<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1 to Form 10-K
(Mark One)
( ) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
(X) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from July 1, 1998 to December 31, 1998
COMMISSION FILE NUMBER 1-5677
WANG LABORATORIES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 04-2192707
- -------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
290 CONCORD ROAD, BILLERICA, MASSACHUSETTS 01821
------------------------------------------ ----------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (978) 625-5000
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 February 26, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $623,959,968 based on the closing price of
Common Stock on the Nasdaq National Market on February 26, 1999 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 of Common Stock outstanding as of February 26, 1999
was 46,648,258
<PAGE> 2
PART II
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.
10
<PAGE> 3
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 in this annual
report on Form 10-K/A, Amendment No. 1 to Form 10-K.
Financial Statements:
Consolidated Statements of Operations for the six months ended
December 31, 1998 and fiscal years ended June 30, 1998, 1997 and 1996.
Consolidated Balance Sheets as of December 31, 1998, June 30,
1998 and June 30, 1997.
Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and the fiscal years ended June 30, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the six months
ended December 31, 1998 and the fiscal years ended June 30, 1998, 1997 and
1996.
11
<PAGE> 4
Notes to Consolidated Financial Statements.
2. The following documents are included as Exhibit D to this annual
report on Form 10-K/A, Amendment No. 1 to Form 10-K.
Financial Statement Schedule:
Schedule II- Valuation and Qualifying Accounts
Exhibit 12.1- Calculation of Ratio of Earnings to Fixed Charges
Exhibit 23.1- Consent of Independent Auditors
Exhibit 27.1- Financial Data Schedule
12
<PAGE> 5
WANG LABORATORIES, INC. AND SUBSIDIARIES EXHIBIT A
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
Predecessor
Company
--------------
Three
Six Months Year Nine Months Months
Ended Year Ended Year Ended Year Ended Ended Ended Ended
December 31, June 30, June 30, June 30, June 30, June 30, Sept 30,
1998 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,818.0 $ 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 (39.8) (251.6) (6.7) 63.5 (14.2) 8.6 11.9
Reorganization expenses -- -- -- -- -- -- (20.8)
Income (loss) from
discontinued operations -- -- 76.6 (69.0) (53.9) -- --
Fresh-start reporting
adjustment -- -- -- -- -- -- 193.6
Gain on debt discharge -- -- -- -- -- -- 329.3
------- ------- ------ ------- ------- ------ -------
Net income (loss) (39.8) (251.6) 69.9 (5.5) (68.1) 8.6 514.0
Dividends and accretion on
preferred stock (7.0) (14.1) (14.1) (22.6) (8.7) (4.2) --
------- ------- ------ ------- ------- ------ -------
Net income (loss) applicable
to common stockholders $ (46.8) $ (265.7) $ 55.8 $ (28.1) $ (76.8) $ 4.4 $ 514.0
======= ======== ====== ======= ======= ===== =======
Net income (loss) per share:
Basic
Continuing operations $ (1.01) $ (6.54) $ (0.56) $ 1.13 $ (0.70) $ 0.13
Discontinued operations -- -- 2.06 (1.91) (1.64) --
------- ------- ------ ------- ------- ------ -------
Net income (loss) $ (1.01) $ (6.54) $ 1.50 $ (0.78) $ (2.34) $ 0.13 *
======= ======== ====== ======= ======= ===== =======
Diluted
Continuing operations $ (1.01) $ (6.54) $ (0.56) $ 1.07 $ (0.70) $ 0.13
Discontinued operations -- -- 2.06 (1.81) (1.64) --
------- ------- ------ ------- ------- ------ -------
Net income (loss) $ (1.01) $ (6.54) $ 1.50 $ (0.74) $ (2.34) $ 0.13 *
======= ======= ====== ======= ======= ====== =======
Average number of employees 20,200 13,300 9,300 6,200 5,200 5,900 6,700
Number of employees 20,300 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.
<PAGE> 6
WANG LABORATORIES, INC. AND SUBSIDIARIES
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
June 30,
December 31, ------------------------------------------------
1998 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total assets $2,369.8 $2,249.4 $1,034.8 $ 856.6 $ 852.5 $ 677.1
Depreciable assets,
net 236.0 $ 214.1 $ 123.0 $ 137.3 $ 134.4 $ 79.6
Working capital 100.6 $ 50.1 $ 126.1 $ 86.7 $ 34.1 $ 95.1
Long-term debt,
excluding
liabilities
subject to
compromise $ 250.7 $ 116.9 $ -- $ -- $ 23.0 $ 2.0
Series A preferred
stock $ 86.5 $ 86.2 $ 85.5 $ 84.8 $ 84.1 $ --
Exchangeable
preferred stock $ -- $ -- $ -- $ -- $ 61.5 $ 53.2
Stockholders'
equity (deficit) $ 348.2 $ 382.5 $ 422.8 $ 343.1 $ 220.8 $ 272.3
</TABLE>
Certain prior years' amounts have been reclassified to conform to the
presentation for the six months ended December 31, 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.
