 to Credit Agreement dated as of January 28, 1998, amending the Credit Agreement between the Company and NationsBank of Texas, N.A., et al. (ff) Amendment No. 2 to Credit Agreement dated as of August 28, 1998, amending the Credit Agreement between the Company and NationsBank of Texas, N.A., et al. (gg) Deferred Compensation Plan dated January 1, 1998, previously filed as Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration Number 333-45153, which is incorporated herein by reference. (hh) 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. (ii) Grant of Common Stock to Non-Employee Directors dated November 5, 1997, previously filed as Exhibit 4.2 to the Company's Registration Statement on Form S-8, Registration Number 333-45153, which is incorporated herein by reference. 11. Computation of basic and diluted earnings per share. 13. Annual report to stockholders for the fiscal year ended September 26, 1998, certain portions of which have been incorporated herein by reference. 21. Subsidiaries of the registrant. 23. Consent of independent accountants. Exhibits, other than those incorporated by reference, have been included in copies of this Report filed with the Securities and Exchange Commission. Stockholders of the Company will be provided with copies of these exhibits upon written request to the Company. EX-10 2 AMENDMENT NO. 1 TO CREDIT AGREEMENT EXHIBIT 10 (ee) THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT (this "Agreement") is made and entered into as of this 28th day of January, 1998 among: DATA GENERAL CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association, THE BANK OF NEW YORK, FLEET NATIONAL BANK, formerly known as Fleet Bank of Massachusetts, N.A, THE BANK OF NOVA SCOTIA, CREDIT LYONNAIS NEW YORK BRANCH and US TRUST (each individually, a "Lender" and collectively, the "Lenders"); and NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association, in its capacity as agent for the Lenders (in such capacity, the "Agent"); W I T N E S S E T H: WHEREAS, the Borrower, the Lenders and the Agent have entered into a Credit Agreement dated as of September 30, 1997, (the "Credit Agreement") pursuant to which the Lenders agreed to make a Revolving Credit Facility available to the Borrower; and WHEREAS, the Borrower has requested that the Credit Agreement be amended in the manner set forth herein and the Agent and the Lenders are willing to agree to such amendment; NOW, THEREFORE, in consideration of the mutual covenants and the fulfillment of the conditions set forth herein, the parties hereto do hereby agree as follows: 1. Definitions. Any capitalized terms used herein without definition shall have the meaning set forth in the Credit Agreement. 2. Amendment. Subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows: (a) Section 1.01 of the Credit Agreement is hereby amended by inserting therein the following new defined term in alphabetical position: "Stock Buyback Program" means the Data General Corporation Stock Buyback Program as approved by the Board of Directors of the Borrower from time to time; (b) Section 8.6 of the Credit Agreement is hereby amended by (i) deleting the word "and" at the end of clause (k) thereof, (ii) deleting the period at the end of clause (l) thereof and inserting "; and" in replacement thereof and (iii) by adding a new clause (m) thereto which shall read as follows: (m) repurchase shares of its own capital stock in one or more transactions on or prior to January 28, 1999 pursuant to the Stock Buyback Program for an aggregate purchase price of up to $60,000,000. (c) Section 8.8 of the Credit Agreement is hereby deleted in its entirety and the following new Section 8.8 is inserted in replacement thereof: 8.8 Restricted Payments. Neither the Borrower nor any Subsidiary shall make any Restricted Payment or apply or set apart any of their assets therefor or agree to do any of the foregoing, provided, however, the Borrower may repurchase shares of its own capital stock in one or more transactions on or prior January 28, 1999 pursuant to the Stock Buyback Program for an aggregate purchase price of up to $60,000,000; 3. Effectiveness. This Agreement shall become effective as of the date hereof upon receipt by the Agent of seven fully executed copies of this Agreement (which may be signed in counterparts). 4. Representations and Warranties. In order to induce the Agent and the Lender to enter into this Agreement, the Borrower represents and warrants to the Agent and the Lenders as follows: (a) The representations and warranties made by Borrower in Article V of the Credit Agreement are true and correct on and as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date and except that the financial statements referred to in Section 6.6(a) of the Credit Agreement shall be deemed to be those financial statements most recently delivered to the Agent and the Lenders pursuant to Section 7.1 of the Credit Agreement; (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole, since the date of the most recent financial reports of the Borrower received by the Agent and the Lenders under Section 7.1(a) of the Credit Agreement, other than changes in the ordinary course of business; (c) The business and properties of the Borrower and its Subsidiaries, taken as a whole, are not, and since the date of the most recent financial report of the Borrower and its Subsidiaries received by the Agent and the Lenders under Section 7.1(a) of the Credit Agreement, have not been, adversely affected in any substantial way as the result of any fire, explosion, earthquake, accident, strike, lockout, combination of workers, flood, embargo, riot, activities of armed forces, war or acts of God or the public enemy, or cancellation or loss of any major contracts; and (d) No event has occurred and is continuing which constitutes, and no condition exists which upon the consummation of the transaction contemplated hereby would constitute, a Default or an Event of Default on the part of the Borrower under the Credit Agreement. 5. Entire Agreement. This Agreement sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relative to such subject matter. 6. Full Force and Effect of Agreement. Except as hereby specifically amended, modified or supplemented, the Credit Agreement and all other Letter of Credit Documents are hereby confirmed and ratified in all respects and shall remain in full force and effect according to their respective terms. 7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. 8. Governing Law. This Agreement shall in all respects be governed by the laws and judicial decisions of the State of New York. 9. Enforceability. Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable as to one or more of the parties hereto, all other provisions nevertheless shall remain effective and binding on the parties hereto. 10. Credit Agreement. All references in any of the Letter of Credit Documents to the Credit Agreement shall mean the Credit Agreement as amended hereby. [Signature page follows.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. BORROWER: DATA GENERAL CORPORATION By: s/ Robert C. McBride Name: Robert C. McBride Title: VP/Treasurer AGENT: NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, as Agent for the Lenders By: /s/ Timothy M. O'Connor Name: Timothy M. O'Connor Title: Vice President LENDERS: NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION By /s/ Timothy M. O'Connor Name: Timothy M. O'Connor Title: Vice President THE BANK OF NEW YORK By: /s/ Walter C. Parelli Name: Walter C. Parelli Title: Vice President FLEET NATIONAL BANK By: /s/ Thomas W. Davies Name: Thomas W. Davies Title: SVP THE BANK OF NOVA SCOTIA By: /s/ T. M. Pitcher Name: T. M. Pitcher Title: Authorized Signatory CREDIT LYONNAIS NEW YORK BRANCH By: /s/ Vladimir Labun Name: Vladimir Labun Title: First Vice President-Manager US TRUST By: /s/ Anthony Wilson Name: Anthony Wilson Title: SVP EX-10 3 AMENDMENT NO. 2 TO CREDIT AGREEMENT EXHIBIT 10 (ff) THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "Agreement") is made and entered into as of this 28th day of August, 1998 among: DATA GENERAL CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK, NATIONAL ASSOCIATION, a national banking association formerly known as NationsBank of Texas, National Association, THE BANK OF NEW YORK, and FLEET NATIONAL BANK, formerly known as Fleet Bank of Massachusetts, N.A, (each individually, a "Lender" and collectively, the "Lenders"); and NATIONSBANK, NATIONAL ASSOCIATION, a national banking association formerly known as NationsBank of Texas, National Association, in its capacity as agent for the Lenders (in such capacity, the "Agent"); W I T N E S S E T H: WHEREAS, the Borrower, the Lenders and the Agent have entered into a Credit Agreement dated as of September 30, 1997, as amended pursuant to that certain Amendment No. 1 to Credit Agreement dated as of January 28, 1998 (as amended and from time to time hereafter amended, restated, modified, supplemented, replaced or amended and restated, the "Credit Agreement"), pursuant to which the Lenders agreed to make a Revolving Credit Facility available to the Borrower; and WHEREAS, the Borrower has requested that the Credit Agreement be amended in the manner set forth herein and the Agent and the Lenders are willing to agree to such amendment, effective immediately after the effectiveness of the Assignment and Acceptances of even date herewith by and between each of the Lenders and certain other financial institutions; NOW, THEREFORE, in consideration of the mutual covenants and the fulfillment of the conditions set forth herein, the parties hereto do hereby agree as follows: 1. Definitions. Any capitalized terms used herein without definition shall have the meaning set forth in the Credit Agreement. 2. Amendment. Subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by deleting in its entirety the definition of "Applicable Margin" and inserting in lieu thereof the following: "Applicable Margin" means that percent per annum set forth below, which shall be based upon the Consolidated Leverage Ratio for the Four-Quarter Period most recently ended as specified below: Applicable Margin Consolidated Eurodollar Rate and Leverage Ratio Letter of Credit Fee Base Rate Commitment Fee - -------------- -------------------- --------- ---------- (a)Less than .75 to 1.00 0.875% 0% .250% (b)Less than 1.50 to 1.00 but greater than or equal to .75 to 1.00 1.1250% 0% .350% (c)Less than 2.25 to 1.00 but greater than or equal to 1.50 to 1.00 1.250% 0% .375% (d)Less than 2.75 to 1.00 but greater than or equal to 2.25 to 1.00 1.375% .250% .500% (e)Greater than or equal to 2.75 to 1.00 1.500% .250% .625% The Applicable Margin shall be established at the end of each fiscal quarter of the Borrower (each, a "Determination Date"). Any change in the Applicable Margin following each Determination Date shall be determined based upon the computations set forth in the certificate furnished to the Agent pursuant to Section 7.1(a)(ii) and Section 7.1(b)(ii) hereof, subject to review and approval of such computations by the Agent, and shall be effective commencing on the date such certificate is received until the date on which a new certificate is delivered; provided however, if the Borrower shall fail to deliver any such certificate within the time period required by Section 7.1 hereof, then the Applicable Margin shall be 1.500% for Eurodollar Rate Loans and the fee for Letters of Credit under Section 4.3 hereof, .250% for Base Rate Loans and .625% for the Commitment Fee, in each case, from the date such certificate was required to be delivered, until the appropriate certificate is so delivered. Further, notwithstanding the foregoing, the Applicable Margin shall be 1.375% for Eurodollar Rate Loans and the fee for Letters of Credit, 0.250% for Base Rate Loans and 0.500% for the Commitment Fee from the Closing Date until the earlier of (i) the date on which the certificate for the period ending June 30, 1999 is delivered or (ii) a certificate is furnished to the Agent that demonstrates a Consolidated Leverage Ratio of not more than 2.25 to 1.00. For purposes of this definition of "Applicable Margin" only, the Consolidated Leverage Ratio shall be calculated without consideration of the final proviso of the definition of "Consolidated EBITDA" relating to the $135,000,000 worldwide restructuring charge taken by the Borrower in its third fiscal quarter of 1998. (b) Section 1.1 of the Credit Agreement is hereby amended by deleting in its entirety the definition of "Consolidated EBITDA" and inserting in lieu thereof the following: "Consolidated EBITDA" means, with respect to the Borrower and its Subsidiaries for any Four-Quarter Period ending on the date of computation thereof, the sum of, without duplication, (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) taxes on income, (iv) amortization, and (v) depreciation, all determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis; provided, however, that for each of the first four fiscal quarters following any Acquisition, the calculation of Consolidated EBITDA for each Four-Quarter Period ending on the last day of each such fiscal quarter shall include the historical financial performance of the acquired business for that portion of such Four-Quarter Period occurring prior to such Acquisition; and provided further, however, that solely for purposes of calculating Consolidated EBITDA for any Four-Quarter Period which includes the Borrower's third fiscal quarter of 1998, the Borrower shall include in the definition of Consolidated Net Income in clause (i) above that portion of the $135,000,000 worldwide restructuring charge against earnings taken by the Borrower during the third fiscal quarter of 1998 that does not constitute Consolidated Interest Expense, taxes on income, depreciation or amortization in clauses (ii) through (v) above. (c) Section 1.1 of the Credit Agreement is hereby amended by deleting in its entirety the definition of "Consolidated Fixed Charge Ratio" and inserting in lieu thereof the following: "Consolidated Fixed Charge Ratio" means, with respect to the Borrower and its Subsidiaries for any Four-Quarter Period ending on the date of computation thereof, the ratio of (i) Consolidated EBITDA plus Consolidated Lease Expense for such period, to (ii) Consolidated Fixed Charges for such period. (d) Section 1.1 of the Credit Agreement is hereby amended by inserting in the proper alphabetical order the following definition of "Consolidated Lease Expense": "Consolidated Lease Expense" means, with respect to any period of computation thereof, the gross expense related to or arising out of the leases of the Borrower and its Subsidiaries for such period, whether or not characterized as rent, excluding expenses in respect of Capital Leases constituting Indebtedness, all determined on a consolidated basis in accordance with GAAP applied on a Consistent Basis. (e) Section 1.1 of the Credit Agreement is hereby amended by deleting in its entirety the definition of "Total Revolving Credit Commitment" and inserting in lieu thereof the following: "Total Revolving Credit Commitment" means a principal amount equal to $45,000,000, as reduced from time to time in accordance with Section 2.7 hereof. (f) Section 8.1(a) of the Credit Agreement is hereby deleted in its entirety and the following new Section 8.1(a) is inserted in replacement thereof: (a)Consolidated Leverage Ratio. Permit at any time during any Four-Quarter Period of the Borrower, the Consolidated Leverage Ratio to be greater than 3.00 to 1.00. (g) Section 8.1(b) of the Credit Agreement is hereby deleted in its entirety and the following new Section 8.1(b) is inserted in replacement thereof: (b)Consolidated Fixed Charge Ratio. Permit at any time during any Four-Quarter Period of the Borrower the Consolidated Fixed Charge Ratio to be less than 2.25 to 1.00. (h)Section 8.1 of the Credit Agreement is hereby amended by inserting the following new Section 8.1(e): (e) Consolidated Cash and Eligible Securities. Permit at any time the sum of cash and Eligible Securities of the Borrower and its Subsidiaries on a consolidated basis to be less than the sum of (i) Letter of Credit Outstandings, (ii) Revolving Credit Outstandings and (iii) $30,000,000.00. 3. Representations and Warranties. In order to induce the Agent and the Lender to enter into this Agreement, the Borrower represents and warrants to the Agent and the Lenders as follows: (a) The representations and warranties made by Borrower in Article VI of the Credit Agreement are true and correct on and as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date and except that the financial statements referred to in Section 6.6(a) of the Credit Agreement shall be deemed to be those financial statements most recently delivered to the Agent and the Lenders pursuant to Section 7.1 of the Credit Agreement; (b) There has been no material adverse change in the condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole, since the date of the most recent financial reports of the Borrower received by the Agent and the Lenders under Section 7.1(a) of the Credit Agreement, other than changes in the ordinary course of business; (c) The business and properties of the Borrower and its Subsidiaries, taken as a whole, are not, and since the date of the most recent financial report of the Borrower and its Subsidiaries received by the Agent and the Lenders under Section 7.1(a) of the Credit Agreement, have not been, adversely affected in any substantial way as the result of any fire, explosion, earthquake, accident, strike, lockout, combination of workers, flood, embargo, riot, activities of armed forces, war or acts of God or the public enemy, or cancellation or loss of any major contracts; and (d) No event has occurred and is continuing which constitutes, and no condition exists which upon the consummation of the transaction contemplated hereby would constitute, a Default or an Event of Default on the part of the Borrower under the Credit Agreement. 4. Conditions To Close. The effectiveness of this Amendment Agreement is subject to the following: (a) The Agent shall have received seven (7) counterparts of this Amendment Agreement complete with all addenda and duly executed by all signatories hereto; and (b) The Lenders shall have each received payment of a fee equal to 0.05% of the Total Revolving Credit Commitment, after giving effectiveness to this Amendment Agreement. 5. Entire Agreement. This Agreement sets forth the entire understanding and agreement of the parties hereto in relation to the subject matter hereof and supersedes any prior negotiations and agreements among the parties relative to such subject matter. 6. Full Force and Effect of Agreement. Except as hereby specifically amended, modified or supplemented, the Credit Agreement and all other Letter of Credit Documents are hereby confirmed and ratified in all respects and shall remain in full force and effect according to their respective terms. 7. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. 8. Governing Law. This Agreement shall in all respects be governed by the laws and judicial decisions of the State of New York. 9. Enforceability. Should any one or more of the provisions of this Agreement be determined to be illegal or unenforceable as to one or more of the parties hereto, all other provisions nevertheless shall remain effective and binding on the parties hereto. 10. Credit Agreement. All references in any of the Loan Documents to the Credit Agreement shall mean the Credit Agreement as amended hereby. [Signature page follows.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all as of the day and year first above written. BORROWER: DATA GENERAL CORPORATION By: /s/ Robert C. McBride Name: Robert C. McBride Title: Vice President; Treasurer AGENT: NATIONSBANK, NATIONAL ASSOCIATION, as Agent for the Lenders By: /s/ Yousuf Omar Name: Yousuf Omar Title: Senior Vice President LENDERS: NATIONSBANK, NATIONAL ASSOCIATION By: /s/ Yousuf Omar Name: Yousuf Omar Title: Senior Vice President THE BANK OF NEW YORK By: /s/ David C. Judge Name: David C. Judge Title: Senior Vice President FLEET NATIONAL BANK By: /s/ Scott D. Wheelock Name: Scott D. Wheelock Title: Vice President EX-11 4 FY98 EARNINGS PER SHARE EXHIBIT 11 DATA GENERAL CORPORATION COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (In thousands except per share amounts) Fiscal Year Ended ---------------------------------------------------------------------------- Sept. 26, Sept. 27, Sept. 28, Sept. 30, Sept. 24, 1998 1997 1996 1995 1994 -------------- -------------- ------------- ---------------- --------------- Basic earnings (loss) per share: Net income (loss) $ (152,395) $ 55,900 $ 28,145 $(46,703) $(87,693) =============== ============= ============= ================ ============= Weighted average shares outstanding 49,038 41,347 38,769 37,052 35,774 ============== ============== ============= =============== ============= Net income (loss) per share $ (3.11) $ 1.35 $ 0.73 $ (1.26) $ (2.45) =============== ============= ============= ================ ============= Diluted earnings (loss) per share: (a) Net income (loss) $ (152,395) $ 55,900 $28,145 $ (46,703) $(87,693) =============== ============= ============= ================ ============= Weighted average shares outstanding 49,038 41,347 38,769 37,052 35,774 Incremental shares from use of treasury stock method for stock options - 2,868 2,326 - - -------------- -------------- ------------- --------------- -------------- Common and common equivalent shares assuming full dilution, where applicable 49,038 44,215 41,095 37,052 35,774 ============== ============== ============= =============== ============== Net income (loss) per share $ (3.11) $ 1.26 $ 0.68 $ (1.26) $ (2.45) =============== ============= ============= ================ ============= - --------------------------------------------------------------------------------------------------------------------------- (a) For the years ended September 26, 1998, September 27, 1997, September 28, 1996, September 30, 1995, and September 24, 1994, 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 years ended September 26, 1998, September 30, 1995, September 24, 1994, the assumed exercise of stock options, giving effect to the incremental shares, results in anti-dilution and has been excluded from the computation.
