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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
For the Fiscal Year ended June 30, 1998
COMMISSION FILE NUMBER 1-5677
WANG LABORATORIES, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 04-2192707
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Technology Park Drive, Billerica, Massachusetts 01821
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (508) 967-5000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Common Stock Purchase Warrants
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
--- ---
On August 31, 1998, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $568,769,009 based on the closing price of
Common Stock on the Nasdaq National Market on August 31, 1998 and assuming a
market value of $50.00 per share for the Depositary Shares (each representing a
1/20 interest in a share of the 6 1/2% Cumulative Convertible Preferred Stock)
and assuming a market value of $1,000.00 per share for the 4 1/2% Series A
Cumulative Convertible Preferred Stock.
The number of shares outstanding of Common Stock outstanding as of
August 31, 1998 was 46,189,773.
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PART I
ITEM 1. BUSINESS
Wang Laboratories, Inc., a Delaware corporation (together with its
subsidiaries, "Wang" or the "Company"), provides information technology ("IT")
services and solutions, including network and desktop design, integration,
security and management, help desk, maintenance, resale and installation of IT
and communications equipment, warranty support, procurement, electronic commerce
and customer contact solutions for financial services institutions. The Company
provides these services and solutions to customers on six continents and in
major markets around the world. The Company's customers include banking and
other financial institutions, insurance companies, governments and their
affiliates, including the Governments of the United States, Italy, and the
European Commission, and commercial enterprises in the retail, oil and gas and
telecommunications sectors. The Company offers these services and solutions to
enhance the ability of its customers to operate efficiently and more profitably
through common operating environments ("COEs"), specialized solutions and the
Internet. The Company has approximately 21,000 employees in 90 countries of
which approximately 16,000 are technical.
The Company is focused on the network and desktop integration and
consulting, network management and multi-vendor services elements of the IT
services industry in which the Company enjoys substantial technological
expertise and global presence and which, in the Company's judgment, offer
significant growth and market opportunities. The Company intends, by internal
development and acquisition, to expand its position as a worldwide provider of
value-added network design and integration, network management solutions, and
network and desktop support services. The Company also intends to broaden its
customer contact solutions for the financial services industry and broaden its
electronic commerce capabilities to the financial, retail and telecom industries
and the public sector. The Company will continue to service the needs of its
traditional VS minicomputer customers by offering upgrade products, service and
open system coexistence and migration products.
In March 1998, the Company completed the purchase of Olsy, the wholly-owned
information technology solutions and service subsidiary of Ing. C. Olivetti &
Co. S.p.A. ("Olivetti"). Olsy is a provider of IT solutions and services to the
Italian, European and other global markets. Olsy's primary geographical markets
outside Italy are U.K., Netherlands, France, Belgium, North America and Japan.
Olsy delivers solutions and services based on open computing standards,
distributed client server architectures and network infrastructures to
customers, principally in the banking, public authority, utility and retail
sectors. The solutions range from the development of the initial computing
environment to systems integration and include analysis, design, validation,
procurement and production through to delivery and roll out of complete
solutions. The services provided by Olsy include hardware, software and network
maintenance and support, on-site support of distributed desktop computing
environments and consultancy. The Company also acquired a 19.9% interest in
Olivetti Ricerca, the Italian consortium supplying research and development
services to both the IT and telecom sectors. In consideration for Olsy, the
Company paid Olivetti $68.6 million in cash; issued 8,750,000 shares of Common
Stock (of which 1,500,000 are to be delivered subject to approval by the
stockholders at the Company's 1998 Annual Meeting of Stockholders) with a value
of $146.8 million at the time of closing; issued 5,000,000 stock appreciation
rights ("SARs") which give Olivetti value for the increase in the market price
of the Company's Common Stock above $30.00 per share at any time from March 2001
to March 2005 and are redeemable in cash or common stock at the Company's
election; and agreed to pay an additional amount of up to $56.0 million payable
in the year 2000, subject to meeting mutually-agreed performance targets for the
calendar years 1998 and 1999.
Wang and Microsoft Corporation entered into a worldwide multi-year
technical, service and marketing alliance in 1995 pursuant to which Wang
continues to be an authorized provider of end-user support services for
Microsoft products. As one of Microsoft's Authorized Support Centers, Wang
provides end-user support and training for Microsoft products. This support
includes on-site system and integration design and installation, consulting,
network integration, migration support, and end-user help desk services. As part
of this agreement, Microsoft purchased $90.0 million face amount of 4-1/2%
Series A Cumulative Convertible Preferred Stock of Wang due in 2002 (the "4-1/2%
Preferred Stock") for $84.0 million. On March 23, 1998, the Company and
Microsoft announced an expansion of their strategic alliance. The Company will
significantly extend its services capacity by training and certifying 2,500
professionals as Microsoft Certified Systems Engineers and Microsoft Certified
Solution Developers. In addition, the Company will open two customer
demonstration facilities which are Microsoft Centers of Excellence, one in
Billerica, Massachusetts and one in Milan, Italy.
In March 1997, the Company completed the sale of its software business unit
to Eastman Kodak Company ("Kodak") for $260 million in cash. The business sold
to Kodak included the Company's software business unit management, employees,
products, technology, customers and business partners, as well as its sales,
marketing and research and development organizations worldwide. The results of
operations of the Company's software business unit have been reported as
discontinued operations and the financial
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statements of the Company have been restated accordingly.
In May 1997, the Company entered into a worldwide arrangement that expanded
its relationship with Cisco Systems, Inc. ("Cisco"). As a global partner of
Cisco, the Company will be able to supply and service Cisco products to Wang
customers in specified countries around the world.
In November 1996, the Company acquired Advanced Paradigms, Inc. ("API"), a
provider of enterprise-wide Microsoft specific LAN/WAN solutions including
network architecture and design installation. In August 1996, the Company
acquired I-NET, Inc. ("I-NET"), a vendor-independent provider of outsourced
client/server, network and desktop management services for the commercial and
federal sectors. These services include enterprise network integration and
operations, on-site and remote network management, help desk services, LAN/WAN
communications, document management services and IT outsourcing.
In May 1996, the Company acquired Dataserv Computer Maintenance, Inc.
("Dataserv"), a provider of computer maintenance and support services for
point-of-sale retail scanners and registers and popular industry-standard
servers and desktop products, as well as application help desk and network
integration services. Dataserv services companies in the banking and financial
services, insurance, retail and manufacturing industries. On June 27, 1997,
Dataserv was merged into the Company.
In October 1995, the Company acquired BISS Limited ("BISS"), a United
Kingdom company which specializes in the design, implementation and support of
network computing solutions. This organization develops network infrastructure
solutions, including local area network ("LAN") and wide area network ("WAN")
interconnection, client/server architecture and network management systems.
In January 1995, the Company completed a transaction with Compagnie des
Machines Bull and certain of its affiliates (collectively, "Bull") in which the
Company purchased Bull's U.S. customer services business, U.S. federal systems
subsidiary and its sales and service subsidiaries in Canada, Mexico, Australia
and New Zealand. The acquired customer services business included multivendor
products and the Bull GCOS mainframe systems.
The Company is the successor to Wang Laboratories, Inc., a Massachusetts
corporation founded in 1955, which implemented a reorganization plan under
Chapter 11 of the U.S. Bankruptcy Code that was approved by the bankruptcy court
on September 20, 1993 (the "Reorganization Plan"). The predecessor company had
filed for reorganization in August 1992. The Reorganization Plan was consummated
on December 16, 1993, at which time the reorganized company was reincorporated
as a Delaware corporation. On May 12, 1998, the court issued an order (i)
authorizing the final distribution of the remaining shares to holders, and (ii)
closing the Chapter 11 case. The Company does business under the trade-name
"Wang Global" and expects to change its legal name to "Wang Global Corporation"
upon approval of the Company's stockholders at the Company's 1998 Annual Meeting
on November 24, 1998.
INDUSTRY BACKGROUND
OPEN SYSTEMS TECHNOLOGY. The Company built its success in the 1980s largely
on its line of VS minicomputers with a proprietary operating system running
office software applications. However, the computer and information technology
industry moved from primarily proprietary hardware systems and software products
to an emphasis on "open" systems, and more recently, COEs, and common support
environments ("CSEs"), which are designed around a technology blueprint with
standard products from industry-leading companies. This transition allows
customers to buy hardware, software and services from a variety of vendors, to
combine components into one integrated system and to more effectively manage
their network computing environment.
Until recent years, the personal computer was the primary open system in
the marketplace. Today, however, open system technology is available on a range
of higher performance processors, which are being used as servers to support
networks of personal computers. The availability of open systems, COEs and CSEs,
which provide customers with increased flexibility in addressing their
productivity requirements, dramatically reduced the opportunity for sales of
hardware and software systems based on proprietary technologies.
At the same time, the use of open systems has increased the complexity of
deploying computer networks and information technology systems. Open systems can
involve multiple interconnections and interfaces. Such complexity has led to
opportunities for companies that are able to offer cost-effective sophisticated
computer services to manage the open systems technology and design and deploy
COEs and CSEs, and thereby, help customers manage the to cost of ownership of
the network computing environment.
The complexity of the network computing environment has been compounded by
the advent of and increasing demand for
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inexpensive "thin-client" applications connected to servers across networks of
all types, particularly the Internet. The Company believes that the
concentration of component-based applications at the server level and the use of
the Internet will result in a demand for high quality services to integrate and
install this new class of applications. In addition, increasing sales and other
commercial activity (electronic commerce) over Internet Protocol-based
("IP-based") networks will increase both network traffic and the sophistication
of web-based computing.
CLIENT/SERVER SYSTEMS. Concurrent with the adoption of open systems
solutions, an increasing number of computer users have moved to a client/server
architecture, which enables an organization to realize both the convenience of
desktop systems and the power of shared processing. As users exploit the
benefits of open systems, many conclude that by linking multiple personal
computers (i.e., clients) and servers into client/server systems, they can
achieve the functionality of traditional minicomputers or mainframes at a lower
initial cost. Client/server applications combine the power and ease of use of
the client with the price/performance of the server. Users of client/server
systems often find that such systems are also easier to use and have added
functionality, such as decision-support capabilities, graphical applications and
imaging.
The transition from centralized mainframe or host-based systems to
client/server systems is time consuming and costly and requires highly trained
network designers and application developers. These critical resources are not
typically resident at a company undergoing the transition. Consequently, the
Company believes system transitions will generate a demand for computer
networking and integration services.
INDUSTRY SOLUTIONS. The financial services, retail and telecom industries
are seeking solutions for customer contact, electronic commerce, work
management, smart card and point of sale ("POS") applications in order to more
effectively service their customers. In the Company's judgment, solutions which
focus on the development, customization and deployment of innovative delivery
solutions will become increasingly important. The Company believes that the
evolution of business in the telecom, retail and banking industries as well as
the public sector requires an architectural vision which leverages advanced
technologies like Microsoft products that enable a provider to deliver
integrated solutions across all delivery channels sharing infrastructure and
application components. The creation, roll-out and support of these new
solutions require an intimate understanding of the industry and the customer's
business and a dedication to high quality service.
The Company believes that the ongoing change from centralized to network
and desktop and IP-based computing and the design and implementation of industry
solutions remains a major challenge across all sectors of industry and
government. The market drivers, including financial services and
telecommunication deregulation, the growth of the Internet and electronic
commerce and the growth of collaborative and remote computing, are resulting in
significant investments in information technology. These investments in turn
have increased the demand for network and desktop services and integrated
solutions which are the Company's core competencies.
BUSINESS STRATEGY
Wang's business strategy is:
- to continue to build a global IT services and solutions business which
provides network and desktop design, integration, security and
management, help desk, maintenance, resale and installation of IT and
communications equipment, warranty support, procurement, infrastructure
support for and integration of electronic commerce and customer contact
solutions for financial services institutions.
- to continue to sell and provide support for multi-vendor products with an
emphasis on deploying COEs and CSEs.
- to continue to provide support for current VS, GCOS and Olsy customers
and offer upgrades and interoperability options for such customers.
The Company is taking advantage of the opportunities created by recent
developments in the IT industry by focusing on particular areas in which it has
the technological, professional and marketing expertise to offer customer
contact and other industry solutions and network based services, including
network and desktop design, integration, security and management, help desk,
maintenance, resale and installation of IT and communications equipment,
warranty support, procurement, infrastructure support for electronic commerce
and customer contact solutions for financial services institutions, that will
permit its customers and clients to increase the performance and reliability of
their computing networks. In addition, the Company will continue to support its
base of existing VS and GCOS customers in maintaining and enhancing their
systems or in transitioning their systems to the open client/server model of
computing. The key elements of this business strategy are as follows:
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-- FOCUS ON NETWORK AND DESKTOP COMPUTER SERVICES AND SOLUTIONS. Wang
offers a comprehensive range of network and desktop services and solutions on a
worldwide basis, including infrastructure support for and integration of
financial services delivery channel solutions and electronic commerce solutions.
At the desktop, the Company offers services including product procurement and
computer maintenance and warranty support, help desk and desktop administration
(including moves, adds, changes and upgrades). Network services include LAN and
WAN design, implementation and administration, as well as the associated
applications for LANs, WANs and internet/intranet configurations. In addition
the Company offers enhanced and cost effective service delivery and remote
network management through its Enterprise Service Centers in Houston, London and
Sydney. The company's solutions offerings include electronic commerce, work
management, petrol/convenience store, smart card and POS applications as well
other integrated solutions. These services and solutions are offered
individually or as a suite of service/solution offerings. By offering customers
a full suite of services and solutions for the desktop through the WAN, the
Company believes that it can offer customers an attractive comprehensive
arrangement for providing desktop and network products and services.
-- COMPLEMENT INTERNAL GROWTH WITH STRATEGIC ACQUISITIONS AND ALLIANCES.
The Company believes that opportunities exist to extend and enhance its current
line of business and distribution capabilities through investments in or
acquisitions of businesses which are either synergistic with or extend the
Company's offerings such as the Olsy, API, I-NET, Dataserv, BISS and Bull
acquisitions or the creation of key strategic alliances. Such acquisitions or
alliances would complement the Company's existing core competencies, leverage
its existing strengths, such as its customer services and solutions business,
and enhance cost efficiencies across the entire organization. The Company's
management intends to continue to analyze additional acquisition opportunities
and opportunities to form additional strategic alliances and to pursue those
opportunities that further its overall business strategy. The Company evaluates
such transactions from time to time, and one or more such transactions could
occur at any time.
PRINCIPAL PRODUCTS AND SERVICES
Wang provides information technology ("IT") services and solutions,
including network and desktop design, integration, security and management, help
desk, maintenance, resale and installation of IT and communications equipment,
infrastructure support for and integration of electronic commerce solutions,
warranty support, procurement, and customer contact solutions for financial
services institutions.
Network and Desktop Design, Installation and Support. Wang has a long history of
providing office automation and systems integration services, including the
design, project management, application design, installation, ongoing support
and administration of a network or interconnected networks. Additionally, the
Company is a leading independent provider of network integration, security and
management, installation, training and other value-added services to customers
worldwide. With the acquisition and integration of Olsy, API, I-NET, and BISS,
Wang believes that it now has the resources and capabilities to provide a full
range of services and solutions at the desktop, including product sourcing, as
well as at the LAN and WAN level for network computing,, throughout the world.
Wang focuses on assisting customers in maximizing the effectiveness of
their organizations by using client/server technologies. Wang has on a global
basis deployed NT, Exchange and SMS migrations for over 800,000 seats. Through a
number of relationships with major technology providers, including, IBM, Dell,
Hewlett Packard, Novell, Packard Bell and Compaq Wang offers customers leading
hardware and software on a "one-stop" basis. The Company has extensive LAN and
office network design and implementation expertise and designs and manages the
installation, maintenance and administration of complex, heterogeneous,
multi-site interconnected office and branch networks. Additionally, the Company
provides specialty services and solutions to its desktop customers, offering
both local or remote help desk support for hardware and software as well as COE
and CSE computer infrastructure solutions.
Wang built upon its strength in the network integration business through
the acquisition of BISS. At the time of acquisition, BISS, a United Kingdom
company, was a leading independent network integrator in the United Kingdom.
BISS specializes in the design, implementation and support of network computing
solutions. Through the integration of BISS with the Company's existing network
integrating operations in the United Kingdom and Ireland, Wang is focusing on
developing network infrastructure solutions, including LAN and wide area network
interconnection, client/server architecture and network management solutions.
Wang added substantially to its networking expertise and market position by
acquiring I-NET and API. The Company believes that I-NET possessed excellent LAN
and WAN design, implementation and operations skills, and provided services that
include enterprise network integration and operations, network management, LAN
and WAN communications, document management services and IT outsourcing. I-NET's
particular strength with agencies in the U.S. Government complemented Wang's
existing federal business. With
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the addition of API, which possesses Microsoft expertise, Wang strengthened its
ability to provide complex services, including network architecture and design
installation. The Company believes that as a result of the combination of Wang,
I-NET, BISS and API, the Company is positioned as a leading provider of IT
services including computer networking and outsourcing services.
The Company acquisition of Olsy, the Company expanded its presence in key
European and Asian markets and increased its global capability for providing
clients with global IT solutions and services in 130 countries. The combined
company under the name Wang Global will implement its networked technology
solutions and network services strategy on a global scale, leveraging the
long-term business relationships of both the Company and Olsy, including Olsy's
customers in banking and other vertical markets. Customers will also benefit
from the combined organization's relationships with major software and hardware
providers, including present strategic partners Microsoft and Cisco Systems.
Wang Government Services, Inc., a wholly-owned Wang subsidiary formerly
known as Wang Federal, Inc., is a leading provider of systems integration
products and services to the United States federal government and to state and
local governments. Wang Government Services has a long history of delivering to
United States government departments and agencies a wide range of information
technology products and services, from large centralized systems to distributed
information networks. It is involved with numerous civilian and military
organizations in developing, installing and maintaining their mission critical
systems. Major customers of Wang Government Services include the NASA,
Department of Defense and each of the military services; the Department of
State; the General Services Administration; and the Department of Commerce and
Transportation. The Company's offerings to the U.S. Government include security
Tempest products developed by Wang in compliance with stringent regulations.
Through the acquisition of Olsy Wang has become a leading provider of IT
products and network and desktop integration services to government agencies and
other public authorities in the European Community. Wang currently provides
services to more than 90 major government and public authority customers in 11
countries.
Warranty Support and Procurement. In addition to its networking and
integration services, the Company sells and supports third-party hardware and
software products, provides maintenance services to the Company's VS customers
and for the Bull GCOS customers and installs and supports products developed by
a number of other manufacturers.
The Company offers a full range of services and support for major
information technology manufacturers and suppliers in the client/server
marketplace. The Company provides on-site and logistics and distribution
services for numerous server/desktop systems and peripherals manufacturers
(Dell, Canon, NEC, Packard Bell, Motorola, Bull and Siemens) and manufacturers
of networking products (Cisco and Novell), help desk services and/or
professional services (NEC, Packard Bell, GE Capital and Hughes Network
Systems). Through the acquisition of Dataserv in 1996, the Company increased its
business in the provision of support service and maintenance for POS retail
scanners and register. In addition, the Company offers end user service and
support on more than 3,500 third party products from more than 350 manufacturers
through its worldwide network of customer engineers, telephone support centers
and logistics operations. In particular, the expanded Wang-Microsoft alliance
announced in March 1998 and the acquisition of API expanded Wang's role as an
authorized provider of end-user support services for Microsoft products. This
support includes on-site architectural and system network design and
installation consulting, network integration and migration support. The Company
employs approximately 16,000 technical professionals worldwide, and offers
support through subsidiaries and affiliates from approximately 130 countries
throughout the world.
A source of the Company's revenue continues to be derived from the
servicing, upgrading and enhancement of its installed base of its VS and GCOS
systems as well as support for certain Automated Teller Machines ("ATMs") and
other cash dispensing machines. The Company's support for its VS line not only
allows customers to continue to benefit from their VS investments, but also
facilitates their transition to open systems and COEs. The Company has addressed
the calendar year 2000 issue (the inability of software to properly recognize
dates after the year 1999) by announcing products such as hardware platforms and
operating systems software releases together with inventory, assessment and
remediation services, to enable VS customers to continue their deployment of VS
systems after the year 2000. Wang maintains an electronic gateway between
Microsoft's Exchange communication server product and Wang's VS Office, the
Company's internally developed electronic mail system. This allows the large
installed base of VS Office to coexist with Microsoft Mail and Exchange. Wang
provides service and support on an exclusive basis to users of Bull GCOS
platforms in the United States (including the United States government), Canada,
Mexico and Australia. In addition, the Company sells and services ATMs, banking
Kiosks and other banking-related peripherals developed by its affiliates and
third parties including Olivetti. The Company supports a strategy of transition
from existing proprietary systems to client/server applications for its VS and
GCOS customers by offering upgrade software, service and open system coexistence
and migration software. The Company expects that due to a general move toward
client-server solutions and COEs, the Company expects the revenues from
servicing and enhancing its installed base of VS systems and Bull GCOS
platforms, will continue to decline at a rate of approximately 25-30% per year
over the next several years. From one period to the next, the decline rate could
be highly variable.
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Customer Contact Solutions For Financial Services Institutions; Electronic
Commerce Solutions. With the acquisition of Olsy, the Company has increased its
ability to provide customer contact solutions for the financial services
industry and cross-industry solutions for the retail and telecom industries and
the public authority sector. These include solutions for Internet electronic
commerce, work management, petrol/convenience store and smart-card applications.
The Company's solutions for the financial services industry include Branch
Automation, Travel Staff, Self-service (ATMs and Kiosks), Phone and Postal,
Electronic Banking and Smart Card solutions. In providing industry solutions for
these delivery channels, the Company has leveraged Microsoft technologies that
enable Wang to provide integrated solutions across all delivery channels sharing
infrastructure and applications components. Wang Global has more than 30 years
of experience in branch banking automation and existing business relationships
with 1 in 3 of the world's 100 largest banks.
MARKETING
The Company sells its services offerings predominantly through its direct
sales effort to both end-user customers, including governmental agencies as well
as large Original Equipment Manufacturers. The Company markets its products and
services in the United States through its nationwide sales and customer service
offices. At June 30, 1998, United States operations included approximately 480
sales, sales support and sales administration personnel and approximately 6,830
people in its service and support organization (compared to approximately 330
and 5,450 respectively, at June 30, 1997).
The Company's products and services are marketed and serviced in Canada,
Europe, Latin America, Asia and the South Pacific regions through subsidiaries
that generally are wholly-owned. At June 30, 1998, these subsidiaries employed
approximately 1,540 sales, sales support and administrative personnel and
approximately 8,950 service personnel (compared to approximately 190 and 1,600,
respectively, at June 30, 1997). The Company reaches customers directly in 44
countries and indirectly through independent distributors in approximately 90
additional countries.
BACKLOG
A majority of the Company's revenues are derived from services and solutions
and products stocked for immediate delivery, meaning that a relatively small
number of product orders are unfulfilled at any time. In addition, customers
generally have the ability to change, reschedule or cancel orders prior to
shipment without penalty. Accordingly, the Company believes that backlog
information is neither necessarily indicative of future sales levels nor
material to an understanding of the Company's business.
CUSTOMERS
The Company's customers include commercial customers, businesses,
institutions and public authorities of varying sizes around the world. The
Company's sales, marketing and professional services groups focus on customers
with network and desktop productivity needs in selected markets. The United
States government, together with its various agencies, is a significant customer
of the Company, and provided revenues to the Company of approximately $383
million in fiscal 1998, $385 million in fiscal 1997 and $228 million in fiscal
1996, which represented approximately 20%, 30%, and 22% of consolidated
revenues, respectively, in each of those periods. No other customer accounted
for more than 10% of the Company's consolidated revenues in any of those
periods.
COMPETITION
Competition is vigorous in all parts of the worldwide market for network
computing services and solutions. The Company's competitors are numerous and
vary widely in size and resources. Some have substantially greater resources,
stronger reference accounts, larger research and engineering staffs and larger
marketing organizations than the Company. Competitors differ significantly
depending upon the market, customer and geographic area involved. In many of the
Company's markets, traditional computer hardware companies provide the most
significant competition. In other areas, systems integrators, consulting
organizations and telecommunications companies are significant competitors. The
Company competes primarily on the basis of service delivery quality, the ability
to offer a range of services and solutions at a competitive price, and the
geographic breadth and scope of its service and support organizations.
