<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-5677
WANG LABORATORIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-2192707
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
290 CONCORD ROAD 01821-4130
- ---------------------------------------- ----------
Billerica, Massachusetts (Zip Code)
(Address of principal executive offices)
(978) 625-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 l934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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 [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date (September 30, 1998):
Common stock, par value $0.01 per share 46,192,607 shares
<PAGE> 2
WANG LABORATORIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
September 30, 1998 (restated) and June 30, 1998 3
Consolidated Statements of Operations -
Three months ended September 30, 1998 (restated) and 1997 4
Consolidated Statements of Cash Flows -
Three months ended September 30, 1998 (restated) and 1997 5
Notes to Consolidated Financial Statements (restated) -
September 30, 1998 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
This Amendment to the Quarterly Report on Form 10-Q of Wang Laboratories, Inc.,
("Wang" or "the Company") for the three months ended September 1998 gives effect
to certain changes resulting from informal discussions with the staff of the
Securities and Exchange Commission which were concluded in March 1999 concerning
the accounting treatment relating to certain aspects of the Olsy acquisition and
the impairment of certain long-lived assets as more fully described in Note A.
The result of these changes was to increase the net loss and net loss per share
for the three months ended September 30, 1998 from $11.3 million or $0.32 per
share to $22.8 million or $0.57 per share.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following documents are included as part of this Quarterly Report on Form
10-Q/A, Amendment No. 1 to Form 10-Q.
Exhibit 12.1 -- Calculation of Ratio of Earnings to Fixed Changes (restated)
Exhibit 27.1 -- Financial Data Schedule (restated)
SIGNATURE 25
2
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PART I - FINANCIAL INFORMATION
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, JUNE 30,
1998 1998
-------- --------
(DOLLARS IN MILLIONS) (RESTATED)
ASSETS
Current assets
<S> <C> <C>
Cash and equivalents $ 178.1 $ 225.0
Accounts receivable, net of allowance for doubtful accounts of $22.9 million and
$20.9 million, respectively 847.5 838.7
Inventories 173.7 168.3
Other current assets 201.0 202.7
-------- --------
Total current assets 1,400.3 1,434.7
Depreciable assets, net of accumulated depreciation of $159.5 million and
$155.7 million, respectively 234.5 214.1
Intangible assets, net of accumulated amortization of $75.2 million and
$47.3 million, respectively 500.2 508.9
Other 80.4 91.7
-------- --------
Total assets $2,215.4 $2,249.4
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Borrowings due within one year $ 36.4 $ 26.3
Accounts payable 410.7 451.5
Accrued expenses 272.7 250.0
Deferred service revenue 178.0 164.6
Other current liabilities 379.4 492.2
-------- --------
Total current liabilities 1,277.2 1,384.6
-------- --------
Long-term liabilities
Debt 233.2 116.9
Other long-term liabilities 258.4 272.6
-------- --------
Total long-term liabilities 491.6 389.5
-------- --------
Commitments and contingencies
Minority interest 7.0 6.6
-------- --------
Series A preferred stock 86.4 86.2
-------- --------
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; 46,192,607 and
46,150,302 shares outstanding, respectively 0.5 0.5
Capital in excess of par value 522.5 525.1
Cumulative translation adjustment (22.7) (19.1)
Accumulated deficit (285.4) (262.3)
-------- --------
Total stockholders' equity 353.2 382.5
-------- --------
Total liabilities and stockholders' equity $2,215.4 $2,249.4
======== ========
</TABLE>
See notes to the consolidated financial statements.
3
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WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------- -------
(RESTATED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES
Services $ 475.4 $ 244.5
Products 310.6 67.7
------- -------
786.0 312.2
------- -------
COSTS AND EXPENSES
Cost of services 377.6 193.1
Cost of products 251.7 52.9
Research and development 3.1 0.7
Selling, general and administrative 135.2 49.1
Amortization of acquisition-related intangibles 26.1 6.3
Acquisition-related charges 8.3 --
------- -------
Total costs and expenses 802.0 302.1
------- -------
OPERATING INCOME (LOSS) (16.0) 10.1
------- -------
OTHER (INCOME) EXPENSE
Interest (income) expense, net 4.9 (0.9)
Other (income) expense, net (2.1) (6.8)
------- -------
Total other (income) expense 2.8 (7.7)
------- -------
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTERESTS (18.8) 17.8
Income taxes 3.6 6.4
------- -------
INCOME (LOSS) FROM OPERATIONS BEFORE MINORITY INTERESTS (22.4) 11.4
Minority interests in earnings of subsidiaries (0.4) --
------- -------
NET INCOME (LOSS) (22.8) 11.4
Dividends and accretion on preferred stock (3.5) (3.5)
------- -------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (26.3) $ 7.9
======= =======
PER SHARE AMOUNTS
Basic $ (0.57) $ 0.21
======= =======
Diluted $ (0.57) $ 0.20
======= =======
SHARES USED TO COMPUTE PER SHARE AMOUNTS
(in millions)
Basic 46.2 38.1
Diluted 46.2 39.7
See notes to the consolidated financial statements.