EX-13 5 FY98 ANNUAL REPORT EXHIBIT 13 Data General Corporation 1998 Annual Report Delivering storage and high-end computing solutions www.dg.com www.clariion.com Data General was built on technology leadership and innovation. Our objective is to be a leader in delivering open server and storage solutions through multiple distribution channels and strategic alliances. We provide superior customer service and support. We have shipped more than 500,000 computers and 75,000 storage subsystems worldwide. Highlights of the past year AViiON Enterprise Server Division o Consolidated all AViiON(R) sales, marketing, product development, and professional services into a single organization focused on enterprise solutions o Achieved market share leadership in systems running Microsoft(R) Windows NT(R) Server priced between $100,000 and $1,000,000, according to 1997 revenue figures from International Data Corporation o Established, in conjunction with Microsoft Corporation, the first Healthcare Competency Center to provide technology labs for testing interoperability of applications that conform to ActiveX for Healthcare standards o Introduced NTerprise Total Care services, featuring OMNiiCARE(SM), a 99.9 percent uptime guarantee for businesses running Microsoft Windows NT Server as their enterprise operating system on AViiON systems, and extended this guarantee to SQL Server 7.0, an industry first o Continued to expand our AViiON family of high-availability "In-a-Box" solutions for Windows NT with new systems based on Intel(R) Pentium(R) II Xeon(R) processors o Strengthened the AViiON NUMA (Non-Uniform Memory Access) family with shipments of the AV 25000; unveiled AVFlex(TM) services that enable customers to partition an AV 25000 server into multiple systems running the DG/UX(R) operating system as well as Microsoft Windows NT Server CLARiiON Advanced Storage Division o Reached new milestones with more than 75,000 disk arrays and five Petabytes (equivalent to two trillion typed pages) of RAID-protected storage shipped; listed as the year's top OEM RAID supplier in revenues by Gartner Group's Dataquest o Became the first major storage vendor to ship full Fibre Channel disk arrays, a revolutionary family of storage subsystems that provides significantly greater performance, scalability, and flexibility than prior generation products o Announced a strategic worldwide OEM agreement with Dell Computer Corporation to deliver enterprise storage products based on Data General's proven CLARiiON(R) Fibre Channel RAID technology o Introduced Navisphere(R), the industry's most advanced enterprise storage management software, which allows system administrators to manage their storage installations from a single management platform located anywhere in the world o Announced, with 3Com Corporation, the formation of a cross-industry alliance to deliver Fibre Channel Storage Area Network (SAN) solutions for Windows NT server platforms o Began expansion of the sales and marketing force and transferred more than 100 engineers to CLARiiON to take advantage of storage market growth opportunities The CLARiiON division of Data General was the first major storage vendor to ship full Fibre Channel subsystems. 1 To Our Stockholders, Customers, and Employees: Throughout the 1990s, Data General has been building its capabilities to deliver storage and high-end computing solutions. High-performance AViiON servers have enabled Data General to achieve market-share leadership in healthcare information systems technology and in segments of the fast-growing market for solutions based on the Microsoft Windows NT Server operating system. AViiON NUMA servers have enabled Data General to maintain momentum in the UNIX market. Our advanced CLARiiON storage systems have made Data General the leader in the OEM segment of the disk storage market. Fiscal 1998 was a transitional year for Data General, following two years of solid growth and profitability. After ten consecutive quarters of profitability extending into the first quarter of this fiscal year, our financial results were affected at mid-year by a delay in the transition from SCSI to Fibre Channel technology in the storage business. We, nonetheless, made significant progress by focusing additional resources on high-growth opportunities in key market segments and by restructuring operations to achieve greater efficiency. These actions helped us to return to profitability in the fourth quarter. For the full 1998 fiscal year, Data General reported a net loss of $152 million or $3.11 per share on revenues of $1.5 billion. The 1998 results include a charge of $135 million, or $2.76 per share related to the mid-year corporate restructuring. For fiscal 1997, the company reported net income of $56 million, or $1.26 per share on a diluted basis on revenues of $1.5 billion. As part of the June restructuring, we transferred approximately 100 people to the CLARiiON Advanced Storage Division where additional resources were deployed to capitalize on the growth opportunities for Fibre Channel storage. In our AViiON Enterprise Server Division, we consolidated sales, marketing, development, and professional services to more efficiently meet our customers' needs for comprehensive solutions. Our manufacturing, services, and administrative operations were also streamlined. Overall, the restructuring resulted in a net reduction in force of approximately 400 people, the consolidation of certain facilities, and the write-off of non-strategic assets. As a result of this restructuring, we expect net annual savings in the range of $40 to $45 million. 2 AViiON Business Our objective in the AViiON Enterprise Server Division is to deliver high-end computing solutions based on industry-leading Intel processor-based servers, storage, and services. We focus on the enterprise level of the Microsoft Windows NT Server market and high-end UNIX solutions using our NUMA technology. We have a strong vertical market focus in healthcare and a vertical sales focus, in conjunction with software partners, in several other markets, including financial services, telecommunications, retail/distribution, and government. We are increasingly using a "consultative selling" approach to ensure that we meet our customers' business needs with solutions emphasizing software and integration partners and the services we deliver as part of the sale, such as networking and implementation, as well as maintenance. Our Windows NT business grew nearly 65 percent in fiscal 1998 -- twice the industry Windows NT growth rate -- and now represents nearly two-thirds of our Intel processor-based AViiON revenues. Data General is the worldwide market-share leader in midrange systems running Microsoft Windows NT Server priced between $100,000 and $1,000,000, according to the latest revenue figures from International Data Corporation. Data General provides innovative "In-a-Box" Windows NT configurations that include two AViiON servers, a highly available CLARiiON RAID storage system, and our NTerprise Manager(TM) server management software, all in a single rack-mounted system that is pre-loaded and pre-tested with the customer's software. Our "In-a-Box" system packaging has received strong customer acceptance and industry accolades. Part of our customers' attraction to Microsoft Windows NT Server is that it is an established operating system standard that enables systems vendors like Data General to add value in services, systems packaging, high availability, and other areas. There is no standard for the UNIX operating system. While several recent attempts by industry consortiums hold the promise of delivering a UNIX standard in the next few years, many versions of UNIX exist today, including our sophisticated DG/UX implementation. We have added new features and enhancements to DG/UX to increase the performance and functionality of our solutions. High-end NUMA-based AViiON servers drive the majority of our UNIX revenues. Our NUMA-based servers provide high performance and scalability for UNIX applications, including on-line transaction processing, enterprise resource planning, data warehousing, server consolidation, and mainframe migration. At fiscal year-end, we further strengthened the AViiON NUMA family with shipments of the AV 25000 -- a new generation of high-end servers which supports up to 64 Intel Pentium II Xeon processors. We also unveiled the AVFlex architecture that includes services and products that allow customers to partition an AV 25000 server into multiple independent DG/UX and Windows NT Server systems. Our worldwide AViiON customer base now includes: more than 30 percent of the hospitals in the United States, including Columbia/HCA, the largest healthcare operation in the U.S.; Bloomberg Financial Markets, one of the fastest-growing suppliers of financial data; Canadian-based Creo Products Inc., the world's leading supplier of computer-to-plate solutions for the graphic arts industry; European-based Baan, one of the market leaders in enterprise-wide software applications, which chose AViiON servers and CLARiiON storage for its European Demo Centre; more than one thousand retail firms including, Jordan's Furniture, a trendsetter in the marketing of retail home furnishings in the U.S.; many of the world's largest petrochemical firms; and departments of numerous national and local governments around the world. 3 CLARiiON Business Since 1992 when Data General created a business unit to focus on OEM opportunities in the storage market, the CLARiiON product line has grown by taking advantage of the latest developments in storage systems technology. Over the past year, we have been transitioning from SCSI-based storage to a new generation of CLARiiON systems based on end-to-end Fibre Channel technology (full fibre connect to full fibre disks). CLARiiON revenues decreased in fiscal 1998 during the transition, but by year-end, total CLARiiON revenues were increasing quarter to quarter, and full Fibre Channel based systems represented over 40 percent of our storage business. Data General was the first major vendor to ship full end-to-end Fibre Channel storage systems. Our goal is to be the Fibre Channel storage vendor of choice in the open systems market. We believe Fibre Channel will become the dominant technology for disk array subsystems for the foreseeable future, and that it is a requisite for implementation of Storage Area Networks (SANs). SANs, which allow users the flexibility to choose best-of-breed storage to attach to their servers, are predicted by industry analysts to be a $5.5 billion market by 2001. We believe that our early lead in this technology provides us a meaningful opportunity to play a significant role in the growth of SANs. Data General's Fibre Channel technology received a significant endorsement when Dell Computer Corporation, the industry's fastest-growing server company, unveiled its high-end enterprise storage system this past summer. The PowerVault 650F, the first in Dell's family of server-attached storage systems, is based on CLARiiON Fibre Channel technology. We will increase our investment in CLARiiON during fiscal 1999, primarily through the hiring of additional research and development and sales and marketing professionals. Part of this investment will allow us to expand our channel coverage beyond the OEM market to include support of new and existing resellers as well as the implementation of a direct sales operation. While the increased investment will impact growth in near-term profitability, we believe that investing in CLARiiON is imperative if we are to take full advantage of the market opportunity before us. The worldwide CLARiiON installed base continues to grow, with more than 75,000 disk array subsystems and five Petabytes of RAID-protected storage shipped. CLARiiON SCSI and Fibre Channel storage solutions are supported on leading open systems platforms, including Hewlett-Packard, IBM AIX, Microsoft Windows NT, and Sun Microsystems. CLARiiON is supported through OEM agreements with companies such as ASC, Avid Technologies, Bull, Data General AViiON, DELL, Hewlett-Packard, ICL, NEC, Samsung, Sequent, Silicon Graphics, Tektronix, and others. CLARiiON storage is also sold around the world by value-added storage resellers such as Storage Technology, Omron in Japan, and BIC Electronics, which serves Tecnologica Informatica in Brazil and other distributors in Latin America. 4 Outlook We believe that we have the people, products, services, and strategy to succeed in the enterprise market. We are also well financed to pursue our growth strategy, with cash and marketable securities of $319 million and total capitalization of nearly $600 million at the end of fiscal 1998. Our AViiON enterprise server business should benefit from continued strong growth in the Microsoft Windows NT Server market and from our ability to leverage AViiON NUMA servers. Our CLARiiON storage business should benefit from increasing market acceptance of Fibre Channel technology where we are the only major storage vendor currently shipping full fibre RAID disk arrays. We are the leader in this advanced technology, which many industry analysts believe will soon become the dominant storage architecture. The growth opportunity that we see for the next several years with our full Fibre Channel CLARiiON disk arrays may be the best since we launched the product family in the early 1990s. Going forward, we believe we are well positioned for continued growth and profitability. Respectfully submitted, Ronald L. Skates President and Chief Executive Officer December 16, 1998 5 Data General AViiON servers and CLARiiON storage are at the heart of many critical applications at some of the world's largest petrochemical firms. 6 Meeting Customer Needs for Solutions Technology excellence and innovation have been the sustaining factors in Data General's growth since the company's founding in 1968. Technology continues to be at the core of our strategy to deliver industry-leading open servers and storage products, and provide our customers with complete business solutions and premier services. Over the past several years, Data General has taken a number of steps to deliver the type of solutions our customers need and to provide the company with new growth opportunities. These include: o Adopting the Intel architecture, the world's leading computer platform, in our AViiON server family to ensure that our customers have access to the broadest range of software applications and solutions o Pioneering Fibre Channel technology for CLARiiON storage, and being the first to deliver full Fibre Channel disk arrays o Focusing on high-availability and clustering technologies which enable AViiON servers and CLARiiON storage to run mission-critical applications o Developing highly scalable servers based on the NUMA architecture, which opens new opportunities such as data warehousing and server consolidation o Pioneering the pre-loaded, pre-tested "In-a-Box" system packaging for the Microsoft Windows NT Server market, which expedites implementation and minimizes deployment risk o Expanding the market for our CLARiiON storage products by establishing strong OEM and reseller alliances o Continuing our focus on UNIX while dedicating new resources to Microsoft Windows NT Server, the fastest-growing operating system o Supporting UNIX and Windows NT server strategies with premier services, including networking, data warehousing, integration, migration, installation, and life-cycle support o Helping customers better utilize their computing assets by becoming a Microsoft Authorized Support Center, Microsoft Authorized Technical Education Center, and SCO Authorized Support Center o Providing complete business solutions by strengthening strategic partnerships with Microsoft, other leading suppliers of databases and applications, major vendors of enterprise resource planning (ERP), and other applications o Delivering the industry's first uptime guarantee for the Microsoft Windows NT Server operating system and Microsoft SQL Server 7.0 database o Extending our manufacturing expertise to third parties through VALiiANT(R) contract manufacturing and design services, and REPAIRiiON(SM) product repair and logistics services, businesses which take advantage of our ISO 9000-certified operations o Using the World Wide Web to expand Data General's market presence through our www.dg.com and www.clariion.com web sites, which include e-commerce product ordering features 7 Among Data General's AViiON customers, are over 30 percent of the hospitals in the United States. These critical operations count on the unparalleled performance, security, and high availability of AViiON enterprise servers. 