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RESEARCH AND DEVELOPMENT
The Company has a research and development program that is primarily
focused on continuing support of its VS customers, specialized client-server
products sold to the United States Government, integration of service delivery
technologies and Olsy's support of software technology for the banking industry.
The Company's research and development expenses for fiscal 1998 were $11.8
million. In fiscal 1997, the Company spent $3.7 million on research and
development in support of its continuing operations. Approximately $5.0 million
was spent in fiscal 1996 in the same operations. These figures include direct
labor costs and some allowances for material and overhead expenses. The increase
in 1998 was due primarily to the acquisition of the Olsy operations.
PATENTS, TRADEMARKS AND LICENSES
The Company owns a number of patents and patent applications, both in the
United States and in various foreign countries. The size of the patent portfolio
may vary over time, either because certain patents may become abandoned if they
no longer are of significant value to the Company, or because new patents may be
added if research and development activities yield inventions of particular
value, or because patents may be sold pursuant to an ongoing sales program. In
addition, the Company receives license royalties from some of these patents and
has cross-licensed some of these patents to other companies, in return for
receiving usage rights under the other companies' patents and patent
applications. The Company also owns certain copyrights, trademarks, trade secret
and other proprietary information used in the conduct of its business
operations. The Company has taken, and will continue to take, measures to
enforce its intellectual property rights when it deems such action appropriate.
The results of such enforcement measures and future awards or royalties, if any,
related thereto cannot be predicted with any certainty at this time, but, if
successful, one or more of these actions could result in a significant recovery
for or other relief granted the Company.
The Company licenses certain other intellectual property from others for
amounts that are not material to the Company's business as a whole. In the event
that products, services or internal business operations of the Company may be
covered in whole or in part by intellectual property rights owned by others, the
Company may find it necessary or desirable to obtain one or more additional
licenses.
Certain software licensed from third parties is important to the internal
business operations and to certain services provided by the Company. Where
applicable, such software is typically licensed to other parties on reasonable
terms and conditions. The Company does not anticipate any difficulty in
maintaining its licenses on such terms. The Company believes it will continue to
maintain adequate software license rights for the conduct of its business.
MANUFACTURING
At June 30, 1998, the Company employed approximately 194 personnel in its
manufacturing and related distribution operations (compared to approximately 125
at June 30, 1997). The continuing decline in demand for the Company's
proprietary computer hardware products, the decision to discontinue the
manufacture of PCs, increased reliance on third-party manufacturing sources and
contract fabricators of subassemblies and components, and increasing reliance on
direct shipment by suppliers to the Company's customers have allowed the Company
to scale back its own manufacturing operations. However, this decline was offset
by the Company's acquisition of Olsy and the related increase in its
manufacturing operations related to ATMs, banking kiosks and other cash
dispensing equipment.
The Company is experiencing no substantial difficulties in obtaining
necessary components, subassemblies and products, although delays have been
experienced from time to time due to temporary shortages of certain components.
Except in the case of some banking peripherals, the Company maintains multiple
sources of supply for most items. In the case of certain proprietary ATMs, cash
dispenser units and other component parts for banking peripherals, the Company
relies on a single source supplier. In either case, the Company believes that
alternative sources could be developed for most existing single sources of
supply, if required.
ENVIRONMENTAL COMPLIANCE
The Company does not believe that compliance with federal, state and local
laws and regulations that have been enacted or adopted regarding the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, will have a material effect on the capital expenditures,
earnings or competitive position of the Company.
EMPLOYEES
At June 30, 1998, the Company employed approximately 21,000 people in its
worldwide operations, compared to approximately
7
<PAGE> 9
9,300 at June 30, 1997. The Company has not experienced any sustained, material
strikes or work stoppages and considers its relations with its employees to be
good.
ITEM 2. PROPERTIES
At June 30, 1998, the Company owned and leased a total of 8.4 million
square feet of building space around the world, approximately 0.4 million square
feet of which is leased out. In the U.S. the Company utilizes 1.7 million square
feet of which approximately 0.5 million is used for administration, customer
services and training, 0.5 million is used for field sales and service offices
including regional administration and training operations and 0.7 million is
used for distribution warehousing, manufacturing and associated administrative
operations. Internationally, the Company owns and leases approximately 6.7
million square feet of which approximately 5.7 million is used for subsidiaries'
administrative sales and service operations and approximately 1.0 million is
used for distribution warehousing, manufacturing and associated administrative
operations.
The Company has excess space in certain operations. Such excess space will
continue to be vacated as a result of ongoing restructuring actions. Amounts
realized from dispositions of excess facilities and space have been, in general,
less than sufficient to retire the Company's obligations with respect to such
space. The Company anticipates that this experience will continue in general for
any facilities restructuring.
The Company is completing construction of a new 150,000 square foot
corporate headquarters in Billerica, Massachusetts which is scheduled for
occupancy in the Fall of 1998.
ITEM 3. LEGAL PROCEEDINGS
The Chapter 11 proceedings were initiated by the predecessor corporation on
August 18, 1992, and on September 30, 1993 a formal confirmation order with
respect to the Company's Reorganization Plan became effective. On December 16,
1993, the Company was reincorporated as a Delaware corporation. The new
corporation issued 30,000,000 shares of the new Common Stock to a Disbursing
Agent (American Stock Transfer & Trust Company) for distribution to holders of
allowed general unsecured claims in the Chapter 11 case. All shares of capital
stock (Class B and Class C Common Stock) of the predecessor Massachusetts
corporation were cancelled. Under the Reorganization Plan, 7,500,000 warrants,
each to purchase one share of new Common Stock at $21.45 per share, are
available to be issued to the record stockholders of the former Massachusetts
corporation and the holders of certain securities claims. The warrant
distribution began in March 1995 and to date 7,197,980 warrants have been
issued. Holders of stock in the predecessor corporation have until December 16,
1998, to redeem such stock for warrants. On May 12, 1998, the Court issued an
order (1) authorizing the final distribution of the remaining shares to holders;
and (2) closing the Chapter 11 case. The final distribution of the shares has
been completed.
The Company is also a defendant in a number of other routine lawsuits
incidental to the conduct of its business. Although it is impossible to predict
the results of specific matters, the Company believes that its aggregate
liability, if any, for all litigation, in excess of insurance coverage and
financial statement provisions, will not be material to the Company's
consolidated financial position or its results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security-holders
during the fourth quarter of the fiscal year ended June 30, 1998.
8
<PAGE> 10
The following table sets forth the names, ages as of August 31, 1998 and
positions of all executive officers of the Company:
<TABLE>
<CAPTION>
OFFICER
NAME POSITION(S) AGE SINCE
---- ----------- --- -------
<S> <C> <C> <C>
Joseph M. Tucci Chairman of the Board, 51 1990
President and Chief Executive Officer
Jose Ofman President and Chief Operating 55 1997
Officer, Americas
Jeremiah J.J. van Vuuren President and Chief Operating 55 1993
Officer, International
Donald P. Casey Chief Technology Officer and President, 52 1991
U.S. Services
Franklyn A. Caine Executive Vice President 48 1994
and Chief Financial Officer
Paul F. Brauneis Vice President and Controller 53 1997
Richard L. Buckingham Vice President and Treasurer 52 1990
Lucy A. Flynn Senior Vice President 45 1996
Corporate/Marketing Communications
David I. Goulden Senior Vice President 39 1994
Marketing and Business Development
James J. Hogan Senior Vice President 56 1990
President, Wang Government Services
Albert A. Notini Senior Vice President, Law and 41 1994
Human Resources, General Counsel
and Secretary
</TABLE>
Mr. Tucci joined the Company in August 1990 as Executive Vice President,
Operations, was elected President and Chief Executive Officer in January 1993,
and Chairman of the Board and was reaffirmed as President in 1998.
Mr. Ofman Joined the Company in March, 1997 as President and Chief Operating
Officer, Americas. Prior to that, he held several senior positions at Electronic
Data Systems Co., an information technology services company, the most recent of
which was Corporate Vice President and Group Executive.
Mr. van Vuuren joined the Company in September 1993 as General Manager, Europe,
Africa and the Middle East and Senior Vice President of the Company. He served
as President of the Company's International Business from July 1994 until March
1997 and has been President and Chief Operating Officer, International since
that time. Previously, he served as Vice President of marketing operations for
Europe, Africa and the Middle East from 1986 to 1989 for Unisys Corporation, a
computer manufacturer, and was appointed Vice President and Group Manager Europe
in 1990.
Mr. Casey joined the Company as Executive Vice President and Chief Development
Officer in September 1991, and was elected President and Chief Technology
Officer in January 1993 and President, U.S. Services in 1998. He served as
President of the Software Business until December 1995 and since then as Chief
Technology Officer. He had served as Vice President, Networking and
Communications at Apple Computer Inc., a personal computer company, from 1988 to
1990, and as Vice President, Spreadsheet Division at Lotus Development
Corporation, a software company, from 1990 to 1991.
Mr. Caine joined the Company as Executive Vice President and Chief Financial
Officer in August 1994. Prior to joining the Company, Mr. Caine was employed by
United Technologies Corporation, a diversified manufacturing company, serving as
Senior Vice President, Planning and Corporate Development, from 1993 to July
1994, as Senior Vice President and Controller from 1991 to 1993, as Senior Vice
President, Human Resources, from 1989 to 1991 and as Vice President and
Treasurer from 1987 to 1989.
Mr. Brauneis joined the Company in August 1997 as Vice President and Controller.
He had served from 1995 to 1997 as Vice President and Corporate Controller of
BBN Corporation, an internet services and network management company. From 1993
to 1995 he was Vice President and Chief Financial Officer at Softkey
International, a consumer software products company. Prior to that he
9
<PAGE> 11
spent 12 years at M/A Com, Inc., an electronic equipment manufacturer, most
recently as Vice President, Finance.
Mr. Buckingham joined the Company as Vice President and Treasurer in 1990. From
1988 to 1990, he served as Vice President-Treasurer of Prime Computer, Inc., a
computer company.
Ms. Flynn joined the Company in June 1996 as Senior Vice President,
Corporate/Marketing Communications. From 1992 through 1996, she served as Senior
Vice President and Director of Corporate Affairs at Shawmut National
Corporation. Previously she served as Vice President of Public Affairs at
Shawmut Bank N.A. from 1989 to 1992.
Mr. Goulden joined the Company in 1990 as Director of Marketing Strategies. From
1991 to 1992 he served as Vice President, Marketing and Development and from
1992 to 1993 he served as Vice President, Marketing. Mr. Goulden served the
Company as Vice President, Marketing and Business Development from 1993 to June
1994, as Senior Vice President, Business Development from June 1994 to December
1995 and as Senior Vice President, Software Products Division from December 1995
until March 1997. Since that time he has held the position of Senior Vice
President, Marketing and Business Development. He previously served as Director
of Corporate Strategy and Business Development from 1989 to 1990 at Unisys
Corporation, a computer manufacturer.
Mr. Hogan joined the Company as Senior Vice President, Personal Computer Systems
in October 1990, and became Senior Vice President Human Resources and Operations
Support in June 1993. From July 1994 to March 1995 he served as President,
Federal Systems Division Business and from March 1995 to December 1996 as Senior
Vice President of the Company at which time he was also elected as President of
Wang Government Services, Inc. He had served as Vice President-Audio and
Communications Division, Americas for Thomson Consumer Electronics when that
company acquired General Electric's consumer electronics business in 1988.
Previously he served as Product General Manger of Audio/Video Systems for
General Electric's consumer electronics business from 1985 through 1987.
Mr. Notini joined the Company in February 1994 as Senior Vice President, General
Counsel and Secretary and is responsible for all of the Company's legal, real
estate, human resources and intellectual property matters. Previously, he had
served as a Senior Partner from 1992 to 1994 and a Junior Partner from 1989 to
1992 at the Boston law firm of Hale and Dorr, LLP, which he joined in 1984.
10
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is quoted on the Nasdaq National Market under the symbol
"WANG."
The following table sets forth, for the periods indicated, the high and low
sales prices per share of the Common Stock as reported on the Nasdaq National
Market during fiscal years 1997 and 1998.
QUARTER ENDED HIGH LOW
------------- --------- -------
September 30, 1996 $20 1/8 $15 3/8
December 31, 1996 $24 1/16 $18 7/8
March 31, 1997 $23 3/4 $17 1/4
June 30, 1997 $21 1/2 $16
September 30, 1997 $23 1/8 $18 5/8
December 31, 1997 $24 13/16 $19 1/8
March 31, 1998 $31 5/8 $21 3/8
June 30, 1998 $32 1/4 $21
The number of stockholders of record on August 31, 1998 was approximately
12,400.
The Company has paid no cash dividends on the Common Stock since its
original issuance in December 1993. Its predecessor Massachusetts corporation
had not paid any dividends on its capital stock for several years. The Company
currently intends to retain any earnings for future growth, and, therefore, does
not anticipate paying any cash dividends on the Common Stock in the foreseeable
future. Moreover, the Company's $500,000,000 credit facility with Bankers Trust
Company and certain other financial institutions prohibits the payment of cash
dividends other than regularly scheduled dividends to the holders of the
Company's 6-1/2% Preferred Stock and 4-1/2% Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA
See EXHIBIT A attached hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
See EXHIBIT B attached hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
See EXHIBIT B attached hereto
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See EXHIBIT C attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
11
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is contained in part under the caption "Executive
Officers of the Company" in Part I of this Annual Report on Form 10-K, and in
part in the Company's Proxy Statement for the Annual Meeting of Stockholders to
be held on November 24, 1998 (the "1998 Proxy Statement") in the sections
"Election of Directors - Directors of the Company," and "Section 16(a)
Beneficial Ownership Reporting Compliance," which sections are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is contained in the 1998 Proxy Statement in the
sections "Election of Directors - Compensation of Directors," "Compensation
Committee Interlocks and Insider Participation," "Executive Compensation," and
"- Employment Contracts and Change-in-Control Arrangements," which sections are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is contained in the 1998 Proxy Statement in the
section "Beneficial Ownership of Voting Stock," which section is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is contained in the 1998 Proxy Statement in the
section "Election of Directors - Certain Transactions," which section is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Consolidated Financial Statements.
1. The following documents are filed as Exhibit C hereto and are
included as part of this Annual Report on Form 10-K.
Financial Statements:
Consolidated Statements of Operations for the fiscal years ended
June 30, 1998, 1997 and 1996.
Consolidated Balance Sheets as of June 30, 1998 and 1997.
Consolidated Statements of Cash Flows for the fiscal years ended
June 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. The following documents are filed as Exhibit D hereto and are
included as part of this Annual Report on Form 10-K.
Financial Statement Schedule:
Schedule II- Valuation and Qualifying Accounts
3. The list of Exhibits filed as a part of this Annual Report on Form
10-K is set forth in the Exhibit Index immediately preceding such
Exhibits, and is incorporated herein by reference.
(b) During the quarter ended June 30, 1998, the Registrant filed a Current
Report on Form 8-K dated May 15, 1998 regarding the Registrants Rights
Agreement and a Current Report on Form 8-K/A, dated June 1, 1998 containing
Combined Consolidated Financial Statements and Pro Forma Combined Condensed
Financial Statements for the Olsy transaction
12
<PAGE> 14
pursuant to the Stock Purchase Agreement among Wang Laboratories, Inc.,
Wang Nederland B.V., Ing. C. Olivetti & C. S.p.A. Olivetti Sistemas e
Servicios Limitada and Olivetti do Brasil S.A.
13
<PAGE> 15
(a) The following exhibits are included herein:
Exhibit No. Description
- ----------- -----------
2.1(1) The Amended and Restated Reorganization Plan of Wang Laboratories,
Inc. and Official Committee of Unsecured Creditors dated September
30, 1993
3.1(2) Certificate of Incorporation
3.2(8) Certificate of Incorporation, as Amended
3.3(10) Certificate of Stock Designation with respect to the 4 1/2% Series
A Cumulative Convertible Preferred Stock
3.4(14) Certificate of Elimination of the Registrant's 11% Exchangeable
Preferred Stock
3.5(14) Certificate of Stock Designation with respect to the 6 1/2% Series
B Cumulative Convertible Preferred Stock
3.6(25) Certificate of Stock Designation with respect to the Series C
Junior Participating Preferred Stock
3.7(13) By-Laws of the Registrant
4.1(23) Rights Agreement
10.1(3) 1993 Directors' Stock Option Plan
10.2(4) Form of Contingent Severance Compensation Agreements with Donald
P. Casey, J.J. Van Vuuren, Albert A. Notini, David I. Goulden, and
James J. Hogan, each an executive officer of the Company
10.3(5) Contingent Severance Compensation Agreement with Joseph M. Tucci
10.4(6) Employment Agreement with James J. Hogan
10.5(3) Consulting Agreement of Raymond C. Kurzweil
10.6(5) Employee Retention Agreement with James J. Hogan
10.7(7) Stock Incentive Plan, as Amended
10.8(8) Contingent Severance Compensation, as Amended with Franklyn A.
Caine (Employment Agreement)
10.9(8) Employees' Stock Incentive Plan
10.10(8) 1995 Director Stock Option Plan
10.11(9) Employment Agreement with Donald P. Casey, as Amended
10.12(10) Form of Amendment to Contingent Severance Compensation Agreements
with Joseph M. Tucci, Donald P. Casey, Albert A. Notini, David I.
Goulden, James J. Hogan, and Franklyn A. Caine, each an executive
officer of the Company
10.13(11) 1994 Employees' Stock Incentive Plan, as Amended
10.14(11) Form of Amendment to Employment Letter Agreement for David I.
Goulden, Albert A. Notini and Franklyn A. Caine
14
<PAGE> 16
Exhibit No. Description
- ----------- -----------
10.15(12) Form of Non-Qualified Long Term Incentive Option to Purchase
Shares of Common Stock for Messrs. Tucci, Caine, Casey, Goulden,
Hogan, Notini, and Van Vuuren
10.16(12) Registration Rights Agreement 6 1/2% Cumulative Convertible
Preferred Stock
10.17(14) Employment Agreement of Lucy A. Flynn
10.18(15) 1995 Employees' Stock Purchase Plan, as Amended
10.19(15) Employees' Stock Incentive Plan, as Amended
10.20(1) 1995 Director Stock Option Plan, as Amended
10.21(16) Asset Purchase Agreement, as amended, with respect to the
Registrant's sale of its software business unit to Eastman Kodak
Company
10.22(17) Amended and Restated Employment Agreement of Joseph M. Tucci
10.23(17) Restricted Stock Agreement of Joseph M. Tucci
10.24(17) Non-Qualified Long Term Incentive Stock Option Agreement of Joseph
M. Tucci
10.25(17) Second Amendment to the Change in Control Severance Agreement of
Joseph M. Tucci
10.26(17) Form of Non-Qualified Long Term Incentive Stock Option Agreement
with Messrs. Caine, Goulden and Notini, each an executive officer
of the Registrant
10.27(17) Form of Restricted Stock Agreement with Messrs. Caine, Goulden and
Notini, each an executive officer of the Registrant
10.28(17) Letter Agreement of Employment of Jose Ofman
10.29(17) Amendment Number 1 to Letter Agreement of Employment of Jose Ofman
10.30(17) Non-Qualified Long Term Stock Option Agreement with Jeremiah J. J.
Van Vuuren
10.31(17) Letter Agreement for Special Bonus of Franklyn A. Caine
10.32(17) Change in Control Severance Agreement, as amended of Franklyn A.
Caine
10.33(17) Letter Agreement for Special Bonus of Albert A. Notini
10.34(17) Change in Control Severance Agreement, as amended of Albert A.
Notini
10.35(17) Letter Agreement for Special Bonus of David I. Goulden
10.36(17) Change in Control Severance Agreement, as amended of David I.
Goulden
10.37(17) Amendment Number 1 to the 1993 Directors' Stock Option Plan
10.38(17) Amendment Number 2 to the Stock Incentive Plan
10.39(17) Amendment Number 3 to the Employees' Stock Incentive Plan
15
<PAGE> 17
Exhibit No. Description
- ----------- -----------
10.40(18) Restricted Stock Agreement of Jeremiah J. J. Van Vuuren with
Registrant
10.41(18) Employment Agreement of Jeremiah J. J. Van Vuuren with Wang
Laboratories Ireland B.V.
10.42(18) Employment Agreement of Jeremiah J. J. Van Vuuren
10.43(18) Change in Control Severance Agreement, as amended of Jeremiah J.
J. Van Vuuren
10.44(19) Form of Change in Control Severance Agreement with Messrs.
Buckingham and Brauneis
10.45(20) Amendment No. 4 to the 1995 Employee Stock Incentive Plan
10.46(20) Amendment No. 5 to the 1995 Employee Stock Incentive Plan
10.47(20) Amendment No. 2 to the 1995 Director Stock Option Plan
10.48(20) Amendment No. 2 to the 1995 Employee Stock Purchase Plan
10.49(20) Short Term Incentive Plan
10.50(21) Stock Purchase Agreement and Wang Laboratories, Inc. and Wang
Nederlands B.V., Ing. C. Olivetti SpA and certain subsidiaries
10.51(21) Credit Agreement among Wang Laboratories, Inc., various subsidiary
borrowers and Bankers Trust Company and various financial
institutions
10.52(22) Olsy Employees Stock Incentive Plan
10.53(23) Rights Agreement, dated April 22, 1998, between Wang Laboratories,
Inc. and American Stock Transfer & Trust Company, as Rights Agent,
including all exhibits thereto
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A
(File No. 0-22470), filed on September 27, 1993.
(2) Filed as an Exhibit to the Registrant's Registration Statement on Form S-8
(File No. 33-73210), filed on December 21, 1993.
(3) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1993.
(4) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended March 31, 1994.
(5) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1,
as amended (File No. 33-81526) filed September 13, 1994.
(6) Filed as an Exhibit to the Registrant's annual report on Form 10-K for the
fiscal year ended June 30, 1994.
(7) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1994.
16
<PAGE> 18
(8) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1994.
(9) Filed as an Exhibit to the Registrant's annual report on Form 10-K for the
fiscal year ending June 30, 1995.
(10) Filed as an Exhibit to the Registrant's report on Form 10-Q/A for the
quarter ended September 30, 1995.
(11) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1995.
(12) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended March 31, 1996.
(13) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
May 3, 1996.
(14) Filed as an Exhibit to the Registrant's annual report on Form 10-K for the
fiscal year ended June 30, 1996.
(15) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1996.
(16) Filed as an Exhibit to the Registrant's Current Report on Form 8-K dated
March 17, 1997.
(17) Filed as an Exhibit to the Registrant's quarterly report a Form 10-Q for
the quarter ended March 31, 1997.
(18) Filed as an Exhibit to the Registrant's annual report on Form 10-K for the
fiscal year ended June 30, 1997.
(19) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1997.
(20) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended December 31, 1997.
(21) Filed as an Exhibit to the Registrant's Current Report on Form 8-k dated
March 17, 1998.
(22) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended March 31, 1998.
(23) Filed as an Exhibit to the Registrant's Registration Statement on Form 8-A
dated May 15, 1998.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WANG LABORATORIES, INC.