<PAGE> 7
WANG LABORATORIES, INC. AND SUBSIDIARIES EXHIBIT B
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 July 22, 1998, Wang's Board of Directors voted to change the Company's fiscal
year end from June 30 to December 31. Accordingly, management's discussion and
analysis of financial condition and results of operations will: (i) compare the
audited results of operations for the six months ended December 31, 1998 to the
unaudited results of operations for the six months ended December 31, 1997; (ii)
compare the results of operations for the fiscal year ended June 30, 1998 to the
results of operations for the fiscal year ended June 30, 1997; (iii) compare the
results of operations for the fiscal year ended June 30, 1997 to the results of
operations for the fiscal year ended June 30, 1996; and (iv) discuss the
Company's liquidity and sources of capital as of December 31, 1998.
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 completed April 7, 1998.
Accordingly, the Company's Consolidated 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.
In connection with the Olsy acquisition, the Company has allocated $18.1 million
for acquired in-process research and development ("IPR&D"). This allocation
represents the estimated fair value of the in-process R&D based on the present
value of future cash flows related to the IPR&D projects. At the date of
acquisition, the development of these projects had not yet reached technological
feasibility, and the IPR&D had no alternative future uses. Accordingly, the
value of the acquired IPR&D was written off in the fiscal quarter ended June 30,
1998.
<PAGE> 8
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
On the date of acquisition, Olsy had approximately fourteen R&D projects which
were expected to reach completion principally by the end of 1998. These projects
related primarily to software development activities focused on operating on a
Microsoft Distributed interNet Architecture for Financial Services ("Microsoft
DNA FS"). At the acquisition date, these R&D projects ranged in completion from
10% to 95% and total R&D commitments to complete the projects were expected to
be approximately $11 million. As of December 31, 1998, the projects ranged in
completion from 60% to 100%, and remaining R&D commitments on these projects
totaled approximately $3 million. Revenues and operating profits from projects
are estimated to be substantially earned between 1999 and 2002 and to diminish
thereafter, and are consistent with the estimates made at the acquisition date.
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 during 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.
In March 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.
The results of operations of the software business unit prior to its sale and
the gain on the sale realized in the March quarter of fiscal 1997 have been
reported as discontinued operations in the accompanying Consolidated Statements
of Operations and of Cash Flows.
The Company completed the acquisition of I-NET, Inc. ("I-NET") on August 29,
1996. The Company's Consolidated Statements of Operations and of Cash Flows
include the results of I-NET subsequent to acquisition.
From time to time the Company has acquired other individually immaterial
businesses and accounted for such business combinations under the purchase
method. These acquisitions do not have a material effect on the Company's
results from operations or financial position.
<PAGE> 9
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RESULTS OF CONTINUING OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1997
Revenues were $1,818.0 million for the six months ended December 31, 1998,
compared to revenues of $651.1 million for the six months ended December 31,
1997. Substantially all of the increase in consolidated revenues is attributable
to the acquisition of Olsy. There were no Olsy-related revenues in the 1997
period.
The operating loss for the six months ended December 31, 1998 was $17.9 million,
and includes nonrecurring charges of $55.0 million, of which $41.5 million was
recorded in the quarter ended December 31, 1998 and $13.5 million in the quarter
ended September 30, 1998. These charges are comprised of $35.1 million of Wang
acquisition-related costs and $19.9 million of other operating costs, primarily
transition-related period costs, incurred to integrate the acquired Olsy
business. The $55.0 million is included in the Consolidated Statements of
Operations as follows: $5.0 million in Cost of services, $14.9 million in
Selling, general and administrative expenses and $35.1 million in
Acquisition-related charges. The $55.0 million is included in the operating
results of the four geographic segments in which the Company operates and in
Corporate as follows: $12.6 million in the United States, $0.1 million in Other
Americas, $27.6 million in Europe/Africa/Middle East, $9.9 million in
Asia/Pacific and $4.8 million in Corporate.
Excluding the nonrecurring charges of $55.0 million for the six months ended
December 31, 1998, operating income was $37.1 million. This compares to
operating income of $27.1 million for the six months ended December 31, 1997.
The increase in operating profit is primarily attributable to the increase in
revenues.
EBITDA (earnings before interest, income taxes, depreciation and amortization)
was $141.4 million for the six months ended December 31, 1998, compared to $78.7
million in the prior year period. EBITDA can be calculated differently from one
company to the next, so this measure may not be comparable to EBITDA reported by
other companies. EBITDA is calculated for the six months ended December 31, 1998
by adjusting the operating loss of $17.9 million for nonrecurring charges of
$55.0 million, depreciation and amortization expenses not included in the
nonrecurring charges of $53.4 million and $46.6 million, respectively, and other
income of $4.3 million not reflected in the nonrecurring charges.
For the six months ended December 31, 1998, cash provided by operating and
financing activities was $68.3 million and $112.0 million, respectively. Cash
used in investing activities was $109.4 million.
<PAGE> 10
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
EBITDA for the six months ended December 31, 1997 was $78.7 million and is
calculated by adjusting operating income of $27.1 million for depreciation and
amortization expenses of $30.9 million and $14.1 million, respectively, and
other income of $6.6 million. There were no nonrecurring charges recorded in the
six months ended December 31, 1997.
For the six months ended December 31, 1997, cash used in operations was $6.3
million, while cash used in investing and financing activities was $24.6 million
and $49.3 million, respectively. The increase in EBITDA is attributable to the
increase in revenue, primarily resulting from the Olsy acquisition.