4
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WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------ ------
(DOLLARS IN MILLIONS) (RESTATED)
OPERATING ACTIVITIES
Net income (loss) $(22.8) $ 11.4
Depreciation 26.5 15.3
Amortization 27.0 7.0
Gain on asset sales -- (6.5)
Non-cash provision for income taxes 2.6 5.6
Acquisition-related charges 8.3 --
Payments for acquisition-related charges (30.4) (6.4)
Payments for restructuring charges -- (0.6)
------ ------
11.2 25.8
------ ------
CHANGES IN OTHER ACCOUNTS AFFECTING OPERATIONS
Accounts receivable 5.8 (10.1)
Inventories (23.9) (1.4)
Other current assets (24.9) (2.9)
Accounts payable and other current liabilities (42.2) (23.4)
Other (5.4) (1.1)
------ ------
Net changes in other accounts affecting
operations (90.6) (38.9)
------ ------
(79.4) (13.1)
Cash used in discontinued operations (0.9) (3.8)
------ ------
Cash used in operations (80.3) (16.9)
------ ------
INVESTING ACTIVITIES
Depreciable assets (43.3) (15.3)
Proceeds from asset sales -- 9.9
Business acquisitions, net of cash acquired (27.7) (0.3)
Other (0.7) (4.2)
------ ------
Cash used in investing activities (71.7) (9.9)
------ ------
FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement 108.6 --
Increase (decrease) in short-term borrowings -- (34.7)
Increase in long-term borrowings 1.6 --
Proceeds from stock plans 0.2 1.8
Dividends paid on preferred stock (3.3) (3.3)
------ ------
Cash provided by (used in) financing activities 107.1 (36.2)
------ ------
Effect of changes in foreign exchange rates on cash (2.0) (1.4)
------ ------
DECREASE IN CASH AND EQUIVALENTS (46.9) (64.4)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 225.0 242.2
------ ------
CASH AND EQUIVALENTS AT END OF PERIOD $178.1 $177.8
====== ======
See notes to the consolidated financial statements.
5
<PAGE> 6
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE A - BASIS OF PRESENTATION (RESTATED)
The balance sheet at June 30, 1998 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The financial information included herein for the periods ended September 30,
1998 and 1997 has not been audited. However, in the opinion of management, all
material adjustments necessary for a fair presentation of the results for the
periods presented have been reflected and consist only of normal recurring
accruals, except for acquisition-related charges recorded in the three months
ended September 30, 1998.
The accompanying financial information should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K/A, Amendment No. 1 to Form 10-K, filed with the
Securities and Exchange Commission for the fiscal year ended June 30, 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"), 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 for the three months ended September 30, 1998, include the results of Olsy
and OCJ.
On August 31, 1998, the Company acquired The Parian Development Group, Inc.
("Parian") for $12.5 million in cash and accounted for the transaction as a
purchase in accordance with Accounting Principles Board Statement No. 16,
"Business Combinations". Parian is a leading Microsoft Solutions provider, with
annual revenues of approximately $8 million. The pro forma effects for the
statement of operations are not material.
Certain amounts in the prior year period have been reclassified to conform to
current presentations.
Subsequent to the filing of its Quarterly Report on Form 10-Q for the three
months ended September 30, 1998, the management of the Company and the Staff of
the Securities and Exchange Commission ("SEC") have had discussions with regard
to the determination and allocation of the purchase price in connection with the
Company's acquisition of Olsy. As a result of these discussions, which concluded
March 1999, the Company has modified the valuation of the acquisition related
consideration and the allocation of the related intangible assets. Additionally,
the Company has modified the impairment losses recorded in fiscal 1998 on
certain other long-lived assets to conform to the methodology recommended by the
SEC. A summary of the modifications and the effects on the financial position at
September 30, 1998 and results of operations for the three months then ended
follow.
Restatement Related to Valuation of Olsy Consideration - Common Stock and Stock
Appreciation Rights:
The Company revised the values of the 8.75 million shares of common stock (of
which 1.5 million are to be delivered upon shareholder approval) and the 5.0
million Stock Appreciation Rights ("SARs") issued to Olivetti as part of the
consideration for Olsy. The value of the shares previously recorded was based on
the market value of the Company's common stock, discounted by 35% to reflect the
restrictions contained in the Stock Purchase Agreement between the Company and
Olivetti. The Company has adjusted the value to reflect a discount of 20% to a
revised calculation of market value. The value of the common stock used to
calculate the value of the SARs has been revised consistent with the new value
per share of the common stock described above. Accordingly, the value of the
consideration was adjusted by $41.0 million and additional paid-in capital
increased, with a corresponding increase to intangible assets.