BY: /s/ Franklyn A. Caine
----------------------------
Franklyn A. Caine
Executive Vice President and
Chief Financial Officer
September 25, 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/ Joseph M. Tucci Chairman of the Board, Chief September 25, 1998
- ----------------------- Executive Officer and Director
Joseph M. Tucci (Principal Executive Officer)
/s/ Franklyn A. Caine Executive Vice President and September 25, 1998
- ----------------------- Chief Financial Officer
Franklyn A. Caine (Principal Financial Officer)
/s/ Paul F. Brauneis Vice President and Controller September 25, 1998
- ----------------------- (Principal Accounting Officer)
Paul F. Brauneis
/s/ David A. Boucher Director September 25, 1998
- -----------------------
David A. Boucher
/s/ Michael W. Brown Director September 25, 1998
- -----------------------
Michael W. Brown
/s/ Robert Colaninno Director September 25, 1998
- -----------------------
Roberto Colaninno
/s/ Sergio Erede Director September 25, 1998
- -----------------------
Sergio Erede
/s/ Marcia A. Hooper Director September 25, 1998
- -----------------------
Marcia A. Hooper
/s/ Joseph J. Kroger Director September 25, 1998
- -----------------------
Joseph J. Kroger
/s/ Raymond C. Kurzweil Director September 25, 1998
- -----------------------
Raymond C. Kurzweil
/s/ Axel J. Leblois Director September 25, 1998
- -----------------------
Axel J. Leblois
18
<PAGE> 20
/s/ Frederick A. Wang Director September 25, 1998
- -----------------------
Frederick A. Wang
/s/ John P. White Director September 25, 1998
- -----------------------
John P. White
19
<PAGE> 21
EXHIBIT A
WANG LABORATORIES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
Predecessor
Company
-------------
Three
Year Ended Year Ended Year Ended Year Ended Nine Months Months
June 30, June 30, June 30, June 30, June 30, Ended
1998 1997 1996 1995 1994 Sept 30, 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $1,887.0 $1,268.4 $1,013.9 $901.9 $644.4 $210.9
Income (loss) from continuing
operations before reorganization
expenses and discontinued
operations $ (281.6) $ (6.7) $ 63.5 $(14.2) $ 8.6 $ 11.9
Reorganization expenses -- -- -- -- -- (20.8)
Income (loss) from dis-continued
operations -- 76.6 (69.0) (53.9) -- --
Fresh-start reporting adjustment -- -- -- -- -- 193.6
Gain on debt discharge -- -- -- -- -- 329.3
-------- -------- -------- ------ ------ ------
Net income (loss) $ (281.6) 69.9 (5.5) (68.1) 8.6 514.0
Dividends and accretion
on preferred stock (14.1) (14.1) (22.6) (8.7) (4.2) --
-------- -------- -------- ------ ------ ------
Net income (loss) applicable
to common stockholders $ (295.7) $ 55.8 $ (28.1) $(76.8) $ 4.4 $514.0
======== ======== ======== ====== ====== ======
Net income (loss) per share:
Basic
Continuing operations $ (7.29) $ (0.56) $ 1.13 $(0.70) $ 0.13
Discontinued operations -- 2.06 (1.91) (1.64) --
-------- -------- -------- ------ ------
Net income (loss) $ (7.29) $ 1.50 $ (0.78) $(2.34) $ 0.13 *
======== ======== ======== ====== ====== ======
Diluted
Continuing operations $ (7.29) $ (0.56) $ 1.07 $(0.70) $ 0.13
Discontinued operations -- 2.06 (1.81) (1.64) --
-------- -------- -------- ------ ------
Net income (loss) $ (7.29) $ 1.50 $ (0.74) $(2.34) $ 0.13 *
======== ======== ======== ====== ====== ======
Average number of employees 13,300 9,300 6,200 5,200 5,900 6,700
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $2,189.2 $1,034.8 $856.6 $852.5 $677.1
Depreciable assets, net $ 214.1 $ 123.0 $137.3 $134.4 $ 79.6
Working capital $ 39.3 $ 126.1 $ 86.7 $ 34.1 $ 95.1
Long-term debt, excluding
liabilities subject to compromise $ 116.3 $ -- $ -- $ 23.0 $ 2.0
Series A preferred stock $ 86.2 $ 85.5 $ 84.8 $ 84.1 $ --
Exchangeable preferred stock $ -- $ -- $ -- $ 61.5 $ 53.2
Stockholders' equity (deficit) $ 311.5 $ 422.8 $343.1 $220.8 $272.3
Number of employees 20,800 9,300 7,200 6,200 5,300
</TABLE>
Certain prior years' amounts have been reclassified to conform to the
presentation for fiscal 1998. Employee data excludes discontinued operations
and businesses held for sale.
* Per share data is not presented for the period ended September 30, 1993, the
confirmation date of the Company's Reorganization Plan, due to the general
lack of comparability as a result of the revised capital structure of the
Company.
20
<PAGE> 22
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS (UNAUDITED)
Wang Laboratories, Inc. and Subsidiaries
The following table sets forth, for the periods indicated, the high and low
sales prices per share of the Common Stock as reported on the NASDAQ National
Market.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------- Fiscal
Sept 30, Dec 31, March 31, June 30, Year
-------- ------- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998
Common Stock price
High $23.13 $24.82 $31.63 $32.25 $32.25
Low $18.62 $19.13 $21.38 $21.00 $18.62
Year ended June 30, 1997
Common Stock price
High $20.13 $24.06 $23.75 $21.50 $24.06
Low $15.38 $18.88 $17.25 $16.00 $15.38
</TABLE>
At August 31, 1998 there were approximately 12,400 record holders of the
Company's Common Stock. The Company has paid no cash dividends on the Common
Stock for several years. The revolving credit facility with Bankers Trust
Company presently restricts the payment of cash dividends on the Common Stock.
The Company currently intends to retain any earnings for future growth and,
therefore, does not anticipate paying any cash dividends on the Common Stock in
the foreseeable future.
21
<PAGE> 23
EXHIBIT B
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This discussion includes certain forward-looking statements about matters such
as the Company's revenue, expected expenses, operating results and the need for
additional investment. Any such statements are subject to normal business risks
that could cause the actual results or needs to differ from those described
herein. For a further discussion of the various risks affecting the business,
refer to "Risks and Uncertainties" appearing at the end of this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
BASIS OF PRESENTATION
On March 17, 1998, the Company completed the purchase of Olivetti Solutions
("Olsy"), the wholly-owned information technology ("IT") solutions and service
subsidiary of Olivetti S.p.A. ("Olivetti"), except for Olivetti Corporation of
Japan ("OCJ"), Olsy's subsidiary in Japan, which was not completed until
April 7, 1998. Accordingly, the Company's Consolidated Balance Sheet and
Statements of Operations and of Cash Flows include the results of Olsy and OCJ
subsequent to their respective dates of acquisition. Olsy develops, implements
and manages IT solutions for large public and private corporate customers,
mainly in banking, the public authorities and utilities sector, and retail. The
Company provides a broad range of services, including application development
and systems integration, network integration and management services and
distributed IT management services to a worldwide customer portfolio. At the
time of acquisition, Olsy had more than 12,000 employees in more than 40
countries, with revenues of approximately $2.4 billion in calendar 1997, at then
current foreign currency exchange rates.
In connection with the Company's filing of Form 8-K, as amended, and disclosures
made in its August 12, 1998 earnings release regarding the results of operations
for the year ended June 30, 1998, the Company is engaged in discussions with the
staff of the Securities and Exchange Commission ("SEC") regarding the purchase
price allocation related to the Company's acquisition of Olsy and other charges
recorded in the June quarter. The Company in concurrence with its auditors,
Ernst & Young LLP, believe that the purchase price allocation and related
amortization charges, as well as the other charges recorded in the June quarter,
are in accordance with generally accepted accounting principles. However, it is
possible these discussions could result in changes to the non-cash charges
recorded in the June quarter operating results. Such changes could also affect
non-cash charges included in future operating results.
In connection with the Company's acquisition of Olsy, the management of the
Company began doing business under the name Wang Global. The change of the name
of the Company is subject to shareholder approval. During the interim, the
Company's legal name will continue to be Wang Laboratories, Inc., although the
Company will conduct its business under the name Wang Global.
On March 17, 1997, the Company completed the sale of its software business unit
to Eastman Kodak Company ("Kodak") for $260.0 million in cash. The business sold
to Kodak included Wang's software business unit management, employees, products,
technology, customers and partners, as well as its sales, marketing and research
and development organizations worldwide. Cash proceeds, net of transaction costs
paid to date, were $239.9 million. Approximately $10 million of cash is
estimated to be required in the future for payment of transaction costs and
guarantees. As a result
22
<PAGE> 24
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
of the sale, the results of operations of the software business unit for all
periods presented and the gain on the sale realized in the third quarter of
fiscal 1997 have been reported as discontinued operations in the accompanying
Statements of Operations and of Cash Flows.
On August 29, 1996, the Company completed the acquisition of I-NET, Inc.
("I-NET") for approximately $152 million in cash and notes, including final
settlement of the notes to the selling stockholders on November 13, 1997. I-NET
is a vendor-independent provider of outsourced network and desktop management
services. These services include enterprise network integration and operations,
network management, client/server technologies, LAN/WAN communications, and IT
outsourcing. The acquisition was accounted for using the purchase method of
accounting. The accompanying financial statements include I-NET's results of
operations from the date of acquisition.
During fiscal 1997, the Company also acquired Advanced Paradigms, Inc. ("API").
This acquisition was completed on November 13, 1996. During fiscal 1996, the
Company completed the acquisitions of BISS Limited ("BISS") on October 18, 1995
and Dataserv Computer Maintenance, Inc. ("Dataserv") on May 3, 1996. The
Company's consolidated Statements of Operations and of Cash Flows include the
results of the acquired businesses since acquisition.
RESULTS OF CONTINUING OPERATIONS
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
For the year ended June 30, 1998, the Company reported revenues of $1,887.0
million, a 48.8% increase compared to revenues of $1,268.4 million for the prior
year. Substantially all of the increase in consolidated revenues is attributable
to acquisitions of Olsy and I-NET offsetting the decline in traditional
revenues.
The operating loss for the year ended June 30, 1998 was $273.2 million and
relates primarily to nonrecurring charges of $302.9 million during the year, of
which $250.7 million was recorded in the quarter ended June 30, 1998 and $52.2
million was recorded in the quarter ended March 31, 1998. These costs include
$136.6 million related to reductions in the carrying value of certain intangible
assets which were determined to be impaired, $74.1 million related to charges
for in-process research and development, $43.9 million of Wang acquisition-
related and restructuring costs, $10.3 million for advertising related to the
Olsy acquisition, $5.1 million for transition costs related to integrating Olsy
into the existing Wang structure, and $32.9 million of other operating charges.
The $302.9 million is recorded in the Consolidated Statements of Operations as
follows: $0.5 million in Cost of services, $8.4 million in Cost of products,
$37.8 million in Selling, general and administrative expenses; $138.2 million in
Amortization of intangibles; $108.6 million in Acquisition-related charges and
$9.4 million in Other restructuring charges.
The operating loss for the year ended June 30, 1997 includes $52.5 million of
costs provided in the quarter ended March 31, 1997 associated with the Company's
organization of its then ongoing services business around four global service
delivery units after the sale of its software business. Of that total, $13.3
million resulted from the sale of the software business, $15.2 million was for
organizational realignment and reductions in the G&A infrastructure, $19.0
million related to reductions in the carrying value of certain assets (including
$14.4 million of intangible assets determined to be impaired) and $5.0 million
was for other charges.
23
<PAGE> 25
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The writedown of the impaired intangible assets is included in the $22.7 million
of amortization of acquired and fresh-start intangible assets reported in the
Statement of Operations for the year ended June 30, 1997. The Company had also
recorded acquisition-related charges of $27.4 million in the three months ended
September 30, 1996.
Excluding the nonrecurring operating charges of $302.9 million and $79.9 million
for the years ended June 30, 1998 and 1997, respectively, operating income was
$29.7 million compared to $57.1 million in the prior fiscal year. The decline in
operating profit in fiscal 1998 is primarily attributable to the previously
anticipated decline in higher margin traditional VS and GCOS and service
revenues, the increase in lower margin desktop and management services revenues
resulting from the acquisition of I-NET and the inclusion of Olsy's lower margin
structure. The Company anticipates that this shift in revenue mix will continue
and proprietary revenues will continue to decline, both absolutely and as a
percentage of total revenues.
Total EBITDA (earnings before interest, income taxes, depreciation and
amortization) was $162.3 million for the year ended June 30, 1998, compared to
$159.7 million in the prior year. EBITDA, which some investors believe to be a
meaningful measure for assessing a company's ability to meet its cash
requirements, is calculated by excluding from the net income (loss):
acquisition-related, Chapter 11-related and restructuring costs and other
nonrecurring charges; income taxes; interest expense; interest income;
depreciation and amortization. Despite the reduction in operating profit, EBITDA
remained relatively flat primarily as a result of higher depreciation and
amortization resulting from the Olsy acquisition.
REVENUES
The Company's revenues are classified and defined as follows: (a) networked
technology services and solutions, comprised of services and products related to
the design, installation, operation and maintenance of global computing and
telecommunications networks; (b) traditional products and services, comprised of
VS, GCOS and Olsy proprietary products and services; and (c) standard products,
which are commodity products (primarily related to Olsy) sold without
accompanying services.
The Company expects traditional revenues associated with VS and GCOS products
and services to continue to decline at a rate approximating 25 to 30% per year
on a constant currency basis, but that rate may accelerate as the Company's
customers make systems decisions regarding Year 2000 compliance. Additionally,
from one period to the next, the rate of decline could be highly variable.
Services revenues increased by 31.7%, to $1,269.5 million, compared to
$963.9 million in the prior year. The increase in services revenues was
primarily attributable to the acquisition of Olsy. Networked technology services
revenues increased by 44.3%, or $313.9 million, to $1,022.1 million, compared to
$708.2 million in the prior year, and is primarily attributable to the Olsy
acquisition. Networked technology services revenues for the years ended June 30,
1998 and 1997 included approximately $11 million and $14 million, respectively,
of revenues derived from the sale of certain intellectual property. Traditional
services revenues decreased by 3.3%, to $247.4 million compared to
$255.7 million in the prior year. The anticipated decline in traditional VS and
GCOS services was virtually offset by the addition of Olsy traditional services
revenues.
24
<PAGE> 26
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
A third, new classification of revenues, called `standard products', has been
added to capture separately the commodity products that are sold without
accompanying services. Had this change not been reflected in the quarter ended
June 30, 1998, reported networked technology products and traditional products
would have been $92.8 million and $31.2 million higher, respectively, for the
year.
Product revenues more than doubled, to $617.5 million in the year ended June 30,
1998, compared to $304.5 million in the prior year. Networked technology product
revenues increased by 27.1%, or $63.5 million, to $297.5 million. Traditional
product revenues increased by $125.5 million, to $196.0 million, compared to
$70.5 million in the prior year. The increase in traditional product revenues is
primarily the net result of the acquisition of Olsy, offset by the anticipated
decline in VS and GCOS product revenues. Standard product revenues were
$124.0 million.
GROSS MARGIN
Services gross margin decreased to 21.4% compared to 23.8% in the prior year.
Margins were negatively affected by the increase in lower-margin maintenance
revenues on multi-vendor services products, the decline in higher-margin
revenues from traditional maintenance contracts and Olsy's lower margin
structure.
The services gross margin continues to be adversely affected by consolidation in
the industry, resulting in competitive and technological pressures. Pressure
will continue to be exerted on the Company's services gross margin as a result
of increased networked technology maintenance revenues, which have historically
lower margins than the Company's traditional VS and GCOS business, coupled with
the inclusion of both I-NET and Olsy's lower margin structures going forward.
Although it is anticipated that these factors will continue to exert pressure on
services gross margin, the Company believes that the effect can be managed by
the continuing implementation of cost reduction, integration and consolidation
initiatives.
Product gross margin was 19.8%, compared to 25.6% in the prior year. This
decrease is primarily the result of the decline in traditional VS and GCOS
product sales, which have historically higher margins than the margins on resold
client-server products, coupled with Olsy's lower margin structure. The Company
anticipates that the decline in traditional VS and GCOS product revenues will
continue to exert downward pressure on product gross margin.
RESEARCH AND DEVELOPMENT
Research and development costs were $11.8 million compared to $3.7 million in
the prior year, representing 0.6% and 0.3% of revenues in fiscal 1998 and 1997,
respectively. The Company's research and development spending is primarily
related to Olsy's development of software technology for the banking industry
and to continuing support for its traditional VS products and specialized client
server products sold to the U.S. government.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $111.7 million, or
45.9%, to $354.9 million, in the year ended June 30, 1998. This increase is
attributable to the inclusion of Olsy as well as $37.8 million of nonrecurring
and other operating charges, and compares to $243.2 million, including
$23.1 million of nonrecurring and other operating charges, in the prior fiscal
year. During fiscal years 1998 and 1997, selling, general and administrative
expenses were 18.8% and 19.2% of revenues, respectively.
25
<PAGE> 27
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Nonrecurring and other operating charges of $37.8 million recorded in Selling,
general and administrative expenses in fiscal 1998 included $10.3 million for
advertising branding and positioning initiatives to launch the new combined
company, $1.7 million of transition costs related to integrating Olsy into the
existing Wang structure, $14.5 million related to reductions in the carrying
value of certain assets and $11.3 million for other operating costs. Excluding
these nonrecurring charges, selling, general and administrative expenses were
$317.1 million, or 16.8% of revenues. Nonrecurring and other operating charges
of $23.1 million recorded in fiscal 1997 included $13.3 million which resulted
from the sale of the software business, $8.3 million related to reductions in
the carrying value of certain assets and $1.5 million for other costs. Excluding
these charges, selling, general and administrative expenses were $221.4 million,
or 17.5% of revenues. The overall reduction in selling, general and
administrative expenses relative to revenues reflects the results of integration
activities initiated in connection with the Company's recent acquisitions, in
addition to other cost control activities.
AMORTIZATION
Amortization of acquired intangible assets totaled $182.7 million in the year
ended June 30, 1998, including $19.0 million for intangible assets established
as part of the Olsy acquisition, and $136.6 million for the writedown of
intangible assets associated with the acquisitions of I-NET, Bull and BISS which
were determined to be impaired. The impairment charge amounts were $114.8
million relating to the goodwill attributable to the I-NET commercial
outsourcing business, $20.0 million attributable to the Bull installed contracts
and assembled workforce, and $1.8 million attributable to the assembled
workforce at BISS. The impairment charge on the goodwill attributable to the
I-NET commercial outsourcing business was the result of significantly lower than
expected revenues and margin growth in the post acquisition period which are
currently expected to grow at a rate insufficient to recover the carrying value
of the related goodwill. The impairment charge attributable to the installed
customer service base and assembled workforce is the result of an accelerated
decline rate for the proprietary GCOS revenue and gross margin stream acquired
from Bull due to Year 2000 issues and market changes as customers migrate from
mainframe systems to networked technology. The impairment charge attributable to
the assembled workforce acquired in the BISS transaction was the result of
faster than expected attrition of the acquired workforce. Impairment of these
assets was determined to exist because the estimate of undiscounted cash flows
of the revenue streams to which each asset relates, net of the carrying amount
of tangible net assets, was less than the carrying amount of the intangible
asset. The undiscounted future cash flows are calculated based upon historical
results, current projections and internal earnings targets, net of applicable
income taxes, for each revenue stream. The impairment is then measured using a
discount rate corresponding to the Company's estimated cost of capital. During
fiscal 1997, the Company had eliminated its remaining fresh-start intangible
assets following the sale of its software business unit to Kodak through the
recognition of a deferred tax asset attributable to the realization and expected
utilization of tax net operating loss carryforwards which existed at September
30, 1993. Amortization of fresh-start and acquired intangible assets in the year
ended June 30, 1997 was $47.0 million, of which $12.0 million relates to the
implementation of fresh-start reporting, $20.6 million relates to assets
established in connection with business acquisitions and $14.4 million is for
the writedown of acquired intangible assets determined to be impaired.
26
<PAGE> 28
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
ACQUISITION-RELATED, RESTRUCTURING AND REORGANIZATION-RELATED CHARGES
Acquisition-related charges of $108.6 million in the year ended June 30, 1998
include $74.1 million for in-process research and development related to Olsy.
The remainder consists of $34.5 million for integration charges which reflect
the costs associated with combining the operations of Wang and Olsy.
Acquisition-related charges of $35.0 million in the year ended June 30, 1997
primarily reflect the costs associated with combining the operations of the
Company and I-NET and other business consolidation activities.
Restructuring charges of $9.4 million in the year ended June 30, 1998 primarily
reflect the costs associated with workforce reductions relative to the Company's
declining VS revenue stream. Periodically, the accruals related to
reorganization-related and restructuring charges are reviewed and compared to
their respective requirements. As a result of those reviews, the accruals are
adjusted for changes in cost and timing assumptions of previously approved and
recorded initiatives. Review of these accruals in fiscal 1998 determined that no
adjustments were required. Review of these accruals in fiscal 1997 determined
that no adjustments were required to restructuring; however, additional
reorganization-related requirements of $1.3 million were incurred and charged to
expense. This adjustment is reported in Chapter 11-related charges (credits) in
the Consolidated Statements of Operations.
INTEREST INCOME AND EXPENSE
Net interest expense of $2.4 million in the year ended June 30, 1998 is
primarily comprised of $10.4 million of interest expense, including $7.2 million
related to the Company's new $500 million Revolving Credit Facility with Bankers
Trust Company ("BTC"), net of $8.0 million of interest income. This compares to
net interest expense of $3.9 million in the prior year which is comprised of
$10.9 million of interest expense which is principally the result of amounts
outstanding under the previous $225 million Revolving Credit Facility and on the
note issued to the selling stockholders of I-NET, net of $7.0 million of
interest income.
OTHER INCOME AND EXPENSE
Net other income of $8.1 million was reported in the year ended June 30, 1998,
and primarily consisted of a $6.5 million gain realized in the first quarter of
the fiscal year on the sale of certain land and facilities owned by the Company
in Billerica, Massachusetts, compared to net other income of $4.4 million in the
prior fiscal year.
INCOME TAXES
The provision for income taxes in the year ended June 30, 1998 was $13.4
million, and included $9.7 million of non-cash expense, and is attributable to
taxes on income of foreign subsidiaries which do not have available net
operating loss carryforwards. The benefit for income taxes in the prior fiscal
year was $15.6 million, and relates to the utilization of certain foreign net
operating loss carryforwards incurred subsequent to the Company's emergence from
Chapter 11.
The Company has a net Deferred tax asset balance at June 30, 1998 of
$33.6 million, of which $20.4 million is included in Current assets and $13.2 is
included in Other assets, and relates to the expected utilization of tax net
operating loss carryforwards which existed at September 30, 1993, reducing
reorganization value in excess of identifiable intangible assets. During fiscal
1998, $9.7 million of deferred tax asset was realized. During fiscal 1997,
$21.0 million of deferred tax
27
<PAGE> 29
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
asset was realized as a result of the Company's sale of the software business,
and the Company recorded an additional net deferred tax asset of $13.5 million.
Although realization is not assured, management believes that the net deferred
tax asset will be realized by generating future taxable income as well as the
implementation of tax planning strategies. The estimate of future taxable income
relates to the Company's operations outside the United States which have, in the
past, consistently generated a level of taxable income similar to the amounts of
future taxable income necessary to realize the net deferred tax asset. In
addition, the Company has tax planning strategies to prevent the tax net
operating loss carryforwards from expiring unused. The amount of the net
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
EMPLOYEES
At June 30, 1998 and 1997, the Company's continuing operations had approximately
20,800 employees and 9,300 employees, respectively. The increase is a result of
acquisitions, net of reductions resulting from integration activities.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996
For the year ended June 30, 1997, the Company reported revenues of
$1,268.4 million, a 25.1% increase compared to revenues of $1,013.9 million for
the prior year. Substantially all of the increase in consolidated revenues is
attributable to acquisitions and internal growth offsetting the decline in
traditional revenues.
The Company reported an operating loss of $22.8 million, including nonrecurring
and operating charges of $79.9 million for its fiscal year ended June 30, 1997,
compared to an operating profit of $86.3 million for the fiscal year ended
June 30, 1996. Excluding these nonrecurring and other operating charges,
operating income was $57.1 million. The decline in operating profit in fiscal
1997 is primarily attributable to the previously anticipated decline in higher
margin proprietary product and lower margin service revenues resulting from the
acquisition of I-NET offsetting the decline in traditional revenues.
Total EBITDA was $289.5 million for the year ended June 30, 1997, compared to
$138.0 million in the prior year, while continuing operations EBITDA in the
years ended June 30, 1997 and 1996, was $159.7 million and $183.8 million,
respectively.
REVENUES
The decline in revenues from traditional sources (i.e., sales and service of
proprietary VS and GCOS products) was $103.3 million, or 24.1% compared to the
prior year.
Services revenues increased by 37.9%, to $963.9 million, compared to
$699.0 million in the prior year. The increase in services revenues was
primarily attributable to the acquisitions of Dataserv and I-NET offsetting the
decline in traditional services.
Product revenues decreased by 3.3%, to $304.5 million. Traditional product sales
totaled $70.5 million, a decline of 10.2%. Networked technology product sales
were stable at $234.0 million, compared to $236.4 million in the prior year.
28
<PAGE> 30
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
GROSS MARGIN
Services gross margin decreased to 23.8% compared to 31.2% in the prior year.
Margins were negatively affected by the increase in mix of maintenance revenues
from lower-margin multi-vendor services ("MVS") products, the acquisition of
I-NET (which has historically lower margins than the Company's existing
business) and $3.5 million of nonrecurring charges recorded in the third quarter
of fiscal 1997, offset by the favorable margin impact from the sale of certain
patents.