REVENUES
The Company operates in four geographic segments from which it earns its
revenues. The Company's revenues in these geographic segments are comprised of:
(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 the sales and service of VS, GCOS and Olsy proprietary or
legacy products; and (c) standard products, which are commodity client/server
products (primarily related to Olsy) sold without accompanying services.
Services revenues were $1,054.3 million for the six months ended December 31,
1998, compared to $496.2 million in the comparable period for the prior year.
The increase was primarily attributable to the inclusion of Olsy revenues during
the 1998 period. Networked technology services and solutions revenues were
$874.0 million, compared to $398.3 million in the prior year period. Traditional
services revenues increased to $180.3 million, compared to $97.9 million in the
prior year period. The anticipated decline in traditional VS and GCOS services
was more than offset by the addition of Olsy traditional services revenues.
Product revenues were $763.7 million for the six months ended December 31, 1998,
compared to $154.9 million in the prior year period. Networked technology
product revenues were $293.6 million, compared to $126.8 million in the
comparable period for the prior year. Traditional product revenues were $274.1
million in the six months ended December 31 1998, compared to $28.1 million in
the six months ended December 31, 1997. These increases are primarily the net
result of the acquisition of Olsy, offset by the anticipated decline in
traditional VS and GCOS product revenues. Standard product revenues were $196.0
million for the six months ended December 31, 1998, and primarily resulted from
the acquisition of Olsy. The Company expects revenues associated with
traditional VS and GCOS products and services to decline at a rate exceeding 25%
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.
<PAGE> 11
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
GROSS MARGIN
Services gross margin in the six months ended December 31, 1998 declined to
20.4% from 21.7% in the six months ended December 31, 1997. The modest decline
is the result of the increase in lower-margin maintenance revenues on
multi-vendor services and the decline in higher-margin revenues from traditional
maintenance contracts.
The services gross margin continues to be negatively 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. Although it
is anticipated that these factors will continue to exert pressure on services
gross margin, the Company believes that the effect can be mitigated by the
continuing implementation of cost reduction, integration and consolidation
initiatives.
Product gross margin was 19.5% for the six months ended December 31. 1998,
compared to 23.6% for the comparable period 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, and the inclusion of lower margin standard product sales from Olsy.
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 $5.4 million for the six month period ended
December 31, 1998, compared to $1.5 million in the same prior year period,
representing 0.3% and 0.2% of revenues in the six months ended December 31, 1998
and 1997, respectively. Research and development costs include amounts spent by
Olsy since the acquisition and development by OliRicerca (a minority investee
company) under contract with Wang Global. The Company's current level of
research and development spending is primarily related to the development of
software technology for the banking industry and, to a lesser degree, to its
continuing support for 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 $194.3 million, to
$297.3 million, in the six months ended December 31, 1998. This increase is
attributable to the inclusion of Olsy as well as $14.9 million of nonrecurring
and other operating charges, and compares to $103.0 million in the same prior
year period. During the six months ended December 31, 1998 and 1997, selling,
general and administrative expenses were 16.3% and 15.8% of revenues,
respectively.
<PAGE> 12
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Nonrecurring and other operating charges of $14.9 million included in selling,
general and administrative expenses in the six months ended December 31, 1998
primarily relate to incremental period transition costs incurred to integrate
Olsy into the existing Wang Global structure and which do not qualify as
restructuring charges. Excluding these nonrecurring charges, selling, general
and administrative expenses would have been $282.4 million, or 15.5% of
revenues. The overall reduction in recurring selling, general and administrative
expenses as a percent of revenues reflects the impact to date of consolidation
and integration initiatives undertaken in connection with the Company's recent
acquisitions.
AMORTIZATION
Amortization of acquired intangible assets totaled $44.3 million in the six
months ended December 31, 1998, including $35.0 million of amortization for
intangible assets established in connection with the Olsy acquisition.
ACQUISITION-RELATED, RESTRUCTURING AND REORGANIZATION-RELATED CHARGES
Acquisition-related charges of $35.1 million in the six months ended December
31, 1998 reflect costs associated with combining the operations of Wang and
Olsy, and are comprised of $26.3 million for workforce-related initiatives,
principally severance costs, $1.6 million for excess facilities cost, $6.4
million for the write-down to disposal value of depreciable assets and $0.8
million for other costs. Acquisition related charges of $8.3 million and $26.8
million were provided in the quarters ending September 30, and December 31,
1998, respectively.
INTEREST INCOME AND EXPENSE
Net interest expense of $9.9 million for the six months ended December 31, 1998
is comprised of $14.4 million of interest expense, including $8.4 million
related to the Company's $500 million Revolving Credit Facility with Bankers
Trust Company ("BTC"), $1.3 million of interest payments to Olivetti in
connection with the 1.5 million shares to be issued to Olivetti upon shareholder
approval and $1.4 million for the factoring of accounts receivable, net of $4.5
million of interest income on invested cash balances. This compares to net
interest income of $3.5 million in the six months ended December 31, 1997, which
was comprised of $4.7 million of interest income, net of $1.2 million of
interest expense.