8 AViiON Solutions Delivering high-end computing solutions begins with understanding each customer's unique business problem; then, assembling the hardware platform, software partners, services, and system integration to implement and deploy the solution. Accomplishing this requires Data General to provide an ever-changing variety of services, systems, and software from a wide range of sources, both internal and external. Services Data General's portfolio of services covers the spectrum of customer needs, including consulting, implementation, integration, networking, migration, and training, as well as 24-hour-a-day, 7-day-a-week, life-cycle support. We provide our customers with significant value through our services. One example is our NTerprise Total Care services, featuring a 99.9 percent uptime guarantee for businesses running Microsoft Windows NT Server as their enterprise operating system on AViiON systems. We are also the first company to make this guarantee available for Microsoft SQL Server 7.0 users. Our Business Practices services are focused on Windows NT solutions, database and data warehousing, and migrations, essential areas in which customers benefit from our in-depth expertise and comprehensive service offerings. To ensure that mission-critical and general-purpose business applications function smoothly across the enterprise, we provide packaged Professional Services to help customers implement, integrate, and manage their system solutions quickly and easily. Our Open Systems Training business provides lecture/lab courses, on-site training, and computer- and video-based training for many mission-critical components, including the operating system, network, database, off-the-shelf applications, and custom programs. In addition, our Open Systems Training organization is a Microsoft Authorized Technical Education Center and offers the Microsoft Certified Professional Program, which certifies a computer professional's ability to design, develop, implement, and support solutions with Microsoft products. In fiscal 1998, Data General continued to expand its family of "In-a-Box" system packaging with TermServer-in-a-Box and Exchange-in-a-Box and new systems based on the latest technologies including Intel Pentium II Xeon processors. 9 Systems Data General's AViiON family uses the power of the Intel architecture to provide customers with a broad and scalable family of high-performance systems ranging from departmental servers to enterprise systems. AViiON servers feature comprehensive security, reliability, high availability, and serviceability. AViiON servers provide an excellent platform for deploying business solutions. Operating systems supported on AViiON servers include Microsoft Windows NT Server; Data General's own DG/UX, one of the most technically advanced UNIX operating systems on the market; and Citrix WinFrame/Enterprise Server. Our top-of-the-line AV 25000 servers, with support for up to 64 processors, are based on NUMA technology. NUMA technology redefines price/performance levels and extends the capabilities of symmetric multiprocessing (SMP) systems, without requiring modifications to existing SMP applications. AVFlex, based on the AV 25000 server, is a comprehensive set of services and products that eases long-range IT planning with cost-effective system growth and the ability to adapt to changing business or application conditions. Data General's clustering solutions for Microsoft Windows NT Server and DG/UX provide reliability, high availability and data protection for critical applications. Introduced in 1997, AViiON NT Cluster-in-a-Box(R) was the industry's first Microsoft Windows NT Server clustering solution in a pre-installed, pre-tested, single rack-mounted system. Cluster-in-a-Box combines two powerful AViiON Windows NT servers with NTerprise Manager server-management software, NTAlert(SM)automatic diagnostics, a CLARiiON disk array, and Microsoft Cluster Server clustering software. In fiscal 1998, we continued to expand our family of "In-a-Box" system packaging with TermServer-in-a-Box(TM) and Exchange-in-a-Box(TM) and new systems based on the latest technologies including Intel Pentium II Xeon processors. The AViiON servers that are used in our In-a-Box configurations are also available as stand-alone servers for thousands of Windows NT and UNIX applications. Our UNIX clustering solution -- DG/UX Cluster(TM) -- includes two or more AViiON servers, a full Fibre Channel CLARiiON disk array, and a PC with cluster-management software. This year, Data General expanded clustering with Disaster Recovery Clusters, enabling customers to have widely dispersed back-up systems that keep businesses going even if their main data center is down. We also offer Failover Clusters and QuickClusters(TM), which provide customers with quick deployment and dedicated functionality in a single site. Introduced in 1997, AViiON NT Cluster-in-a-Box was the industry's first Microsoft Windows NT Server clustering solution in a pre-installed, pre-tested, single rack-mounted system. 10 With our AViiON servers, we offer the DG/ViiSION(R) family of personal computers, which includes desktop, minitower, and laptop products featuring Intel processors. For customers with special equipment or application requirements, our Special Systems team integrates third-party products into Data General systems and adapts standard Data General products to exact customer specifications. One example is our handheld computer family, which is designed for data collection environments in which long battery life, rugged design, and ease of use are critical features. Strategic Business Partners Data General works closely with leading software and integration services suppliers that understand specific customer problems and provide efficient, effective, and affordable computing solutions. Their complementary products and services add significant value to Data General's products, and allow us to bring complete business solutions to customers in diverse markets. Data General teams with a multitude of solutions suppliers to offer a portfolio of applications for a variety of industries and markets, including healthcare, manufacturing, distribution, financial services, telecommunications, and government. Delivering high-end computing solutions begins by understanding each customer's unique business problem; then, assembling the hardware platform, business partners, services, and system integration to implement and deploy the solution. 11 CLARiiON advanced storage systems provide the high availability and performance customers require for their most demanding applications in such areas as financial services and government. Used with permission of NYSE 12 CLARiiON Storage Solutions Our market-leading CLARiiON disk arrays are innovative, highly available storage subsystems based on RAID technology. Powerful, competitively priced, and compact, the CLARiiON family offers a wide range of storage systems, from disk arrays for servers on local area networks to high-capacity, high-availability arrays for enterprise servers with applications needing multiple Terabytes of storage. The CLARiiON family continues to grow by taking advantage of the latest developments in information systems technology. CLARiiON was the first to ship full Fibre Channel technology -- the next-generation serial interface. Industry analysts expect the Fibre Channel storage market to grow exponentially over the next few years. Staying ahead of the next storage trend, Data General CLARiiON, together with 3Com Corporation, announced the formation of a cross-industry alliance to deliver Fibre Channel Storage Area Network (SAN) solutions for Windows NT server platforms. The cross-industry alliance represents a commitment between CLARiiON, the leader in Fibre Channel storage technology, and 3Com, the leader in enterprise networking products, to work together to develop, qualify, and support total solutions for Storage Area Networks and we expect further penetration of the SAN market through new partnerships we will form in the coming year. From mainframes to two-processor servers, CLARiiON disk arrays provide the high availability and performance customers require for their most demanding applications. Redundant subsystems within the CLARiiON arrays -- drives, storage control processors, power supplies, and fans -- eliminate many single points of failure. In the event of a problem, on-line maintenance allows replacement or repair of the component while under power and fully operational. CLARiiON disk arrays allow concurrent multi-RAID configurations to maximize each application's performance. In addition, CLARiiON disk arrays offer an innovative mirrored cache feature that actually improves data integrity while dramatically improving performance. In 1998, CLARiiON introduced Navisphere, the industry's most advanced storage management software, which allows system administrators to manage their storage installations from a single management platform located anywhere in the world. This Navisphere capability is a requisite for the successful implementation of SANs. Multidimensional Storage Architecture(TM) (MSA) is the CLARiiON strategic framework for deploying open systems storage throughout an enterprise. MSA provides virtually unlimited flexibility to configure centrally managed storage pools through SANs that scale independently in five dimensions -- capacity, transaction performance, data throughput, connectivity, and availability of business information. 13 Services CLARiiON delivers expert technical support, warranty and material programs, training, and professional services to our customers around the world. These same services support our strategic partners, enabling them to provide a complete set of services to their end customers. As Storage Area Networks grow and become more distributed geographically, professional service providers increasingly must deliver sophisticated levels of support for these complex configurations. Tools to gather and analyze data more quickly and efficiently are required. CLARiiON offers a comprehensive collection of storage maintenance and diagnostic software, including CLARalert(R), an enterprise-wide, network-based service solution. CLARalert delivers early notification of service events and provides remote diagnostic capabilities, 24 hours a day, 7 days a week, 365 days a year. CLARiiON Service Powertools, packaged on a single CD-ROM, provides tools for support diagnostics, performance monitoring, event logging and notification, advanced scripting, disk array management, remote access, and serial port access. CLARiiON Service Powertools runs on an Windows NT platform, and delivers faster, more flexible service functionality, maximizing a support team's efficiency. Using Powertools results in more efficient disk array support, lower overall service costs, and higher user satisfaction. Business Partners CLARiiON disk arrays are installed in enterprises around the globe. Some of the world's leading server vendors and storage suppliers offer CLARiiON arrays in their products under their own labels. In addition to our growing direct sales operation, a variety of resellers and independent distributors offer our storage systems under the CLARiiON label. Each CLARiiON partner has its own unique set of benefits. For example, server vendors (OEMs) offer direct support for their host platforms, as well as the CLARiiON disk array connect, while private labelers offer multiple CPU support and service. Value-added Resellers offer industry expertise, enabling them to recommend the best CLARiiON storage solution that meets the application's needs. Our distributors have chosen CLARiiON as their high-availability storage solution of choice, as part of the set of diverse products and services that they sell. 14 Data General teams with a multitude of solutions suppliers to offer a portfolio of applications for a variety of industries, including distribution and manufacturing. 15 Customer Services and Manufacturing Data General's Customer Services and Manufacturing groups support our AViiON and CLARiiON businesses. Our worldwide Customer Service network is ready to provide our customers with service and support whenever and wherever they need it. With more than 200 U.S. field offices, 130 international service locations, three primary Customer Support Centers, and numerous secondary customer support organizations worldwide, our service is always available -- seven days a week, 24 hours a day. Whether a customer needs full on-site service from a knowledgeable engineer, on-line telephone support from our Customer Support Centers, or customized support services, we have a ready-to-go solution. As a Microsoft Authorized Support Center (ASC), the Data General Customer Support Center provides software support services for Microsoft Windows NT for Workstations and Windows NT Server, the full set of Microsoft desktop and BackOffice products, as well as hundreds of other software products. Data General is also a SCO Authorized Support Center, and has been certified to support SCO's operating system and client-integration products and customers in North America. Data General was the first major computer vendor in the industry to have its entire U.S. Service and Support Organization registered with the Underwriters Laboratories (UL) and certified to the ISO 9001 Standard. We also offer our manufacturing expertise to customers through our VALiiANT electronic manufacturing and design services business. With facilities in the U.S. and Asia, VALiiANT is a full-service supplier, offering design services for layout and metal fabrication, quick-turn prototype runs, volume manufacturing, and repair/engineering change services. Data General also recently formed the REPAIRiiON business unit to provide product repair and logistics services for companies worldwide. This unit provides a one-stop source for customized repair and logistics solutions for businesses that wish to offer their customers quality service and extend the life of their key products while reducing their costs. The company's manufacturing organization received two major awards in 1998. The Manufacturing Services operation received an "Excellence in Logistics" award from Transportation and Distribution Magazine, based on high marks in supply chain programs, inventory management, technology, strategic planning, and logistics activities. The company's Manila operations received the Philippine Quality Award. Based on Malcolm Baldridge award criteria, it is the highest form of national recognition accorded to organizations for outstanding quality performance in the Philippines. 16 Five-Year Summary of Selected Financial Data .................................18 Management's Discussion and Analysis of Financial Condition and Results of Operations ...................................................................19 Consolidated Statements of Operations ........................................27 Consolidated Balance Sheets ..................................................28 Consolidated Statements of Cash Flows ........................................29 Consolidated Statements of Stockholders' Equity ..............................30 Notes to Consolidated Financial Statements ...................................31 Report of Independent Accountants ............................................41 Supplemental Financial Information ...........................................41 Directors and Senior Management ..............................................42 Facilities ...................................................................42 Corporate Information ........................................................43 17 DATA GENERAL CORPORATION FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
YEAR ENDED ------------------------------------------------------------------- SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Total revenues $1,462,109 $1,533,169 $1,322,250 $1,159,316 $1,120,505 ---------- ---------- ---------- ---------- ---------- Total cost of revenues 1,071,491 1,021,569 877,692 772,047 733,114 Research and development 118,731 109,984 98,022 85,886 90,826 Selling, general, and administrative 338,108 338,443 309,259 334,337 341,343 Restructuring charge 82,400 - - 43,000 35,000 ------------- ------------- ------------ ------------ ------------ Total costs and expenses 1,610,730 1,469,996 1,284,973 1,235,270 1,200,283 ------------- ------------- ------------ ------------ ------------ Income (loss) from operations (148,621) 63,173 37,277 (75,954) (79,778) Interest expense, net 1,014 4,873 5,632 4,116 8,168 Other income, net 240 - - 41,972 2,353 ------------- ------------- ------------ ------------ ------------ Income (loss) before income taxes (149,395) 58,300 31,645 (38,098) (85,593) Income tax provision 3,000 2,400 3,500 8,605 2,100 ------------- ------------- ------------ ------------ ------------ Net income (loss) $(152,395) $ 55,900 $ 28,145 $ (46,703) $ (87,693) ============= ============= ============ ============ ============ Basic net income (loss) per share $(3.11) $1.35 $0.73 $(1.26) $(2.45) Diluted net income (loss) per share $(3.11) $1.26 $0.68 $(1.26) $(2.45) AS OF ---------------------------------------------------------------------- SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24, DOLLARS IN THOUSANDS 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Current assets $ 795,961 $ 858,236 $616,812 $ 591,485 $ 598,076 Current liabilities 430,714 391,822 366,184 370,226 326,865 -------------- ------------- ------------- ------------- ------------- Working capital $ 365,247 $ 466,414 $250,628 $ 221,259 $ 271,211 ============== ============= ============= ============= ============= Total assets $1,065,064 $1,134,868 $860,443 $ 832,018 $ 821,864 Annual expenditures for property, plant, and equipment $ 114,247 $ 110,505 $ 94,670 $ 96,471 $ 92,955 Long-term debt $ 212,750 $ 212,750 $149,971 $ 153,457 $ 156,942 Other liabilities $ 36,645 $ 11,516 $ 15,224 $ 28,791 $ 29,445 Stockholders' equity $ 384,955 $ 518,780 $329,064 $ 279,544 $ 308,612 Employees 4,700 5,100 4,900 5,000 5,800 Results of operations are for 52-week periods except 1995, which is for a 53-week period. The company has not declared or paid cash dividends since its inception.