Product gross margin was 25.6%, compared to 31.2% in the prior year. The
decrease in gross margin is primarily a result of the changing mix resulting
from the decline in traditional products, the I-NET acquisition, which has
historically lower margins than the Company's traditional business, as well as
$2.2 million of nonrecurring charges recorded in the third quarter of fiscal
1997.
RESEARCH AND DEVELOPMENT
Research and development costs decreased by $1.3 million, or 26.0%, from
$5.0 million during the prior year, representing 0.3% and 0.5% of revenues in
fiscal 1997 and 1996, respectively. The Company's modest level of research and
development spending is primarily related to continuing support of its
proprietary VS products.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased $51.2 million, compared
to the prior year, and also increased slightly as a percentage of revenues, to
19.2% in fiscal 1997, compared to 18.9% in fiscal 1996. The increase includes
$23.1 million of nonrecurring charges which were recorded in fiscal 1997 and
pension plan-related credits associated with the termination of four
international plans approximating $1.3 million.
AMORTIZATION
Amortization of fresh-start and acquired intangible assets totaled $47.0 million
in the year ended June 30, 1997, and is comprised of $12.0 million related to
the implementation of fresh-start reporting, $20.6 million for intangible
assets established in connection with business acquisitions and $14.4 million
for the writedown of impaired acquired intangible assets. Amortization of
fresh-start and acquired intangible assets in the year ended June 30, 1996 was
$34.5 million, of which $18.4 million relates to the implementation of
fresh-start reporting and $16.1 million relates to intangible assets
established in connection with business acquisitions.
ACQUISITION, RESTRUCTURING AND CHAPTER 11-RELATED CHARGES
Acquisition-related charges of $35.0 million in the year ended June 30, 1997,
primarily reflect the costs associated with combining the operations of the
Company and I-NET and the writedown of legacy information systems being
replaced. There were no acquisition-related charges recorded in continuing
operations in the year ended June 30, 1996.
Periodically, the accruals related to reorganization-related and restructuring
charges are reviewed and compared to their respective requirements. As a result
of those reviews, the accruals are adjusted for changes in cost and timing
assumptions of previously approved and recorded initiatives. In fiscal 1997,
additional costs of $1.3 million were incurred and charged to expense. Review of
the reorganization-related accruals in fiscal 1996 identified $1.1 million of
excess reorganization reserves and $2.2 million of excess Chapter 11 accounts
payable accruals, which were
29
<PAGE> 31
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
reversed. These items are reported as Chapter 11-related charges (credits) in
the Consolidated Statements of Operations. Review of the restructuring accruals
in fiscal 1997 determined that no adjustments were required, while the fiscal
1996 review identified net additional requirements of $2.2 million related to
previously approved and recorded initiatives. This adjustment is reported as
Other restructuring charges in the Consolidated Statements of Operations.
INTEREST INCOME AND EXPENSE
Interest expense increased to $10.9 million for the year ended June 30, 1997,
compared to $5.1 million in the prior year. The increase in interest expense is
principally the result of amounts outstanding under the Revolving Credit
Facility with Bankers Trust Company and interest on the note issued to the
selling stockholders of I-NET. Interest income was $7.0 million, compared to
$9.0 million in the prior year. The reduction in interest income is primarily
due to the decrease in cash available for investment during most of fiscal 1997
primarily as a result of the cash paid to acquire I-NET.
OTHER INCOME AND EXPENSE
Net other income of $4.4 million for the year ended June 30, 1997 was primarily
comprised of gains realized on the sale of certain land and facilities owned by
the Company in both Massachusetts and Australia. This compares to net other
income of $4.7 million, in the year ended June 30, 1996.
INCOME TAXES
The benefit for income taxes for the year ended June 30, 1997, was 70%, compared
to the provision for the prior year, which was 33%. The higher benefit in fiscal
1997 relates to the utilization of the Company's net operating loss
carryforwards. The provision for income taxes of $31.4 million in the prior year
included $30.7 million of non-cash expense.
EMPLOYEES
At June 30, 1997 and 1996, the Company's continuing operations had approximately
9,300 employees and 7,200 employees, respectively.
LIQUIDITY AND SOURCES OF CAPITAL
Cash and equivalents were $225.0 million at June 30, 1998, a decrease of
$17.2 million from June 30, 1997.
Cash used in operations during the year ended June 30, 1998 was $10.1 million,
including $9.4 million used for costs associated with prior discontinued
operations.
Cash used in investing activities during the year ended June 30, 1997 was $65.0
million, and includes $91.1 million used for capital additions, including $40.8
million for nonconsumable spares and $12.6 million towards the construction of
new facilities, offset by $25.6 million of proceeds on asset sales, of which
$16.8 million relates to sales of land and buildings located on the Company's
Billerica, Massachusetts headquarters. Net cash acquired in connection with the
Olsy acquisition was $29.2 million and consists of $112.3 million acquired cash
less $68.6 million of cash consideration paid to Olivetti and transaction costs
of $14.5 million.
In connection with the acquisition of Olsy, the Company entered into a revolving
credit facility with Bankers Trust Company ("BTC") and certain other financial
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CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
institutions. The five-year facility provides for borrowings up to $500.0
million, including $200.0 million for letters of credit. At June 30, 1998, the
Company had long-term borrowings of $110.6 million and had available to it the
unused portion of the revolving credit facility, providing for additional
borrowings and/or the issuance of letters of credit of up to $380.6 million.
Cash provided by financing activities was $59.5 million in the year ended
June 30, 1998, and consists primarily of net borrowings under the Revolving
Credit Facility with BTC of $110.6 million, principal payments in connection
with the settlement of the notes to the selling stockholders of I-NET of
$47.4 million, cash dividends on preferred stock paid of $13.4 million, and
$11.9 million proceeds from stock plans.
In addition to normal operating activities, capital expenditures and payment of
preferred dividends, the Company estimates that expenditures of as much as
$380 million will be required in connection with the integration and rightsizing
of the combined company over the next two years. The Company has recorded a
total of $292.9 million for these activities, of which $83.1 million was
recorded as a charge to operations and $209.8 million was recorded as part of
purchase accounting for the acquisition of Olsy, as of June 30, 1998. The
$292.9 million includes approximately $164 million related to organizational
redundancies, $45 million related to facilities and $84 million related to
systems and other costs. A total of $198 million remains to be expended. The
Company currently estimates that such expenditures will approximate $131 million
through the remainder of calendar year 1998 and $61 million and $6 million in
calendar years 1999 and 2000, respectively. The Company estimates that the
$380 million will be recovered through cost savings through calendar year 2000.
Additionally, the Company has announced that it would spend an additional
$16 million for advertising, branding and positioning initiatives to launch the
newly combined company, of which approximately $4 million remains to be spent,
and approximately $6 million for the completion of the construction and fit-up
of the Company's new Corporate headquarters in Billerica, Massachusetts. The
estimated total cost of the construction activities is $20 million, which
approximates the cumulative proceeds, realized or expected to be realized, from
the disposition of other land and facilities. The Company expects to spend
approximately $11 million, principally over the remainder of calendar 1998, to
attain technological feasibility on Olsy in-process research and development
activities.
The Company believes that existing cash balances, cash generated from
operations, and borrowing availability under its Revolving Credit Facility will
be sufficient to meet the Company's operational cash requirements as well as the
integration and restructuring initiatives previously discussed, and for pursuing
potential investments, acquisitions and other expansion opportunities. As part
of furthering its business strategy, the Company explores acquisitions and
strategic relationships with other businesses on an on-going basis. One or more
of these opportunities could have an impact on the Company's liquidity through
the use of cash or could involve the issuance of debt or equity securities of
the Company. While the Company believes that the facility provides sufficient
capital availability there can be no assurance that sufficient capital will be
available on terms acceptable to the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
YEAR 2000
OVERVIEW. Ensuring that the Company's business and service delivery processes
are not disrupted by Year 2000 ("Y2K") related problems is a top priority. The
Company is taking necessary steps to ensure that the products and services of
its suppliers and sub-contractors upon whom the Company relies will not be
adversely affected by millennium problems.
Prior to the acquisition of Olsy, the Company was in the process of replacing
many of the systems used to operate its business. OLSY was involved in a similar
venture to achieve Y2K compliance for its systems. Although Y2K compliance is a
key consideration, the driving force behind the introduction of new systems has
been the need to consolidate multiple service management and delivery systems
into a new generation of systems that allow the Company to operate as a larger
enterprise in the service environment.
Wang's IT strategy has been to select and implement, Y2K compliant solutions to
replace the majority of legacy systems currently in use in the Company. In many
cases, the rollout of these systems is well underway. For the remaining
applications the Company is implementing and piloting programs in 1998 and plans
to complete a rollout in the first half of 1999. For functions where replacement
systems cannot be deployed before the third quarter of 1999, the Company is
upgrading existing legacy based systems to be Y2K compliant. This strategy will
allow Wang to continue its program of development, while minimizing risk through
continued use of its existing systems during the transition.
IMPLEMENTATION. In describing the detailed plans for implementing compliance of
the Company's major Management Information Systems, support systems can be
divided into two general categories:
- - Infrastructure, including network, network and mail servers and desktop
systems; and
- - Business Application Systems, including Service Support Systems and
Enterprise, Resource & Planning (ERP) Systems.
Infrastructure. Wang operates more than 20,000 personal computers and 400 NT
servers. Since 1996, the Company has been implementing a common operating
environment that is Y2K compliant. Desktop systems are being migrated to Windows
95, NT and 98 with Microsoft Office, Explorer and Outlook applications. Servers
will be migrated to compliant releases of Windows NT. The underlying
infrastructure is implemented on routers which have been certified as Y2K
compliant from the Company's strategic partner, CISCO. The Company plans to
complete this project by early 1999, at a cost of $11 million for Infrastructure
and $9 million to bring Olsy up to Wang's common operating environment. The
roll-out of this new infrastructure is already well under way. By December 1998
the Company will have completed its assessment at the small country level.
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CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Business Applications. Business applications fall into two categories: corporate
(addressing common global business practices) and local (reflecting unique
geographic, business and operating needs). The comments below relate to the
corporate or common systems assessment. Additional work is underway to review
both the expanded implementation of corporate systems and the Y2K actions that
relate to the ongoing use of local systems.
1. SERVICE DELIVERY SYSTEMS. The Company is consolidating eight service
delivery systems in the Americas into a single service delivery system
model ("SDSM") that has been certified as Y2K compliant. In Europe there
is a consolidation around the three Olsy legacy service delivery systems
(already Y2K compliant). This activity is expected to be completed
before the end of 1998, with the exception of Italy, which is expected
to be compliant in the first quarter of calendar year 1999. Between 1999
and 2001, Wang will migrate from these systems to the corporate service
delivery system model in North America. The process in Asia Pacific is
the same as in Europe.
SDSM refers to a combination of "best of breed" packaged solutions
blended with Internet & EDI technology to support its service delivery.
Among the key components are Metrix and Vantive. Scopus (another package
solution) is already widely used in our International Service Centers.
Vantive, a customer support package, ultimately will replace Scopus, is
used both in Network Control Centers and North American-based Service
Centers. Metrix, which automates field service delivery, has been
piloted in Australia, implemented in Canada and is being prepared for a
global roll-out. The manufacturers of each of these packages have
certified that they are Y2K compliant. The Company plans to implement
its SDSM in North America in 1999, and partially in the international
arena in the same timeframe. A contingency plan, around using Y2K
compliant legacy systems, exists and addresses unforeseen delays in
rolling out the SDSM.
A major component of its contingency plan involves Wang enhancing
certain legacy service delivery systems in order to allow them to
operate past 2000. This will both allow International to deploy the SDSM
at a pace and sequence that accommodates the intensive management
attention required to integrate Wang and Olsy while serving to mitigate
the risk associated with any SDSM implementation delay.
2. ENTERPRISE RESOURCE PLANNING SYSTEMS. Wang has chosen SAP R/3 as its
strategic ERP solution, and has already installed the software in many
of its subsidiaries. The Company plans to implement SAP R/3 as a
replacement for the Olsy subsidiary legacy systems in the United States,
Italy, and the U.K. In the second half of 1998. Other SAP modules will
be used to replace a number of systems previously used in Olsy
headquarters. During 1999, the Company plans to roll out the SAP systems
to the eighteen remaining countries, replacing all the Olsy legacy ERP
systems. SAP has certified SAP R/3 as Y2K compliant. Twenty-three small
countries will migrate to a corporate small-scale system (Solomon IV)
that provides a stepping stone towards future SAP migration. Although
Solomon reports that its system is Y2K compliant, the Company has
requested formal certification from Solomon.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
COSTS TO ADDRESS Y2K ISSUES. An investment program of nearly $100 million
commenced in 1996 supports the Company's strategy of replacing legacy systems.
An additional $5 million has been allocated for work on corporate legacy systems
required for compliance. A further $5 million will be allocated for funding of
local system compliance projects.
Risks to the Company of Y2K Issues. Y2K noncompliance by the Company would
seriously damage its image and credibility within the marketplace, adversely
affecting Wang's operating results and growth plans. Specifically, failure to
complete the required work in a timely manner may result in the following:
Wang Service Delivery Impact: Service delivery at the Company will be
forced to move to manual processes, impacting Wang's ability to meet
service level agreement obligations. At best, such a move would cause the
projected profit margin on key contracts to erode and at worst the
contracts would be terminated for failure to perform. Reverting to manual
processes would add cost and reduce gross margin.
Customer Compliance Failure Impact: The Company relies on its customers to
be Y2K compliant and to rectify any internal compliance problems. In the
event such customers fail to become compliant they likely would be forced
to move to manual processes to work around the issues. Although it is
unlikely that Wang would lose such contracts, it is likely that the
Company's service delivery costs would increase and the resultant gross
margin would erode.
Supplier Compliance Failure Impact: Wang relies on key information
technology suppliers (Microsoft, Dell, Hewlett-Packard, SAP, Siemens
Nixdorf, EMC, Northern Telecomm and Cisco) to implement the Company's Y2K
strategy. While Wang is performing some independent testing, the Company
expects our suppliers to extensively test all affected products. If
products produced by these suppliers prove not to be compliant, then Wang's
service delivery and internal operations would be impacted as described
herein.
Wang Internal Systems Impact: If the Company's internal systems do not
comply with Y2K standards, Wang will be forced to move to manual reporting
and processing which would increase SG&A costs by as much as 50% for those
systems negatively impacted until the problems are resolved.
COMPANY'S CONTINGENCY PLAN. In the event that Wang is unable to implement its
Y2K plan fully, manual processes will be used until the failed systems can be
fixed. For example, automated service call tracking and dispatch would be
handled manually until the automated systems become available.
Given the Company's reliance on replacement programs, continual close monitoring
of their progression is essential. Any replacement program slippage will require
increased investment in Y2K remediation of legacy systems. For those systems
which are beyond repair, alternative legacy systems would have to be
substituted.
The Company is committed to assisting its customers in managing the compliance
of their IT systems purchased from or serviced by the Company in order to meet
the Year 2000 challenge. The compliance of products and services supplied by the
Company has been given the highest priority.
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CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
The Company is committed to providing its customers with products that are
supportable beyond the Year 2000 and has engaged in a development effort to
bring its principal products into Year 2000 compliance.
The Company has developed a suite of products designed to provide VS users the
information, products, and tools required to update their VS systems as well as
to assist users in identifying and resolving issues with their own or third
party VS applications.
The Company has engaged in a communications campaign to notify its customers of
the compliance status of its products. This communications campaign has
consisted of written notices sent directly to customers, meetings with
customers, open forums for customers, and numerous postings on the Company's web
site. Although the Company cannot ensure that every customer has received all of
the necessary information, the Company believes that its communications effort
has been successful in informing its customers about the compliance status of
the Company's products and solutions.
The Company believes that its development effort and communications campaign has
minimized its potential exposure to Year 2000 claims and liability. Moreover,
the Company believes that the standard terms and conditions of its customer
contracts provide substantial protection against potential claims by customers.
The Company recognizes, however, that there continue to be risks associated with
the sale and use of Wang products that may not be Year 2000 compliant. The
Company is unable to assess the extent of the risk at this time. No claim has
been filed against the Company relating to Year 2000 issues and no customer has
asserted losses associated with any products of the Company.
THIRD PARTY PRODUCTS. It is the Company's goal to supply only products made by
other companies that are Year 2000 compliant. Where products originate from
third parties, the Company will seek to verify that the supplier has certified
the product as Year 2000 compliant. If an upgrade or future release of a product
is required, the Company will work with its customers to establish a plan for
obtaining the required upgrade or release. The Company has implemented a
certification program in which it has requested certifications from its
principal strategic suppliers. The Company is committed to providing its
customers with all of the relevant information available regarding Year 2000
status of products and provides information about standard PCs and links to a
number of our strategic partners and suppliers.
The Company recognizes, however, that there continue to be risks associated with
the sale of third-party hardware and software products that may not be Year 2000
compliant. The Company is unable to assess the extent of the risk at this time.
No claim has been filed against the Company relating to Year 2000 issues of
third party products and no customer has asserted losses caused by any sales of
third party products by the Company.
MULTI-VENDOR MAINTENANCE SERVICES. The Company provides maintenance services for
customers around the world who are using hundreds of different hardware and
software products made by dozens of companies. Although the Company will assist
its maintenance customers in addressing their Year 2000 related problems, the
Company does not intend to provide hardware maintenance or software support for
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
products that will not be ear 2000 complaint or will not be supported by the
manufacturer beyond that the Year 2000. Through its field service engineering
work force and its professional services teams, Wang will help customers analyze
the impact of the Year 2000 on its systems. Such services will be available on a
project basis at current commercial rates and terms.
Because the Company's standard maintenance contracts do not cover problems
associated with the Year 2000, the Company does not believe that it has material
exposure for providing maintenance services. The Company recognizes, however,
that there continue to be risks associated with the maintenance of hardware and
software products that may not be Year 2000 compliant. The Company is unable to
assess the extent of the risk at this time. No claim has been filed against the
Company relating to Year 2000 maintenance issues and no customer has asserted
losses due to any actions of the Company.
RISKS AND UNCERTAINTIES
Certain statements in this Form 10-K may be deemed "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Act"). The Company desires to take advantage of the safe harbor provisions of
the Act and is including this statement for the express purpose of availing
itself of the protection of the safe harbor with respect to all forward-looking
statements that involve risks and uncertainties. The Company or its
representatives may also make forward looking statements in other written
reports filed with the Securities and Exchange Commission ("SEC"), in materials
delivered to stockholders, in press releases and in oral statements to security
analysts, investors and others. Such forward-looking statements may relate to
various matters, including, without limitation, the Company's business, revenue,
expenses, profitability, acquisitions, dispositions, products, services,
intellectual property, expenses, labor matters, effective tax rate, the impact
of Year 2000 issues and operating and capital requirements. Forward looking
statements provide current expectations of future events based on certain
assumptions and include any statement that does not directly relate to any
historical or current fact. Words such as "anticipates," "believes," "expects,"
"estimates," "intends," "plans," "projects," and similar expressions, may
identify such forward-looking statements. In accordance with the Act, set forth
below are cautionary statements that accompany those forward-looking statements.
Readers should carefully review these cautionary statements as they identify
certain important factors that could cause actual results to differ materially
from those in the forward-looking statements and from historical trends. The
following cautionary statements are not exclusive and are in addition to other
factors discussed elsewhere in the Company's filings with the SEC and in
materials incorporated therein by reference.
IMPLEMENTATION OF BUSINESS STRATEGY. The Company's business strategy is to
increase the revenues and margins it realizes from providing networked
technology services and solutions to customers and clients and to build upon
that growth through acquisitions and alliances with other companies. The
Company's ability to implement successfully this strategy over the long term,
and the ultimate success of this strategy and the achievement of sustained
profitable growth, is uncertain and subject to a broad range of variables and
contingencies, many of which are beyond the Company's control. The Company may
not be able to achieve the revenue growth it is seeking as a result of an
inability to obtain new customer contracts, recruit, train
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CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
and retain required skilled personnel or the inability to deliver the required
services or solutions in a timely and satisfactory manner to customers. In
addition, there can be no assurance that the Company will be able to implement
strategic relationships or acquisitions, or, if entered into, that such
strategic relationships or acquisitions will in fact further the implementation
of the Company's business strategy. The Company's existing strategic
relationships with Dell Computer products Corporation, Microsoft Corporation,
and Cisco Systems, Inc. are subject to a variety of uncertainties, including
possible evolutions in technology, business relationships or strategic plans of
the parties which may, in the future, result in the termination of, or a change
in the nature of or in the expectations with respect to, such strategic
relationships. The Company's relationships with Dell, Microsoft and Cisco also
include certain contractual obligations, which, if not satisfied, could allow
Dell, Microsoft and Cisco, respectively, to terminate all or a portion of their
relationships.
Currently, a significant portion of the Company's revenues and gross margins are
attributable to the servicing, upgrading and enhancement of its installed base
of VS and other traditional systems and the resale of certain hardware products,
including banking peripherals. The Company expects revenues from traditional
sources, including the acquired Bull traditional product and service revenue
streams, to decline at a rate approximating 30% per year on a constant currency
basis, but that rate may accelerate as the Company's customers make systems
decisions regarding Year 2000 compliance. Additionally, from one period to the
next, the decline rate could be highly variable. As the Company's traditional
revenues decline, the loss of individual customers will have an increasingly
significant effect on the rate of decline for any particular measurement period.
The Company's continued growth is predicated on the business strategy described
above (including the acquisition of new customer service and network integration
businesses) more than offsetting the decline in revenues and gross margins from
traditional sources. There can be no assurance that delays or difficulties in
the implementation of the Company's strategy, or a higher than anticipated
decline in revenues and gross margins from traditional sources will not
adversely impact the Company's results of operations or the market value of its
securities.
RISKS OF NEWLY ACQUIRED BUSINESSES. In March and April 1998, the Company
completed its acquisition of the wholly-owned IT solutions and services business
of Olivetti Solutions ("Olsy") from the Olivetti Corporation. The transaction
more than doubled the annualized revenue and number of employees of the Company.
The Company will confront a number of risks as it operates the Olsy business and
integrates it with the Company's existing business. As with any significant
acquisition or merger, the Company confronts challenges in retaining employees,
customer relationships, synchronizing service delivery systems and business
processes, and integrating logistics, marketing, and product offerings to
achieve greater efficiencies as well as unforeseen liabilities. Moreover, the
Company may be unable to implement all anticipated cost savings in the Olsy
business. Finally, there can be no assurance that the acquisition of Olsy or any
of the Company's other acquisitions or strategic alliances will result in
long-term benefits to the Company, or that the Company and its management will
be able to effectively assimilate and manage the business of such acquired
companies. The Company continues to evaluate such opportunities regularly, and
one or more other transactions could occur at any time.
The transfer of Company shares to Olivetti as part of the purchase price for
Olsy increases the risk that the Company's use of its net operating loss may be
limited in the future. Federal tax rules impose an annual limitation on the use
of a net
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
operating loss when the change of ownership of shares in a corporation exceeds a
certain limit. The transfer of Company shares to Olivetti brings the aggregate
change of ownership closer to, but not in excess of, that stated limit. Other
unforeseen changes of ownership may push the aggregate change of ownership over
the stated limit. The Company believes that even if the annual limitation on the
use of its net operating loss were imposed, such limitation would be of no
consequence as the projected annual limitation on the use of a net operating
loss exceeds the projected federal taxable income of the Company.
DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent on
key management personnel and technical employees. The Company's growth and
future success will depend in large part on its ability to attract, motivate and
retain highly qualified personnel, particularly, trained and experienced
technical professionals capable of providing sophisticated network and desktop
outsourcing and integration services. In particular, the Company's new
relationships with Microsoft and Dell contemplates that the Company will train a
significant number of qualified Microsoft- and CISCO-certified personnel.
Competition for such personnel is intense and there can be no assurances that
the Company will be successful in hiring, training, motivating or retaining such
qualified personnel. The loss of key personnel or the inability to hire, train
or retain qualified personnel could have a material adverse effect on the
Company's business, financial condition or results of operations.
COMPETITION. The information technology ("IT") services and solutions
industry, including the network and desktop services markets, is intensely
competitive and undergoing continual change. Worldwide competition is vigorous
in all of the markets in which the Company does business. The Company's
competitors are numerous and vary widely in market position, size and resources.