OTHER INCOME AND EXPENSE
Net other income was $4.3 million for the six months ended December 31, 1998,
and primarily consisted of $3.5 million of foreign exchange transaction gains.
This compares to net other income of $6.6 million in the six months ended
December 31, 1997, which primarily consisted of a $6.5 million gain realized on
the sale of certain land and facilities owned by the Company in Billerica,
Massachusetts.
<PAGE> 13
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
INCOME TAXES
The provision for income taxes in the six months ended December 31, 1998 was
$14.2 million, including non-cash tax expense of $9.2 million. The cash portion
of tax expense is attributable to taxes on income of foreign subsidiaries which
do not have available net operating loss carryforwards. The provision for income
taxes in the six months ended December 31, 1997 was $13.4 million, including
$7.8 million of cash expense.
The Company has a net Deferred tax asset balance at December 31, 1998 of $25.3
million, of which $18.7 million is included in Current assets and $6.6 million
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 the six
months ended December 31, 1998 and 1997, $8.3 million and $6.5 million,
respectively, of deferred tax asset was realized. Although realization is not
assured, management believes that the net deferred tax asset will be realized
through the generation of 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. A deferred tax asset was not established in connection with the
acquisition of the Olsy net operating losses as utilization of these tax loss
carryforwards could not be assured.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
For the fiscal 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 the acquisitions of Olsy and I-NET, which was partially offset
by the decline in traditional revenues.
The operating loss for the year ended June 30, 1998 was $243.2 million,
including nonrecurring charges of $266.3 million recorded by the Company during
the year. The operating loss for the year ended June 30, 1997 was $22.8 million
and includes $79.9 million of nonrecurring charges recorded by the Company. The
costs for the year ended June 30, 1998 include $158.8 million related to
reductions in the carrying value of certain intangible assets which were
determined to be impaired, $18.1 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, $2.3 million for transition costs related to integrating Olsy into
the existing Wang structure, and $32.9 million of other operating charges. The
$266.3 million is included in the operating results of the four
<PAGE> 14
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
geographic segments in which the Company operates and in Corporate as follows:
$181.6 million in the United States, $3.4 million in Other Americas, $23.2
million in Europe/Africa/Middle East, $7.5 million in Asia/Pacific and $50.6
million in Corporate.
Excluding the nonrecurring operating charges of $266.3 million and $79.9 million
for the years ended June 30, 1998 and 1997, respectively, operating income was
$23.1 million and $57.1 million, respectively. 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.
EBITDA from continuing operations for the year ended June 30, 1998 was $159.5
million and is calculated by adjusting the loss from operations of $243.2
million for nonrecurring charges of $266.3 million, depreciation and
amortization expenses not included in the nonrecurring charges of $74.0 million
and $55.0 million, respectively, and other income of $7.4 million not reflected
in the nonrecurring charges. For the year ended June 30, 1998, cash used in
operating and investing activities was $10.1 million and $65.0 million,
respectively, and cash provided by financing activities was $59.5 million.
EBITDA from continuing operations for the year ended June 30, 1997 was $159.7
million and is calculated by adjusting the loss from operations of $22.8 million
for nonrecurring charges of $79.9 million, depreciation and amortization
expenses not included in the nonrecurring charges of $63.4 million and $35.4
million, respectively, and other income of $3.8 million not reflected in the
nonrecurring charges. For the year ended June 30, 1997, cash provided by
operations was $287.9 million, and cash used in investing and financing
activities was $214.9 million and $4.0 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
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. 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.
<PAGE> 15
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', was added
to capture separately the commodity client/server 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. Standard product revenues, defined as commodity
client/server products that are sold without accompanying services, 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 and the decline in higher-margin revenues from
traditional maintenance contracts.
Product gross margin was 19.6%, 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, and the inclusion of lower-margin standard product sales
from Olsy.
RESEARCH AND DEVELOPMENT
Research and development costs were $8.7 million, compared to $3.7 million in
the prior year, representing 0.5% and 0.3% of revenues in fiscal 1998 and 1997,
respectively. Research and development costs include amounts spent by Olsy since
the acquisition and development by OliRicera (a minority investee company) under
contract with Wang Global. The Company's research and development spending is
primarily related to development of software technology for the banking industry
in the current year and to continuing support for its traditional VS products
and specialized client/server products sold to the U.S. government for both
years.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $113.1 million, or
46.5%, to $356.3 million including $37.8 million of nonrecurring and other
operating charges, in the year ended June 30, 1998. This 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 including nonrecurring charges were 18.9% and 19.2% of
revenues, respectively.
<PAGE> 16
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.
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.
AMORTIZATION
Amortization of acquired intangible assets totaled $208.7 million in the year
ended June 30, 1998, including $22.8 million for intangible assets established
as part of the Olsy acquisition, representing approximately three and one half
months since date of acquisition, and $158.8 million for the writedown of
intangible assets established in connection with prior business acquisitions
which were determined to be impaired and not recoverable through the anticipated
cash flows of the related businesses. The impairment charge amounts were $130.7
million relating to the goodwill attributable to the I-NET commercial
outsourcing business, $26.3 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 is
currently expected to grow at a rate insufficient to recover the carrying value
of the related goodwill. The impairment charge attributable to the installed
contracts 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
revenues 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 equal to the Company's estimated cost of capital. 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.