Restatement Related to Acquired In-Process Research and Development:
The Company has modified the methods used to value acquired in-process research
and development ("IPR&D") and other intangible assets in connection with the
Company's acquisition of Olsy. Initial calculation of value of the acquired
IPR&D was based on the cost required to complete each project, the cash flows
attributable to each project, and the selection of an appropriate rate of return
6
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to reflect the risk associated with the stage of completion of each project.
Revised calculations are based on adjusted after-tax cash flows that give
explicit consideration to the Staff's views on IPR&D as set forth in its
September 15, 1998 letter to the AICPA including consideration of the stage of
completion of the IPR&D at the acquisition date and the view that IPR&D be
valued on a fair market value basis versus a fair value basis in arriving at the
valuation amount. As a result of these modifications the Company has decreased
the amount of the purchase price allocated to acquired in-process research and
development from $74.1 million to $18.1 million and increased goodwill by $56.0
million for the year ended June 30, 1998.
Restatement Related to Impairment Losses on Long-Lived Assets:
The Company revised the cashflow analysis made to determine impairment losses
under Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed of"
("FAS 121") to conform the assumptions to those used in allocating the Olsy
purchase price. The impairment charges associated with the I-NET commercial
outsourcing business were increased from $114.8 million to $130.7 million, and
the impairment charges associated with the Bull installed contracts and
assembled workforce were increased from $20.0 million to $26.3 million for the
year ended June 30, 1998.
Restructuring Charges:
As of June 30, 1998, the Company recorded $10.8 million of estimated severance
costs associated with workforce reductions in an acquired Olsy subsidiary as
part of its purchase price allocation. Pursuant to discussions with the SEC,
these costs have been excluded from the purchase price, and the actual
severance cost of $8.3 million was charged to expense during the three months
ended September 30, 1998, as it was incurred.
A summary of the acquisition related adjustments follows (in millions):
Previously
Restated Reported
-------- --------
Cash, including transaction costs $ 90.2 $ 90.2
Common stock and stock equivalents 197.2 146.9
Stock appreciation rights 32.5 41.8
------ ------
Total consideration 319.9 278.9
Estimated fair value of net
(assets) liabilities assumed 84.2 95.0
------ ------
Excess of purchase price over
net tangible assets acquired $404.1 $373.9
====== ======
The excess of purchase price over the fair value of the net liabilities assumed
has been restated as follows:
Previously
Restated Reported
-------- --------
In-process research and development $ 18.1 $ 74.1
Capitalized software 43.2 56.4
Trademarks 57.0 39.0
Goodwill 285.8 204.4
------ ------
$404.1 $373.9
====== ======
7
<PAGE> 8
Summary of Effects of Restatements:
The effects of the restatement related to acquired in-process research and
development, impairment losses and restructuring charges resulted in the
following impact on the Company's financial position as of September 30, 1998
and the results of operations for the quarter then ended (in millions).
Three Months Ended
September 30,
1998
------------------
Results from operations:
- ------------------------
Loss from continuing operations before income taxes and
minority interest as previously reported $ (7.3)
Adjustment related to restructuring
charges (8.3)
Adjustment to amortization of intangible
assets (3.2)
------
Restated $(18.8)
======
Net Loss applicable to common
stockholders as previously reported $(14.8)
Adjustment related to restructuring
charges (8.3)
Adjustment to amortization of intangible
assets (3.2)
------
Restated net loss applicable to common stock $(26.3)
======
Loss per share:
- ---------------
As previously reported $(0.32)
Adjustment related to restructuring
charges (0.18)
Adjustment to amortization of intangible
assets (0.07)
------
Restated $(0.57)
======
September 30,
1998
-------------
Financial Position:
-------------------
Intangible assets, net as previously reported $ 443.2
Adjustment related to acquired in-process
research and development 56.0
Adjustment related to impairment losses (22.2)
Adjustment related to restructuring
charges (10.8)
Adjustment to amortization of intangible
assets (7.0)
Adjustment related to valuation of
consideration for Olsy 41.0
-------
Restated $ 500.2
=======
Other current liabilities, as previously
reported 381.9
Adjustment related to restructuring
charges (2.5)
-------
$ 379.4
=======
8
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Capital in excess of par value as
previously reported $ 481.5
Adjustment related to valuation of
consideration for Olsy 41.0
-------
Restated $ 522.5
=======
Accumulated deficit, as previously reported $(303.9)
Adjustment related to acquired in-process
technology 56.0
Adjustment related to impairment losses (22.2)
Adjustment related to amortization of
intangible assets (7.0)
Adjustment related to restructuring
changes (8.3)
-------
Restated $(285.4)
=======
9
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During 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("FAS 130"). The Company will adopt the
provisions of FAS 130 for the six month period ended December 31, 1998.