18 Data General Corporation MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company reported a net loss of $152 million for fiscal 1998 compared with net income of $56 million and $28 million for fiscal years 1997 and 1996, respectively. Included in the net loss for fiscal year 1998 was a charge of $135 million related to a restructuring program and certain asset write-downs resulting from the program. Revenues (in millions) =============================================================================== 1998 Change 1997 Change 1996 ------------------------------------------------------ Product $1,068 (6%) $1,142 24% $ 924 % of Total Revenues 73% 74% 70% Service 394 1% 391 (2%) 398 % of Total Revenues 27% 26% 30% Total $1,462 (5%) $1,533 16% $1,322 ================================================================================ In fiscal 1998, product revenues were $542 million from the Company's AViiON family of open systems products, a 3% increase over fiscal 1997. Since 1989, the Company has established a customer base of approximately 56,000 AViiON installations, with a total sales value of over $3.5 billion. In fiscal 1996, the Company introduced its Intel processor-based AViiON systems. These systems represented 86% of total fiscal 1998 AViiON revenues and 64% of total fiscal 1997 AViiON revenues. In fiscal 1998, revenues from the Company's Intel processor-based AViiON systems increased by 38% while revenues from the Motorola-based AViiON systems declined by 60% compared to the prior fiscal year. The Company anticipates that the percentage of server product revenues generated by the Intel processor-based AViiON products will continue to increase in fiscal 1999 while the Motorola-based AViiON system revenues are expected to continue to decline. Product revenues from the Company's CLARiiON storage systems decreased 19% compared to the prior fiscal year and accounted for 38% of total product revenues in the current year. This decline is primarily the result of the longer than anticipated product transition from SCSI-based storage systems to the Company's newer fibre-based storage products. CLARiiON is sold primarily through the Company's original equipment manufacturer ("OEM") and distributor channels; thus sales in any given period are subject to the 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 21% from the prior fiscal year and represented 8% of total product revenues compared to 10% for the prior fiscal year. 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 current fiscal year represented 3% of total product revenues. 19 Revenues by Geographic Marketplace ================================================================================ Percentage of Percentage Change of Consolidated Revenues $ of Revenues -------------------------------------------------------------- 1998 1997 1996 1998-97 1997-96 -------------------------------------------------------------- Domestic Product 63% 64% 61% (7%) 30% Service 60% 59% 57% 3% - Total 62% 63% 60% (5%) 22% Europe Product 22% 22% 24% (4%) 11% Service 31% 31% 32% 1% (4%) Total 25% 24% 26% (3%) 5% Other International Product 15% 14% 15% (6%) 18% Service 9% 10% 11% (11%) (6%) Total 13% 13% 14% (7%) 12% ================================================================================ In fiscal 1998, domestic marketplace revenues from the CLARiiON product line decreased 21% and personal computer and other equipment decreased 29% from the prior year. This was offset, in part, by a 2% increase in AViiON product revenues and an increase in VALiiANT product revenues. The increase in AViiON product revenues in the current year resulted from an increase in Intel processor-based AViiON systems, offset, in part, by a decrease in Motorola-based AViiON systems. In the prior year, domestic product revenues from the CLARiiON, AViiON, and PC and other equipment product lines had increased by 52%, 14%, and 5%, respectively. The decrease in European product revenues, including U.S. direct export sales, for the current fiscal year was mainly attributable to decreases in CLARiiON and personal computer and other equipment product revenues, which was partly offset by increases in Intel processor-based AViiON product revenues. In fiscal 1998, total revenues in the European marketplace decreased by approximately 3% due, in great part, to a stronger U.S. dollar in relation to European currencies. In fiscal 1997, European product revenues increased 11% due to increases in AViiON and CLARiiON product revenues. Other international product revenues, including U.S. direct export sales, for the current fiscal year decreased 6% as compared with the prior fiscal year, due to a 9% decrease in AViiON product revenues, offset, in part, by a 4% increase in CLARiiON product revenues. The fiscal 1997 increase in other international product revenues was due to increases in the CLARiiON, AViiON, and PC product revenues. In the service business, the Company increased professional services revenues by 9% in fiscal 1998 as compared with fiscal 1997. Professional services revenues experienced modest growth in fiscal 1997 as compared with the prior fiscal year. These increases were partially offset by a 1% and 3% decline in contract maintenance revenue in fiscal years 1998 and 1997, respectively, as compared with prior years. These declines are the result of the continued shift from proprietary to open systems service maintenance contracts. In Europe, foreign exchange negatively impacted current year service revenues by 3%, when compared to fiscal 1997. In fiscal 1997, foreign exchange accounted for the 4% decrease in service revenues over fiscal 1996. Cost of Revenues (in millions) ================================================================================ 1998 Change 1997 Change 1996 ------------------------------------------------------ Product $ 826 7% $ 773 25% $ 619 % of Product Revenues 77% 68% 67% Service 246 (1%) 249 (4%) 259 % of Service Revenues 62% 64% 65% Total $1,072 5% $1,022 16% $ 878 % of Total Revenues 73% 67% 66% ================================================================================ 20 During fiscal year 1998, the Company recorded certain unusual charges, which are included in product cost of revenues, of $52.6 million related to the Company's restructuring program. These charges are primarily related to the write-down of capitalized software development costs associated with 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 charge is the write-down of certain inventory associated with the Company's THiiN(TM) Line business unit and the refocused server strategy. Without these charges, the pro-forma product cost of revenues as a percentage of product revenues was 72%. The increase in the pro-forma product cost as a percentage of product revenues from the prior fiscal year 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 fiscal year was the result of continued improvements in spare parts inventory management and improved gross margins in the professional services business related to cost savings from the Company's restructuring program. Operating Expenses (in millions) ================================================================================ 1998 Change 1997 Change 1996 ----------------------------------------------- Research & Development $119 8% $110 12% $ 98 % of Total Revenues 8% 7% 7% Selling, general, & administrative $338 - $338 9% $309 % of Total Revenues 23% 22% 23% Restructuring charge $ 82 - - - - % of Total Revenues 6% - - ================================================================================ The Company continued to focus its research and development efforts on its core business technology: multi-user computer systems and mass storage devices. In the current fiscal year, gross expenditures on research and development and software development before capitalization were $154 million, an increase of 5% from $146 million for the prior fiscal year. The increase in research and development expenditures was driven by investment in CLARiiON Fibre Channel products and in the NUMA architecture for high-end AViiON servers. Additionally, in the current fiscal year, changes in the strategic focus for the Company's server products resulted in expensing software development costs that had previously been capitalized. For fiscal years 1998 and 1997, the increase in selling, general, and administrative expenses 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 fiscal 1998 restructuring program in the server business will result in decreases in selling, general, and administrative expenses in fiscal year 1999, offset by increases arising from the continued investment in the CLARiiON storage business. It is the Company's objective that the ratio of selling, general, and administrative expenses decline as a proportion of total revenues. In fiscal year 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 CLARiiON storage business. The program also included the discontinuation of the Company's THiiN Line Internet server products and 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 fiscal year, the Company recorded a charge of $135 million related to the restructuring program and certain asset write-downs resulting from the program. The charge included approximately $82.4 million related to employee termination benefits, asset write-downs, and other exit costs that 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 revenues. A summary of the restructuring charge included in operating expense and the related accrued liability balance at September 26, 1998 is as follows: 21 Restructuring Charge (in millions)
- ----------------------------------------------------------------------------------------------- Restructuring Less: Charge Cash Payments and September 26, 1998 Fiscal Year 1998 Asset Write-downs Balance - ----------------------------------------------------------------------------------------------- Employee termination benefits $ 43.7 $ 16.7 $ 27.0 Asset write-downs 19.9 13.2 6.7 Lease abandonments 11.3 0.7 10.6 Other exit costs 7.5 3.8 3.7 ------ ------ ------ Total $ 82.4 $ 34.4 $ 48.0 ====== ====== ====== - -----------------------------------------------------------------------------------------------
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 345 were terminated during the fiscal year ended September 26, 1998, and the remaining terminations are expected to be substantially complete by the end of calendar year 1998. Asset write-downs are composed primarily of fixed assets, including leasehold improvements and demonstration equipment, which are being 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 revenues. 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. The Company does not currently foresee any significant additional restructuring charges in the near future. During fiscal year 1995, the Company recorded a restructuring charge of $43 million. As of September 26, 1998, the remaining reserves of $3.9 million from the 1995 restructuring program are for excess vacant rental properties, primarily located in Europe. At September 26, 1998, the number of employees totaled approximately 4,700, a net decrease of 400 employees from September 27, 1997. During fiscal year 1997, there was a net increase of 200 employees from the 4,900 employed as of September 28, 1996. Net Income (Loss) (in millions) ================================================================================ 1998 1997 1996 ------ ------ ------ Income (loss) from operations $(149) $63 $37 Interest and other income - (5) (5) Tax provision (3) (2) (4) ------ ------ ----- Net income (loss) $(152) $56 $28 ================================================================================ The loss from operations in fiscal 1998 of $149 million was composed of losses of $120 million, $24 million, and $5 million from the domestic marketplace, Europe, and other international locations, respectively. The loss in the current fiscal year includes a charge of $135 million related to the Company's restructuring program and certain asset write-downs resulting from the program. The income from operations for fiscal 1997 of $63 million was composed of $73 million domestically, partially offset by losses from operations of $5 million each from Europe and other international locations. In fiscal 1996, income from operations was $44 million domestically and $3 million in Europe, offset by a loss from operations of $10 million from other international markets. Interest income for fiscal 1998 increased 27% from fiscal 1997, following a 42% increase from fiscal 1996 to fiscal 1997. The increases were primarily due to higher levels of invested cash. Interest expense was $14 million, $15 million, and $13 million for fiscal years 1998, 1997, and 1996, respectively. The interest expense for fiscal year 1998 relates primarily to interest expense and amortization of issuance costs associated with the Company's 6% Convertible Subordinated Notes due 2004, which were issued during the second half of fiscal 1997. In fiscal 1997, the Company converted $125 million of the 7 3/4% Convertible Subordinated Debentures due 2001 and retired $27 22 million of the 8 3/8% Sinking Fund Debentures due 2002. In fiscal 1998, other income, net, includes a gain on the sale of an equity security of $2.2 million, offset, in part, by the write-off of a $2 million equity investment which had been previously carried at cost. The provision for income taxes in fiscal years 1998, 1997, and 1996 related primarily to foreign, state, and federal alternative minimum taxes. The Company has a valuation allowance which substantially offsets all deferred tax assets existing as of September 26, 1998 and September 27, 1997. The amount of the deferred tax asset considered realizable is subject to change based on estimates of future taxable 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. In the first quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards Number 128 ("SFAS 128"), "Earnings per Share." SFAS 128 specifies modifications to the calculation of earnings per share from the method previously used by the Company as prescribed by APB Opinion Number 15. As required by the Securities and Exchange Commission, Note 11 to the Consolidated Financial Statements discloses earnings per share amounts in accordance with SFAS 128 for fiscal years 1998, 1997, and 1996. In July 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." In October 1997, the Accounting Standards Executive Committee of American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." All these statements are effective for fiscal years beginning after December 15, 1997. The Company will implement these statements as required. The future adoption of SFAS 130, SFAS 131, and SOP 97-2 is not expected to have a material effect on the Company's consolidated financial position or results of operations. In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS 132 revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. This Statement is effective for fiscal years beginning after December 15, 1997. The Company will implement the Statement as required. 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 currently evaluating the effect, if any, the future adoption of SFAS 133 will have on the consolidated financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES Cash and temporary cash investments as of September 26, 1998 were $158 million, a decrease of $59 million from fiscal 1997. At the same date, the Company held $160 million in marketable securities, a net increase of $9 million from the prior fiscal year. In total, cash and temporary cash investments, along with marketable securities, decreased $50 million in the current fiscal year. The decrease was mainly attributable to the purchases of equipment required for the company's server and storage businesses, payments reducing employee-related accruals, and payments related to the restructuring program implemented in June of 1998. 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 $9.8 million and classified as available-for-sale. The unrealized gain on marketable securities of $8.5 million is recorded as a separate component of stockholders' equity. Net cash provided from operations in fiscal 1998 was $80 million. Expenditures for property, plant, and equipment were $114 million, capitalized software development costs totaled $36 million, and cash provided from stock plans equaled $11 million. The effect of foreign currency exchange rate fluctuations on cash and temporary cash investments was an increase of $1 million for fiscal year 1998. Net receivables increased $11 million to $307 million as of September 26, 1998. Total inventories as of September 26, 1998 were $142 million, a decrease of $24 million from September 27, 1997, primarily as a result of the reduction in inventory levels related to the Company's restructuring program and improved supply management. Net property, plant, and equipment remained at $180 million. The purchases of the equipment and capital expenditures for developing both operating and financial systems and to support the new product initiatives in the server and storage businesses were offset, in part, by the write-down of non-strategic assets, which are being disposed of in connection with the restructuring program. Fixed asset dispositions related to the sale of demonstration equipment totaled $8.7 million for the current fiscal year. Management expects that sales of demonstration equipment will continue. Other long-term assets decreased by approximately $8 million to $89 million as of September 26, 1998. This decrease was primarily the result of the write-down of certain capitalized software costs to the net realizable value, due to the Company's restructuring program, partly offset by recording an intangible asset of $20.4 million equal to the amount of unrecognized prior service cost of the Company's domestic pension plan. The amount of the accumulated benefit obligation in excess of the intangible asset of $6.3 million has been recorded as a separate component of stockholders' equity. Accounts payable increased $6 million, partly due to an increase in the value of unmatured foreign exchange contracts as of September 26, 1998. Other current liabilities and other liabilities increased $58 million, primarily as a result of charges related to employee 23 termination benefits and provisions for lease abandonments related to vacated lease properties resulting from the Company's restructuring program. Additionally, the Company recorded a pension liability of approximately $27 million related to the excess of the accumulated benefit obligation over the pension plan assets. Long-term debt of $212.8 million remained unchanged from September 27, 1997. For the three-year period ending September 26, 1998, cash and temporary cash investments increased $41 million. Net cash provided from operations was $312 million. The sale of non-operating facilities and other assets provided $13 million. Proceeds from the Company's employee stock plans provided $37 million. Net cash provided from long-term debt was $177 million, as a result of the Company issuing $213 million of 6% Convertible Subordinated Notes due 2004, in fiscal 1997, which was partially offset by the retirement of $30 million of 8 3/8% Sinking Fund Debentures due 2002, and the payment of $6 million in debt issuance costs on the 6% Convertible Subordinated Notes due 2004. Net cash used for the purchase of marketable securities was $67 million. Expenditures for property, plant, and equipment totaled $319 million and the Company's investment in capitalized software development costs was $103 million. Notes payable were paid in the amount of $2 million during this three-year period. The effect of foreign exchange on this three-year period was a $4 million decrease to cash. Operations have generally been the primary source of the Company's cash. Cash provided from operations has been augmented by proceeds from the issuance of 6% Convertible Subordinated Notes, sales of stock under the Company's stock plans, and sales of facilities and other non-operating assets. The Company has not paid cash dividends since its inception in order to reinvest available cash in operations. At September 26, 1998, the Company had a $45 million unsecured letter of credit and reimbursement facility with a group of banks. This facility is available for working capital, capital expenditures, permitted acquisitions, and to secure the issuance of letters of credit. It contains certain covenants, including restrictions on particular liens, other indebtedness, and certain investments. The interest rate for borrowings under the letter of credit and reimbursement facility is the lower of 1.375% per annum above LIBOR or the prime rate plus 0.25%. Commitment fees paid on available funds during fiscal years 1998 and 1997 were not material. There were $4.7 million and $5.0 million of letters of credit secured by the $45 million letter of credit and reimbursement facility at September 26, 1998 and September 27, 1997, respectively. During fiscal years 1998 and 1997, there were no borrowings under this facility. The facility has a duration of three years and expires on September 30, 2000. The Company believes it is important to maintain a conservative capital structure and a strong cash position. Cash is primarily invested in liquid temporary investments pending its utilization. The Company's investment policy is to minimize risk while maximizing return on cash, and to keep uninvested cash at a minimum. Cash is generally centralized domestically, although some cash is also held at various subsidiaries around the world to meet local operating funding requirements. All cash is freely remittable to the United States. Although the actual level of spending will be influenced by many factors, the Company anticipates that expenditures for property, plant, and equipment will continue to be the primary non-operating use of cash during fiscal year 1999. Most of the expenditures will be for capital assets directly related to the Company's open systems product sales, marketing, support, and development. During fiscal 1999, cash totaling $40 million is expected to be utilized to settle liabilities arising from the Company's restructuring programs. The Company believes it has sufficient resources to provide for its current operations and to continue to invest in the future. YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT The "Year 2000 issue" arises because many computer hardware and software systems use only two digits to represent the year. As a result, these systems and programs may not correctly handle dates beyond 1999, resulting in errors in information or program or systems failures. Assessments of the potential effects of the Year 2000 issues vary markedly among different companies, governments, consultants, economists and commentators. It is not possible to accurately predict what the actual impact may be. In this context, the Company offers the following statements concerning the Year 2000 issues. All statements made and referred to here are Year 2000 Readiness Disclosures under the U.S. Year 2000 Readiness Disclosure Act. 1. Product Readiness and Customer Communications The Company is communicating with its customers concerning the Year 2000 issue by letters to the Company's current service customers, and creation of Data General and CLARiiON Year 2000 Internet web sites at http://www.dg.com/year2000 and http://www.clariion.com/corporat/yr2000readiness.html where Year 2000 Readiness Disclosures concerning various products and the Company's Year 2000 program are made available to customers and the general public. The Company has established teams to codify and confirm the Year 2000 readiness of Data General's AViiON, CLARiiON, and 32-bit ECLIPSE(R) MV computer products, as well as Data General Pentium processor-based and later generation personal computers. Based on these efforts as of November 1, 1998, and subject to ongoing investigation, the Company has identified many products which are either Year 2000 Ready or may be made so by means of Year 2000 updates which the Company intends to make available. The Company is making no assurance of Year 2000 Readiness for products not so identified. As well, the Company does not intend to generally address the Year 2000 readiness of third-party products (i.e., products not marketed under the "Data General" brand name). 