<PAGE> 17
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 $52.6 million in the year ended June 30, 1998
include $18.1 million for IPR&D related to Olsy and $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 traditional VS revenue stream. Periodically, the accruals related to
reorganization and restructuring initiatives are reviewed and compared to their
respective requirements. As a result of those reviews, 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 $500.0 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, comprised of $10.9
million of interest expense which is principally the result of amounts
outstanding under the previous $225.0 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, including $9.7 million of non-cash expense. The cash portion of tax
expense 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.
<PAGE> 18
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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. EBITDA from continuing operations for the year
ending June 30, 1997 is calculated by adjusting the loss from operations of
$22.8 million for nonrecurring charges of $79.9 million, depreciation and
amortization expenses not included in the nonrecurring charges of $63.4 million
and $35.4 million, respectively, and other income of $3.8 million not reflected
in the nonrecurring charges. For the year ended June 30, 1997, cash provided by
operations was $287.9 million, and cash used in investing and financing
activities was $264.9 million and $4.0 million, respectively.
EBITDA from continuing operations for the year ending June 30, 1996 is
calculated by adjusting operating income of $86.3 million for depreciation
expense of $45.9 million, amortization expense of $44.7 million, Chapter
11-related credits net of restructuring charges of $1.1 million, and other
income of $8.0 million. For the year ended June 30, 1996, cash provided by
operations and financing activities was $36.5 million and $55.3 million,
respectively, and cash used in investing activities was $98.5 million. 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
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.
<PAGE> 19
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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
intellectual property.
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.
<PAGE> 20
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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
<PAGE> 21
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.
LIQUIDITY AND SOURCES OF CAPITAL
Cash and equivalents were $301.3 million at December 31, 1998, an increase of
$76.3 million from June 30, 1998.
Cash provided by operations during the six months ended December 31, 1998 was
$68.3 million, including $1.2 million used for costs associated with prior
discontinued operations, primarily attributable to operating results and working
capital management. Days Sales Outstanding ("DSO") for accounts receivable was
59 days at December 31, 1998, compared to 82 days at December 31, 1997. The
decrease in DSO is the result of unusually strong cash collections in the
December 1998 quarter, particularly in the United States, which offset the
higher DSO associated with foreign accounts receivable. The Company expects that
due to the significant increase in the foreign composition of the Company's
receivables, the DSO as of December 31, 1998, may not be representative of the
normal DSO levels for the combined company going forward.
<PAGE> 22
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
Cash used in investing activities during the six months ended December 31, 1998
was $109.4 million, and includes $83.2 million used for capital additions,
including $38.0 million for nonconsumable spares and $6.9 million for the
completion of the Company's new corporate headquarters located in Billerica,
Massachusetts.
Cash provided by financing activities was $112.0 million during the six months
ended December 31, 1998, and was comprised of $122.9 million of net borrowings
under the Company's revolving credit facility, plus proceeds of $2.6 million
from employee stock plans, less cash dividends on preferred stock of $6.6
million and $6.9 million of net repayments of other long-term borrowings.
In connection with the acquisition of Olsy, the Company entered into a
multi-currency, revolving credit facility with Bankers Trust Company ("BTC") and
certain other financial institutions on March 13, 1998. The five-year facility
provides borrowings up to $500.0 million, including up to $200.0 million for
letters of credit. At December 31, 1998, $244.8 million of the line was in use,
including $7.8 million for letters of credit. On January 8, 1999, the Company
entered into short-term interest rate swaps for a notional amount of $150
million at an effective fixed rate approximating 6.0% in order to assist in the
management of interest rate exposure.
In addition to normal operating activities, capital expenditures and payment of
preferred dividends, the Company has previously estimated that it would spend
approximately $380 million subsequent to its acquisition of Olsy through the
year 2000 in connection with integration and rightsizing initiatives of the
combined company. To date, $332.6 million has been recognized for these and
certain other activities, of which $133.6 million has been charged to operations
and $199.0 million recorded as an adjustment to the purchase price related to
Olsy. The $332.6 million includes approximately $180 million related to
organizational redundancies, $47 million related to facilities and $106 million
related to systems and other costs. The Company expects that additional charges
are likely in the March 1999 and subsequent quarters. Of the $332.6 million
recognized to date, it is expected that remaining cash requirements of $142
million will be expended as follows: $120 million in 1999 and $22 million in
2000. The Company estimates that the $380 million will be recovered through cost
savings through calendar year 2000.
On November 3, 1998, the Company announced that 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. None had been expended as of
February 28, 1999. 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.
If the Company's shareholders do not approve the issuance of the 1.5 million
shares of the Company's common stock to Olivetti as part of the consideration
for Olsy by June 30, 1999,the Company will be required to
<PAGE> 23
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
With regard to in-process research and development, the Company expects to spend
approximately $3 million in 1999 to attain technological feasibility on projects
that were in process at the date of acquisition in Europe and the United States.
The Company believes that existing cash balances, cash generated from
operations, and its unused, committed lines of credit will provide sufficient
liquidity to meet the Company's operational cash requirements, the integration
and restructuring initiatives previously discussed, and for pursuing additional
potential investments. As part of its business development 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 it has
sufficient access to capital, 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 in March 1998, 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. The
rollout of these systems is well underway and should be completed in the third
quarter 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.