Competitors differ significantly depending upon the market, customer and
geographic area involved. In many of the Company's markets, traditional computer
hardware manufacturing, communications and consulting companies provide the most
significant competition. The Company must also compete with smaller IT services
businesses and solution providers, that have been able to develop strong local
or regional customer bases. Many of the Company's competitors have substantially
greater resources, including larger research and engineering staffs and larger
marketing organizations, than those of the Company. The Company may have
difficulty implementing the leading edge technology required to service its
customers. There can be no assurance that the Company will be able to compete
successfully against other companies that provide similar IT services and
solutions.
YEAR 2000 LIABILITY. The Company supplies computer systems to large
organizations in the commercial and government markets, which include federal,
state and local customers. Any failure of the Company's products to perform,
including system malfunctions due to the onset of the calendar year 2000 (caused
by a data structure problem that will prevent software from properly recognizing
dates after the year 1999), could result in claims against the Company. Although
the Company maintains computer software and services errors and omissions
insurance, a claim brought against the Company could have a material adverse
effect on the Company's business, financial condition or results of operations.
Moreover, an increasing number of the Company's installed base of VS and other
traditional proprietary systems could choose to convert to other calendar year
2000 compliant systems in order to avoid such malfunctions. An increasing rate
of conversion would accelerate the decline of revenue associated with such
proprietary systems, and could have a material
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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adverse effect on the Company's business, financial condition or results of
operations. In addition, the Company operates internal legacy systems and
applications that contain year 2000 limitations. Initiatives are underway to
replace existing systems and address existing year 2000 limitations. There can
be no assurance that the conversion will be completed in a timely manner.
In the course of providing complex, integrated solutions to customers, the
Company frequently forms alliances with third parties that supply both hardware
and software products and services. Future results of the Company will in part
depend upon the performance and capabilities of these parties, including their
ability to deal effectively with the year 2000 issue. The Company is evaluating
the impact of the year 2000 compliance on its suppliers and is working with its
suppliers and customers on resolving year 2000 compliance issues. Because the
Company relies on the cooperation and assistance of its suppliers in addressing
year 2000 matters, there remains a possibility that year 2000 problems
experienced by its suppliers could have a material adverse impact on the
Company's business and operating results.
See "Year 2000" above.
POSSIBLE VOLATILITY OF PRICE OF COMMON STOCK. The market price of the
Company's Common Stock has fluctuated significantly in the past and may continue
to fluctuate in the future. Factors such as announcements of acquisitions,
technological innovations or other developments concerning the Company, its
competitors or other third parties, quarterly variations in the Company's
results of operations, non-recurring transactions and changes in overall
industry and economic conditions may all affect the market prices of the Common
Stock and cause it to fluctuate significantly. Moreover, the Company's expense
levels are based in part on expectations of future revenue levels, and a
shortfall in expected revenue could therefore have a disproportionate adverse
effect on the Company's net income. Furthermore, the market prices of the stocks
of many high technology companies have experienced wide fluctuations that have
not necessarily been related to the operating performance of the individual
companies.
DEPENDENCE ON GOVERNMENT REVENUE. The years ended June 30, 1998 and 1997,
the Company derived approximately 20% and 30%, respectively of its revenues from
branches or agencies of the United States government, and derived significant
additional revenues from agencies of various foreign governments. The Company
expects that a significant portion of the revenue from the newly-acquired Olsy
operations will be attributable to the sale of products and services to
governments of other countries and their instrumentalities and agencies. A
significant portion of the Company's U.S. and non-U.S. government revenues comes
from orders under government contract or subcontract awards, which involves the
risk that the failure to obtain or renew an award due to the change in ownership
or other factors, or a delay on the part of the government agency in making the
award or of ordering or paying for products or services under an awarded
contract, could have a material adverse effect on the financial performance of
the Company for the period in question. Other risks involved in government sales
are the larger discounts (and thus lower margins) often involved in government
sales, the unpredictability of funding for various government programs, and the
ability of government agencies to unilaterally terminate the contract. Revenues
from government of the United States and other foreign governments and their
instrumentalities and agencies, are received under a number of different
contracts and from a number of different contracting authorities.
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WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
INTERNATIONAL OPERATIONS. International revenues in recent years have
accounted for a substantial portion of the Company's total revenues. As a result
of the acquisition of Olsy, the Company expects to derive more than fifty
percent of its revenue from affiliates operating outside of the United States.
The Company's international entities are subject to all of the risks normally
associated with international operations, including changes in regulatory
compliance requirements, compliance costs associated with International
Standards Organization (ISO) 9000 quality control standards, special standards
requirements, exposure to currency fluctuations, exchange controls, tariffs and
other barriers, difficulties in staffing and managing international subsidiary
operations, potentially adverse tax consequences and country-specific product
requirements. The introduction of the Euro may result in changes to business
practices throughout Europe affecting pricing, systems and competition. While
the Company attempts to reduce its currency exposure, there can be no assurance
that it will not experience losses due to international currency fluctuations.
The Company's results of operations could also be affected by economic
conditions and changes in foreign countries and by macro-economic changes,
including recession and inflation. For example, weakness in some Asian economies
may have an adverse impact on the Company's business. In addition, effective
intellectual property protection may not be available in every foreign country
in which the Company distributes its own and other products and the loss of such
protection could have a material adverse effect on the business of the Company.
NATURE OF CONTRACTS. Some of the Company's contracts are for a fixed price
and are long-term in duration, which subjects the Company to substantial risks
relating to unexpected cost increases and other factors outside the control of
the Company.
Revenues and profits on such contracts are recognized using estimates and actual
results, when known, may differ materially from such estimates. Additionally,
some of the customer relationships in the international arena, particularly
those acquired through the Olsy acquisition, are supported by periodic purchase
orders in lieu of contracts of a predetermined duration. Revenues supported by
purchase orders are often less predictable and may be jeopardized by the change
of ownership of Olsy. Finally, IT outsourcing contracts in particular, often
contain provisions that allow for termination for convenience, service level
agreement compliance, liquidated damages and penalties and are awarded based on
a competitive procurement process. Such contracts often require high pre-award
expenditures and long lead times with no assurance of success.
SUPERIOR RIGHTS OF PREFERRED STOCK. The Board of Directors of the Company
is authorized under the Company's Certificate of Incorporation, without
stockholder approval, to issue from time to time up to an aggregate of 5,000,000
shares of preferred stock, $0.01 par value per share (the "Preferred Stock"), in
one or more series. Of the 5,000,000 authorized shares of Preferred Stock,
90,000 shares have been designated as 4 1/2% Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock"), all of which shares have been
issued, and 143,750 shares have been designated as 6 1/2% Series B Cumulative
Convertible Preferred Stock ("Series B Preferred Stock"), all of which shares
have been issued. The rights of holders of Common Stock are subject to, and may
be adversely affected by, the rights of holders of the Series A Preferred Stock
and the Series B Preferred Stock and any other series of Preferred Stock that
the Company may designate and issue in the future. In particular, before any
payment or distribution is made to holders of Common Stock upon the liquidation,
dissolution or winding-up of the Company,
40
<PAGE> 42
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
holders of both the Series A Preferred Stock and the Series B Preferred Stock
are entitled to receive a liquidation preference of $1,000.00 per share, plus
accrued and unpaid dividends. The holders of the Series A Preferred Stock and
the Series B Preferred Stock also have various rights, preferences and
privileges with respect to dividends, redemption, voting, conversion and
registration under the Securities Act.
MARKET RISK. The Company is exposed to market risk from changes in interest
rates and foreign exchange rates. The Company does not use derivative
instruments for trading purposes. The Company monitors foreign exchange and
interest rate risks and manages such risks on specific transactions. The risk
management process uses analytical techniques including market value,
sensitivity analysis, and value at risk estimates. The Company does not believe
that the potential exposure is significant in light of the size of the Company
and its business. In addition, foreign exchange rates may move in the Company's
favor. Recent experience has demonstrated that gains on certain days are offset
by losses on other days. While the Company does not expect to incur material
losses as a result of this market risk, there can be no assurance that losses
will not result.
AVAILABILITY OF FINANCING. The Company may need to raise additional funds
through public or private debt or equity offerings in order to make other
acquisitions and otherwise implement its strategy. The Company has recently
entered into a $500 million secured credit facility in conjunction with the
completion of the transaction with Olivetti. While the Company believes that the
facility provides sufficient capital availability for the foreseeable future
there can be no assurance that sufficient capital will be available on terms
acceptable to the Company.
ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and
By-laws and the Delaware General Corporation Law contain certain provisions
which could have the effect of delaying or preventing transactions that might
result in a change in control of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over the
then-current market price, and may limit the ability of stockholders to approve
transactions that they deem to be in their best interests. In addition, the
Company has recently adopted a shareholder rights plan which is intended to
deter coercive or unfair takeover tactics and to prevent a potential acquirer
from gaining control of the Company without offering a fair price to all of the
Company's shareholders which could have the same effect as the provisions
referred to above.
41
<PAGE> 43
EXHIBIT C
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wang Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Wang
Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1998. Our audits also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wang
Laboratories, Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Boston, Massachusetts
August 12, 1998
42
<PAGE> 44
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Services $ 1,269.5 $ 963.9 $ 699.0
Products 617.5 304.5 314.9
--------- --------- ---------
1,887.0 1,268.4 1,013.9
--------- --------- ---------
Costs and expenses
Cost of services 997.5 734.4 480.7
Cost of products 495.3 226.6 216.5
Research and development 11.8 3.7 5.0
Selling, general and administrative 354.9 243.2 192.0
Amortization of intangibles - acquisition and fresh-start 182.7 47.0 34.5
Acquisition-related charges 108.6 35.0 --
Chapter 11-related charges (credits) -- 1.3 (3.3)
Other restructuring charges 9.4 -- 2.2
--------- --------- ---------
Total costs and expenses 2,160.2 1,291.2 927.6
--------- --------- ---------
Operating income (loss) (273.2) (22.8) 86.3
--------- --------- ---------
Other (income) expense
Interest (income) expense, net 2.4 3.9 (3.9)
Other income, net (8.1) (4.4) (4.7)
--------- --------- ---------
Total other income (5.7) (0.5) (8.6)
--------- --------- ---------
Income (loss) from continuing operations before
income taxes and minority interests (267.5) (22.3) 94.9
Provision (benefit) for income taxes 13.4 (15.6) 31.4
--------- --------- ---------
Income (loss) from continuing operations
before minority interests (280.9) (6.7) 63.5
Minority interests in earnings of subsidiaries (0.7) -- --
--------- --------- ---------
Income (loss) from continuing operations (281.6) (6.7) 63.5
Income (loss) from discontinued operations,
net of taxes -- 76.6 (69.0)
--------- --------- ---------
Net income (loss) (281.6) 69.9 (5.5)
Dividends and accretion on preferred stock (14.1) (14.1) (22.6)
--------- --------- ---------
Net income (loss) applicable to common stockholders $ (295.7) $ 55.8 $ (28.1)
========= ========= =========
Per share amounts
Basic
Continuing operations $ (7.29) $ (0.56) $ 1.13
Discontinued operations -- 2.06 (1.91)
--------- --------- ---------
Net income (loss) $ (7.29) $ 1.50 $ (0.78)
========= ========= =========
Diluted
Continuing operations $ (7.29) $ (0.56) $ 1.07
Discontinued operations -- 2.06 (1.81)
--------- --------- ---------
Net income (loss) $ (7.29) $ 1.50 $ (0.74)
========= ========= =========
Shares used to compute per share amounts
Basic 40.6 37.2 36.0
Diluted 40.6 37.2 38.0
</TABLE>
See notes to the consolidated financial statements.
43
<PAGE> 45
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------
(Dollars in millions) 1998 1997
-------- --------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 225.0 $ 242.2
Accounts receivable, net 838.7 244.3
Inventories 168.3 14.5
Other current assets 202.7 53.6
-------- --------
Total current assets 1,434.7 554.6
Depreciable assets, net 214.1 123.0
Intangible assets, net 448.7 311.6
Other assets 91.7 45.6
-------- --------
Total assets $2,189.2 $1,034.8
======== ========
Liabilities and stockholders' equity
Current liabilities
Borrowings due within one year $ 26.3 $ 63.3
Accounts payable 451.5 64.4
Accrued expenses and other current liabilities 753.0 231.3
Deferred service revenue 164.6 69.5
-------- --------
Total current liabilities 1,395.4 428.5
-------- --------
Long-term liabilities
Debt 116.9 --
Other long-term liabilities 272.6 98.0
-------- --------
Total long-term liabilities 389.5 98.0
-------- --------
Commitments and contingencies
-------- --------
Minority interest 6.6 --
-------- --------
Series A preferred stock 86.2 85.5
-------- --------
Stockholders' equity
Series B preferred stock, $0.01 par value,
143,750 shares authorized and outstanding,
liquidation preference of $143.8 million 138.3 138.3
Common stock, $0.01 par value, 100,000,000
shares authorized; 46,150,302 and
38,008,004 shares outstanding, respectively 0.5 0.4
Capital in excess of par value 484.1 291.4
Cumulative translation adjustment (19.1) (3.7)
Accumulated deficit (292.3) (3.6)
-------- --------
Total stockholders' equity 311.5 422.8
-------- --------
Total liabilities and stockholders' equity $2,189.2 $1,034.8
======== ========
</TABLE>
See notes to the consolidated financial statements.
44
<PAGE> 46
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations $(281.6) $ (6.7) $ 63.5
Depreciation 74.0 67.6 45.9
Amortization 189.4 49.8 44.7
Gain on asset sales (8.7) (2.9) (2.3)
Non-cash provision (benefit) for income taxes 9.7 (22.8) 30.7
Non-cash compensation expense -- 5.6 --
Acquisition-related charges 108.6 35.0 --
Chapter 11-related charges (credits) -- 1.3 (3.3)
Other restructuring charges (credits) 9.4 -- 2.2
Payments for acquisition-related and
other restructuring charges (59.6) (30.1) (44.5)
------- ------- -------
41.2 96.8 136.9
------- ------- -------
Changes in other accounts affecting operations
Accounts receivable (19.1) 6.4 10.8
Inventories 21.5 6.6 7.1
Other current assets 22.4 3.7 3.6
Accounts payable and other current liabilities (63.5) (43.1) (48.1)
Other (3.2) 4.1 3.0
------- ------- -------
Net changes in other accounts affecting operations (41.9) (22.3) (23.6)
------- ------- -------
Cash provided by (used in) continuing operations (0.7) 74.5 113.3
------- ------- -------
Proceeds from sale of discontinued operation, net -- 249.2 --
Cash used in discontinued operations (9.4) (35.8) (76.8)
------- ------- -------
Cash provided by (used in) discontinued operations (9.4) 213.4 (76.8)
------- ------- -------
Cash provided by (used in) operations (10.1) 287.9 36.5
------- ------- -------
INVESTING ACTIVITIES
Investment in depreciable assets (91.1) (55.0) (43.4)
Investment in capitalized software -- -- (0.4)
Proceeds from asset sales 25.6 10.4 5.0
Business acquisitions, net of cash acquired 8.4 (170.1) (49.8)
Other (7.9) (0.2) (9.9)
------- ------- -------
Cash used in investing activities (65.0) (214.9) (98.5)
------- ------- -------
FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement 110.6 -- --
Net increase (decrease) in long-term borrowings 0.8 (0.1) (3.7)
Net increase (decrease) in short-term borrowings (48.6) (0.3) (2.5)
Proceeds from sale of preferred stock -- -- 138.3
Retirement of preferred stock -- -- (72.9)
Proceeds from sale of common stock 11.9 9.7 5.2
Dividends paid on preferred stock (13.4) (13.4) (8.3)
Other (1.8) 0.1 (0.8)
------- ------- -------
Cash provided by (used in) financing activities 59.5 (4.0) 55.3
------- ------- -------
Effect of changes in foreign exchange rates on cash (1.6) (2.1) (0.4)
------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (17.2) 66.9 (7.1)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 242.2 175.3 182.4
------- ------- -------
CASH AND EQUIVALENTS AT END OF YEAR $ 225.0 $ 242.2 $ 175.3
======= ======= =======
</TABLE>
See notes to the consolidated financial statements.
45
<PAGE> 47
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Convertible Capital in Cumulative Earnings
Preferred Common Excess of Translation (Accumulated
(Dollars in millions) Stock Stock Par Value Adjustment Deficit) Total
----------- ------ ---------- ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 $ -- $0.3 $291.2 $ (0.5) $ (70.2) $220.8
Net loss (5.5) (5.5)
Stock to be issued in business acquisition 5.0 5.0
Stock plans (604,007 shares) 0.1 5.1 5.2
Dividends and accretion on
preferred stock (22.6) (22.6)
Issuance of cumulative convertible preferred
stock, net of issuance costs 138.3 138.3
Currency translation (0.3) (0.3)
Other, net 2.2 2.2
------ ---- ------ ------ ------- ------
Balance June 30, 1996 138.3 0.4 278.7 (0.8) (73.5) 343.1
Net income 69.9 69.9
Warrant issued in relation to divestiture 5.0 5.0
Stock plans (1,322,638 shares) 21.8 21.8
Dividends and accretion on
preferred stock (14.1) (14.1)
Currency translation (2.9) (2.9)
------ ---- ------ ------ ------- ------
Balance June 30, 1997 138.3 0.4 291.4 (3.7) (3.6) 422.8
Net loss (281.6) (281.6)
Stock and stock equivalents issued in
business acquisition 0.1 188.5 188.6
Stock plans (892,298 shares) 11.2 11.2
Dividends and accretion on preferred stock (7.0) (7.1) (14.1)
Currency translation (15.4) (15.4)
------ ---- ------ ------ ------- ------
Balance June 30, 1998 $138.3 $0.5 $484.1 $(19.1) $(292.3) $311.5
====== ==== ====== ====== ======= ======
</TABLE>
See notes to the consolidated financial statements.
46
<PAGE> 48
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of the Company and all majority-owned subsidiaries. All significant
intercompany accounts and transactions are eliminated. Investments in affiliated
companies, owned more than 20% but not in excess of 50%, are recorded on the
equity method.
The Company completed the purchase of Olivetti Solutions ("Olsy"), the
wholly-owned information technology ("IT") solutions and service subsidiary of
Olivetti S.p.A. ("Olivetti") on March 17, 1998, except for Olivetti Corporation
of Japan ("OCJ"), Olsy's subsidiary in Japan, which was completed April 7, 1998.
Accordingly, the Company's Consolidated Statements of Operations and of Cash
Flows include the results of Olsy and OCJ for the periods subsequent to their
respective dates of acquisition.
Certain amounts in previously issued financial statements have been reclassified
to conform to current presentations.
REVENUE RECOGNITION: The Company provides services under level-of-effort and
fixed-price contracts. Under level-of-effort types of contracts, revenue is
earned and billed as services are provided. For fixed-price contracts, revenue
is recognized on the percentage-of-completion method. Anticipated contract
losses are recognized in the period they are determined. Deferred revenue is
recorded to the extent that billings exceed revenue recognized under service
contracts and contracts accounted for under the percentage-of-completion method.
Revenues from royalty agreements are recognized as earned over the contract
term. Hardware and software revenues are recognized at time of shipment or
delivery, provided collection is probable and there are no significant
post-contract support obligations. If significant post-contract support
obligations exist, then revenue is recognized over the period of such support
arrangements.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include revenues and costs under
long-term contracts, collectibility of accounts receivable, recoverability of
depreciable assets, intangibles and deferred tax assets and the adequacy of
acquisition-related, Chapter 11-related and restructuring reserves. Although the
Company regularly assesses these estimates, actual results could differ from
those estimates. Changes in estimates are recorded in the period in which they
become known.
CASH AND EQUIVALENTS: Cash and equivalents include time deposits, certificates
of deposit and repurchase agreements with original maturities of three months or
less. Also included is restricted cash, totaling $9.2 million and $12.7 million
at June 30, 1998 and 1997, respectively. These restricted cash balances
generally relate to normal trade practices and arrangements and in the prior
year also related to statutory reserves for the Company's insurance
subsidiaries.
CURRENCY TRANSLATION: For most non-U.S. subsidiaries, which operate in a local
currency environment, assets and liabilities are translated at period-end
exchange rates, and income statement items are translated at the average
exchange rates for the period. Translation adjustments are reported in a
separate component of stockholders' equity, which also includes exchange gains
and losses on certain intercompany balances of a long-term investment nature.
47
<PAGE> 49
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- (CONTINUED)
CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the
Company to concentration of credit risk consist primarily of temporary cash
investments and trade receivables. The Company restricts investment of temporary
cash investments to financial institutions with investment grade credit ratings.
Credit risk on trade receivables is minimized as a result of the large and
diverse nature of the Company's worldwide customer base. Trade receivables
include $100.4 million and $77.7 million at June 30, 1998 and 1997,
respectively, due from the United States government and its agencies. Trade
receivables from the Italian government and its agencies, which resulted from
the acquisition of Olsy, were $169.0 million at June 30, 1998.
FORWARD EXCHANGE CONTRACTS: The Company enters into forward exchange contracts
as a hedge against certain intercompany transactions denominated in foreign
currency. These financial instruments are designed to minimize exposure and
reduce risk from exchange rate fluctuations in the regular course of business.
Market value gains and losses are included in income as incurred and offset
gains and losses on foreign currency assets or liabilities that are hedged.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market.
INTANGIBLE ASSETS: Intangible assets, including those identified as a result of
purchase accounting, and the related depreciable lives are as follows:
Trademarks 1 year
Patents 15 years
Computer software 3-7 years
Installed base - service 5-8 years
License agreements 3-5 years
Assembled workforce 7-10 years
Goodwill 15-25 years
The Company periodically evaluates the carrying value of intangible assets to
determine if impairment exists based upon estimated undiscounted future cash
flows over the remaining useful life of the assets. The impairment, if any, is
measured by the difference between carrying value and estimated discounted
future cash flows and is charged to expense in the period identified.
Trademarks include rights to use the Olsy or Olivetti name obtained by the
Company in connection with the Olsy acquisition in certain countries. Patents
include legal costs related to successfully defending certain patents, and
expenditures to maintain licenses and register new patents. The capitalized
costs of patent defense are charged to expense in the period in which the patent
defense is determined to be unsuccessful or the capitalized amount has no future
value.
Amortization is computed principally by use of the straight line method with the
exception of computer software, which is amortized on a product-by-product basis
using the ratio that current gross revenues bear to the total of current and
future gross revenues.
DEPRECIABLE ASSETS: Property, plant and equipment, and spare parts and rental
equipment are stated at cost less accumulated depreciation. Depreciation is
computed principally by use of the straight-line method.
48
<PAGE> 50
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- (CONTINUED)
Depreciable lives are summarized as follows:
Buildings and improvements 5 - 40 years
Machinery and equipment 3 - 10 years
Spare parts and rental equipment 3 - 5 years
INCOME TAXES: The Company does not provide for U.S. federal income taxes on the
undistributed earnings of its foreign subsidiaries since it intends to
permanently reinvest these earnings in the growth of the business outside of the
United States.
EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings Per Share", which was required to be adopted
for financial statements issued for periods ending after December 15, 1997. In
accordance with this Statement, the Company has changed the method previously
used to compute earnings per share and has restated prior periods. Basic
earnings per share is calculated based on the weighted average number of common
shares outstanding, including approximately 2.6 million shares which the
Disbursing Agent under the Company's Reorganization Plan has been instructed to
distribute. In addition, diluted earnings per share includes the effect of stock
options and warrants, when dilutive. Income (loss) from continuing operations,
for purposes of calculating basic and diluted earnings per share, has been
adjusted by cumulative dividends and accretion related to the Company's
preferred stock.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting
Standards Board issued Statement No. 130, "Reporting Comprehensive Income,"
("FAS 130") and Statement No. 131, "Disclosures About Segments of an Enterprise
and Related Information" ("FAS 131"). These recent accounting pronouncements
have not been adopted by the Company, as permitted by the pronouncements. FAS
130 establishes standards for reporting and displaying comprehensive income and
its components. FAS 131 establishes standards for the way public companies
report information about operating segments in financial statements, and
supersedes FAS 14, "Financial Reporting for Segments of a Business Enterprise,"
but retains the requirements to report information about major customers. FAS
130 and FAS 131 are effective for the Company in its next fiscal year. The
Company does not believe the adoption of these Statements will have a material
effect on the Company's financial statements.