Comprehensive income is generally defined as all changes in stockholders' equity
exclusive of transactions with owners such as capital investments and dividends.
Comprehensive income (loss) for the quarters ended September 30, 1998 and
September 30, 1997 was $(26.4) million and $10.0 million, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("FAS
131"). The Company will adopt the provisions of FAS 131 for the six month period
ended December 31, 1998. It is not anticipated that FAS 131 will have a
significant impact on segment information disclosures.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. The Company
expects to adopt the new Statement effective January 1, 2000 and has not yet
determined its impact.
10
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NOTE B - BUSINESS ACQUISITION (RESTATED)
OLSY ACQUISITION
The Company has recorded a total of $199.0 million of restructuring and
integration liabilities in connection with the purchase accounting in the Olsy
acquisition, of which $138.6 million is workforce-related, $26.2 million is for
facilities, and $34.2 million is for other. The Company has utilized $75.7
million of the liabilities established in connection with the Olsy acquisition,
and believes that remaining reserves are adequate to complete actions identified
in connection with the restructuring and integration plan.
In connection with the acquisition of Olsy, the following pro forma results of
operations have been prepared as though the acquisition had occurred as of the
beginning of the period presented (in millions except per share data):
THREE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
Revenues $ 821.4
Loss from continuing operations $ (43.1)
Loss attributable to common stockholders $ (46.6)
Net loss per share applicable to common stockholders $ (1.04)
NOTE C - EARNINGS PER SHARE (RESTATED)
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------- -------
(IN MILLIONS EXCEPT PER SHARE DATA)
Numerator:
<S> <C> <C>
Net income (loss) $ (22.8) $ 11.4
Dividends and accretion on the Series A Preferred Stock (1.2) (1.2)
Dividends on the Series B Preferred Stock (2.3) (2.3)
------- -------
Numerator for basic and diluted earnings per share - net income (loss) available
to common shareholders $ (26.3) $ 7.9
======= =======
Denominator:
Denominator for basic earnings per share - Weighted average shares 46.2 38.1
------- -------
Effect of dilutive securities:
Stock options -- 1.6
Stock warrants -- --
------- -------
Dilutive potential common shares -- 1.6
------- -------
Denominator for diluted earnings per share -
Adjusted weighted-average shares and assumed conversions 46.2 39.7
======= =======
Basic earnings per share $ (0.57) $ 0.21
Diluted earnings per share $ (0.57) $ 0.20
</TABLE>
11
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NOTE D - CONTINGENCIES
The Company is a defendant in a number of lawsuits arising from the conduct 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 current litigation will be material to the Company's
consolidated financial position or results of operations.
As part of its consideration for Olsy, the Company has the potential to pay 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 and 1999. The earnout will be recorded at the time it becomes
probable that a payment will be required and the amount can be reasonably
estimated.
NOTE E - SUBSEQUENT EVENTS
On November 3, 1998, the Company announced its board of directors had authorized
the use of up to $50 million for repurchase of its common stock or publicly
traded warrants via open market purchases. The Company is also authorized to
enter into hedging transactions designed to reduce the potential dilutive impact
of its Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and warrants.
12
<PAGE> 13
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 expected revenue, 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
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.
This Amendment to the Quarterly Report on Form 10-Q of Wang Laboratories, Inc.,
("Wang" or "the Company") for the three months ended September 1998 gives effect
to certain changes resulting from informal discussions with the staff of the
Securities and Exchange Commission which were concluded in March 1999 concerning
the accounting treatment relating to certain aspects of the Olsy acquisition and
the impairment of certain long-lived assets as more fully described in Note A.
The result of these changes was to increase the net loss and net loss per share
for the three months ended September 30, 1998 from $11.3 million or $0.32 per
share to $22.8 million or $0.57 per share.
In connection with the acquisition of Olsy, the Company allocated $18.1 million
of the purchase price to in-process research and development ("IPR&D") and
charged the amount to expense in the fiscal year ended June 30, 1998. At the
acquisition date, Olsy had approximately fourteen R&D projects focused on
operating on a Microsoft Distributed interNet Architecture for Financial
Services ("Microsoft DNAfs"), which ranged in completion from 10% to 95%. As of
September 30, the projects ranged in completion from 30% to 100%, and remaining
R&D commitments on these projects totaled approximately $6 million. Revenues and
operating profits for these projects are estimated to be substantially earned
between 1999 and 2002 and to diminish thereafter. These estimates are subject to
change, given the uncertainties of the development process, and no assurance can
be given that deviations from these estimates will not occur. Management
believes the Company is positioned to complete the major R&D projects valued
hereunder principally during calendar 1999. However, there is risk associated
with the completion of the projects, and there is no assurance that any project
will meet with either technological or commercial success.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
OVERVIEW
For the three months ended September 30, 1998, the Company reported revenues of
$786.0 million, a $473.8 million increase compared to revenues of $312.2 million
for the same prior year period, primarily attributable to the Olsy acquisition.