<PAGE> 24
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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:
o Infrastructure, including network and mail servers and network and desktop
systems; and
o 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
are being 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 in the first half of 1999, at a cost of $11 million for
infrastructure and $9 million to bring Olsy up to Wang's common operating
environment.
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 eight service
delivery systems in the Americas into a single service delivery
system model ("SDSM") that has been certified as Y2K compliant. SDSM
refers to a combination of "best of breed" solutions blended with
Internet and EDI technology to support its service delivery. The
Company plans to implement its SDSM in North America in 1999. In
Europe there is a consolidation around the three Olsy legacy service
delivery systems (already Y2K compliant). Between 1999 and 2001,
Wang will migrate from these systems to the compliant SDSM. The
process and timing in the Asia Pacific area is the same as in
Europe.
A contingency plan, based on using Y2K compliant legacy systems,
exists and addresses unforeseen delays in rolling out the SDSM. A
major component of its contingency plan involves enhancing certain
legacy service delivery systems in order to allow them to operate
past 2000. This will allow the International operations 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.
<PAGE> 25
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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. In 1998, the Company implemented SAP R/3
as a replacement for the Olsy subsidiary legacy systems in the
United States and the U.K. During 1999, the Company plans to roll
out the SAP systems to the nineteen 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 an interim step
towards future SAP migration, when those operations reach sufficient
size to justify the SAP investment. Solomon Software has certified
Solomon IV as Y2K compliant. The Company is updating all legacy and
local applications to minimize the risk of any delay in the
deployment plan of SAP and Solomon. This update is expected to be
completed in the second quarter of calendar year 1999.
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 as a result, 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 level of independent testing, the
Company expects its suppliers to extensively test all affected products.
If these suppliers' products prove not to be compliant, then Wang's
service delivery and internal operations would be impacted as described
herein.
<PAGE> 26
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
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 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.
<PAGE> 27
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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
products that will not be Year 2000 complaint 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 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.
All Year 2000 statements contained herein or in any of the Company's prior
public filings or announcements are designated as "Year 2000 Readiness
Disclosures" pursuant to the Year 2000 Information and Readiness Disclosure Act
(P.L. 105-271).
<PAGE> 28
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RISKS AND UNCERTAINTIES
Certain statements in this Annual Report 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,
<PAGE> 29
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 exceeding 25% 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 confronts 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, integrating logistics, marketing, and product offerings to achieve
greater efficiencies and managing 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.
<PAGE> 30
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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.
IMPAIRMENT OF LONG-LIVED ASSETS. In accordance with FAS 121, the Company
periodically evaluates the carrying value of long-lived assets such as goodwill
and other intangible assets resulting from business combinations accounted for
as purchases, in relation to the operating performance and future undiscounted
cash flows, net of taxes, of the underlying business. Significant changes in
future operating and business conditions could result in impairment and material
writedowns in the future, if estimated undiscounted cash flows are projected to
be insufficient to recover the carrying value of the related long-lived assets.
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 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
<PAGE> 31
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 successfully 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.
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
<PAGE> 32
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 six months ended December 31,
1998, the Company derived approximately 11% of its revenues from branches or
agencies of the United States government. Sales to the United States government
and its agencies comprised approximately 20% and 30% of revenues in the years
ended June 30, 1998 and 1997, respectively. The Company derived significant
additional revenues from agencies of various foreign governments. A significant
portion of the revenue from the acquired Olsy operations is attributable to the
sale of products and services to governments of other countries and their
instrumentalities and agencies. For example, sales to the Italian government and
its agencies were approximately 9% of revenues in the six months ended December
31, 1998. A significant portion of the Company's U.S. and non-U.S. government
revenues is derived 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.
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, more than fifty percent of the Company's 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
<PAGE> 33
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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, and 100,000 shares of Series C Junior Participating Preferred
Stock, now of which 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, Series B Preferred Stock, Series C 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
<PAGE> 34
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
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 March 1999 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. In January 1999, the Company changed its current
policies, and commenced using interest rate derivative instruments to manage
exposure to interest rate changes. Accordingly, the Company does not anticipate
significant interest rate exposure in 1999.
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 entered into a
$500.0 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 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.
<PAGE> 35
WANG LABORATORIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS 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.
<PAGE> 36
WANG LABORATORIES, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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 March 1999 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. In January 1999, the Company changed its current
policies, and commenced using interest rate derivative instruments to manage
exposure to interest rate changes. Accordingly, the Company does not anticipate
significant interest rate exposure in 1999.
<PAGE> 37
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 December 31, 1998,
June 30, 1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the six months ended December 31, 1998
and 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 December 31, 1998, June 30, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the six months ended December 31, 1998 and 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.