24 2. Data General's Internal Systems, Manufacturing Processes and Facilities With regard to the Company's own business systems, Data General has been preparing for Year 2000 since mid-1996, and has established teams to coordinate solutions to the Year 2000 issue for its own internal information systems and applications across the Company's operations worldwide. As of October, 1998, the Company's assessment was that a significant proportion of the Company's information system and applications have been rendered Year 2000 ready, through a combination of re-engineering, software updates, or replacement with new technologies. The Company is continuing its assessment and remediation of Year 2000 issues. Based on existing plans and schedules, and subject in any event to the possibilities of delays, the Company plans to complete the process of making all its significant internal information systems Year 2000 Ready in time to meet the Company's specific business requirements. Although Data General's evaluation of its information management systems is still in process, the Company believes that the impact of the Year 2000 issues on its business systems and applications should not have a material adverse impact on future results. The Company has also undertaken an assessment of the Year 2000 issue as related to its manufacturing facilities and processes. Although work remains to be done, a significant portion of this evaluation has been completed and the Company is not aware at November 1, 1998, of any material Year 2000 concerns with respect to its manufacturing facilities and processes. The Company is also assessing the possible impact of Year 2000 issues on the operations of its facilities (including such matters as security systems, building equipment, and potential interruptions to utilities). This evaluation is ongoing at this time. It is the Company's intention that all material Year 2000 issues regarding the operation of the Company's facilities will be addressed as the requisite information is received by the Company. 3. Data General's Suppliers The Company's procurement organizations are seeking to monitor the Year 2000 readiness of the Company's key suppliers. In 1997, the Company sought to contact over 200 of its significant suppliers to determine their Year 2000 readiness. The Company is continuing its efforts to monitor its suppliers regarding Year 2000 readiness assessments. Since the Company views Year 2000 preparations as ongoing, both within Data General and at our suppliers' operations, and since suppliers' reported Year 2000 readiness can change, efforts to monitor the status of suppliers will be continuing. As Year 2000 readiness issues are identified and as the Company gains more certain information concerning the Year 2000 readiness of its suppliers, the Company intends to evaluate contingency plans as needed to address the Company's business requirements. Since determining the Year 2000 readiness of suppliers depends upon their cooperation and upon their disclosure of often imprecise or estimated information, it is likely that the Company's inquiries will not be entirely successful, and it remains possible that actual results may deviate from assurances which were given to the Company. It is possible that notwithstanding the Company's efforts, interruptions of key components or services could have an adverse impact on the Company's operations and future results. If significant exposures are identified, the Company expects during 1999 to assess the efficacy and reasonability of contingency plans to mitigate or avoid potential interruptions to delivery of critical supplies or services, but alternatives - particularly for single-sourced components or suppliers -- may not always be readily available or economically reasonable. It is likely that not every potential Year 2000 exposure will be protected by a contingency plan; a measure of reasonable business risk will be undertaken relative to the Year 2000 problem, both by Data General and by other companies. 4. Risks of Claims In addition, there may be a potential for claims against the Company arising from products and services that were not Year 2000 ready. Because the Company is in the business of selling computer system products, the Company's risk of being subjected to lawsuits relating to Year 2000 issues with its products is likely to be greater than that of companies in other industries. The outcomes of any Year 2000 claims and the impact of such claims on the Company cannot be determined at this time; such outcomes will depend on the facts and circumstances of each situation and an evolving state of law as these types of claims are addressed by legal systems worldwide. 5. Accounting Treatment of Year 2000 Expenses The cost of addressing Year 2000 issues is presently being funded through operating cash flows. During the fiscal year ended September, 1998, the Company expensed approximately $840,000 in Year 2000 costs for internal labor and outside consultants in connection with internal projects supporting the Company's critical systems. The Company is expensing costs associated with identification and resulting changes to its systems, but does not expect the amounts to have a material effect on its financial position or results of operations. As of November 1, 1998, the Company believes the cost of administering its Year 2000 readiness program will not have a material adverse impact on future earnings. 6. Certain Additional Risk Factors It is unknown how the Company's sales may be impacted by Year 2000 issues. As the Company's customers focus on preparing their businesses for Year 2000, capital budgets in the near term may be redirected toward remediation efforts, potentially delaying the purchase and implementation of new systems, thereby creating less demand for the Company's products and services. Alternatively, sales of Year 2000 ready Data General products could be increased, to replace older products. As well, the Company's sales during 1999 could be affected by the customers' perceptions of Data General's own state of Year 2000 readiness. All these factors could affect the Company's future revenues. 25 Overriding any preparations taken by the Company, the Year 2000 issue presents risks and uncertainties that could affect the Company; these include unexpected Year 2000 issues, or unexpected problems arising from plans implemented to anticipate Year 2000 problems; extended interruptions to power, water or telecommunications utility services; potential unavailability of skilled or critical personnel; delays or interruptions in national or international transportation systems; and potential governments' responses to Year 2000 emergencies, among others. Further, there can be no assurance that there will not be delays in, or increased costs associated with, the Company's Year 2000 readiness efforts, or that the Company's suppliers and other parties will adequately prepare for the Year 2000. The nature of these uncertainties is such that it remains possible that Year 2000 issues could have a material adverse impact on the Company's operations and financial results. While the Company does not currently expect that this will be the case, and continues to aggressively pursue its preparations for the Year 2000, the Company can offer no express assurance whether or to what extent the Company may be affected by matters which it has not anticipated or by matters outside of the Company's control. The Company recognizes the need to continue its analysis, assessment, monitoring, and planning for the various Year 2000 issues, across its businesses worldwide, and to address Year 2000 issues as they are identified. Within that uncertain context, however, and subject to the various factors discussed above, the Company believes that the impact of Year 2000 issues on its business should not have a material adverse effect on the Company's financial position or results of operations. MARKET RISK The Company is exposed to market risk primarily in its cash and foreign currency transactions. Because a substantial portion of the Company's operations and revenue occur outside the United States, the Company's results can be significantly impacted by changes in foreign currency exchange rates. The Company manages its foreign currency risk through the use of forward foreign currency contracts. The Company does not hold or enter into derivative financial instruments for trading purposes. At inception, the forward foreign currency contracts are designated as hedges of intercompany accounts receivable and foreign sales which are firmly committed or forecasted. These contracts generally mature within three months. Market value gains and losses on these contracts are included in the cost of product revenues and generally offset exchange gains or losses on the related transactions. See Note 2 and 7 to the Consolidated Financial Statements for a description of the Company's use of derivative and other financial instruments and related market risk. As of September 26, 1998, the Company had entered into forward foreign currency contracts to purchase $81.5 million and sell $153.7 million in various foreign currencies. Between September 26, 1998, and September 30, 1998, forward foreign currency contracts to purchase $81.5 million and $78.0 million were settled resulting in a net loss of approximately $4.0 million. This loss was partially offset by exchange gains on the hedged transactions. The potential gain or loss for a hypothetical 10% beneficial or adverse change in foreign currency exchange rates on the forward foreign currency contracts to sell $75.7 million maturing after September 30, 1998 would result in a gain or loss of approximately $8.0 million. The Company expects that this gain or loss would be substantially offset by exchange gains or losses on the related hedged transactions 26 DATA GENERAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED ------------------------------------------------------- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - ----------------------------------------------------------------------------------------------------------------- REVENUES Product $ 1,067,888 $ 1,142,561 $ 924,140 Service 394,221 390,608 398,110 ----------------- --------------- ------------------ Total revenues 1,462,109 1,533,169 1,322,250 ----------------- --------------- ------------------ COSTS AND EXPENSES Cost of product revenues 825,954 772,721 618,351 Cost of service revenues 245,537 248,848 259,341 Research and development 118,731 109,984 98,022 Selling, general, and administrative 338,108 338,443 309,259 Restructuring charge 82,400 - - ----------------- --------------- ------------------ Total costs and expenses 1,610,730 1,469,996 1,284,973 ----------------- --------------- ------------------ Income (loss) from operations (148,621) 63,173 37,277 Interest income 13,425 10,549 7,440 Interest expense 14,439 15,422 13,072 Other income, net 240 - - ----------------- --------------- ------------------ Income (loss) before income taxes (149,395) 58,300 31,645 Income tax provision 3,000 2,400 3,500 ----------------- --------------- ------------------ Net income (loss) $ (152,395) $ 55,900 $ 28,145 ================= =============== ================== BASIC NET INCOME (LOSS) PER SHARE Net income (loss) per share $(3.11) $1.35 $0.73 Weighted average shares outstanding 49,038 41,347 38,769 DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) per share $(3.11) $1.26 $0.68 Weighted average shares outstanding, including common stock equivalents, where applicable 49,038 44,215 41,095 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
27 DATA GENERAL CORPORATION CONSOLIDATED BALANCE SHEETS
AS OF ------------------------------------- DOLLARS IN THOUSANDS, EXCEPT PAR VALUE SEPT. 26, 1998 SEPT. 27, 1997 - ------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and temporary cash investments $ 158,220 $ 216,814 Marketable securities 160,354 151,455 Receivables, less allowances of $19,424 at Sept. 26, 1998 and $16,588 at Sept. 27, 1997 307,428 296,375 Inventories 141,639 166,008 Other current assets 28,320 27,584 ----------------- ------------------ Total current assets 795,961 858,236 Property, plant, and equipment, net 180,454 180,410 Other assets 88,649 96,222 ----------------- ------------------ Total Assets $ 1,065,064 $ 1,134,868 ================= ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 160,940 $ 154,624 Other current liabilities 269,774 237,198 ----------------- ------------------ Total current liabilities 430,714 391,822 ----------------- ------------------ Long-term debt 212,750 212,750 ----------------- ------------------ Other liabilities 36,645 11,516 ----------------- ------------------ Commitments and Contingencies Stockholders' equity Common Stock, $.01 par value Outstanding - 49,689,000 shares at Sept. 26, 1998 and 48,588,000 shares at Sept. 27, 1997 (net of deferred compensation of $15,444 at Sept. 26, 1998 and $14,157 at Sept. 27, 1997) 626,137 607,130 Accumulated deficit (231,976) (79,581) Unrealized gains on marketable securities 8,513 2,812 Equity adjustment for minimum pension liability (6,252) - Cumulative translation adjustment (11,467) (11,581) ----------------- ------------------ Total stockholders' equity 384,955 518,780 ----------------- ------------------ Total Liabilities and Stockholders' Equity $ 1,065,064 $ 1,134,868 ================= ================== The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
28 DATA GENERAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED ---------------------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - ------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (152,395) $ 55,900 $ 28,145 Adjustments to reconcile net income (loss) to net cash provided from operating activities Depreciation 95,345 79,203 82,330 Amortization of capitalized software development costs 60,881 20,180 19,130 Amortization of deferred compensation 8,461 4,669 3,866 Decrease in other liabilities (1,507) (3,708) (8,263) Net book value of fixed asset disposals 8,735 8,858 6,399 Gain on sale of marketable securities (2,239) - - Other non-cash items, net 8,348 2,368 (299) Changes in operating assets and liabilities, net of effects from sale of facilities and other assets (Increase) in receivables (11,463) (46,514) (9,268) (Increase) decrease in inventories 33,363 (28,876) 1,567 (Increase) decrease in other current assets (655) (4,313) 2,080 Increase in accounts payable 1,784 36,389 6,627 Increase (decrease) in other current liabilities, excluding debt 31,196 2,484 (27,191) --------------- --------------- ----------------- Net cash provided from operating activities 79,854 126,640 105,123 --------------- --------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant, and equipment (114,247) (110,505) (94,670) Purchase of marketable securities (302,798) (221,859) (84,224) Proceeds from sales and maturity of marketable securities 302,472 89,131 150,080 Capitalized software development costs (35,554) (36,283) (30,714) Net proceeds from sale of facilities and other assets - - 12,797 Investment in equity securities - - (2,000) --------------- --------------- ----------------- Net cash used by investing activities (150,127) (279,516) (48,731) --------------- --------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Cash provided from stock plans, net 10,547 17,049 9,684 Repayment of notes payable - (1,794) - Repayment of long-term debt - (27,177) (3,000) Proceeds from long-term debt, net - 206,853 - --------------- --------------- ----------------- Net cash provided from financing activities 10,547 194,931 6,684 --------------- --------------- ----------------- Effect of foreign currency rate fluctuations on cash and temporary cash investments 1,132 (4,238) (1,280) --------------- --------------- ----------------- Increase (decrease) in cash and temporary cash investments (58,594) 37,817 61,796 Cash and temporary cash investments - beginning of the period 216,814 178,997 117,201 =============== =============== ================= Cash and temporary cash investments - end of the period $ 158,220 $ 216,814 $ 178,997 =============== =============== ================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid $ 14,382 $ 11,772 $ 12,797 Income taxes paid $ 2,074 $ 5,951 $ 1,716 The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
29 DATA GENERAL CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED --------------------------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - ------------------------------------------------------------------------------------------------------------------- COMMON STOCK Beginning balance $ 607,130 $ 460,312 $ 446,762 Shares issued under stock plans, net 10,547 17,049 9,684 Amortization of deferred compensation 8,460 4,669 3,866 Debt conversion to Common Stock - 125,100 - ---------------- ---------------- ---------------- Ending balance 626,137 607,130 460,312 ---------------- ---------------- ---------------- ACCUMULATED DEFICIT Beginning balance (79,581) (135,481) (163,626) Net income (loss) for year (152,395) 55,900 28,145 ----------------- ---------------- ---------------- Ending balance (231,976) (79,581) (135,481) ----------------- ---------------- ---------------- UNREALIZED GAINS ON MARKETABLE SECURITIES Beginning balance 2,812 9,708 - Net adjustment for year 5,701 (6,896) 9,708 ----------------- ---------------- ---------------- Ending balance 8,513 2,812 9,708 ----------------- ---------------- ---------------- EQUITY ADJUSTMENT FOR MINIMUM PENSION LIABILITY Beginning balance - - - Net adjustment for year (6,252) - - ----------------- ---------------- ---------------- Ending balance (6,252) - - ----------------- ---------------- ---------------- CUMULATIVE TRANSLATION ADJUSTMENT Beginning balance (11,581) (5,475) (3,592) Net translation adjustment for year 114 (6,106) (1,883) ----------------- ----------------- ---------------- Ending balance (11,467) (11,581) (5,475) ----------------- ---------------- ---------------- Total stockholders' equity $ 384,955 $ 518,780 $ 329,064 ================= ================ ================ The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements.
30 DATA GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS Data General Corporation (the "Company") designs, manufactures, markets, and supports a family of open computer systems including servers and mass storage products. The Company's products provide solutions for high-performance customer applications such as database management, transaction processing, decision support, accounting and finance, healthcare information systems, telecommunications and video storage, manufacturing planning and control, human resources management, and data warehousing. The Company focuses on providing enterprise-level solutions for businesses of all sizes, healthcare providers, and government agencies, and has a worldwide sales, service, and support network. The principal markets are North America and Europe. NOTE 2. ACCOUNTING POLICIES FISCAL YEAR. The Company's fiscal year ends on the last Saturday in September. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Data General Corporation and its domestic and foreign subsidiaries. All significant intercompany transactions have been eliminated. 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSACTIONS. The functional currencies for the Company's operations in Australia, Canada, Europe, Japan, and New Zealand are the local currencies. Assets and liabilities of these operations are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at average exchange rates for the period. Translation adjustments are reported as a separate component of stockholders' equity. For the Company's other foreign operations, the U.S. dollar is the functional currency. Assets and liabilities of these operations are remeasured into U.S. dollars at exchange rates in effect at the balance sheet date, except for inventories and property, plant, and equipment, which are remeasured at historical exchange rates. Income and expense items are remeasured at average rates for the period, except for cost of sales and depreciation, which are remeasured at historical exchange rates. Gains and losses resulting from remeasurement, not material in amount, are included in the results of operations. The Company enters into foreign exchange contracts as a hedge against exposure to fluctuations in exchange rates associated with certain transactions denominated in foreign currencies, principally intercompany accounts receivable. Market value gains or losses on these contracts are included in the cost of product revenues and generally offset exchange gains or losses on the related transactions. Foreign exchange transaction gains and losses for the periods ended September 26, 1998, September 27, 1997, and September 28, 1996, are included in the cost of product revenues. Cash flows from foreign exchange contracts that are accounted for as hedges of identifiable foreign exchange transactions are classified as cash flows from operating activities in accordance with the nature of the transactions being hedged. TEMPORARY CASH INVESTMENTS AND MARKETABLE SECURITIES. Temporary cash investments consist of highly liquid time deposits, commercial paper, and U.S. Treasury bills and notes with original maturities of 90 days or less. Marketable securities consist of U.S. Treasury bills and notes, commercial paper, and notes issued by U.S. government agencies with original maturities of 91 to 365 days, as well as equity securities. All of the Company's investments in U.S. Treasury bills and notes, commercial paper, and notes issued by U.S. government agencies have maturities of less than one year, and have been classified as held-to-maturity. These investments are recorded at amortized cost, which approximates market value. The Company also holds three publicly traded equity securities as part of its marketable security portfolio. These securities are considered to be readily marketable and are classified as available-for-sale. These investments, which are accounted for at fair market value at September 26, 1998 and September 27, 1997 totaled $9.8 million and $4.0 million, respectively. The unrealized gain on marketable securities of $8.5 million and $2.8 million is recorded as a separate component of stockholders' equity at September 26, 1998 and September 27, 1997, respectively. INVENTORIES. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories consist primarily of components and subassemblies and finished products held for sale. Rapid technological change and new product introductions and enhancements could result in excess or obsolete inventory. To minimize this risk, the Company evaluates inventory levels and expected usage on a periodic basis and records adjustments as required. Certain components and products that meet the Company's requirements are available only from a single supplier or a limited number of suppliers. Among those components are disk drives, microprocessors, and certain proprietary integrated circuits. The rapid rate of technological change and the necessity of developing and manufacturing products with short life cycles may intensify these risks. The inability to obtain components and products as required, or to develop alternative sources, if and as required in the future, could result in delays or reductions in product shipments, which in turn could have a material adverse effect on the Company's business, financial condition, and results of operations. PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method, based on the following estimated useful lives: land improvements, 10-12 years; buildings and building improvements, 3-25 years; equipment, 3-10 years; 31 application software, 5-10 years. Included in property, plant, and equipment are computer equipment spares which are not available for resale. These spares are used to support systems the Company has sold or is using internally. Spares are depreciated over a three-year estimated useful life. REVENUE RECOGNITION AND MAJOR CUSTOMERS. Product revenues are recognized at the time of shipment, provided that there are no significant uncertainties regarding the customer's acceptance and collection of the related receivable is probable. Service revenues, including post-contract customer support, are recognized ratably over applicable contractual periods or as services are performed. The costs of these service revenues are charged to expense when incurred. During the years ended September 26, 1998, September 27, 1997, and September 28, 1996, revenues from a single customer totaled $192 million, $238 million, and $201 million, or approximately 13%, 16%, and 15% of total revenues, respectively. RESEARCH & DEVELOPMENT, SOFTWARE DEVELOPMENT, AND WARRANTY COSTS. Research, engineering, and product development costs are expensed as incurred. Software development costs incurred after reaching technological feasibility and prior to first customer shipment are capitalized and amortized to cost of product revenues over a period not to exceed four years for operating system software and three years for application software, which approximates the estimated economic lives of these software products. On a quarterly basis, the Company evaluates the recoverability of capitalized software costs. In performing its evaluation, the Company must make estimates of anticipated future gross revenues as well as the remaining economic life of the product. As discussed further in Note 3 to the Consolidated Financial Statements, during fiscal year 1998, the Company's evaluation of anticipated future gross revenue for certain software-based solutions required that the previously capitalized costs be reduced. Unamortized software development costs were $51.5 million at September 26, 1998 and $76.8 million at September 27, 1997. Write-offs of certain capitalized software development costs totaled approximately $39.4 million, $0.5 million, and $2.7 million for fiscal years 1998, 1997, and 1996, respectively. Estimated direct on-line diagnostic support and warranty costs are accrued at the time of product shipment. ADVERTISING. Advertising costs are charged to operations when incurred. The Company has not incurred any costs associated with direct-response advertising during fiscal years 1998, 1997, and 1996, and there were no capitalized advertising costs as of September 26, 1998 or September 27, 1997. Advertising expenses for fiscal 1998, 1997, and 1996 were $8.3 million, $14.7 million, and $12.6 million, respectively. RETIREMENT/POST-EMPLOYMENT BENEFITS. Net pension cost for the Company's domestic defined benefit pension plan is funded as accrued, to the extent that current pension cost is deductible for U.S. Federal tax purposes and to comply with the General Agreement on Tariff and Trade Bureau (GATT) additional minimum funding requirements for the plan year beginning October 1, 1995. The plan's transition surplus is amortized over 18 years. Net pension cost for the Company's international defined benefit pension plans is generally funded as accrued. The net transition surplus or obligation for these plans is amortized over periods ranging from 15 to 20 years. Net post-retirement benefit costs for the Company's domestic post-retirement benefits plan are generally funded as accrued, to the extent that current cost is deductible for U.S. Federal tax purposes. The net transition obligation for the plan is amortized over 18 years. IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically assesses whether any events or changes in circumstances have occurred that would indicate that the carrying amount of a long-lived asset may not be recoverable. If such an event or change in circumstance occurs, the Company evaluates whether the carrying amount of such asset is recoverable by comparing the net book value of the asset to estimated future undiscounted cash flows, excluding interest charges, attributable to such asset. If it is determined that the carrying amount is not recoverable, the Company will recognize an impairment loss equal to the excess of the carrying amount of the asset over its estimated fair value of such asset. STOCK-BASED COMPENSATION PLANS. The Company applies Accounting Principles Board Opinion Number 25 and related Interpretations in accounting for its stock option and purchase plans. Note 9 to the Consolidated Financial Statements contains a summary of the pro-forma effects to reported net income (loss) and earnings (loss) per share for fiscal years 1998, 1997, and 1996, as if the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by Statement of Financial Accounting Standards Number 123 ("SFAS 123"), "Accounting for Stock-Based Compensation". EARNINGS PER SHARE. In the first quarter of fiscal 1998, the Company adopted SFAS 128, "Earnings per Share." Basic net income (loss) per share is based upon the weighted average number of common shares outstanding. Diluted net income (loss) per share is based upon the weighted average number of common shares outstanding, including dilutive common stock equivalents and the assumed conversion of the Company's convertible debentures, if dilutive. Common stock equivalents represent the net additional shares resulting from the assumed exercise of options outstanding under the Company's stock option plans, using the "treasury stock" method. For fiscal 1998, 1997, and 1996, the debentures are anti-dilutive and have been excluded from the calculation. OTHER RECENT PRONOUNCEMENTS. In July 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise and Related Information." In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." These statements are effective for fiscal years beginning after December 31, 1997. In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement is effective for fiscal years beginning after December 15, 1997. 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 32 after June 15, 1999. The Company will implement these statements as required. The future adoption of SFAS 130, SFAS 131, SFAS 132, and SOP 97-2 is not expected to have a material effect on the Company's consolidated financial position or results of operations. 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 3. RESTRUCTURING During fiscal year 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 program 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 CLARiiON storage business. The program also included the discontinuation of the Company's THiiN Line Internet server products and 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 fiscal year, the Company recorded a charge of $135 million related to the restructuring program and certain asset write-downs resulting from the program. 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 revenues. This provision includes severance benefits for approximately 480 employees, of whom approximately 65% were based in the United States and the remainder in Europe and Asia/Pacific. Of the 480 employees identified, approximately 345 were terminated during the year ended September 26, 1998 and the remaining terminations are expected to be substantially complete by the end of calendar year 1998. Asset write-downs are composed 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 revenues for the year ended September 26, 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. During fiscal 1995, the Company recorded a restructuring charge of $43 million. As of September 26, 1998 the remaining reserves of $3.9 million from the 1995 restructuring program are for excess vacant rental properties, primarily located in Europe. The amounts accrued and charged against the established provisions described above were as follows:
BEGINNING CURRENT YEAR CURRENT YEAR ENDING IN MILLIONS BALANCE PROVISION CHARGES BALANCE - ------------------------------------------------------------------------------------------------------------------ FISCAL 1998 ACTIVITY Employee termination benefits $ 0.8 $ 43.7 $ (17.3) $27.2 Lease abandonments 5.6 11.3 (3.6) 13.3 Asset write-downs - 19.9 (13.4) 6.5 Other exit costs 1.2 7.5 (3.8) 4.9 ------ ------- ---------- -------- Total $7.6 $ 82.4 $ (38.1) $51.9 ------ ------- ---------- -------- FISCAL 1997 ACTIVITY Employee termination benefits $ 2.5 - $(1.7) $0.8 Lease abandonments 10.0 - (4.4) 5.6 Other exit costs 2.0 - (0.8) 1.2 ------- ------- ---------- -------- Total $14.5 - $(6.9) $ 7.6 ------- ------- ---------- --------
NOTE 4. CONSOLIDATED BALANCE SHEET DETAILS
AS OF ------------------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 - -------------------------------------------------------------------------------------------------------- INVENTORIES Raw materials $ 1,420 $ 16,169 Work in process 64,200 78,335 Finished systems 50,632 44,349 Field engineering parts and components 25,387 27,155 -------- -------- Total inventories $141,639 $166,008 -------- -------- PROPERTY, PLANT, AND EQUIPMENT Land $ 3,512 $ 3,512 Buildings and improvements 81,350 75,819 Manufacturing and design equipment 100,452 95,931 Data processing, office, and other equipment 381,945 399,812 Computer equipment spares 74,353 82,277 -------- -------- Total property, plant, and equipment 641,612 657,351 Accumulated depreciation (461,158) (476,941) -------- -------- Total property, plant, and equipment, net $180,454 $180,410 -------- -------- OTHER CURRENT LIABILITIES Accrued employee compensation and benefits $ 62,279 $86,268 Deferred revenues 56,321 50,574 Accrued restructuring charges 45,114 7,649 Other accrued expenses 106,060 92,707 -------- -------- Total other current liabilities $269,774 $237,198 -------- --------
During the current fiscal year, the Company retired fully depreciated computer equipment spares with an original cost of $19.4 million. 33 NOTE 5. INCOME TAXES Domestic and foreign income (loss) before taxes, and details of the income tax provision (benefit) are as follows:
YEAR ENDED ---------------------------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - ----------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES Domestic $(124,886) $62,125 $32,200 Foreign (24,509) (3,825) (555) --------- -------- -------- $(149,395) $58,300 $31,645 --------- -------- -------- INCOME TAX PROVISION (BENEFIT) Current Federal $ - $ 250 $ 650 Foreign 1,589 1,091 1,076 State 700 800 800 ------ ------ ------ Total Current 2,289 2,141 2,526 ------ ------ ------ Deferred Federal - - 1,350 Foreign 711 259 (376) ------ ------ ------ Total Deferred 711 259 974 ------- ------ ------- Total Tax Provision $ 3,000 $ 2,400 $ 3,500 ------- ------ -------
Deferred income taxes reflect the tax impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Under SFAS 109, the benefit associated with future deductible temporary differences is recognized if it is more likely than not that a benefit will be realized. The Company has recorded a valuation allowance that offsets substantially all deferred tax assets as of the end of each related year. The amount of the deferred tax asset considered realizable is subject to change based on estimates of future taxable 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. Principal components of the deferred tax assets and liabilities included on the balance sheet at September 26, 1998 and September 27, 1997 were as follows:
AS OF --------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 - ---------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Inventory $ 10,278 $ 10,618 Operating expenses 44,732 54,218 Intercompany profit in inventory and fixed assets 6,345 7,334 Depreciation 12,110 5,933 Restructuring 40,663 1,403 Stock option plans 7,503 6,026 Interest on convertible debentures 1,940 1,842 Net operating losses 150,129 116,043 Tax credits 19,090 17,696 -------- -------- Gross deferred tax assets 292,790 221,113 Less: Valuation allowances 260,235 195,071 -------- -------- Total deferred tax assets 32,555 26,042 -------- -------- DEFERRED TAX LIABILITIES Capitalized software development costs (35,132) (28,695) Other (3,535) (2,748) -------- -------- Total deferred tax liabilities (38,667) (31,443) -------- -------- Net deferred tax liabilities $ (6,112) $ (5,401) -------- --------
Reconciliation of the U.S. Federal statutory rate to the Company's effective tax rate is as follows:
YEAR ENDED --------------------------------------------------------- SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - ----------------------------------------------------------------------------------------------------------------- U.S. Federal statutory rate (35.0%) 35.0% 35.0% State income taxes 0.5 1.4 2.5 Net domestic and foreign losses without tax benefits 37.9 3.7 15.0 Net operating loss carryforwards utilized (0.2) (36.8) (42.1) Foreign income taxed at different rates (1.1) 0.4 (1.5) Alternative minimum tax - 0.4 2.1 Other - - 0.1 ----- ----- ----- Effective tax rate 2.1% 4.1% 11.1% ----- --- ----- -----
The Company has U.S. Federal and foreign operating loss carryforwards of approximately $395 million and tax credit carryforwards of approximately $18 million. The operating loss carryforwards expire in the years 1999 through 2018. The operating loss carryforward expiring in 1999 is an immaterial amount. The tax credit carryforwards expire in the years 2000 through 2017. Provision has not been made for U.S. or additional foreign taxes on approximately $89 million of undistributed earnings of foreign subsidiaries, as those earnings are considered to be permanently reinvested. Such earnings would become taxable upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. It is not practicable to estimate the amount of the deferred tax liability on such earnings. Upon remittance, certain foreign countries impose withholding taxes that are then available, subject to certain limitations, for use as credits against the Company's U.S. tax liability, if any. The amount of withholding tax that would be payable upon remittance of the entire amount of undistributed earnings would approximate $1.0 million. NOTE 6. DEBT
AS OF -------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 - ------------------------------------------------------------------------------------------------------ 6% Convertible Subordinated Notes due 2004 $212,750 $212,750 --------- --------
The 6% Convertible Subordinated Notes are convertible at the option of the holder, at any time prior to maturity, into shares of Common Stock of the Company at a conversion price of $26.194 per share, subject to adjustment for certain events. The Notes are subordinated to all Senior Indebtedness (as defined in an indenture under which the Notes were issued.) At any time on or after May 18, 2000, the Company may redeem the Notes at decreasing redemption prices; and they may be redeemed at the option of the holder if there is a Fundamental Change (as defined in the indenture) in the Company's operations. The indenture does not contain any financial covenants or any restrictions on the payment of dividends or the repurchase of the Company's securities. Deferred debt issuance costs at September 26, 1998 and September 27, 1997 of $4.8 and $5.6 million, respectively, are being amortized to interest expense over the life of the Notes. The Company does not have any maturity requirements for long-term debt for the next five fiscal years. 34 At September 26, 1998, the Company had a $45 million unsecured letter of credit and reimbursement facility with a group of banks. This facility is available for working capital, capital expenditures, permitted acquisitions, and to secure the issuance of letters of credit. It contains certain covenants, including restrictions on particular liens, other indebtedness, and certain investments. The interest rate for borrowings under the letter of credit and reimbursement facility is the lower of 1.375% per annum above LIBOR or the prime rate plus 0.25%. Commitment fees paid on available funds during fiscal years 1998 and 1997 were not material. There were $4.7 million and $5.0 million of letters of credit secured by the $45 million letter of credit and reimbursement facility at September 26, 1998 and September 27, 1997, respectively. During fiscal years 1998 and 1997, there were no borrowings under this facility. The facility has a duration of three years and expires on September 30, 2000. On October 10, 1996, the Company acquired a $3.9 million principal amount of the 8 3/8% Sinking Fund Debentures at a discount. The transaction resulted in an immaterial gain. On May 21, 1997, the Company redeemed the remaining Sinking Fund Debentures. The Company paid a premium to debenture holders, and the transaction resulted in an immaterial loss. The debentures were retired using a portion of the proceeds of the issuance of 6% Convertible Subordinated Notes due 2004. On August 18, 1997, the Company redeemed $125 million of its 7 3/4% Convertible Subordinated Debentures due 2001 at a redemption price of 103.1% of the principal face value plus accrued interest to the redemption date. The debentures provided for conversion into Common Stock of Data General at a conversion price of $19.20 any time before the redemption date. Prior to August 18, 1997, $124.8 million of debentures were converted, which resulted in the issuance of 6.5 million shares of Common Stock. NOTE 7. FINANCIAL INSTRUMENTS, COMMITMENTS, AND CONTINGENCIES FINANCIAL INSTRUMENTS. The Company enters into various types of financial instruments in the normal course of business. Fair values for certain financial instruments are based on quoted market prices. For other financial instruments, fair values are estimated based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates reflecting varying degrees of perceived risk. Accordingly, the fair values may not represent actual values of the financial instruments that could have been realized as of year end or that will be realized in the future. Fair values for cash and temporary cash investments, marketable debt securities, accounts receivable, notes payable, accounts payable, and accrued expenses approximate carrying value at September 26, 1998 and September 27, 1997, due to the relatively short maturity of these financial instruments. The Company holds three publicly traded equity securities as part of its marketable securities portfolio. These securities are considered to be readily marketable and are classified as available-for-sale. The fair value of these marketable equity securities totaled $9.8 million and $4.0 million at September 26, 1998 and September 27, 1997, respectively. The fair value of investments and notes receivable, included in other assets, was $1.6 million and $4.0 million at September 26, 1998 and September 27, 1997, respectively, which is equal to their carrying values. The fair value of long-term debt, including debt due within one year, at September 26, 1998 and September 27, 1997 was $170.7 million and $267.8 million, respectively, compared to carrying values of $212.8 million for the years ended September 26, 1998 and September 27, 1997. The Company enters into various forward contracts to limit its exposure to fluctuations in foreign currency exchange rates. As of September 26, 1998, in connection with the Company's foreign exchange hedging programs, the Company had entered into forward exchange contracts to purchase $81.5 million and to sell $153.7 million in various foreign currencies. The Company's exposure to credit risk is believed to be minimal since the counterparties are major financial institutions. The market risk exposure is limited to risk related to currency rate movements. As substantially all of these contracts were entered into shortly before year end, the fair value of outstanding contracts at September 26, 1998 approximates the original value of the forward contracts. Between September 26, 1998 and September 30, 1998, forward exchange contracts to purchase $81.5 million and to sell $78.0 million in various foreign currencies matured and were settled. The remaining contracts mature at various dates through January 27, 1999 and are not concentrated in any one currency. The Company's temporary cash investments, marketable securities, and accounts receivable are subject to potential concentrations of credit risk. The Company's investment policies limit the amount of investments in a single institution and restrict investments to low-risk, highly liquid securities. Portions of the Company's trade receivables are concentrated in the U.S. government and in the healthcare industry. Management does not believe that the Company is subject to any unusual risk beyond the normal credit risk attendant to operating its business. Ongoing credit evaluations of customers' financial condition are performed, and generally, collateral is not required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. In the normal course of business, the Company enters into certain sales-type lease arrangements with customers. These leases are generally sold to third-party financing institutions. A portion of these arrangements contains certain recourse provisions under which the Company remains liable. The Company's maximum exposure under the recourse provisions was approximately $15.3 million, net of related reserves. A portion of this contingent obligation is collateralized by security interests in the related equipment. The fair value of the recourse obligation at September 26, 1998 was not determinable as no market exists for these obligations. LEASE COMMITMENTS. Lease agreements are primarily for sales and service offices and the Company's corporate headquarters. The leases expire at various dates through 2015 and some contain options for renewal. Rental expense, including amounts charged against previously established restructuring reserves for vacant and sublet properties, was $28.9 million, $29.9 million, and $32.2 million for fiscal years 1998, 1997, and 1996, respectively. 