The Company reported an operating loss of $16.0 million for the three months
ended September 30, 1998, compared to operating income of $10.1 million for the
three months ended September 30, 1997.
The decline in operating income is primarily attributable to increases in
amortization expense of intangible assets associated with the acquisition of
Olsy.
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
three months ended September 30, 1998 was $53.1 million and is calculated by
adjusting the loss from operations of $16.0 million for nonrecurring charges of
$13.6 million, depreciation and amortization expenses not included in
non-recurring charges of $26.5 million and $27.0 million, respectively, and
other income of $2.0 million not reflected in the nonrecurring charges. For the
six months ended September 30, 1998, cash used in operating and investing
activities was $80.3 million and $71.7 million, respectively, and cash provided
by financing activities was $107.1 million.
EBITDA for the three months ended September 30, 1997 was $39.2 million and is
calculated by adjusting income from operations of $10.1 million depreciation and
amortization expenses of $15.3 million and $7.0 million, respectively, and other
income of $6.8 million. For the three months ended September 30, 1997, cash used
in operating, investing and financing activities was $16.9 million, $9.9 million
and $36.2 million, respectively.
EBITDA can be calculated differently from one company to the next, so this
measure may not be comparable to EBITDA reported by other companies.
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
13
<PAGE> 14
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 30% per year on a
constant dollar 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 94.4%, to $475.4 million, compared to $244.5
million in the same prior year period. The increase in networked technology
services revenues was $182.6 million, or 94.0%, to $376.8 million, and was
primarily attributable to the acquisition of Olsy. Traditional services revenues
increased by 96.0%, to $98.6 million. The anticipated decline in traditional VS
and GCOS services was more than offset by the addition of Olsy traditional
services revenues. The Company anticipates that the shift in revenue mix and the
decline in traditional revenues will continue.
Product revenues increased by $242.9 million, to $310.6 million. Networked
technology product revenues more than doubled to $123.3 million, compared to
$53.3 million in the same quarter of the prior year. Traditional product
revenues increased by $97.3 million, to $111.7 million, compared to $14.4
million in the same prior year period. The increase in traditional product
revenues is primarily due to the acquisition of Olsy, offset by the anticipated
decline in VS and GCOS product revenues. Standard product revenues were $75.6
million in the quarter ended September 30, 1998.
GROSS MARGIN
Services gross margin decreased to 20.6%, from 21.0% in the comparable prior
year period. 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 revenue mix. 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 certain lower-margin services from Olsy.
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 and by enriching its revenue mix by expanding in high end solutions
integration and network integration services.
Product gross margin was 19.0%, compared to 21.9% in the comparable prior year
period. 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 standard
product revenues. 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 EXPENSES
Research and development costs increased by $2.4 million, from $0.7 million in
the comparable prior year period. Research and development expenses for the
three months ended September 30, 1998 includes amounts spent by Olsy and
development by Oli Ricerca (a minority investee company) under contract with
Wang. The Company's current quarter research and development spending is
primarily related to Olsy's development of software technology for the banking
industry and, to a lesser extent, continuing support for its traditional VS
products and specialized client server products sold to the U.S. government.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $86.1 million,
compared to the prior year period, and also increased as a percentage of
revenues, to 17.2% in the three months ended September 30, 1998, compared to
15.7% in the three months ended September 30, 1997. This increase is primarily
attributable to the inclusion of Olsy. The Company expects that ongoing
integration activities will contribute to the management of selling, general and
administrative costs in the future.
AMORTIZATION
Amortization of acquired intangible assets totaled $26.1 million in the three
months ended September 30, 1998, including $22.6 million for intangible assets
related to the Olsy acquisition. This compares to amortization of acquired
intangible assets of $6.3 million in the three months ended September 30, 1997.
INTEREST INCOME AND EXPENSE
Net interest expense of $4.9 million in the three months ended September 30,
1998 is comprised of $6.9 million of interest expense, including $5.0 million
related to the Company's Revolving Credit Facility with Bankers Trust Company
("BTC"), net of $2.0 million of interest income. This compares to net interest
income of $0.9 million in the same period of the prior year, which was comprised
of
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$2.6 million of interest income, primarily due to higher cash balances resulting
from the sale of the Company's software business unit to Eastman Kodak Company
in the third quarter of fiscal 1997, net of $1.7 million of interest expense,
principally the result of imputed interest recorded on the notes issued to the
selling stockholders of I-NET.