/s/ Ernst & Young LLP
Boston, Massachusetts
March 22, 1999
1
<PAGE> 38
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -----------------------------------
1998 1998 1997 1996
------------
<S> <C> <C> <C> <C>
Revenues
Services $ 1,054.3 $ 1,269.5 $ 963.9 $ 699.0
Products 763.7 617.5 304.5 314.9
--------- --------- --------- ---------
1,818.0 1,887.0 1,268.4 1,013.9
--------- --------- --------- ---------
Costs and expenses
Cost of services 839.0 998.0 734.4 480.7
Cost of products 614.8 496.5 226.6 216.5
Research and development 5.4 8.7 3.7 5.0
Selling, general and administrative 297.3 356.3 243.2 192.0
Amortization of intangibles -
acquisition and fresh-start 44.3 208.7 47.0 34.5
Acquisition-related charges 35.1 52.6 35.0 --
Chapter 11-related charges (credits) -- -- 1.3 (3.3)
Other restructuring charges -- 9.4 -- 2.2
--------- --------- --------- ---------
Total costs and expenses 1,835.9 2,130.2 1,291.2 927.6
--------- --------- --------- ---------
Operating income (loss) (17.9) (243.2) (22.8) 86.3
--------- --------- --------- ---------
Other income (expense)
Interest income (expense), net (9.9) (2.4) (3.9) 3.9
Other income, net 4.3 8.1 4.4 4.7
--------- --------- --------- ---------
Total other income (expense) (5.6) 5.7 0.5 8.6
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and minority
interests (23.5) (237.5) (22.3) 94.9
Provision (benefit) for income taxes 14.2 13.4 (15.6) 31.4
--------- --------- --------- ---------
Income (loss) from continuing operations
before minority interests (37.7) (250.9) (6.7) 63.5
Minority interests in earnings of
consolidated subsidiaries (2.1) (0.7) -- --
--------- --------- --------- ---------
Income (loss) from continuing operations (39.8) (251.6) (6.7) 63.5
Income (loss) from discontinued
operations, net of taxes -- -- 76.6 (69.0)
--------- --------- --------- ---------
Net income (loss) (39.8) (251.6) 69.9 (5.5)
Dividends and accretion on preferred stock (7.0) (14.1) (14.1) (22.6)
--------- --------- --------- ---------
Net income (loss) applicable to common
stockholders $ (46.8) $ (265.7) $ 55.8 $ (28.1)
========= ========= ========= =========
Per share amounts
Basic
Continuing operations $ (1.01) $ (6.54) $ (0.56) $ 1.13
Discontinued operations -- -- 2.06 (1.91)
--------- --------- --------- ---------
Net income (loss) $ (1.01) $ (6.54) $ 1.50 $ (0.78)
========= ========= ========= =========
Diluted
Continuing operations $ (1.01) $ (6.54) $ (0.56) $ 1.07
Discontinued operations -- -- 2.06 (1.81)
--------- --------- --------- ---------
Net income (loss) $ (1.01) $ (6.54) $ 1.50 $ (0.74)
========= ========= ========= =========
Shares used to compute per share amounts
Basic 46.2 40.6 37.2 36.0
Diluted 46.2 40.6 37.2 38.0
</TABLE>
See notes to the consolidated financial statements.
2
<PAGE> 39
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30, June 30,
(Dollars in millions) 1998 1998 1997
--------------------------------
<S> <C> <C> <C>
Assets
Current assets
Cash and equivalents $ 301.3 $ 225.0 $ 242.2
Accounts receivable, net 881.7 838.7 244.3
Inventories, net 168.5 168.3 14.5
Other current assets 156.8 202.7 53.6
-------- -------- --------
Total current assets 1,508.3 1,434.7 554.6
Depreciable assets, net 236.0 214.1 123.0
Intangible assets, net 502.0 508.9 311.6
Other assets 123.5 91.7 45.6
-------- -------- --------
Total assets $2,369.8 $2,249.4 $1,034.8
======== ======== ========
Liabilities and stockholders' equity
Current liabilities
Debt due within one year $ 34.9 $ 26.3 $ 63.3
Accounts payable 538.1 451.5 64.4
Accrued expenses and other current
liabilities 661.0 742.2 231.3
Deferred service revenue 173.7 164.6 69.5
-------- -------- --------
Total current liabilities 1,407.7 1,384.6 428.5
-------- -------- --------
Long-term liabilities
Debt 250.7 116.9 --
Other long-term liabilities 266.0 272.6 98.0
-------- -------- --------
Total long-term liabilities 516.7 389.5 98.0
-------- -------- --------
Commitments and contingencies (See Notes)
Minority interests 10.7 6.6 --
-------- -------- --------
Series A preferred stock 86.5 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 138.3 138.3 138.3
Common stock, $0.01 par value,
100,000,000 shares authorized; 46,334,047,
46,150,302, and 38,008,004 shares outstanding
at December 31, 1998, June 30, 1998 and
June 30, 1997, respectively 0.5 0.5 0.4
Capital in excess of par value 522.5 525.1 291.4
Accumulated other comprehensive income (loss) (11.0) (19.1) (3.7)
Accumulated deficit (302.1) (262.3) (3.6)
-------- -------- --------
Total stockholders' equity 348.2 382.5 422.8
-------- -------- --------
Total liabilities and stockholders'
equity $2,369.8 $2,249.4 $1,034.8
======== ======== ========
</TABLE>
See notes to the consolidated financial statements.