NOTE B -- BUSINESS ACQUISITIONS AND ACQUISITION-RELATED CHARGES
BUSINESS ACQUISITIONS:
Olsy
On March 17, 1998, the Company completed the purchase of Olsy, the wholly-owned
information technology solutions and service subsidiary of Olivetti, except for
OCJ, which was completed April 7, 1998. Olsy's revenues for the calendar year
ended December 31, 1997 were approximately $2.4 billion at then current foreign
currency exchange rates.
In consideration for Olsy, the Company paid Olivetti $68.6 million in cash; 8.75
million shares of common stock (of which 1.5 million shares are to be delivered
before the end of calendar year 1998, subject to shareholder approval) with a
value of $146.8 million at the time of issuance; 5.0 million stock appreciation
rights ("SARs") which give Olivetti value for the increase in the market price
of the Company's common stock
49
<PAGE> 51
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
above $30.00 per share at any time from March 2001 to March 2005 and are
redeemable in cash or common stock at the Company's election and valued at $41.8
million; and the potential for an additional amount (an "earnout") of up to
$56.0 million payable in the year 2000, subject to meeting mutually-agreed
performance targets for the calendar years 1998 to 1999. The value of the shares
was recorded at a discount of 35% of the market value of the Company's common
stock based on restrictions contained in the Stock Purchase Agreement between
the Company and Olivetti. The value of the SARs was recorded based on the
historical and implied volatility of the common stock, considering both the
minimum guaranteed price and the restrictions on exercise inherent in the SARs.
These values were determined by independent valuations. Neither the shares nor
the SARs are registered, and are subject to a three-year restriction period.
Until shareholder approval is obtained on the 1.5 million shares, the Company
will pay Olivetti an incremental $2.6 million per year in quarterly
installments. Settlement of the 1.5 million shares will be in cash if the
shareholders do not approve the issuance. The earnout will be recorded at the
time it becomes probable that a payment will be required and the amount can be
reasonably estimated. Additionally, Olivetti has indemnified the Company against
certain contingencies acquired by the Company as part of the transaction.
The acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board No. 16, "Business Combinations"
("APB 16"). Under APB 16, purchase price allocations are made to the assets
acquired and the liabilities assumed based on their respective fair values.
A summary of the acquisition, follows (in millions):
Cash, including transaction costs $ 90.2
Common stock and stock equivalents 146.9
Stock appreciation rights 41.8
------
Total consideration 278.9
Estimated fair value of net (assets) liabilities assumed 95.0
Excess of purchase price over net tangible assets acquired $373.9
======
The excess of the purchase price over the fair value of the net liabilities
assumed was $373.9 million and has been recorded based on a preliminary purchase
price allocation including an accrued restructuring liability of $209.8 million.
Finalization of the allocation of the purchase price to assets acquired and
liabilities assumed is subject to appraisals, valuations, evaluations,
settlements with labor representatives, and other analyses of the fair values of
assets acquired and liabilities assumed. The preliminary purchase price
allocation is based on the report of an independent appraiser. The purchased
in-process research and development of $74.1 million was based upon an analysis
of those projects which had not reached technological feasibility, had no
alternative future use, and was valued using expected future cash flows,
discounted for risks and uncertainties related to the target markets and the
completion of the products. Consequently, the $74.1 million allocated to
purchased in-process research and development was recorded as an
Acquisition-related charge.
The excess of purchase price over the fair value of the net liabilities assumed
of $373.9 million was allocated to specific intangible asset categories as
follows (in millions):
50
<PAGE> 52
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
In-process research and development $ 74.1
Capitalized software 56.4
Trademarks 39.0
Goodwill 204.4
------
$373.9
======
Amortization of these intangibles for the period subsequent to the acquisition
was $19.0 million.
The Company has recorded a total of $209.8 million of restructuring and
integration liabilities in connection with the purchase accounting in the Olsy
acquisition, of which $149.4 million is workforce-related, $26.2 million is for
facilities, and $34.2 million is for other.
Under certain conditions, costs related to the acquired Olsy business will be
accounted for as an additional cost of the acquisition at the time the formal
plan of restructuring is completed. Integration-related costs attributable to
Wang will be accounted for as charges to operations in the periods they are
determined.
In connection with the acquisition, on March 13, 1998, the Company entered into
a multi-currency, revolving credit facility with Bankers Trust Company ("BTC")
and certain other financial institutions. The five-year facility provides
borrowings up to $500.0 million, including $200.0 million for letters of credit.
For a more detailed description of this facility, please see Note G, Financing
Arrangements.
The following pro forma results of operations have been prepared as though the
Olsy acquisition had occurred as of the beginning of the periods presented (in
millions except per share data):
<TABLE>
<CAPTION>
Year Ended
June 30,
-----------------------
1998 1997
-------- ---------
<S> <C> <C>
Revenues $3,527.7 $3,921.7
Loss from continuing operations $ (370.5) $ (219.5)
Loss attributable to common stockholders $ (381.1) $ (233.6)
Net loss per share applicable to common stockholders $ (9.39) $ (5.08)
</TABLE>
In connection with the Company's filing of Form 8-K, as amended, and disclosures
made in its August 12, 1998 earnings release regarding the results of operations
for the year ended June 30, 1998, the Company is engaged in discussions with the
staff of the Securities and Exchange Commission ("SEC") regarding the purchase
price allocation related to the Company's acquisition of Olsy and other charges
recorded in the June quarter. The Company with the concurrence of its auditors,
Ernst & Young LLP, believes that the purchase price allocation and related
amortization charges, as well as the other charges recorded in the June quarter,
are in accordance with generally accepted accounting principles. However, it is
possible these discussions could result in changes to the non-cash charges
recorded in the June quarter operating results. Such changes could also affect
non-cash charges included in future operating results.
51
<PAGE> 53
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
I-NET
On August 29, 1996, the Company acquired all of the outstanding shares of I-NET,
pursuant to the Stock Purchase Agreement between the Company and the other
stockholders of I-NET dated as of July 24, 1996, as amended on August 29, 1996.
I-NET is a vendor-independent provider of outsourced network and desktop
management services. These services include enterprise network integration and
operations, network management, client/server technologies, local area network
and wide area network communications and IT outsourcing. In consideration for
the shares of I-NET, the Company paid the stockholders of I-NET $100.2 million
in cash and issued one-year, interest-free notes in the total amount of
$64.5 million. The Company discounted the notes at a rate of 8.0%, to
$59.7 million for accounting purposes, and increased the principal balance
through charges to interest expense through the settlement date.
Through September 1997, the Company paid $36.3 million to the holders of the
notes, including $2.2 million of interest. In accordance with the terms of a
final settlement of the notes reached November 13, 1997, the Company paid an
additional $14.9 million, including $1.6 million of accrued interest, to the
selling shareholders. The balance of $13.3 million was reversed in the three
months ended December 31, 1997, of which $1.2 million was recorded as a
reduction of interest expense and $12.1 million was recorded as an adjustment of
the original purchase price.
The acquisition was accounted for using the purchase method of accounting in
accordance with APB 16. The excess of the purchase price over the net
liabilities assumed was $219.5 million and will be amortized using the straight
line method over a period of twenty-five years.
A summary of the acquisition follows (in millions):
Cash $100.2
Note to selling stockholders 47.4
Original investment in I-NET 12.4
Transaction costs 7.9
Stock options 4.9
------
Total consideration 172.8
Estimated fair value of net (assets) liabilities assumed 46.7
------
Excess of purchase price over net liabilities assumed $219.5
======
The following pro forma results of operations have been prepared as though the
I-NET acquisition had occurred as of the beginning of the periods presented. The
pro forma information does not purport to be indicative of the results of
operations that would have been attained had the combination been in effect on
the dates indicated, nor of future results of operations of the Company (in
millions, except per share data).
52
<PAGE> 54
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended
June 30,
----------------------
1997 1996
--------- ----------
<S> <C> <C>
Revenues $1,325.8 $1,356.7
Income (loss) from continuing operations $ (14.1) $ 9.7
Net income (loss) attributable to
common stockholders $ 48.4 $ (81.9)
Net income (loss) per share applicable
to common stockholders $ 1.32 $ (2.28)
</TABLE>
ACQUISITION-RELATED AND RESTRUCTURING CHARGES: During fiscal year 1998, the
Company recorded integration and restructuring charges totaling $118.0 million,
of which $94.8 million was recorded in the fourth quarter, and $23.2 million was
recorded in the third quarter. Of the total charge, $108.6 million is recorded
in Acquisition-related charges (including the $74.1 million charge for purchased
in-process research and development discussed above) and $9.4 million is
recorded in Other restructuring charges in the Consolidated Statements of
Operations. Excluding the charge for purchased in-process research and
development, the balance of the acquisition-related and restructuring charges
reflect the costs associated with combining the operations of Wang and Olsy, in
addition to the costs of other business realignment activities. These charges
were recorded after certain actions had been identified, quantified and
approved. The acquisition-related and other restructuring charges recorded in
fiscal 1998 consist of the following (in millions):
Workforce-related $ 14.4
Facilities 18.9
Depreciable assets 5.5
Other 5.1
------
43.9
In-process research and development 74.1
------
Total $118.0
======
Workforce-related charges, consisting principally of severance costs, were
recorded based on specific identification of employees to be terminated, along
with their job classifications or functions and their locations. The
facilities-related charges for the Company's excess facilities were recorded to
recognize the lower of the amount of the remaining lease obligations, net of any
sublease rentals, or the expected lease settlement costs. These costs have been
estimated from the time when the space is expected to be vacated when there are
no plans to utilize the facility in the future. Costs incurred prior to vacating
the facilities will be charged to operations. Depreciable asset-related charges
were provided to recognize, at net realizable value, the write-down to disposal
value of existing assets. The charge for in-process research and development
consists of that portion of the purchase price allocated to acquired research
and development which had not reached technological feasibility and has no
alternative future use but which the Company expects to achieve technological
feasibility.
Cash outlays to complete these and earlier initiatives, are estimated to
approximate $196 million during the next 12 months and $18 million thereafter.
As of June 30, 1998, approximately 1,700 employees had been released in the
current fiscal year relative to these and previously recorded initiatives.
53
<PAGE> 55
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
Periodically, the accruals related to the acquisition-related charges are
reviewed and compared to their respective cash requirements. As a result of
those reviews, the accruals are adjusted for changes in cost and timing
assumptions of previously approved and recorded initiatives. During fiscal 1998,
review of these accruals identified $1.1 million of excess reserves, which were
reversed in June 1998. During fiscal 1997, review of these accruals identified
$1.0 million of excess reserves, which were reversed in June 1997. During the
fiscal 1996 review of the acquisition-related accruals, the Company identified
excess reserves of $2.8 million, primarily related to facilities and depreciable
assets, as well as $2.8 million of additional severance requirements relative to
the workflow and imaging R&D workforce in Paris acquired from Bull.
The activity related to these charges during fiscal years 1998, 1997 and 1996 is
summarized in the following table (in millions):
<TABLE>
<CAPTION>
Fiscal 1996 Activity
----------------------------------------------------------------------------
Charges/
(reversals)
changes in
Balance estimates Balance
June 30, and new Purchase Currency June 30,
1995 initiatives Accounting Utilization Other Translation 1996
-------- ----------- ---------- ----------- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Facilities $ 5.2 $ (0.9) $ -- $ (3.2) $ -- $(0.1) $ 1.0
Depreciable assets 8.8 22.0 -- (30.0) -- -- 0.8
Workforce-related 37.4 3.7 2.4 (26.6) -- (0.5) 16.4
Other 3.8 6.0 -- (4.5) 0.4 0.1 5.8
----- ------ ---- ------ ---- ----- -----
55.2 30.8(A) 2.4 (64.3) 0.4 (0.5) 24.0
Less amounts included in
discontinued operations (2.0) (30.8) -- 30.8 -- -- (2.0)
----- ------ ---- ------ ---- ----- -----
Acquisition-related
charges-continuing
operations $53.2 $ -- $2.4 $(33.5) $0.4 $(0.5) $22.0
===== ====== ==== ====== ==== ===== =====
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1997 Activity
------------------------------------------------------------------
Charges/
(reversals)
changes in
estimates Balance
and new Purchase Currency June 30,
initiatives Accounting Utilization Other Translation 1997
----------- ---------- ----------- ----- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Facilities $ 7.1 $ -- $ (1.4) $(0.1) $ -- $ 6.6
Depreciable assets 3.2 4.6 (4.4) (0.1) -- 4.1
Workforce-related 20.0 4.8 (18.1) 0.1 (0.6) 22.6
Other 6.4 1.0 (8.9) 0.3 -- 4.6
------ ----- ------ ----- ----- -----
36.7(A) 10.4 (32.8) 0.2 (0.6) 37.9
Less amounts included in
discontinued operations (1.7) -- 3.7 -- -- --
------ ----- ------ ----- ----- -----
Acquisition-related
charges-continuing
operations $ 35.0 $10.4 $(29.1) $ 0.2 $(0.6) $37.9
====== ===== ====== ===== ===== =====
</TABLE>
54
<PAGE> 56
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
<TABLE>
<CAPTION>
Fiscal 1998 Activity
--------------------------------------------------------------------------------
Charges/(reversals) Balance
changes in estimates Purchase Currency June 30,
and new initiatives Accounting Utilization Other Translation 1998
-------------------------------------------------------------------------------- --------
Integration-
Restructuring Related
Charges Charges
-------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Facilities $ 0.3 $ 18.6 $ 26.2 $ (15.3) $ 0.7 $(0.1) $ 37.0
Depreciable assets 0.1 5.4 13.8 (1.6) -- (0.1) 21.7
Workforce-related 8.0 6.4 149.4 (35.9) (6.0) (0.7) 143.8
Other 1.0 78.2 20.4 (80.6) 5.6 0.1 29.3
------ ------ ------ ------- ----- ----- ------
Acquisition-related and
restructuring charges $ 9.4(A) $108.6(A) $209.8 $(133.4) $ 0.3 $(0.8) $231.8
====== ====== ====== ======= ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ------- ------
Integration-
Restructuring Related
(A) Comprised of: Charges Charges
------------- ------------
<S> <C> <C> <C> <C>
Increase in initial purchase price adjusted
pursuant to SFAS 38 $ -- $ -- $ -- $ --
Decrease in initial purchase price adjusted
pursuant to SFAS 38 -- -- -- --
Initial charges 9.4 109.7 37.7 30.8
Increases and overages of estimated integration
accruals recognized in income -- -- -- 2.8
Reversals of estimated integration accruals
recognized in income -- (1.1) (1.0) (2.8)
----- ------ ------ -----
$ 9.4 $108.6 $ 36.7 $30.8
===== ====== ====== =====
</TABLE>
The June 30, 1998 and 1997 balances of acquisition-related reserves are
classified as follows (in millions):
June 30,
------------------
1998 1997
-------- ------
Depreciable assets $ 21.7 $ 4.1
Accounts payable, accrued expenses and other 192.0 26.0
Non-current liabilities 18.1 7.8
------ -----
$231.8 $37.9
====== =====
NOTE C -- DISCONTINUED OPERATIONS
On March 17, 1997, the Company completed the sale of its software business unit
to Kodak for $260.0 million in cash. The business sold to Kodak included Wang's
software business unit management, employees, products, technology, customers
and partners, as well as its sales, marketing and research and development
organizations worldwide. As a result of the sale, the operations of the software
business unit for all periods presented have been reclassified and reported as
discontinued operations in the Consolidated Statements of Operations and of Cash
Flows.
Revenues, related income (loss) and income tax benefits associated with the
software business unit for the years ended June 30, 1997 and 1996 were as
follows (in millions):
55
<PAGE> 57
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------
1997 1996
------- -------
<S> <C> <C>
Revenues $ 47.0 $ 75.9
====== ======
Operating loss, net of applicable
tax benefits of $9.3 million and
$20.4 million in 1997 and 1996,
respectively $(36.2) $(69.0)
Gain on sale, net of income tax
expense of $75.2 million 112.8 --
------ ------
Income (loss) from discontinued
operations $ 76.6 $(69.0)
====== ======
</TABLE>
NOTE D -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in millions except per share data):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Income (loss) from continuing operations $ (281.6) $ (6.7) $ 63.5
Dividends and accretion on 11%
Exchangeable Preferred Stock (14.6)
Dividends and accretion on Series A Preferred Stock (4.8) (4.8) (4.8)
Dividends on Series B Preferred Stock (9.3) (9.3) (3.2)
-------- -------- --------
Numerator for basic and diluted earnings per share
- Income (loss) from continuing operations
available to Common Shareholders $ (295.7) $ (20.8) $ 40.9
======== ======== ========
Denominator:
Denominator for basic earnings per share
- weighted average shares 40.6 37.2 36.3
Effect of dilutive securities:
Stock options -- -- 1.8
Stock warrants -- -- 0.1
-------- -------- --------
Dilutive potential common shares -- -- 1.9
-------- -------- --------
Denominator for diluted earnings per share
- adjusted weighted-average
shares and assumed conversions 40.6 37.2 38.2
======== ======== ========
Basic earnings per share - continuing operations $ (7.29) $ (0.56) $ 1.13
-------- -------- --------
Diluted earnings per share - continuing operations
$ (7.29) $ (0.56) $ 1.07
======== ======== ========
</TABLE>
Options to purchase approximately 6.6 million shares of common stock and
warrants to purchase approximately 7.5 million shares of common stock were
excluded from the computation of diluted earnings per share as their effect
would be antidilutive.
56
<PAGE> 58
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D -- (CONTINUED)
In connection with the acquisition of Olsy, the Company issued to Olivetti
5,000,000 Stock Appreciation Rights ("SARs"). Each Right entitles Olivetti to
receive from the Company an amount equal to the higher of (a) $4.00 or (b) the
difference between the fair market value per share of Common Stock on the date
of exercise and $30.00 (the "Strike Price"). The Company may pay such amount in
either cash or shares of Common Stock. The SARs can be exercised any time from
March 2001 to March 2005. The SARs were excluded from the computation of diluted
earnings per share as their effect would be antidilutive.
For additional disclosures regarding the Series A Preferred stock, the Series B
Preferred stock, the stock options and the warrants, see Notes G and I,
respectively.
NOTE E--OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheet follow
(in millions):
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Accounts receivable
Billed $ 816.3 $ 226.2
Unbilled 43.3 36.0
------- -------
859.6 262.2
Less allowances 20.9 17.9
------- -------
$ 838.7 $ 244.3
======= =======
Inventories
Finished products $ 63.3 $ 5.6
Raw materials and work-in-process 55.6 7.8
Service parts and supplies 49.4 1.1
------- -------
$ 168.3 $ 14.5
======= =======
Depreciable assets
Land $ 3.5 $ 4.5
Buildings and improvements 106.5 25.0
Machinery and equipment 122.0 84.9
Spare parts 137.8 140.3
------- -------
369.8 254.7
Less accumulated depreciation 155.7 131.7
------- -------
$ 214.1 $ 123.0
======= =======
</TABLE>
57
<PAGE> 59
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- (CONTINUED)
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Intangible assets
Trademarks $ 39.0 $ --
Patents 4.6 4.1
Computer software 56.7 0.3
Installed base - service 45.2 61.6
License agreements 15.4 15.4
Assembled workforce 7.1 13.9
Goodwill 373.2 266.1
------- -------
541.2 361.4
Less accumulated amortization 92.5 49.8
------- -------
$ 448.7 $ 311.6
======= =======
Accrued expenses and other current liabilities
Accrued expenses $ 250.0 $ 126.5
Compensation and benefits 56.1 57.9
Restructuring, reorganization and acquisition-related 192.1 28.7
Warranty accruals 39.0 1.5
Income and other taxes 77.6 15.5
Other 138.2 1.2
------- -------
$ 753.0 $ 231.3
======= =======
Other long-term liabilities
Postretirement $ 16.1 $ 16.8
Pension 94.3 7.1
Facilities 6.5 9.2
Restructuring, reorganization and acquisition-related 18.1 7.8
Insurance 7.7 5.6
Deferred compensation and benefits 99.0 --
Deferred taxes 21.2 22.1
Other 9.7 29.4
------- -------
$ 272.6 $ 98.0
======= =======
</TABLE>
NOTE F -- IMPAIRMENT LOSSES ON LONG-LIVED ASSETS
In the first quarter of fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and of Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the carrying amount of the assets.
In accordance with FAS 121, the Company periodically evaluates the carrying
value of long-lived assets in relation to the operating performance and future
undiscounted cash flows of the underlying business.
58
<PAGE> 60
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F -- (CONTINUED)
During the fourth quarter of fiscal 1998, the Company identified an impairment
of the goodwill associated with the commercial outsourcing portion of I-NET,
based upon estimated undiscounted cash flows over the remaining useful life of
the asset. The impairment was the result of significantly lower than expected
revenue and margin growth in the post acquisition period which are currently
projected to grow at a rate insufficient to recover the carrying value of the
related goodwill. The cash flows associated with the I-NET commercial
outsourcing business were discounted at the Company's weighted average cost of
capital over the remaining useful life of the asset and resulted in a charge of
$114.8 million to amortization expense. The remaining net asset of $18.2 million
associated with commercial outsourcing will be amortized over its remaining
useful life based on current projections and the Company's plans for this
business.
Also during the fourth quarter of fiscal 1998, the Company identified an
impairment of the installed customer service base and assembled workforce
acquired in the Bull HN Information Systems acquisition based upon estimated
undiscounted cash flows over the remaining useful life of the assets. The
impairment was the result of an accelerated decline rate for the proprietary
GCOS revenue and gross margin stream acquired from Bull due to Year 2000 issues
and market changes as customers migrate from main frame systems to networked
technology. The cash flows associated with the installed customer service base
and assembled workforce acquired in the Bull purchase were discounted at the
Company's weighted average cost of capital over the remaining useful life of the
asset and resulted in charges of $16.3 million and $3.7 million respectively.
The remaining balance of $14.5 million relating to the installed customer
service base and of $3.4 million relating to the assembled workforce will be
amortized over 4.25 years and 6.75 years, respectively, based on current
projections of the decline rate.
During the third quarter of fiscal 1998, the Company identified an impairment of
the value of the assembled workforce at BISS U.K. based upon the faster than
expected attrition of the acquired workforce. A charge of $1.8 million was taken
in the third quarter, and there is no remaining value associated with the
acquired workforce.
The writedown of the I-NET, Bull and BISS assets is included with Amortization
of intangibles - acquisition and fresh-start in the Consolidated Statements of
Operations for the year ended June 30, 1998.
In fiscal 1997, the Company evaluated the ongoing value of certain software
licenses and the related goodwill that were the result of the Bull acquisition,
and determined that assets with a carrying amount of $21.3 million were impaired
and wrote them down by $14.4 million to their carrying value of $6.9 million. In
order to determine the carrying value of these assets, the Company discounted
future cash flows at the Company's weighted average cost of capital. The
impairment is due to an accelerated conversion by a major client to other
systems which became evident in February 1997. The writedown of these assets is
included with Amortization of intangibles - acquisition and fresh-start in the
Consolidated Statements of Operations for the year ended June 30, 1997.
While the Company believes it has reduced these assets to their proper carrying
values, changes in estimates of future undiscounted cash flows could result in a
future requirement to further reduce the carrying value of those or other assets
to fair value.
59
<PAGE> 61
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- FINANCING ARRANGEMENTS
SERIES A PREFERRED STOCK: On May 30, 1995, the Company issued to Microsoft
Corporation 90,000 shares ($90.0 million face amount) of 4 1/2% Series A
Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"),
redeemable on October 1, 2003 or within 180 days of a written request of the
holders thereof received by the Company at any time on or after May 30, 2002 at
$1,000.00 per share plus accrued and unpaid dividends. Redemption and
liquidation preference of the preferred stock is $90.0 million. The excess of
the redemption value over the initial carrying value of $84.0 million is being
accreted by periodic charges to retained earnings over the life of the issue,
or, in the absence of retained earnings, to capital in excess of par value.
The Series A Preferred Stock is convertible into Common Stock of the Company at
$23.00 per share, subject to adjustment in the event of a subdivision or
combination of the Common Stock. The stockholders of the Series A Preferred
Stock are entitled to one vote per share. Cash dividends of $45.00 per annum per
share are payable quarterly in arrears. The Company may redeem the Series A
Preferred Stock with cash or with Common Stock.