ACQUISITION-RELATED CHARGES
Acquisition-related charges of $8.3 million in the three months ended September
30, 1998 reflect the costs associated with headcount reductions in the Company's
subsidiary in Japan. There were no acquisition-related charges recorded in the
three months ended September 30, 1997.
OTHER INCOME AND EXPENSE
Net other income of $2.1 million was primarily comprised of foreign exchange
gains in the three months ended September 30, 1998. Net other income of $6.8
million in the prior year period primarily consisted of a $6.5 million gain
realized on the sale of certain land and facilities owned by the Company in
Billerica, Massachusetts.
INCOME TAXES
The provision for income taxes in the three months ended September 30, 1998 was
$3.6 million. This compares to a provision of $6.4 million for the three months
ended September 30, 1997. The provision in the current year period is
attributable to taxes on income of foreign subsidiaries which do not have
available net operating loss carryforwards. The provision included $2.6 million
and $5.6 million of non-cash tax expense for the three months ended September
30, 1998 and 1997, respectively.
EMPLOYEES
At September 30, 1998, the Company had approximately 20,000 employees.
LIQUIDITY AND SOURCES OF CAPITAL
Cash and equivalents were $178.1 million, a decrease of $46.9 million during the
three months ended September 30, 1998.
Cash used in operations during the three months ended September 30, 1998 was
$80.3 million, including $79.4 million from current operating activities and
$0.9 million used for transaction costs associated with discontinued operations.
Cash used in investing activities during the three months ended September 30,
1998 is primarily comprised of $43.3 million for capital additions, including
$19.0 million for purchases of non-consumable spares and $5.7 for the completion
of the Company's new corporate headquarters located in Billerica, Massachusetts.
Cash provided by financing activities was $107.1 million during the three months
ended September 30, 1998, and was comprised of $108.6 million of net borrowings
under the Company's line-of-credit agreement, $1.6 million of net long-term
borrowings, cash dividends on preferred stock paid of $3.3 million, and proceeds
of $0.2 million proceeds from stock plans.
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 up to $200.0 million for letters of
credit. At September 30, 1998, $228.7 million of the line was in use.
In addition to normal operating activities, capital expenditures and payment of
preferred dividends, the Company estimates that total expenditures of as much as
$380 million will be required in connection with the integration of Olsy and
rightsizing of the combined company over the next two years. The Company has
recorded a total of $239.6 million for these activities, of which $40.6 million
was recorded as a charge to operations and $199.0 million was recorded as part
of purchase accounting for the acquisition of Olsy, as of September 30, 1998.
The $239.6 million includes approximately $161 million related to organizational
redundancies, $45 million related to facilities and $33 million related to
systems and other costs. A total of approximately $158 million remains to be
expended. The Company currently estimates that such expenditures will
approximate $67 million in the remainder of calendar year 1998 and $85 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.
On November 3, 1998, the Company announced its board of directors had authorized
the use of up to $50 million for repurchase of its common stock or publicly
traded warrants via open market purchases. The Company is also authorized to
enter hedging transactions designed to reduce the potential dilutive impact of
its Series A Convertible Preferred Stock, Series B Convertible Preferred Stock
and warrants. In addition, if the Company's shareholders do not approve the
issuance of the 1.5 million shares of the Company's common
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stock due to Olivetti as part of the consideration for Olsy, the Company will
be required to settle the outstanding obligation in cash. The amount will be
based on the average trading price of the common stock of the Company during the
10 days prior to that date.
Additionally, the Company estimates that approximately $4 million remains to be
spent for its previously announced advertising, branding and positioning
initiatives to launch the newly combined company, and approximately $0.5 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 $6 million,
principally through 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 ongoing 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 its credit facility provides
sufficient capital availability there can be no assurance that sufficient
capital will be available on terms acceptable to the Company.
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 into Wang's common operating environment. The
roll-out of this new infrastructure is already well under way.
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.
1. SERVICE DELIVERY SYSTEMS. The Company is consolidating multiple service
delivery systems in the United States into a
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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
consolidation 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.
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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 smaller scale worldwide standard system (Solomon
IV) that provides full functionality and a stepping stone towards future SAP
migration, when those operations reach sufficient size to justify the SAP
investment. Solomon reports that its system is Y2K compliant, but the Company
is awaiting formal certification from Solomon.
Costs to Address Y2K Issues. The Company has invested nearly $60 million in its
internal systems since 1996 and plans to invest approximately $20 million over
the next twelve months to complete its systems initiatives.
Risks to the Company of Y2K Issues. Y2K noncompliance by the Company, if not
quickly remedied, would seriously damage its image and credibility within the
marketplace and adversely affect 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 would 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 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 provide products and software to help
implement the Company's Y2K strategy. While Wang is performing some
independent testing, the Company expects its suppliers to test all affected
products extensively. 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: In the event that one or more of the Company's
internal systems do not comply with Y2K standards, it would support those
processes with manual reporting and processing. The cost to the Company would
be limited to the incremental support costs for the affected systems only for
as long as those systems remained non-compliant.