35 Future minimum rental payments under existing non-cancelable operating leases as of September 26, 1998 are as follows: FISCAL YEAR IN MILLIONS - ------------------------------------------------- 1999 $ 20.7 2000 18.2 2001 15.4 2002 12.7 2003 9.9 Subsequent to 2003 73.6 --------- $150.5 --------- The majority of the leases contain escalation clauses which provide for increases in base rentals to recover increases in future operating costs. The future minimum rental payments shown above include base rentals, exclusive of any future escalation. Approximately $64.8 million, prior to amounts expected to be recovered through subleases, of the future minimum rental payments shown above relate to facilities which have been closed or are expected to be closed as the result of the Company's restructuring and cost reduction programs. A portion of the future rental obligations for these facilities, net of amounts expected to be recovered through existing and future subleases, has been accrued as part of the restructuring charges. LITIGATION. 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 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 AViiON and CLARiiON computer systems 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 counterclaim, 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. NOTE 8. STOCKHOLDERS' EQUITY The Company has 100,000,000 authorized shares of Common Stock. As of September 26, 1998, 49,898,000 shares of Common Stock have been issued, of which 209,000 shares with a cost of $5.9 million are held by the Company as treasury shares. As of September 27, 1997, 48,808,000 shares of Common Stock had been issued, of which 220,000 shares with a cost of $6.5 million were held by the Company as treasury shares. The Company has 1,000,000 authorized shares of $.01 par value preferred stock. The Company's Board of Directors (the "Board") is authorized to issue shares of preferred stock in such series and with such terms and conditions as the Board may determine. In connection with the adoption of the Company's Stockholder Rights Plan (see below), as of September 26, 1998, 600,000 shares of preferred stock had been designated as Series A Junior Participating Preferred Stock. No shares of preferred stock have been issued as of September 26, 1998. Under the Stockholder Rights Plan adopted in 1986, as amended, a dividend of Stock Purchase Rights (the "Rights") was paid. The Rights enable common stockholders to purchase from the Company shares of Series A Junior Participating Preferred Stock under certain circumstances following the acquisition of, or attempt to acquire, 20% or more of the Company's Common Stock or a determination that an "adverse person" has purchased 15% or more of the Common Stock. The Rights also entitle common stockholders to purchase shares of the Company's or an acquirer's Common Stock at one-half of market value under circumstances which include certain transactions by or with a potential acquirer, including "adverse persons," and mergers and certain asset sales. The Rights may be redeemed by the Company under certain circumstances. NOTE 9. STOCK PLANS The Company adopted SFAS 123, "Accounting for Stock-Based Compensation" in fiscal 1997. As permitted by SFAS 123, the Company continues to measure compensation cost in accordance with APB Opinion Number 25 and related Interpretations in accounting for its plans. Had compensation cost for the Company's stock-based compensation plans, including the employee stock purchase plan, been determined based on the fair value at the grant dates for awards under these plans consistent with the method of SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been reduced to the pro-forma amounts indicated below: YEAR ENDED --- ---------------------------------- ----------------- SEPT. 26, 1998 SEPT. 27,1997 SEPT. 28, 1996 ------------------- ------------------ ----------------- Net income (loss) (in thousands) As reported $(152,395) $55,900 $28,145 Pro forma $(158,790) $52,473 $26,161 Diluted earnings (loss) per share As reported $(3.11) $1.26 $0.68 Pro forma $(3.24) $1.19 $0.64
The effect on net income (loss) and earnings (loss) per share is not expected to be indicative of the effects in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: YEAR ENDED ------------------- ------------------------------------ SEPT. 26,1998 SEPT. 27, 1997 SEPT. 28, 1996 ------------------- ------------------ ----------------- Expected volatility 41.22% 38.75% 42.91% Risk-free interest rate 5.6% 5.9% 5.6% Expected life of options in years 3.9 4.2 4.2 Expected dividend yield - - -
During fiscal years 1998, 1997, and 1996, the weighted average grant-date fair value of options granted was $8.31, $10.73, and $6.09 per share, respectively, and the exercise price of options granted was $11.46, $11.70, and $8.65 per share, respectively. 36 EMPLOYEE STOCK OPTION PLANS. As of September 26, 1998 the Company had three employee stock option plans that authorize the grant of either incentive stock options or non-qualified stock options to key employees to purchase up to 21,500,000 shares of Common Stock. For incentive options, the purchase price is equal to the fair market value on the date of grant. For non-qualified options, the purchase price is determined by the plan committees within limits as set forth in the plans. Options granted under the plans generally are immediately exercisable and include restrictions against disposition of the shares and a requirement, upon termination of employment, to offer unvested shares for resale to the Company at their original purchase price. The periods over which restrictions lapse are determined by the plan committees. Options may expire up to ten years after date of grant. A summary of the status of these stock option plans as of September 26, 1998, September 27, 1997, and September 28, 1996 and changes during the years ending on those dates is presented as follows: NUMBER WTD. OF OPTIONS AVG. PRICE (000's) PER SHARE - ------------------------------------------------------------------------------------------------------------- Outstanding, September 30, 1995 5,442 $5.49 Options granted 624 $6.43 Options exercised (958) $4.25 Options canceled (298) $5.63 ------ Outstanding, September 28, 1996 4,810 $5.88 Options granted 1,274 $9.40 Options exercised (1,900) $5.39 Options canceled (151) $6.14 ------ Outstanding, September 27, 1997 4,033 $7.22 Options granted 1,885 $12.32 Options exercised (390) $5.14 Options canceled (334) $8.18 ------ Outstanding, September 26, 1998 5,194 $9.16 Exercisable, September 26, 1998 1,812 $7.05 Options reserved for future grants, September 26, 1998 3,351
The following table summarizes information about these plans at September 26, 1998:
Options Options Outstanding Currently Exercisable ------------------------------------------------- ----------------------------- Wtd. Avg. Exercise No. of Contractual Wtd. Avg. No. of Wtd. Avg. Price Range Options Life (in years) Exercise Options Exercise Price (000's) Price (000's) - ----------------------- ------------- ----------------- ------------------ -- ---------- ------------------ $1.06 - $3.97 384 6.14 $3.27 255 $3.19 $4.00 - $7.94 2,326 7.44 $6.09 785 $5.09 $8.00 - $20.00 2,484 7.81 $12.96 772 $10.31
1998 EMPLOYEE STOCK OPTION PLAN. On November 4, 1998, the Board of Directors established a fourth employee stock option plan (the "1998 Plan"). The 1998 Plan is a broadly based plan in which all employees of the Company are eligible to participate. The 1998 Plan authorizes the grant of stock options to employees to purchase up to 2,500,000 shares of Common Stock. The purchase price per share is at the discretion of the 1998 Employee Stock Option Plan Committee appointed by the Board of Directors, but shall not be lower than 25% of the fair market value of the Company's Common Stock on the date of grant or 50% of the Company's book value per share of the Common Stock as of the fiscal year end preceding the date of grant. Options granted under the plan are generally immediately exercisable and include restrictions against disposition of the shares and a requirement, upon termination of employment, to offer unvested shares for resale to the Company at their original purchase price. The periods over which restrictions lapse is determined by the Board of Directors or the 1998 Employee Stock Option Plan Committee. Options may expire up to ten years after date of grant. EMPLOYEE QUALIFIED STOCK PURCHASE PLAN. This plan covers substantially all employees and authorizes the issuance of a maximum of 11,100,000 shares of Common Stock upon exercise of nontransferable options granted semiannually. The options are exercisable six months after grant, at the lower of 85% of market value at the beginning or end of the six-month period, through accumulation of payroll deductions of up to 10% of each participating employee's regular base pay at the beginning of each period. During fiscal 1998, options were exercised to purchase 682,000 shares at an average price of $12.18 per share. Unissued shares of Common Stock reserved for future issuance under this plan were 1,598,000 shares at September 26, 1998 and 2,280,000 shares at September 27, 1997. 1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. This plan authorizes the grant of an option to purchase 4,000 shares of Common Stock to each non-employee director on the date of the director's annual election(s) to the Board of Directors. The exercise price of options granted is 100% of the closing price per share of Common Stock on the date of grant. An aggregate of 150,000 shares of Common Stock may be issued under the plan. Options granted are immediately exercisable and include restrictions against disposition of the shares. Should the optionee cease to serve as a director, except under certain circumstances, any restricted shares must be offered to the Company at their original purchase price. Restrictions lapse cumulatively to the extent of 25% of the grant on each anniversary of the date of grant. During fiscal 1998, 1997, and 1996, 24,000, 28,000, and 24,000 options were granted at a weighted average price of $15.44, $20.30, and $15.75 per share, respectively. During fiscal 1998 and 1997, options were exercised to purchase 16,000 and 11,000 shares at a weighted average price of $12.69 and $9.12 per share, respectively. There were no options exercised during fiscal year 1996. There were no options canceled during fiscal years 1998, 1997, and 1996. Options to purchase 89,000, 81,000, and 64,000 shares at a weighted average price of $15.18, $14.61, and $11.17 per share, respectively, were outstanding at the end of fiscal 1998, 1997, and 1996. As of September 26, 1998, the 89,000 options outstanding in this plan have exercise prices between $8.39 and $33.31, with a weighted average remaining contractual life of 7.9 years, and 29,000 shares were exercisable at a weighted average price of $12.72 per share. There were 34,000 shares reserved for future grants at September 26, 1998. 37 1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. On November 4, 1998, the 1998 Non-Employee Director Stock Option Plan was approved. This plan authorizes the grant of an option to purchase 7,500 shares of Common Stock reduced by the number of shares available for purchase under options granted from the 1994 Non-Employee Director Stock Plan described above on the date of the director's annual election(s) to the Board of Directors. The exercise price of options granted is 100% of the closing price per share of Common Stock on the date of grant. An aggregate of 150,000 shares of Common Stock may be issued under the plan. The Board of Directors has reserved 150,000 of the Company's treasury shares to utilize under this plan. Options granted are immediately exercisable and include restrictions against disposition of the shares. Should the optionee cease to serve as a director, except under certain circumstances, any restricted shares must be offered to the Company at their original purchase price. Restrictions lapse cumulatively to the extent of 25% of the grant on each anniversary of the date of grant. NON-EMPLOYEE DIRECTOR RESTRICTED STOCK OPTION PLAN. This plan authorized the grant of an option to purchase 4,000 shares of Common Stock to each non-employee director upon the director's initial election to the Board of Directors. The exercise price of options granted is the lesser of 50% of the book value per share of Common Stock at the end of the fiscal year preceding the date of grant or 25% of the fair market value per share on the date of grant. An aggregate of 32,000 shares of Common Stock may be issued under the plan. Options granted are immediately exercisable and include restrictions against disposition of the shares. Should the optionee cease to serve as a director, except under certain circumstances, any restricted shares must be offered to the Company at their original purchase price. Restrictions lapse cumulatively to the extent of 25% of the grant on each anniversary of the date of grant. During fiscal year 1998 and 1996, options were exercised to purchase 2,000 and 4,000 shares, respectively, at a weighted average price of $4.38 per share. There were no options exercised in fiscal 1997. There were no options canceled during fiscal years 1998, 1997, and 1996. At September 26, 1998, options to purchase 8,000 shares at exercise prices between $1.81 and $2.66, with a weighted average remaining contractual life of 6.0 years, were outstanding, and 7,000 shares were exercisable at a weighted average price of $2.17 per share. This plan terminated on December 31, 1994. Outstanding options can be exercised until their expiration date. No new options can be issued. NOTE 10. BENEFIT PLANS The Company has a noncontributory defined benefit pension plan which covers substantially all U.S. employees. The Company also has a supplemental retirement benefit plan, which covers certain U.S. employees. Benefits under the plans are based on an employee's regular base pay and creditable years of service, as defined in the plans. Certain of the Company's foreign subsidiaries also have retirement plans covering substantially all of their employees. Benefits under these plans are generally based on either career average or final average salaries and creditable years of service, as defined in the plans. The annual cost for these plans is determined using the projected unit credit actuarial cost method which includes significant actuarial assumptions and estimates which are subject to change in the near term. Prior service cost is amortized over the average remaining service period of employees expected to receive benefits under the plan. Funds contributed to the plans are invested primarily in common stocks, mutual funds, global bond funds, and cash equivalent securities. The components of net pension expense are as follows:
YEAR ENDED ------------------------------------------------------------ IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - ---------------------------------------------------------------------------------------------------------- Service cost $ 9,992 $ 7,886 $ 7,468 Interest on projected benefit obligation 16,981 14,127 12,736 Actual return on plan assets 4,080 (32,325) (14,362) Deferral of net actuarial gains/(loss) and amortization of transition surplus and prior service cost (23,861) 17,261 2,283 Special termination benefit charge 1,044 - - Curtailment loss, net of settlement gain 1,197 316 (50) ------- ------- ------- Net pension expense $ 9,433 $ 7,265 $ 8,075 ------- ------- -------
The funded status of the plans is as follows:
AS OF ------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 - ----------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Vested benefit obligation $240,339 $174,673 -------- -------- Accumulated benefit obligation $252,334 $183,164 -------- -------- Projected benefit obligation $274,216 $203,070 Market value of plan assets 213,472 192,424 -------- -------- Excess of projected benefit obligation over plan assets 60,744 10,646 Unrecognized actuarial gain/(loss) (38,277) 15,560 Unrecognized prior service cost (23,388) (16,561) Unrecognized transition surplus, net 5,402 6,236 -------- -------- Net pension liability included in current and other liabilities $ 4,481 $ 15,881 -------- -------- ASSUMPTIONS USED IN COMPUTING THE FUNDED STATUS OF THE PLANS Weighted average discount rate 6.96% 7.63% Expected long-term weighted average rate of return of assets 9.28% 9.41% Weighted average rate of increase in compensation levels 4.00% 4.16%
38 As of October 1, 1997, the U.S. plan was amended to change the benefit for creditable service prior to October 1, 1997 to 1 1/2% of a participant's average base pay on October 1, 1997. The benefit formula for future service did not change. The update generally resulted in increased benefits to participants with creditable service prior to October 1, 1997. As of September 26, 1998, the Company recorded a liability of $26.7 million to recognize the accumulated benefit obligation in excess of plan assets and an intangible asset of $20.4 million equal to the amount of unrecognized prior service cost for the U.S pension plan. The amount of the accumulated benefit obligation in excess of the intangible asset of $6.3 million has been recorded as a separate component of stockholders' equity. The Company also has foreign defined contribution pension plans. Total pension cost charged to expense for these plans was $2.3 million in fiscal 1998, and $1.6 million in both fiscal years 1997 and 1996. The Company's post-retirement benefit plan provides certain medical and life insurance benefits for retired employees. Substantially all U.S. employees of the Company may become eligible for these benefits if they remain employed until normal retirement age and fulfill other eligibility requirements as specified by the plan. With the exception of certain participants who retired prior to 1986, the medical benefit plan requires monthly contributions by retired participants in amounts equal to insured equivalent costs less a fixed Company contribution which is dependent on the participant's length of service and Medicare eligibility. Benefits are continued to dependents of eligible retiree participants for 39 weeks after the death of the retiree. The life insurance benefit plan is noncontributory. Funds contributed to the plan are invested primarily in common stocks, mutual funds, and cash equivalent securities. The components of net periodic post-retirement benefit cost are as follows: YEAR ENDED ---------------------------------------------------------- IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 - -------------------------------------------------------------------------------------------------------- Service cost $ 325 $ 296 $ 293 Interest on projected benefit obligation 722 687 655 Actual return on plan assets 7 (26) (56) Deferral of net actuarial gains and amortization of transition surplus and prior service cost 288 247 282 ------ ------ ------ Net pension expense $1,342 $1,204 $1,174 ------ ------ ------
The funded status of the plan is as follows: AS OF IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 - ------------------------------------------------------------------------------------------------------------- ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION Retirees $4,464 $4,273 Fully eligible active plan participants 1,370 1,206 Other active plan participants 4,637 4,085 ------ ------ Total accumulated post-retirement benefit obligation 10,471 9,564 Market value of plan assets 301 88 ------ ------ Excess of accumulated post-retirement benefit obligation over plan assets 10,170 9,476 Unrecognized transition obligation (1,973) (2,292) Unrecognized prior service cost (603) (719) Unrecognized actuarial gain 662 1,293 ------ ------ Net post-retirement benefit liability included in current and other liabilities $8,256 $7,758 ------ ------ ASSUMPTIONS USED IN COMPUTING THE FUNDED STATUS OF THE PLAN Weighted average discount rate 7.25% 7.75% Expected long-term weighted average rate of return of assets 10.00% 10.00%
For participants who receive full retiree medical benefits, the medical premium rates were assumed to increase at 7% for fiscal 1998 and thereafter. A 1% increase in the medical trend rate would not have a significant impact on the accumulated post-retirement benefit obligation as of September 26, 1998. NOTE 11. EARNINGS PER SHARE 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 (loss) per share and the effect on income (loss) and the weighted average number of shares of potentially dilutive common stock.
YEAR ENDED ------------------------------------------------------------------------------- SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996 ------------------------- ------------------------- ------------------------- (LOSS) SHARES PER-SHARE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE IN THOUSANDS, EXCEPT PER-SHARE (NUM.) (DEN.) AMOUNT (NUM.) (DEN.) AMOUNT (NUM.) (DEN.) AMOUNT AMOUNTS ------------------------- ------------------------- ------------------------- BASIC EARNINGS (LOSS) PER SHARE Net income (loss) available to common stockholders $(152,395) 49,038 $(3.11) $55,900 41,347 $1.35 $28,145 38,769 $0.73 EFFECT OF DILUTIVE SECURITIES Stock options - - - 2,868 - 2,326 DILUTED EARNINGS (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions $(152,395) 49,038 $(3.11) $55,900 44,215 $1.26 $28,145 41,095 $0.68 --------- ------ ------- ------- ------ ----- ------- ------ -----
For the years ended September 26, 1998, September 27, 1997, and September 28, 1996, the assumed conversion of 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 year ended September 26, 1998, the assumed exercise of stock options, giving effect to the incremental shares is anti-dilutive and has been excluded from the calculation. 39 NOTE 12. GEOGRAPHIC SEGMENT DATA The Company's operations involve a single industry segment - the design, manufacture, sale, and support of multi-user computer systems, servers, and mass storage devices. Financial information, summarized by geographic area, is presented below.