BORROWING ARRANGEMENTS:
Borrowings due consisted of (in millions):
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Revolving Credit Facility $ 110.6 $ --
Capital lease obligations 32.6 --
Notes payable to former shareholders
of I-NET, non-interest bearing,
paid November 1997 -- 63.3
------- -------
143.2 63.3
Less current maturities 26.3 63.3
------- -------
$ 116.9 $ --
======= =======
</TABLE>
Interest paid amounted to $8.1 million, $2.9 million and $2.4 million for the
years ended June 30, 1998, 1997 and 1996 and is primarily related to notes
payable to selling shareholders of acquired businesses and to the revolving
credit facility described below. The weighted average interest rate on
borrowings outstanding at June 30, 1998 was 7.03%.
On March 13, 1998, the Company entered into a revolving credit facility with
Bankers Trust Company ("BTC") and certain other financial institutions. The
five-year facility provides borrowings up to $500.0 million, including
$200.0 million of borrowing capacity to support letters of credit. Interest on
the borrowings is based on the LIBOR rate plus 0.75% to 1.50%, depending on the
Company's leverage ratio. Fees and expenses associated with the new facility
amounted to $7.2 million in fiscal 1998, approximately $3.5 million of which was
charged to interest expense in the third quarter, representing that portion of
the facility used to replace the existing $225.0 million facility. The BTC
agreement contains various financial covenants, including covenants relating to
the Company's operating results, working capital, net worth and level of
indebtedness. The Company was in compliance with these
60
<PAGE> 62
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- (CONTINUED)
covenants as of June 30, 1998. In addition to providing financing for the Olsy
acquisition, the credit facility will be used for general corporate purposes. As
of June 30, 1998, borrowings of $110.6 million and letters of credit aggregating
$8.8 million were outstanding under the agreement. The financing is secured by
substantially all of the Company's domestic assets and partial pledges of
selected international subsidiaries.
NOTE H -- INCOME TAXES
Pretax income/(loss) from continuing operations is as follows (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Domestic $(261.3) $ (49.8) $ 56.0
Foreign (6.2) 27.5 38.9
------- ------- -------
Total $(267.5) $ (22.3) $ 94.9
======= ======= =======
</TABLE>
The provision for income taxes consisted of (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Continuing operations $ 13.4 $ (15.6) $ 31.4
Discontinued operations -- 65.9 (20.4)
------- ------- -------
Net income tax provision $ 13.4 $ 50.3 $ 11.0
======= ======= =======
</TABLE>
The income tax provision (benefit) from continuing operations consists of the
following:
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 0.1 $ 3.5 $ --
Non-US 3.9 2.2 0.7
State -- 1.5 --
Deferred:
Federal -- (23.3) 20.4
Non-US 9.4 4.6 --
State -- (4.1) --
Change in valuation allowance -- -- (2.5)
Tax benefit applied to reduce
reorganization value in excess
of amounts allocated to identifiable
intangible assets and goodwill -- -- 12.8
------- ------- -------
$ 13.4 $ (15.6) $ 31.4
======= ======= =======
</TABLE>
The provisions (benefit) for income taxes from continuing operations differed
from the amount computed by applying the U.S. federal statutory rate as follows
(in millions):
61
<PAGE> 63
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Taxes at statutory rate of 35% $ (93.9) $ (7.8) $ 33.2
Amortization of excess reorganization value -- 0.9 2.4
Non-deductible expenses 70.5 1.8 2.0
Foreign tax differential 2.6 (0.6) 0.7
State taxes -- (2.6) --
Loss carryforwards not currently utilizable 35.5 1.7 3.7
Loss carryforwards utilized (4.2) (6.7) (5.3)
Change in Valuation allowance -- -- (2.5)
Other, net 2.9 (2.3) (2.8)
------- ------- -------
$ 13.4 $ (15.6) $ 31.4
======= ======= =======
</TABLE>
The significant components of deferred tax assets and liabilities are as follows
(in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------
1998 1997
------- -------
<S> <C> <C>
Net operating loss and credit carryforwards $ 667.7 $ 477.2
Accrued restructuring expenses 91.0 43.7
Capitalized research and development expenses 2.1 8.3
Depreciation 34.1 17.8
Provision for doubtful accounts 13.3 --
Other 41.0 52.1
------- -------
Gross deferred tax assets 849.2 599.1
------- -------
Goodwill and other acquired intangibles (10.9) (12.7)
Other (32.5) (57.8)
------- -------
Gross deferred tax liabilities (43.4) (70.5)
------- -------
Valuation allowance (772.2) (488.5)
------- -------
Net deferred tax asset $ 33.6 $ 40.1
======= =======
</TABLE>
The decrease in the net deferred tax asset balance during fiscal 1998 was due
primarily to the utilization of net operating losses in connection with
operating income earned in certain foreign locations.
Although realization is not assured, management believes that the net deferred
tax asset will be realized. The estimate of future taxable income relates to the
Company's operations outside the United States which have, in the past,
consistently generated a level of taxable income similar to the amounts of
future taxable income necessary to realize the net deferred tax asset. In
addition, the Company has tax planning strategies to prevent tax net operating
loss carryforwards from expiring unused. The amount of deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
Under fresh start reporting, any tax benefits for cumulative temporary
differences and tax basis net operating loss carryforwards existing at September
30, 1993, will not reduce the tax provision for income taxes, but instead, have
reduced reorganization value in excess of amounts allocated to identifiable
intangible assets to zero, and thereafter will increase capital in excess of par
value.
62
<PAGE> 64
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- (CONTINUED)
Tax benefits which are substantially recognized through a reduction in the
valuation allowance will be recorded as follows (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Reorganization value in excess of amounts
allocated to identifiable assets $ -- $ -- $ 13.7
Goodwill and other non-current
intangible assets 111.9 -- 65.5
Capital in excess of par value 360.7 325.4 298.3
Income tax benefit to be reported
in the Statement of Operations 299.6 163.1 145.2
------- ------- -------
$ 772.2 $ 488.5 $ 522.7
======= ======= =======
</TABLE>
If the Company experiences a change in ownership within the meaning of
Section 382 of the Internal Revenue Code, an annual limitation will be placed
upon the Company's ability to realize the benefit of its U.S. net operating loss
carryforwards.
U.S. federal income taxes have not been provided on approximately
$184.7 million, $125.0 million and $119.4 million of earnings on non-U.S.
subsidiaries at June 30, 1998, 1997 and 1996, respectively, since such amounts
are considered to be permanently reinvested.
At June 30, 1998, the Company and its subsidiaries have tax basis net operating
loss carryforwards of approximately $1.7 billion and tax credit carryforwards of
approximately $72.1 million that are available to offset future taxable income.
Tax basis loss carryfowards and tax credit carryforwards expire as follows (in
millions):
<TABLE>
<CAPTION>
2004
1999 2000 2001 2002 2003 & Beyond
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. tax basis loss
carryforwards $ -- $ -- $ -- $103.8 $153.6 $457.7
Non-U.S. tax loss
carryforwards $104.3 $81.9 $58.8 $ 69.3 $ 98.7 $541.4
Investment tax credits
and R&D tax credit
carryforwards $ 26.3 $20.7 $13.8 $ 3.4 $ 4.2 $ 3.7
</TABLE>
Net taxes paid amounted to $5.7 million for the year ended June 30, 1998, $6.7
million for the year ended June 30, 1997 and $0.9 million for the year ended
June 30, 1996.
NOTE I -- STOCKHOLDERS' EQUITY
SERIES C PREFERRED STOCK: On April 22, 1998, the Company declared a dividend
distribution of one Right for each outstanding share of Common Stock to
stockholders of record at the close of business on May 1, 1998. Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series C Junior Participating Preferred Stock (the "Series C
preferred
63
<PAGE> 65
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
Stock"), par value $0.01 per share, at a purchase price of $120.00, subject to
adjustment. Initially, the Rights will be attached to all Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. The Rights will separate from the Common Stock
and a Distribution Date will occur within a predetermined time after the
occurrence of one of several specific Triggering Events. The Rights are not
exercisable until the Distribution Date and will expire at the close of business
on April 22, 2008, unless earlier redeemed or exchanged by the Company. Until a
Right is exercised, the holder thereof will have no rights as a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends.
SERIES B PREFERRED STOCK: On February 27, 1996, the Company completed a private
placement of 2,875,000 Depositary Shares, each representing a 1/20 interest in a
share of 6 1/2% Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock"), $0.01 par value per share, for $138.3 million, net of
issuance costs. Each share of Series B Preferred Stock is convertible at the
option of the holder into Common Stock of the Company at a conversion price of
$26.5625 per share of Common Stock subject to adjustment for dividends payable
in Common Stock, the issuance of rights or warrants to purchase Common Stock,
the subdivision, combination or reclassification of Common Stock and the
distribution of other assets to all the holders of Common Stock. Upon
conversion, the Series B Preferred Stock is convertible into a total of 5.4
million shares of Common Stock. The Series B Preferred Stock may not be redeemed
before March 1, 1999. Thereafter, the Series B Preferred Stock may be redeemed
at the option of the Company, in whole or in part, at specified redemption
prices plus accrued and unpaid dividends. Each Depositary Share entitles the
holder to 1/20th of one vote. Cash dividends are cumulative at the rate of
$65.00 per annum per share ($3.25 per annum per Depositary Share) payable
quarterly in arrears.
COMMON STOCK: The Company's authorized Common Stock consists of 100 million
shares, $0.01 par value per share. Holders of the Common Stock are entitled to
one vote for each share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. The common stockholders are entitled
to receive ratably such dividends, if any, as may be declared by the Board of
Directors. No dividends have been paid to date. The rights, preferences and
privileges of holders of the Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of the outstanding Series A and
Series B Preferred Stock, as well as any other series of preferred stock that
the Company may designate and issue in the future.
STOCK WARRANTS: In satisfaction of the interests of the Class B and C common
stockholders of the Predecessor Company, 7.5 million warrants, less an amount
allocated for certain disputed claims, were made available for issuance to
stockholders of the Predecessor Company as of September 29, 1993. The Company
began issuance of these warrants on March 17, 1995. Each warrant entitles its
holder to purchase one share of Common Stock for an exercise price of $21.45 per
share, and expires on June 30, 2001. The exercise price was set in such a manner
as to allow the creditors who are issued Common Stock in the reorganization to
recover an estimated 95 percent of the value of their allowed claims before the
exercise price of the warrants equals the trading price of the Common Stock.
Holders of the Class B and C Common Stock received one warrant for each 24
shares of stock of the Predecessor Company.
64
<PAGE> 66
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
STOCK APPRECIATION RIGHTS: In connection with the acquisition of Olsy, the
Company issued to Olivetti 5,000,000 Stock Appreciation Rights ("SARs") which
give Olivetti value for the increase in the market price of the Company's common
stock above $30.00 per share at any time from March 2001 to March 2005. The SARs
are redeemable in cash or common stock at the Company's election. At the time of
issuance, the SARs were valued at $41.8 million.
In connection with the sale of its software business to Kodak, the Company
issued to Microsoft a stock appreciation right ("SAR") to purchase 1,000,000
shares of Common Stock at an exercise price of $23.00 per share, exercisable at
any time beginning 90 days after the closing and expiring on the redemption date
of the Series A Preferred Stock. If and when exercised, the SAR will be closed
out on a net share basis.
STOCK OPTIONS: The Company has a series of stock incentive option plans for
directors and eligible employees on terms and vesting schedules as may be set
from time to time by the Organization, Compensation, and Nominating Committee of
the Board of Directors. Options granted to date generally vest ratably over
three to four years from the date of the grant provided the employee continues
to be employed by the Company, and expire seven or ten years after the date of
the grant.
1995 EMPLOYEES' STOCK PURCHASE PLAN: On January 25, 1995, the Company's
stockholders approved the 1995 Employees' Stock Purchase Plan (the "1995 Plan").
As amended, the 1995 Plan permits purchases on a voluntary basis by eligible
employees of up to 809,607 shares of Common Stock of the Company. Employees of
the U.S. parent company and designated subsidiaries, but excluding any officers
with the rank of vice president or above of the parent company, are eligible to
participate in the 1995 Plan. The purchase price is 85% of the market price of
the Common Stock on the first business day or the last business day of that
payment period, whichever is lower.
PRO FORMA ACCOUNTING FOR STOCK-BASED COMPENSATION: In the first quarter of
fiscal 1997, the Company adopted Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("FAS 123"). FAS 123 encourages
companies to adopt the fair value method of accounting for employee stock
options. Under this method, compensation expense for stock-based compensation
plans is measured at the grant date based on the fair value of the award and is
recognized over the service period.
In accordance with FAS 123, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB 25") and related interpretations in accounting for its employee stock
options. Under APB 25, no compensation expense is recognized as long as the
exercise price equals the market price of the underlying stock on the date of
grant.
Pro forma information regarding net income and earnings per share is required by
FAS 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
June 30, 1995 under the fair value method of that statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1998:
risk-free interest rates ranging from 5.40% to 6.06%; dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
39%; and weighted average expected life of 3.8 years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
65
<PAGE> 67
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Pro forma income (loss) (in millions)
Continuing operations $ (287.7) $ (13.4) $ 60.8
Net income $ (287.7) $ 63.3 $ (8.2)
Pro forma earnings (loss) per share
Basic
Continuing operations $ (7.44) $ (0.45) $ 1.05
Net income $ (7.44) $ 1.31 $ (0.85)
Diluted
Continuing operations $ (7.44) $ (0.32) $ 1.05
Net income $ (7.44) $ 1.30 $ (0.85)
Weighted average fair value of options
granted during the period $ 8.25 $ 8.56 $ 6.36
</TABLE>
During the initial phase-in period, the effects of applying FAS 123 for
recognizing compensation expense may not be representative of the effects on
reported net income or loss for future quarters or years because the options
granted by the Company vest over several years and additional awards may be made
in future years.
Presented below is a summary of the status of the stock option plans and the
related transactions:
<TABLE>
<CAPTION>
Year Ended June 30,
1998 1997 1996
-------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Shares Price Shares Price Shares Price
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year 5,987,055 $ 14.68 4,601,997 $ 12.45 3,453,001 $ 9.73
Granted 2,190,800 $ 23.07 2,820,143 $ 17.62 2,175,750 $ 15.66
Exercised 756,279 $ 11.93 773,033 $ 11.28 598,472 $ 8.41
Canceled 461,973 $ 17.27 662,052 $ 15.97 428,282 $ 12.20
--------- --------- ---------
Options outstanding at end of year 6,959,603 $ 17.53 5,987,055 $ 14.68 4,601,997 $ 12.45
========= ========= =========
Options exercisable at end of year 3,101,432 1,958,781 1,039,665
========= ========= =========
</TABLE>
At June 30, 1998, 1997 and 1996, 2,914,047, 373,930 and 1,942,421 shares,
respectively, were available for future grants under stock option plans.
66
<PAGE> 68
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- --------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range of Exercise Life Exercise Exercise
Prices Shares (Years) Price Shares Price
- ------------------ --------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.07 - $ 0.07 60,293 8.2 $ 0.07 50,858 $ 0.07
$ 0.96 - $ 0.96 1,830 5.3 $ 0.96 457 $ 0.96
$ 7.35 - $10.22 644,280 5.5 $ 7.44 644,280 $ 7.44
$11.15 - $16.63 1,851,472 6.9 $13.59 1,504,723 $13.43
$16.88 - $25.18 3,878,228 7.7 $20.15 901,114 $18.68
$26.31 - $30.94 523,500 6.8 $26.51 -- --
--------------- --------- --- ------ --------- ------
$ 0.07 - $30.94 6,959,603 7.2 $17.52 3,101,432 $13.49
========= =========
</TABLE>
NOTE J -- POSTRETIREMENT BENEFITS
DEFINED BENEFIT PLANS (U.S.): The Company has two frozen defined benefit plans
in the United States. As a result of freezing all future benefits under both
U.S. plans, no increase in compensation is assumed for either plan subsequent to
the dates that the plans were frozen. The Company also has two non-frozen
defined benefit plans in the U.S. related to the Olsy acquisition. Amounts
related to the Olsy plans are included in the 1998 amounts.
U.S. net pension cost (credits) consisted of (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost $ 0.6 $ -- $ 0.6
Interest cost 8.5 7.7 7.0
Actual return on assets (19.9) (8.7) (10.3)
Other, net 9.3 (0.1) 3.0
------- ------- -------
$ (1.5) $ (1.1) $ 0.3
======= ======= =======
</TABLE>
67
<PAGE> 69
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J -- (CONTINUED)
The funded status of the U.S. plans was (in millions):
<TABLE>
<CAPTION>
June 30,
--------------------
1998 1997
------- -------
<S> <C> <C>
Fair value of plan assets $ 144.5 $ 114.4
Projected benefit obligation (159.5) (99.3)
------- -------
Plan assets greater (less) than projected
benefit obligation (15.0) 15.1
Unrecognized net (gain) loss 6.5 (13.8)
Unrecognized net transition asset (0.4) (0.5)
------- -------
Prepaid (accrued) pension costs $ (8.9) $ 0.8
======= =======
Accumulated benefits $ 156.2 $ 99.3
======= =======
Vested benefits $ 155.8 $ 99.3
======= =======
</TABLE>
DEFINED BENEFIT PLANS (FOREIGN): The Company has various defined benefit plans
in foreign countries, including several in connection with the Olsy acquisition.
The Company's international subsidiaries maintain defined benefit pension plans
that provide plan benefits primarily based on the employee's compensation during
the last years before retirement and the number of years of service. The Company
has plans under which funds are deposited with trustees, annuities are purchased
under group contracts, or reserves are provided. In certain countries the
funding of pension plans is not a common practice, consequently, the Company has
pension plans which are under-funded. Amounts related to the Olsy acquisition
are included in the 1998 amounts effective from the date of acquisition.
Non-U.S. net pension cost (credits) consisted of (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Service cost $ 3.2 $ 0.4 $ 1.9
Interest cost 5.0 1.2 2.4
Actual return on assets (6.4) (3.5) (3.7)
Other, net 2.6 2.3 0.4
------- ------- -------
$ 4.4 $ 0.4 $ 1.0
======= ======= =======
</TABLE>
The funded status of non-U.S plans was (in millions):
<TABLE>
<CAPTION>
Ended June 30,
--------------------------------------
1998 1997
-------------------------- --------
Assets Accumulated
exceed benefits
accumulated exceed
Benefits Assets
----------- -----------
<S> <C> <C> <C>
Fair value of plan assets $ 244.1 $ 49.4 $ 16.7
Projected benefit obligation (237.5) (108.9) (16.5)
------- ------- -------
Plan assets in excess (deficiency)
over projected benefit obligation 6.6 (59.5) 0.2
Unrecognized net (gain) loss (3.7) 0.6 3.3
------- ------- -------
Prepaid (accrued) pension costs $ 10.3 $ (60.1) $ (3.1)
======= ======= =======
Accumulated benefits $ 206.0 $ 95.1 $ 15.9
======= ======= =======
Vested benefits $ 163.9 $ 39.2 $ 12.7
======= ======= =======
</TABLE>
68
<PAGE> 70
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J -- (CONTINUED)
The net accrued pension costs at June 30, 1998 is primarily related to a certain
non-U.S. pension plan assumed in connection with the Olsy transaction. In
connection with the Stock Purchase Agreement between the Company and Olivetti,
Olivetti has agreed to reimburse the Company, at a time stipulated in the
agreement, for the net after tax amount of such unfunded liability.
During 1997, the Company converted four of its defined benefit pension plans
related to its Australian and Canadian subsidiaries to defined contribution
plans. The accrued benefits for plan members were transferred to the defined
contribution plans. A net gain of $1.1 million was recognized for the
curtailment and settlement of the plans.
The following assumptions were used to measure the projected benefit obligation
for the defined benefit pension plans:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997 June 30, 1996
------------------ ------------------ -----------------
U.S. Non-U.S. U.S. Non-U.S. U.S. Non-U.S.
Plans Plans Plans Plans Plans Plans
----- ---------- ----- ---------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 7.0% 2.4%-14.0% 8.25% 6.3%-12.0% 8.0% 6.8% - 12.0%
Average increase in
compensation levels 4.0% 1.9%-11.5% 0.0% 3.0%-9.0% 0.0% 7.5% - 12.0%
Expected long-term rate of
return for plan assets 9.5% 4.0%-16.0% 9.0% 8.0%-12.0% 8.0% 7.5% - 12.0%
</TABLE>
Plan assets consist principally of equity and fixed income investments. Annual
cost is determined using the projected unit credit actuarial method.
DEFINED CONTRIBUTION PLANS: The Company has several defined contribution plans
which cover substantially all employees in the United States and certain
non-U.S. subsidiaries. Contributions are generally based on fixed amounts of
eligible compensation ("Basic Contribution"). The Company may make an additional
contribution when its operating income exceeds 4% of revenue, which is based on
a percentage of the Basic Contribution. No additional contribution was made by
the Company in any of the years ended June 30, 1998, 1997 or 1996. The Company's
expense for U.S. and non-U.S. plans totaled $9.9 million for the year ended June
30, 1998, $13.8 million for the year ended June 30, 1997 and $9.6 million for
the year ended June 30, 1996. Non-U.S. employees are covered by defined
contribution and/or defined benefit pension plans in several countries, in
accordance with applicable government regulations and local practices.
ITALIAN TFR: Under Italian law, deferred compensation accrues in favor of
employees and agents which they (or in the case of their death, their heirs) are
entitled to collect upon termination of employment or under certain other
circumstances. The amount payable related to each year's services is calculated
on the basis of the renumeration for that year and will be subject to annual
revaluations based on increases in the Italian cost-of-living index. Included in
other liabilities as of June 30, 1998 is approximately $92 million, which
is unfunded.
69
<PAGE> 71
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -- INDUSTRY, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
INDUSTRY SEGMENT INFORMATION: The Company operates primarily in one industry
segment, which includes providing customers in approximately 140 countries with
information technology services, including electronic commerce, software
application integration, network architecture, design and consulting services,
network integration, network security management, help desk support, maintenance
and installation, warranty and procurement.
GEOGRAPHIC INFORMATION: Transfer prices to non-U.S. sales subsidiaries, combined
with supplemental commission and expense reimbursement arrangements, are
intended to produce profit margins commensurate with the sales and service
effort associated with the products sold, and are comparable to prices charged
to unaffiliated distributors.
SIGNIFICANT CUSTOMER: The Company had revenues from the U.S. government and its
agencies of approximately $383 million, $385 million and $228 million for the
years ended June 30, 1998, 1997 and 1996, respectively. The majority of these
revenues were in the United States geographic area.
Certain information on a geographic basis follows (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States, including direct export sales $ 893.9 $ 858.9 $ 537.6
Other Americas 86.8 69.4 63.8
Europe/Africa/Middle East 689.9 216.5 251.1
Asia/Pacific 216.4 123.6 161.4
-------- -------- --------
$1,887.0 $1,268.4 $1,013.9
======== ======== ========
Interarea transfers:
United States $ 10.5 $ 14.8 $ 13.9
Other Americas 0.2 -- --
Europe/Africa/Middle East -- 0.3 0.1
Asia/Pacific 0.7 0.1 --
-------- -------- --------
$ 11.4 $ 15.2 $ 14.0
======== ======== ========
Income (loss) from continuing operations
before income taxes and minority interests:
United States $ (258.8) $ (52.2) $ 46.8
Other Americas 8.3 6.1 10.0
Europe/Africa/Middle East (1.4) 17.4 18.3
Asia/Pacific (15.6) 6.4 19.8
-------- -------- --------
$ (267.5) $ (22.3) $ 94.9
======== ======== ========
</TABLE>
The income (loss) from continuing operations before income taxes for the years
ended June 30, 1998, 1997 and 1996 included $118.0 million, $36.3 million and
$(1.1) million, respectively, of net acquisition-related, Chapter 11-related and
restructuring charges (credits).
70
<PAGE> 72
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - (CONTINUED)
<TABLE>
<CAPTION>
June 30,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Identifiable assets (excluding intercompany):
United States $ 720.1 $ 732.3
Other Americas 59.7 44.1
Europe/Africa/Middle East 1,234.4 204.5
Asia/Pacific 189.9 53.9
Eliminations and other (14.9) --
-------- --------
$2,189.2 $1,034.8
======== ========
</TABLE>
NOTE L -- COMMITMENTS AND CONTINGENCIES
LEASES: Rental expense for the three fiscal years ended June 30, 1998, 1997 and
1996 was $45.1 million, $33.8 million and $28.2 million respectively.