COMPANY'S CONTINGENCY PLAN. In the event that Wang is unable to implement its
Y2K plan fully, manual processes would 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.
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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.
The Company is committed to providing its customers with products that are
supportable beyond the Y2K and has engaged in a development effort to bring its
principal products into Y2K 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 believes that its development effort and communications campaign has
minimized its potential exposure to Y2K 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 Y2K 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 Y2K issues and no customer has asserted losses
associated with any products of the Company.
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.
THIRD PARTY PRODUCTS. It is the Company's goal to supply only products made by
other companies that are Y2K compliant. Where products originate from third
parties, the Company will seek to verify that the supplier has certified the
product as Y2K 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 Y2K 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 Y2K related problems, the Company
does not intend to provide hardware maintenance or software support for products
that will not be Y2K compliant or will not be supported by the manufacturer
beyond 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 Y2K 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 Y2K maintenance issues and no customer has asserted losses due to
any actions of the Company.
All Year 2000 statements contained herein or in any of the Company's prior
public filings or announcements, including its Form 10-K for the period ended
June 30, 1998, are designated as "Year 2000 Readiness Disclosures" pursuant to
the Year 2000 Information and Readiness Disclosure Act (P.L. 105-271).
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RISKS AND UNCERTAINTIES
Certain statements in this Form 10-Q 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 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
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
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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 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 CISCO contemplate 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 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.
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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. In the three months ended September 30, 1998
and the year ended June 30, 1998, the Company derived approximately 12% and 20%,
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 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 the 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.
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 million shares of
preferred stock, $0.01 par value per share (the "Preferred Stock"), in one or
more series. Of the 5 million authorized shares of Preferred Stock, 90,000
shares have been designated as 42% 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 62% Series B Cumulative
22
<PAGE> 23
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, 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's earnings and cash flow are subject to
fluctuations due to changes in foreign currency exchange rates. The Company
manages its exposures to changes in foreign currency exchange rates on certain
intercompany and third party transactions denominated in foreign currency by
entering into forward exchange contracts. The Company's risk management
objective is to reduce its exposure to the effects of changes in future cash
flows. To a certain extent, foreign currency exchange rate movements also affect
the Company's competitive position, as exchange rate changes may affect business
practices and/or pricing strategies of non-U.S. based competitors. The Company's
foreign currency risk policies entail entering into foreign currency derivative
instruments only to manage transaction risk, and not for speculative
investments.
Based on exposures on certain intercompany and third party transactions
denominated in foreign currency which are anticipated in the December 1998
quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other
currencies would not materially adversely affect expected cash flows. This
analysis is dependent on actual transactions denominated in foreign currency
exposures not being materially different from anticipated exposures. The effect
of the hypothetical change in exchange rates does not take into account the
affect this movement may have on other variables including competitive risk. If
it were possible to quantify this competitive impact, the results could well be
different than the sensitivity effects shown above. In addition, it is unlikely
that all currencies would uniformly strengthen or weaken relative to the U.S.
dollar or other currencies. In reality, some currencies may weaken while others
may strengthen.
The Company also is exposed to changes in interest rates primarily from its
revolving credit borrowings. The Company currently does not enter into interest
rate derivative instruments to manage exposure to interest rate changes,
however, management is considering hedging options in the future to mitigate
exposure to interest rate changes.
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.
23
<PAGE> 24
WANG LABORATORIES, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flow are subject to fluctuations due to changes
in foreign currency exchange rates. The Company manages its exposures to changes
in foreign currency exchange rates on certain intercompany and third party
transactions denominated in foreign currency by entering into forward exchange
contracts. The Company's risk management objective is to reduce its exposure to
the effects of changes in future cash flows. To a certain extent, foreign
currency exchange rate movements also affect the Company's competitive position,
as exchange rate changes may affect business practices and/or pricing strategies
of non-U.S. based competitors. The Company's foreign currency risk policies
entail entering into foreign currency derivative instruments only to manage
transaction risk, and not for speculative investments.
Based on exposures on certain intercompany and third party transactions
denominated in foreign currency which are anticipated in the December 1998
quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other
currencies would not materially adversely affect expected cash flows. This
analysis is dependent on actual transactions denominated in foreign currency
exposures not being materially different from anticipated exposures. The effect
of the hypothetical change in exchange rates does not take into account the
affect this movement may have on other variables including competitive risk. If
it were possible to quantify this competitive impact, the results could well be
different than the sensitivity effects shown above. In addition, it is unlikely
that all currencies would uniformly strengthen or weaken relative to the U.S.
dollar or other currencies. In reality, some currencies may weaken while others
may strengthen.