OTHER IN THOUSANDS UNITED STATES EUROPE INTERNATIONAL ELIMINATIONS CONSOLIDATED - ------------------------------------------------------------------------------------------------------------ YEAR ENDED SEPTEMBER 26, 1998 Total revenues Unaffiliated customers $1,057,684 $286,362 $118,063 $1,462,109 Inter-area transfers 121,531 - 23,933 $(145,464) - ---------- -------- -------- ---------- ---------- Total $1,179,215 $286,362 $141,996 $(145,464) $1,462,109 ---------- -------- -------- ---------- ---------- Restructuring Charge $ 49,660 $ 26,927 $ 5,813 - $ 82,400 ---------- -------- -------- ---------- ---------- Loss from operations $ (118,356) $(23,841) $ (5,145) $ (1,279) $ (148,621) ---------- -------- -------- ---------- ---------- Identifiable assets $ 616,740 $216,296 $ 85,632 $ (82,704) $ 835,964 ---------- -------- -------- ---------- Corporate assets 229,100 ---------- Total assets $1,065,064 ---------- YEAR ENDED SEPTEMBER 27, 1997 Total revenues Unaffiliated customers $1,133,230 $273,838 $126,101 $1,533,169 Inter-area transfers 115,620 - 29,608 $(145,228) - ---------- -------- -------- ----------- ---------- Total $1,248,850 $273,838 $155,709 $(145,228) $1,533,169 ---------- -------- -------- ----------- ---------- Income (loss) from operations $ 70,274 $ (5,031) $ (4,563) $ 2,493 $ 63,173 ---------- -------- -------- ----------- ---------- Identifiable assets $ 684,899 $184,554 $ 94,684 $(129,523) $ 834,614 ---------- -------- -------- ----------- Corporate assets 300,254 ---------- Total assets $1,134,868 ---------- YEAR ENDED SEPTEMBER 28, 1996 Total revenues Unaffiliated customers $ 941,916 $263,461 $116,873 $1,322,250 Inter-area transfers 120,810 - 26,497 $(147,307) - ---------- -------- -------- ---------- ---------- Total $1,062,726 $263,461 $143,370 $(147,307) $1,322,250 ---------- -------- -------- ---------- ---------- Income (loss) from operations $ 42,277 $ 3,054 $(9,613) $ 1,559 $ 37,277 --------- -------- -------- ---------- ---------- Identifiable assets $ 562,845 $177,903 $88,614 $(106,897) $ 722,465 ---------- --------- -------- ---------- Corporate assets 137,978 ---------- Total assets $ 860,443 ----------
United States inter-area transfers primarily represent shipments of equipment and parts to international subsidiaries. Other international inter-area transfers primarily represent shipments of work in process and finished goods inventory from manufacturing facilities to domestic operations. These inter-area shipments are made at transfer prices which approximate prices charged to unaffiliated customers and have been eliminated from consolidated net revenues. United States revenues from unaffiliated customers include direct export sales. Corporate assets consist primarily of temporary cash investments and marketable securities. Total liabilities of international subsidiaries, before intercompany eliminations, were $252.3 million as of September 26, 1998 and $247.2 million as of September 27, 1997. Cumulative retained earnings of international subsidiaries were $94.1 million as of September 26, 1998 and $87.7 million as of September 27, 1997. 40 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF DATA GENERAL CORPORATION In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows, and of stockholders' equity present fairly, in all material respects, the financial position of Data General Corporation and its subsidiaries at September 26, 1998 and September 27, 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 26, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts October 28, 1998 SUPPLEMENTAL FINANCIAL INFORMATION QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH FISCAL IN MILLIONS, EXCEPT PER SHARE AMOUNTS QUARTER QUARTER QUARTER QUARTER YEAR - ----------------------------------------------------------------------------------------------------------- FISCAL 1998 Total revenues $365.3 $361.8 $351.3 $383.7 $1,462.1 Total cost of revenues 249.3 253.8 304.2 264.2 1,071.5 Net income (loss) 3.5 (4.5) (155.1) 3.7 (152.4) Net income (loss) per share $0.07 $(0.09) $(3.15) $0.07 $(3.11) FISCAL 1997 Total revenues $348.5 $389.3 $391.3 $404.1 $1,533.2 Total cost of revenues 229.5 260.8 260.9 270.4 1,021.6 Net income 10.4 13.8 14.7 17.0 55.9 Net income per share $0.25 $0.32 $0.34 $0.35 $1.26
STOCK PRICE RANGE The principal markets on which the Company's stock is traded are the New York Stock Exchange ("NYSE") under the symbol "DGN," and the London Stock Exchange. The table below shows the range of reported last sale prices on the NYSE for the Company's Common Stock during each quarterly period for the last two fiscal years.
FISCAL 1998 FISCAL 1997 ------------------------- ------------------------- HIGH LOW HIGH LOW - ---------------------------------------------------------------------------------------------------------------- First quarter 27 16 5/16 15 5/8 13 Second quarter 21 5/16 13 13/16 20 3/8 14 1/2 Third quarter 19 1/8 14 1/16 26 1/2 15 5/8 Fourth quarter 15 15/16 7 7/16 37 1/4 25 3/4
41 DIRECTORS AND SENIOR MANAGEMENT DATA GENERAL CORPORATION Frederick R. Adler Director, Chairman of the Executive Committee; of counsel to Fulbright & Jaworski L.L.P. Attorneys at Law, New York, New York Ethan Allen Jr. Senior Vice President and General Manager, AViiON Enterprise Server Division Stephen P. Baxter Vice President, Europe/Pacific Ferdinand Colloredo-Mansfeld Director; Chairman of the Board and Chief Executive Officer, Cabot Industrial Trust, Boston, Massachusetts Jeffrey M. Cunningham Director; Business Consultant William J. Cunningham Senior Vice President, Manufacturing, Information Management, and Customer Services Arthur W. DeMelle Senior Vice President; Chief Financial Officer Jacob Frank Vice President and General Counsel John J. Gavin Jr. Vice President; Controller Joel Schwartz Senior Vice President and General Manager, CLARiiON Advanced Storage Division Carl E. Kaplan Secretary; Senior Partner, Fulbright & Jaworski L.L.P. Attorneys at Law, New York, New York Robert C. McBride Vice President; Treasurer Anthony C. Nicoletti Vice President, Asia and CLARiiON Asia/Pacific Ronald L. Skates President and Chief Executive Officer; Director W. Nicholas Thorndike Director; Corporate Director and Trustee Donald H. Trautlein Director; Retired Chairman, Bethlehem Steel Corporation, Bethlehem, Pennsylvania Richard L. Tucker Director; Managing Director, Trinity Investment Management Corporation, Boston, Massachusetts FACILITIES Data General does business in more than 70 countries through direct sales, subsidiaries, distributors, and representatives. The company has approximately 220 sales and service offices. Major administrative, development, manufacturing, and support facilities, and subsidiaries' headquarters locations are listed below. FACILITY LOCATION Westborough, Massachusetts corporate headquarters; administration; product (512,000/Leased) development; special systems Southborough, Massachusetts manufacturing service division; software (545,000) reproduction; distribution center; equipment refurbishment; major unit repair; custom product manufacturing; field engineering services and logistics; and the CLARiiON Storage Division Apex, North Carolina assembly, test and systems integration facility (388,000) Research Triangle Park, advanced systems research and development North Carolina (174,000) Duluth, Georgia customer support center (86,000/Leased) Mississauga, Ontario, Canada sales; field engineering; administration (32,000/Leased)* Etobicoke, Ontario, Canada product repair center (18,000/Leased) Chihuahua, Mexico product repair center (55,000/Leased) Schwalbach, Germany sales; customer education; services (23,000/Leased) Brentford, England sales; services; administration; customer (120,000/Leased)** education Manila, Philippines power supply and transformer manufacturing; (68,000) communications products assembly and test Melbourne, Australia product repair center; logistics and equipment (31,000/Leased) refurbishment SUBSIDIARY HEADQUARTERS Canada Toronto/Mississauga ASIA/PACIFIC Australia Sydney Hong Kong Japan Tokyo Korea Seoul Malaysia Kuala Lumpur New Zealand Wellington Singapore Thailand Bangkok EUROPE Austria Vienna Belgium Brussels Denmark Copenhagen/Smedeholm France Paris/Velizy Germany Frankfurt/Schwalbach Italy Milan Netherlands Amsterdam Norway Oslo/Voyenenga Spain Madrid Sweden Stockholm/Kista Switzerland Zurich United Kingdom and Ireland London/Brentford LATIN AMERICA Argentina Buenos Aires Brazil Sao Paulo Chile Santiago Mexico Monterrey Peru Lima Puerto Rico San Juan Venezuela Caracas * Includes 6,000 square-feet of sub-leased space. ** Includes 42,000 square-feet of sub-leased space. 42 CORPORATE INFORMATION CORPORATE HEADQUARTERS Data General Corporation 4400 Computer Drive Westborough, Massachusetts 01580 508-898-5000 LEGAL COUNSEL Fulbright & Jaworski L.L.P. New York, New York INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP Boston, Massachusetts DEBENTURE TRUSTEE The Bank of New York Corporate Trust Office 101 Barclay St., Floor 21 West New York, New York 10286 TRANSFER AGENT AND REGISTRAR The Bank of New York 800-524-4458 Address Shareholder Inquiries to: The Bank of New York Shareholder Relations Department - 11E Post Office Box 11258 Church Street Station New York, New York 10286 Send Certificates For Transfer and Address Changes to: The Bank of New York Receive and Deliver Department - 11W Post Office Box 11002 Church Street Station New York, New York 10286 STOCK EXCHANGE LISTING New York Stock Exchange London Stock Exchange Unlisted trading privileges on Boston, Midwest, Philadelphia, Pacific, and Cincinnati exchanges TRADING SYMBOL DGN Listed NYSE ANNUAL MEETING The Annual Meeting of Stockholders will be held at 1:00 p.m., January 27, 1999, in the Enterprise Room, State Street Bank Building, 225 Franklin Street, Boston, Massachusetts. NUMBER OF STOCKHOLDERS As of September 26, 1998, there were approximately 10,500 stockholders of record. This number excludes individual stockholders holding stock under nominee security position listings DIVIDEND POLICY No cash dividends have been declared or paid by the Company since its inception. It is the policy of the Company to retain any cash flow for future business expansion. The Company anticipates no changes in this policy in the foreseeable future. PUBLISHED INFORMATION The Company's Annual Report,Interim Reports, Form 10-K, and Quarterly Reports on Form 10-Q as filed with the Securities and Exchange Commission, and other published information are available on request to: Investor Relations Department Data General Corporation 4400 Computer Drive, Mail Stop 9S/22 Westborough, Massachusetts 01580 Published information, as well as mailed or faxed copies of quarterly financial press releases, can be obtained by calling 1-800-941-2382. All information is available on Data General's internet web site at www.dg.com. In the section titled "About Data General," select"Financial Information for Investors." Investors may also choose to: o Request information using e-mail to info@dg.com o Dial the Company's FAX-back system at 1-800-99-DGFAX (North America only) and press 411 to receive a menu of publications by facsimile o Call Data General Corporation at 1-800-DATAGEN This report contains forward-looking statements under the captions "To Our Stockholders, Customers, and Employees" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which reflect Management's current views of future events and financial performance. These forward-looking statements involve risks and uncertainties, and are based upon many assumptions and factors, including the effects of period-to-period fluctuations, OEM inventory positions, and new product development and marketing. Many of these factors are discussed in the Company's Securities and Exchange Commission filings, including its annual report on Form 10-K for the year ended September 26, 1998. Any changes in such assumptions or factors could produce significantly different results. Data General An Equal Opportunity / Affirmative Action Employer Making a Commitment to Workforce Diversity AViiON, CLARalert, CLARiiON, Cluster-in-a-Box, DG/UX, DG/ViiSION, ECLIPSE, Navisphere, and VALiiANT are registered trademarks; AVFlex, DG/UX Cluster, Exchange-in-a-Box, Multidimensional Storage Architecture, NTerprise Manager, QuickClusters, TermServer-in-a-Box, and THiiN are trademarks; and OMNiiCARE, NTAlert and REPAIRiiON are service marks of Data General Corporation. Intel, the Intel Inside logo and Pentium are registered trademarks and Xeon is a trademark of Intel Corporation. Microsoft and Windows NT are registered trademarks of Microsoft Corporation. All other brand and product names may be trademarks or registered trademarks of their respective holders. The terms and conditions governing the sale of Data General hardware products and services, and the licensing of Data General software consist solely of those set forth in the written contracts between Data General and its customers. The materials contained herein are summary in nature, subject to change, and intended for general information only. Details and specifications regarding Data General equipment, services, and software are included in the applicable technical manuals, available from local sales representatives. All rights reserved. Printed in the U.S.A. 43 (BACK COVER) How to contact Data General World Wide Web www.dg.com E-Mail info@dg.co Mail, Telephone, FAX Worldwide Headquarters Data General Corporation 4400 Computer Drive Westborough, Massachusetts 01580 Telephone: 508-898-5000 Literature Requests: 1-800-DATA-GEN FAX: 508-898-7568 European Headquarters Data General Europe Data General Tower Great West Road, Brentford Middlesex TW8 9AN United Kingdom Telephone: +44 (0)181.758.6000 FAX: +44 (0)181.758.6950 Asia/Pacific Headquarters Data General Ltd. 11/F Southwest Wing Warwick House Taikoo Place, 979 Kings Road Quarry Bay, Hong Kong, China Telephone: (852) 2599-6688 FAX: (852) 2506-0221 Latin American Headquarters Data General Corporation 3400 Computer Drive Westborough, Massachusetts 01580 Telephone: 508-898-6680 FAX: 508-898-7924 012-005183-00 Copyright (C) Data General Corporation, 1998. EX-21 6 FY98 SUBSIDIARIES OF REGISTRANT EXHIBIT 21 Subsidiaries of Data General Corporation. The following are the Company's subsidiaries as of September 26, 1998. All beneficial interests are wholly-owned, directly or indirectly, by the Company, with the exception of Data General Technology (1990) Limited which is 45% owned. All subsidiaries are included in the Company's consolidated financial statements. State or Jurisdiction of Name Organization --------------- Asia Data General Corporation Delaware China Data General Corporation Delaware CLARiiON Storage Systems, Inc. Delaware Data General (Canada) Company Nova Scotia Data General A.G. Switzerland Data General A/S Norway Data General A/S Denmark Data General AB Sweden Data General Africa SARL France Data General Australia Pty., Ltd. Australia Data General Bahamas Limited Bahamas Data General BVI, Ltd. British Virgin Islands Data General Chile S.A. Chile Data General Computers Sdn, Bhd. Malaysia Data General Costa Rica S.A. Costa Rica Data General de Mexico, S.A. de C.V. Mexico Data General del Peru, S.A. Peru Data General France S.A.S. France Data General Gesellschaft mbH Austria Data General GmbH Germany Data General Graphics, Inc. Delaware Data General Hong Kong Sales and Service, Ltd. Hong Kong Data General Hong Kong, Ltd. Hong Kong Data General Computers Hungary Ltd. Hungary Data General International Manufacturing Pte., Ltd. Singapore Data General International Sales Corporation Delaware Data General International, Inc. Delaware Data General Investment Corporation Delaware State or Jurisdiction of Name Organization --------------- Data General Ireland, Ltd. Ireland Data General Israel, Ltd. Israel Data General Japan KK Japan Data General Korea, Ltd. Korea Data General Latin America, Inc. Delaware Data General Limited United Kingdom Data General do Brasil Ltda. Brazil Data General Nederland BV The Netherlands Data General New Zealand, Limited New Zealand Data General Philippines, Inc. Philippines Data General (Portugal) Sociedade de Computadores Lda. Portugal Data General Puerto Rico, Inc. Delaware Data General S.A. Belgium Data General S.A. Spain Data General S.p.A. Italy Data General Singapore Pte., Ltd. Singapore Data General Systems (Thailand) Limited Thailand Data General Technology (1990) Limited Israel Data General Telecommunications, Inc. Delaware D G Venezula, C.A. Venezuela Data General Wholesale Pty., Ltd. Australia Datagen Investment Trust Massachusetts Datagen, Inc. Delaware DG Argentina S.A. Argentina D G Foreign Sales Corporation, Inc. Barbados Digital Computer Controls, Inc. Delaware Digital Computer Controls International, Inc. Delaware General Risk Insurance Company Ltd. Bermuda EX-23 7 FY98 INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-91481, 33-19759, 33-53039, 33-58237, 333-31159, 333-31549, and 333-45153) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 333-30199) of Data General Corporation of our report dated October 28, 1998 appearing in the 1998 Annual Report to Stockholders which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 23 of this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts December 17, 1998 EX-27 8 ART. 5 FDS FOR ANNUAL 10-K
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FY98 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR SEP-26-1998 SEP-26-1998 158,220 160,354 326,852 19,424 141,639 795,961 641,612 461,158 1,065,064 430,714 212,750 0 0 626,137 (241,182) 1,065,064 1,067,888 1,462,109 825,954 1,071,491 539,239 0 14,439 (149,395) 3,000 (152,395) 0 0 0 (152,395) (3.11) (3.11)
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