Future minimum lease commitments on noncancelable operating leases and sublease
income are as follows (in millions):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1999 2000 2001 2002 2003 Thereafter
----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Future minimum lease
commitments on
noncancelable leases $72.5 $54.1 $33.9 $19.8 $13.3 $47.5
Future minimum
sublease income $ 9.4 $ 4.4 $ 3.7 $ 2.8 $ 2.1 $ 5.7
</TABLE>
These future minimum lease commitments include approximately $56 million, net of
sublease income, related to facilities the Company has elected to abandon in
connection with the restructuring and acquisition-related initiatives.
FOREIGN CURRENCY GAINS (LOSSES): Foreign currency exchange and translation gains
or losses were insignificant for the years ended June 30, 1998, 1997 and 1996.
FORWARD EXCHANGE CONTRACTS: The Company had no forward exchange contracts at
either June 30, 1998 or 1997. Market risk arises from fluctuation of currency
rates during the period that contracts are outstanding.
LITIGATION: Prior to its filing for Chapter 11 protection in August of 1992,
from which it successfully emerged in September of 1993, the Company was a
defendant in a number of other lawsuits arising from the conduct of its
business. Substantially all such suits were stayed while the Company operated
under Chapter 11. Claims in such suits relating to periods prior to the
Company's filing under Chapter 11 are being extinguished and, to the extent
allowed, have been provided for under the Reorganization Plan. The Company also
is subject to other legal proceedings and claims which arise in the ordinary
course of its business. Although the Company is not in a position to predict
accurately the results of specific matters, the Company does not currently
believe that its liability, if any, for all litigation will be material to the
Company's consolidated financial position, results of operations, or cash flows.
71
<PAGE> 73
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
forward exchange contracts, long- and short-term debt, warrants, stock
appreciation rights and preferred stock. The carrying amounts reported in the
balance sheets for cash and cash equivalents, forward exchange contracts and
long and short-term debt approximate their fair value. The fair value of the
Company's publicly traded warrants is determined by the closing price on a
nationally recognized exchange. The fair value of the warrants was approximately
$63.0 million and $45.1 million at June 30, 1998 and 1997, respectively. The
carrying value of the Company's Series A Preferred Stock approximates fair value
at June 30, 1998 and 1997. The fair value of the Company's SARs is determined by
the Black Scholes pricing (with assumptions consistent to those shown in Note
I). The fair value of the SARs was approximately $50 million and $5 million at
June 30, 1998 and 1997, respectively.
NOTE N -- REORGANIZATION AND RESTRUCTURING EXPENSES
Reorganization expenses relate to the reorganization and restructuring of the
Company in connection with its emergence from Chapter 11 and the implementation
of its Reorganization Plan.
In conjunction with its emergence from Chapter 11, an accrual of $17.8 million
was recorded, representing the estimated amount of the Predecessor Company's
liabilities that would be settled in cash.
The activity related to the accruals for reorganization and restructuring
activities accruals is summarized in the following table (in millions):
<TABLE>
<CAPTION>
Fiscal 1996 Activity
----------------------------------------------------------
Charges/
(reversals)
changes in
Balance estimates Balance
June 30, and new Currency June 30,
1995 initiatives Utilization Translation 1996
-------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Accrued reorganization $ 1.4 $ (1.1) $ (0.3) $ --
Chapter 11 accounts payable 2.4 (2.2) -- 0.2
Restructuring
Facilities 10.2 3.3 (7.0) $ -- 6.5
Depreciable Assets 3.7 0.1 (3.0) (0.2) 0.6
Workforce-related 3.6 (0.2) (2.2) (0.1) 1.1
Other 6.4 (1.0) (3.5) -- 1.9
----- ------ ------ ----- -----
Reorganization and
restructure-related
accruals $27.7 $ (1.1)(A) $(16.0) $(0.3) $10.3
===== ====== ====== ===== =====
</TABLE>
72
<PAGE> 74
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - (CONTINUED)
<TABLE>
<CAPTION>
Fiscal 1997 Activity
----------------------------------------------------------
Charges/
(reversals)
changes in
Balance estimates Balance
June 30, and new Currency June 30,
1995 initiatives Utilization translation 1996
-------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Accrued reorganization $ -- $ 1.3 $(1.3) $ --
Chapter 11 accounts payable 0.2 -- -- 0.2
Restructuring
Facilities 6.5 -- (4.0) $ -- 2.5
Depreciable Assets 0.6 -- (0.6) -- --
Workforce-related 1.1 -- (1.1) -- --
Other 1.9 -- (1.5) -- 0.4
----- ----- ----- ----- -----
Reorganization and
restructure-related
accruals $10.3 $ 1.3(A) $(8.5) $ -- $ 3.1
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 Activity
----------------------------------------------------------
Charges/
(reversals)
changes in
Balance estimates Balance
June 30, and new Currency June 30,
1995 initiatives Utilization translation 1996
-------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Accrued reorganization $ -- $ -- $ -- $ --
Chapter 11 accounts payable 0.2 -- (0.1) 0.1
Restructuring
Facilities 2.5 -- (2.5) $ -- --
Depreciable Assets -- -- -- -- --
Workforce-related -- -- -- -- --
Other 0.4 -- -- -- 0.4
----- ----- ------ ----- -----
Reorganization and
restructure-related
accruals $ 3.1 $ --(A) $ (2.6) $ -- $ 0.5
===== ===== ====== ===== =====
</TABLE>
73
<PAGE> 75
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N -- (Continued)
(A) Comprised of:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Initial provisions for reorganization
and restructuring actions $ -- $ -- $ --
Increases due to changes in
reorganization or restructuring plans
Decreases due to changes in
reorganization or restructuring plans (2.2)
Increases and overages of estimated
costs of plans 3.4
Incremental costs related to ongoing
Chapter 11 administration 1.3
Reversals of estimated costs of plans (2.3)
------- ------- -------
$ (1.1) $ 1.3 $ --
======= ======= =======
</TABLE>
Periodically, the accruals related to the reorganization and restructure-related
charges are reviewed and compared to their respective requirements. As a result
of those reviews, the accruals are adjusted for changes in cost and timing
assumptions of previously approved and recorded initiatives. No adjustments for
changes in estimates were required during fiscal 1998.
At June 30, 1997, an additional charge of $1.3 million for incurred incremental
Chapter 11-related expense was recorded.
During fiscal 1996, a review of the Chapter 11-related accruals identified
$1.1 million of excess reorganization reserves and $2.2 million of excess
Chapter 11 accounts payable accruals which were reversed and reported as Chapter
11-related charges in the statements of operations. The Company determined the
amount of excess reorganization reserves to be reversed by reviewing its
requirements for reserve utilization, primarily related to litigation and
bankruptcy administration, and reversing the balance of the reserve identified
as excess as a result of this analysis. The Chapter 11 accounts payable excess
reserves related primarily to trade vendor liabilities discharged with lower
cash payment requirements than originally anticipated.
Additionally, review of the restructure accruals during fiscal 1996 identified
net additional facilities change in estimate charge of $3.3 million was required
due to the Company's lack of success in subleasing certain properties or
otherwise terminating its leases in Europe. This charge is included in the line
"Other restructuring charges (credits)" in the Consolidated Statements of
Operations.
The June 30, 1998 and 1997 balances of the restructuring accruals are classified
as follows (in millions):
<TABLE>
<CAPTION>
June 30,
------------------
1998 1997
------- -------
<S> <C> <C>
Depreciable assets $ -- $ --
Accounts payable, accrued expenses and other -- 2.5
Liabilities of businesses held for sale 0.4 0.4
Non-current liabilities -- --
------- -------
$ 0.4 $ 2.9
======= =======
</TABLE>
74
<PAGE> 76
WANG LABORATORIES, INC. AND SUBSIDIARIES
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
Three months ended September 30 December 31 March 31 June 30
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JUNE 30, 1998
Revenues $ 312.2 $ 338.9 $ 402.6 $ 833.3
Costs 246.0 260.9 318.3 667.6
Expenses 49.8 54.7 93.7 168.5
Amortization of intangibles - acquisition 6.3 6.3 8.5 161.6
Acquisition-related charges (credits) -- -- 14.0 83.3
Restructuring charges (credits) -- -- 9.2 11.5
------- ------- ------- -------
Operating income (loss) 10.1 17.0 (41.1) (259.2)
Interest and other (income) expense - net (7.7) (2.4) 3.8 1.3
Provision (benefit) for income taxes 6.4 7.0 -- --
------- ------- ------- -------
Net income (loss) 11.4 12.4 (44.9) (260.5)
Dividends and accretion - preferred stock (3.5) (3.6) (3.5) (3.5)
------- ------- ------- -------
Net income (loss) applicable to common stockholders $ 7.9 $ 8.8 $ (48.4) $(264.0)
======= ======= ======= =======
Net income (loss) per share:
Basic $ 0.21 $ 0.23 $ (1.22) $ (5.73)
======= ======= ======= =======
Diluted $ 0.20 $ 0.22 $ (1.22) $ (5.73)
======= ======= ======= =======
YEAR ENDED JUNE 30, 1997
Revenues $ 272.7 $ 342.4 $ 315.1 $ 338.2
Costs 196.1 261.0 242.9 261.0
Expenses 50.8 52.9 81.2 62.0
Amortization of intangibles - acquisition and fresh-start 9.0 10.5 22.7 4.8
Acquisition-related charges (credits) 27.4 -- 8.6 (1.0)
Chapter 11-related charges (credits) -- -- -- 1.3
Other restructuring charges (credits) -- -- -- --
------- ------- ------- -------
Operating income (loss) (10.6) 18.0 (40.3) 10.1
Interest and other (income) expense - net -- 1.6 2.7 (4.8)
Provision (benefit) for income taxes 1.7 1.3 (21.1) 2.5
------- ------- ------- -------
Income (loss) from continuing operations (12.3) 15.1 (21.9) 12.4
Income (loss) from discontinued operations
(14.1) (10.6) 101.3 --
------- ------- ------- -------
Net income (loss) (26.4) 4.5 79.4 12.4
Dividends and accretion - preferred stock (3.5) (3.5) (3.6) (3.5)
------- ------- ------- -------
Net income (loss) applicable to common stockholders $ (29.9) $ 1.0 $ 75.8 $ 8.9
======= ======= ======= =======
Net income (loss) per share:
Basic
Continuing operations $ (0.43) $ 0.32 $ (0.69) $ 0.24
Discontinued operations (0.39) (0.29) 2.74 --
------- ------- ------- -------
Net Income $ (0.82) $ 0.03 $ 2.05 $ 0.24
======= ======= ======= =======
Diluted
Continuing operations $ (0.43) $ 0.30 $ (0.69) $ 0.23
Discontinued operations (0.39) (0.27) 2.74 --
------- ------- ------- -------
Net income (loss) $ (0.82) $ 0.03 $ 2.05 $ 0.23
======= ======= ======= =======
</TABLE>
75
<PAGE> 77
EXHIBIT D
Wang Laboratories, Inc. and Subsidiaries
SCHEDULE II - Valuation and Qualifying Accounts (in millions)
<TABLE>
<CAPTION>
Additions
---------------------------------------
Charged to
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions- End
DESCRIPTION of Period Expenses Describe Describe of Period
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1998:
Allowances for doubtful
accounts and sale credits $17.9 $ 9.6 $ - $(6.6)(A) $20.9
Year ended June 30, 1997:
Allowances for doubtful
accounts and sale credits $10.8 $10.3 $ - $(3.2)(A) $17.9
Year ended June 30, 1996:
Allowances for doubtful
accounts and sale credits $10.8 $ 0.6 $ - $(0.6)(A) $10.8
</TABLE>
(A) Accounts charged off, net of recoveries.
76
<PAGE> 78
EXHIBIT INDEX
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
<PAGE> 1
<TABLE>
EXHIBIT 12.1 - CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions except ratios)
<CAPTION>
Predecessor
Company
--------------
Three months
Year Year Year Year Nine months ended
ended June 30, ended June 30, ended June 30, ended June 30, ended June 30, September 30,
1998 1997 1996 1995 1994 1993
------------- ------------- -------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense $ 10.4 $ 10.9 $ 5.1 $ 3.7 $ 3.5 | $ 1.2
Portion of rent expense |
representative of interest 15.0 9.4 9.4 5.9 5.6 | 2.7
------- ------ ------ ----- ----- | -----
25.4 20.3 14.5 9.6 9.1 | 3.9
|
Preferred dividend requirement 23.5 23.5 37.7 14.5 8.7 | --
------- ------ ------ ----- ----- | -----
Combined fixed charges and |
preferred dividend $ 48.9 $ 43.8 $ 52.2 $24.1 $17.8 | $ 3.9
======= ====== ====== ===== ===== | =====
|
EARNINGS |
Income (loss) from continuing |
operations before income |
taxes, discontinued operations, |
minority interest, fresh-start |
reporting adjustment and |
extraordinary item ($267.5)(1) ($22.3)(2) $94.9(3) $ 6.9(4) $18.4 | ($8.5)
|
Fixed charges per above 25.4 20.3 14.5 9.6 9.1 | 3.9
------- ------ ----- ----- ----- | -----
($242.1) ($2.0) $109.4 $16.5 $27.5 | ($4.6)
======= ====== ====== ===== ===== | =====
|
Ratio of earnings to combined |
fixed charges and preferred dividends -- -- 2.1 -- 1.5 | --
======= ====== ====== ===== ===== | =====
|
Coverage deficiency $(291.0) $(45.8) -- $(7.6) -- | $(8.5)
======= ====== ====== ===== ===== | =====
</TABLE>
- ------------
(1) Includes $118.0 million of acquisition-related and restructuring charges.
(2) Includes $36.3 million of acquisition- and Chapter 11-related charges.
(3) Includes $1.1 million of net restructuring and Chapter 11-related credits.
(4) Includes $62.1 million of acquisition-related, restructuring and Chapter 11-
related charges.
<PAGE> 1
EXHIBIT 21.1
WANG LABORATORIES, INC.
SUBSIDIARIES
ALL SUBSIDIARIES CONDUCT BUSINESS UNDER THE NAME WANG GLOBAL
AUSTRALIA
Wang Australia
Wang Global OA Pty. Ltd. (formerly, Olivetti Australia Pty. Ltd.)
OP Pty. Ltd. (formerly, Olivetti Pacific Pty Ltd.)
Triumph-Adler OA Pty. Ltd. (formerly, Triumph Adler Olivetti (Australia) Ltd.)
Open Access Pty. Ltd.
AUSTRIA
Olsy Austria GmbH
Open Networks Distr. Ges.m.b.H
Open Systems Olsy Austria Information Systems GmbH & Co. KG
BAHRAIN
Advanced Global Communications Networks
BELGIUM
Wang Europe B.V.B.A.
Olsy Belgium B.V.B.A.
Dynamic Office Tech. Serv. S.A.
Ambrasoft S.A.
Cable Print NV
Berma BVBA
BERMUDA
Wang Global Holdings LP
BRAZIL
Wang Global Ltda.
CANADA
Wang Canada Limited
Wang Global Canada Limited
CHILE
Wang Export Services Inc.
CZECH REPUBLIC
Wang Global s.r.o.
DENMARK
Olsy A/S
DDI Communications A/S
DUBAI
Advanced Global Communication Networks
ESTONIA
Olsy Eesti AS
<PAGE> 2
FINLAND
Wang Global Oy
Dildata Oy
Microcomputer Support Oy
FRANCE
Wang France S.A.
Olsy France SA
Pharasia SCS
Sameca SarL
GERMANY
Wang Deutschland GmbH
GREECE
Wang Global SA
HONG KONG
Wang Pacific Asia
Wang Global (HK) Ltd.
ISC Systems Asia Ltd.
ISC Systems Asia Pacific Corp.
Asian Electronics Limited
HUNGARY
Wang Global Hungary Network Services Ltd.
INDONESIA
PT Wang Global Indonesia Ltd.
ISRAEL
Wang Global Systems, Ltd.
IRELAND
Wang Ireland Ltd.
ITALY
WANG GLOBAL S.P.A.
Dr. Ing, Franco Iachello & C. SpA.
DSI Italia SpA
Prodest SpA
Radiel SpA
OSE SpA
Delphi SpA
Olivetti Engineering Serv. Scpa
Unite SpA
Nomos Sistema SpA
O'Group Technology SpA
ORE&L
Olsy S.p.A.
JAPAN
Olivetti Corporation of Japan
<PAGE> 3
KOREA
Wang Computer Korea, Ltd.
LUXEMBOURG
Infotechnique S.A.
MALAYSIA
Wang Enterprise Solutions Malaysia
OMAL (Malaysia) Sdn. Berhad
MEXICO
Wang Global de Mexico S.A. de C.V.
NETHERLANDS
Wang Netherlands B.V.
Olsy Netherlands B.V.
Olsy International N.V.
NORWAY
Wang Global AS
PEOPLE REPUBLIC OF CHINA
Beijing O.I.S. Engineering Co. Ltd.
Olivetti Tianjin Int. T & Serv. Co. Ltd.
PUERTO RICO
Wang Computadoras Inc.
PHILIPPINES
Wang Global Philippines Inc.
POLAND
Wang Global Z.O.O.
PORTUGAL
Wang Global Portugal - Servicos e Redesde Informatica, S.A.
SINGAPORE
Wang Computers (Pte) Limited
Wang Global (Singapore) Pte. Ltd.
Enterprise Solutions (Singapore)
SLOVAKIA
Wang Global s.r.o.
SOUTH AFRICA
Olsy Africa Pty. Ltd.
Lole Pty. Ltd.
Quintus Pty. Ltd.
Ensemble Technology
Portion 543 Farm Reitfontein (Pty.) Ltd.
SPAIN
Wang Espana, S.A.
<PAGE> 4
Wang Network Services, S.A.
SWITZERLAND
Wang (Schweiz) AG
Olsy (Schweiz) AG
Datrac AG
Netspeed AG
UNITED KINGDOM
Wang (UK) Limited
Wang I-Net Limited
Olsy UK Limited
Olsy Financial Services
Wang Holdings, Inc.
UNITED STATES
Wang International Holdings, Inc. - Massachusetts
Cartgate, Inc. - Massachusetts
Olsy North America Inc. - Washington
I-NET, Inc. - Maryland
Advanced Paradigm Inc. - Virginia
Bannex Corporation - Florida
The Parian Development Group, Inc. - Illinois
Wang Laboratories Puerto Rico, Inc. - Delaware
Wang Government Services, Inc. - Delaware
Wang Global Holdings LLC - Delaware
VENEZUELA
Wang Venezuela C.A.
<PAGE> 1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-73210), pertaining to the Company's Stock Incentive Plan, 1993
Employees' Stock Grant Plan, Employees' Stock Purchase Plan and Senior
Management Stock Distribution Plan, the Registration Statement (Form S-8
No.33-75350), pertaining to the Company's 1993 Directors' Stock Option Plan, the
Registration Statement (Form S-8 No. 33-89910), pertaining to the Company's 1995
Director Stock Option Plan, the Registration Statement (Form S-8 No. 33-89912),
pertaining to the Company's Employees' Stock Incentive Plan, the Registration
Statement (Form S-8 No. 33-89914), pertaining to the Company's 1995 Employees'
Stock Purchase Plan, the Registration Statement (Form S-8 No. 333-01333),
pertaining to the Company's Employees' Stock Incentive Plan, the Registration
Statement (Form S-8 No. 333-01335), pertaining to the Avail Systems Corporation
1991 Incentive Stock Plan, the Registration Statement (Form S-3 and Form S-3/A
No. 333-06611) of Wang Laboratories, Inc. and the related Prospectus, the
Registration Statement (Form S-8 No. 333-12963), pertaining to the I-Net, Inc.
Key Employee Stock Option Plan, the Registration Statement (Form S-8 No.
333-12943), pertaining to the I-Net, Inc. 1996 Stock Incentive Plan, the
Registration Statement (Form S-3 and Form S-3/A No.333-19789), of Wang
Laboratories, Inc. Common Stock, the Registration Statement (Form S-8 No.
333-26661), pertaining to Wang Laboratories, Inc. Common Stock, the Registration
Statement (Form S-8 No. 333-26635), pertaining to the I-Net Inc. Key Employee
Stock Option Plan, the Registration Statement (Form S-8 No. 333-26637),
pertaining to the I-Net, Inc. 1996 Stock Incentive Plan, the Registration
Statement (Form S-3 and Form S-3/A No. 333-27969), of Wang Laboratories, Inc.
pertaining to a warrant for Common Stock, the Registration Statement (Form S-3
and Form S-3/A No. 333-27971), of Wang Laboratories, Inc. Common Stock, the
Registration Statement (Form S-8 No. 333-46075) pertaining to the Company's 1995
Employees' Stock Purchase Plan, the Registration Statement (Form S-8 No.
333-46079) pertaining to the Company's Employees' Stock Incentive Plan, the
Registration Statement (Form S-8 No. 333-46081) pertaining to the Company's 1995
Director Stock Option Plan, and the Registration Statement (Form S-8 No.
333-46103) pertaining to the Company's Short-Term Incentive Compensation Plan of
our report dated August 12, 1998, with respect to the consolidated financial
statements and schedule of Wang Laboratories, Inc. included in the Annual Report
(Form 10-K) for the year ended June 30, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
September 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS, NOTE E-OTHER
BALANCE SHEET INFORMATION, MANAGEMENT'S DISCUSSION AND ANALYSIS AND SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 225,000
<SECURITIES> 0
<RECEIVABLES> 859,600
<ALLOWANCES> 20,900
<INVENTORY> 168,300
<CURRENT-ASSETS> 1,434,700
<PP&E> 369,800<F1>
<DEPRECIATION> 155,700<F1>
<TOTAL-ASSETS> 2,189,200
<CURRENT-LIABILITIES> 1,506,000
<BONDS> 143,200
86,200
138,300
<COMMON> 500
<OTHER-SE> 172,700
<TOTAL-LIABILITY-AND-EQUITY> 2,189,200
<SALES> 617,500
<TOTAL-REVENUES> 1,887,000
<CGS> 495,300
<TOTAL-COSTS> 1,492,800
<OTHER-EXPENSES> 412,500<F2>
<LOSS-PROVISION> 9,600
<INTEREST-EXPENSE> 10,400
<INCOME-PRETAX> (267,500)
<INCOME-TAX> 13,400
<INCOME-CONTINUING> (281,600)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (281,600)
<EPS-PRIMARY> (7.29)
<EPS-DILUTED> (7.29)
<FN>
<F1>PP&E COST AND ACCUMULATED DEPRECIATION INCLUDE CAPITALIZED NON-CONSUMABLE
SPARES INVENTORY.
<F2>OTHER COSTS AND EXPENSES INCLUDES $118.0 MILLION OF NET ACQUISITION-RELATED
AND RESTRUCTURING CHARGES.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS, NOTE E-OTHER
BALANCE SHEET INFORMATION, MANAGEMENT'S DISCUSSION AND ANALYSIS AND SCHEDULE II-
VALUATION AND QUALIFYING ACCOUNTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 242,200
<SECURITIES> 0
<RECEIVABLES> 262,200
<ALLOWANCES> 17,900
<INVENTORY> 14,500
<CURRENT-ASSETS> 554,600
<PP&E> 254,700<F1>
<DEPRECIATION> 131,700<F1>
<TOTAL-ASSETS> 1,034,800
<CURRENT-LIABILITIES> 428,500
<BONDS> 63,300
85,500
138,300
<COMMON> 400
<OTHER-SE> 284,100
<TOTAL-LIABILITY-AND-EQUITY> 1,034,800
<SALES> 304,500
<TOTAL-REVENUES> 1,268,400
<CGS> 226,600
<TOTAL-COSTS> 961,000
<OTHER-EXPENSES> 87,000<F2>
<LOSS-PROVISION> 10,300
<INTEREST-EXPENSE> 10,900
<INCOME-PRETAX> (22,300)
<INCOME-TAX> (15,600)
<INCOME-CONTINUING> (6,700)
<DISCONTINUED> 76,600
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,900
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<FN>
<F1>PP&E COST AND ACCUMULATED DEPRECIATION INCLUDE CAPITALIZED NON-CONSUMABLE
SPARES INVENTORY.
<F2>OTHER COSTS AND EXPENSES INCLUDES $36.3 MILLION OF NET ACQUISITION-RELATED
AND RESTRUCTURING CHARGES.
</FN>
</TABLE>