The Company also is exposed to changes in interest rates primarily from its
revolving credit borrowings. The Company currently does not enter into interest
rate derivative instruments to manage exposure to interest rate changes,
however, management is considering hedging options in the future to mitigate
exposure to interest rate changes.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: April 5, 1999
WANG LABORATORIES, INC.
/s/ Paul A. Brauneis
-------------------------------
Paul A. Brauneis,
Vice President and
Corporate Controller
25
<PAGE> 1
EXHIBIT 12.1 - CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions except ratios)
<TABLE>
<CAPTION>
Three months Year ended Year ended Year ended Year ended Nine months
ended September 30, June 30, June 30, June 30, June 30, ended June 30,
1998 1998 1997 1996 1995 1994
------------------- ---------- ----------- ---------- ------- -------------
(Restated)*
<C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense $ 6.9 $ 10.4 $10.9 $ 5.1 $ 3.7 $ 3.5
Portion of rent expense
representative of interest 4.1 15.0 9.4 9.4 5.9 5.6
----- ------- ----- ----- ----- ------
11.0 25.4 20.3 14.5 9.6 9.1
Preferred dividend requirement 5.8 23.5 23.5 37.7 14.5 8.7
------ ------- ----- ----- ----- ------
Combined fixed charges and
preferred dividend $ 16.8 $ 48.9 $43.8 $52.2 $24.1 $ 17.8
====== ======= ===== ===== ===== ======
EARNINGS
Income (loss) from continuing
operations before income
taxes, discontinued operations,
fresh-start reporting adjustment
and extraordinary item ($18.8)(1) ($237.5)(2) ($22.3)(3) $94.9 (4) $ 6.9(5) $ 18.4
Fixed charges per above 11.0 25.4 20.3 14.5 9.6 9.1
------ -------- ------ ----- ----- ------
($ 7.8) ($212.1) ($2.0) $109.4 $16.5 $ 27.5
====== ======== ====== ====== ===== ======
Ratio of earnings to combined
fixed charges and preferred dividends -- -- -- 2.1 -- 1.5
====== ======= ====== ===== ===== ======
Coverage deficiency ($24.6) $(261.0) $(45.8) -- $ (7.6) --
====== ======= ====== ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Company
-----------------
Three months ended
September 30, 1993
-------------------
<S> <C>
FIXED CHARGES
Interest expense $ 1.2
Portion of rent expense
representative of interest 2.7
-----
3.9
Preferred dividend requirement --
-----
Combined fixed charges and
preferred dividend $ 3.9
=====
EARNINGS
Income (loss) from continuing
operations before income
taxes, discontinued operations,
fresh-start reporting adjustment
and extraordinary item ($8.5)
Fixed charges per above 3.9
-----
($4.6)
=====
Ratio of earnings to combined
fixed charges and preferred dividends --
=====
Coverage deficiency $(8.5)
=====
</TABLE>
* The operating results for the quarter ended September 30, 1998 have been
restated to reflect certain modifications as discussed in Note A to the
consolidated financial statements
(1) Includes $8.3 million of acquisition-related charges
(2) Includes $62.0 million of acquisition-related, restructuring and Chapter 11-
related charges
(3) Includes $36.3 million of acquisition-related, restructuring and Chapter 11-
related charges
(4) Includes $(1.1) million of acquisition-related, restructuring and
Chapter 11-related charges
(5) Includes $62.1 million of acquisition-related, restructuring and Chapter 11-
related charges
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENT OF OPERATIONS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM
10-Q/A, AMENDMENT NO. 1 TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 178,100
<SECURITIES> 0
<RECEIVABLES> 870,400
<ALLOWANCES> 22,900
<INVENTORY> 173,700
<CURRENT-ASSETS> 1,400,300
<PP&E> 394,000<F1>
<DEPRECIATION> 159,500<F1>
<TOTAL-ASSETS> 2,215,400
<CURRENT-LIABILITIES> 1,277,200
<BONDS> 269,600
86,400
138,300
<COMMON> 500
<OTHER-SE> 214,400
<TOTAL-LIABILITY-AND-EQUITY> 2,215,400
<SALES> 310,600
<TOTAL-REVENUES> 786,000
<CGS> 251,700
<TOTAL-COSTS> 629,300
<OTHER-EXPENSES> 37,500<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,900
<INCOME-PRETAX> (18,800)
<INCOME-TAX> 3,600
<INCOME-CONTINUING> (22,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,800)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
<FN>
<F1>PP&G COST AND ACCUMULATED DEPRECIATION INCLUDE CAPITALIZED NONCONSUMABLE
SPACES INVENTORY.
<F2>OTHER COSTS AND EXPENSES INCLUDES $8.3 MILLION OF ACQUISITION RELATED
CHARGES.
</FN>
</TABLE>