3
<PAGE> 40
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Year Ended June 30,
Ended ---------------------------
December 31, 1998 1998 1997 1996
-----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Income (loss) from continuing operations $ (39.8) $(251.6) $ (6.7) $ 63.5
Depreciation 53.4 74.0 67.6 45.9
Amortization 46.6 215.4 49.8 44.7
Gain on asset sales -- (8.7) (2.9) (2.3)
Non-cash provision (benefit) for income taxes 9.2 9.7 (22.8) 30.7
Non-cash compensation expense -- -- 5.6 --
Acquisition-related charges 35.1 52.6 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 (76.7) (59.6) (30.1) (44.5)
------- ------- ------- -------
27.8 41.2 96.8 136.9
------- ------- ------- -------
Changes in other accounts affecting operations
Accounts receivable 7.1 (19.1) 6.4 10.8
Inventories (9.5) 21.5 6.6 7.1
Other current assets (12.8) 22.4 3.7 3.6
Accounts payable and other current liabilities 68.7 (63.5) (43.1) (48.1)
Other (11.8) (3.2) 4.1 3.0
------- ------- ------- -------
Net changes in other accounts
affecting operations 41.7 (41.9) (22.3) (23.6)
------- ------- ------- -------
69.5 (0.7) 74.5 113.3
Proceeds from sale of discontinued operation, net -- -- 249.2 --
Cash used in discontinued operations (1.2) (9.4) (35.8) (76.8)
------- ------- ------- -------
Cash provided by (used in) operations 68.3 (10.1) 287.9 36.5
------- ------- ------- -------
INVESTING ACTIVITIES
Investment in depreciable assets (83.2) (91.1) (55.0) (43.4)
Investment in capitalized software (1.4) -- -- (0.4)
Proceeds from asset sales -- 25.6 10.4 5.0
Business acquisitions, net of cash acquired (23.1) 8.4 (170.1) (49.8)
Other (1.7) (7.9) (0.2) (9.9)
------- ------- ------- -------
Cash used in investing activities (109.4) (65.0) (214.9) (98.5)
------- ------- ------- -------
FINANCING ACTIVITIES
Net borrowings under
line-of-credit agreement 122.9 110.6 -- --
Net increase (decrease) in other
long-term borrowings (6.9) 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 2.6 11.9 9.7 5.2
Dividends paid on preferred stock (6.6) (13.4) (13.4) (8.3)
Other -- (1.8) 0.1 (0.8)
------- ------- ------- -------
Cash provided by (used in) financing activities 112.0 59.5 (4.0) 55.3
------- ------- ------- -------
Effect of changes in foreign exchange rates on cash 5.5 (1.6) (2.1) (0.4)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 76.4 (17.2) 66.9 (7.1)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 225.0 242.2 175.3 182.4
------- ------- ------- -------
CASH AND EQUIVALENTS AT END OF YEAR $ 301.4 $ 225.0 $ 242.2 $ 175.3
======= ======= ======= =======
</TABLE>
See notes to the consolidated financial statements.
4
<PAGE> 41
WANG LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in Accumulated Retained
Convertible Excess Other Earnings
Preferred Common of Par Comprehensive (Accumulated
(Dollars in millions) Stock Stock Value Income/(loss) Deficit) Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 $ -- $ 0.3 $291.2 $ (2.7) $(68.0) $220.8
Net loss (5.5) (5.5)
Currency translation (0.3) (0.3)
Minimum Pension Liability 2.2 2.2
------
Comprehensive income/(loss) (3.6)
------
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
------ ------ ------ ------ ------ ------
Balance June 30, 1996 138.3 0.4 278.7 (0.8) (73.5) 343.1
Net income 69.9 69.9
Currency translation (2.9) (2.9)
------
Comprehensive income/(loss) 67.0
------
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)
------ ------ ------ ------ ------ ------
Balance June 30, 1997 138.3 0.4 291.4 (3.7) (3.6) 422.8
Net loss (251.6) (251.6)
Currency translation (15.4) (15.4)
------
Comprehensive income/(loss) (267.0)
------
Stock and stock
equivalents issued in
business acquisition 0.1 229.6 229.7
Stock plans (892,298
shares) 11.1 11.1
Dividends and accretion on
preferred stock (7.0) (7.1) (14.1)
------ ------ ------ ------ ------ ------
Balance June 30, 1998 138.3 0.5 525.1 (19.1) (262.3) 382.5
Net loss (39.8) (39.8)
Currency translation 8.1 8.1
------
Comprehensive income/(loss) (31.7)
------
Stock and stock
equivalents issued in
business acquisition 0.4 0.4
Stock plans (183,745
shares) 4.0 4.0
Dividends and accretion on
preferred stock (7.0) (7.0)
------ ------ ------ ------ ------- ------
Balance December 31, 1998 $138.3 $ 0.5 $522.5 $(11.0) $(302.1) $348.2
====== ====== ====== ====== ======= ======
</TABLE>
See notes to the consolidated financial statements.
5
<PAGE> 42
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.
Effective July 1, 1998, the Company changed its fiscal year from a twelve month
period ending June 30 to a twelve month period ending December 31. The
consolidated financial statements include presentation of the transition period
beginning on July 1, 1998 and ending on December 31, 1998.
The following table presents certain financial information for the six months
ended December 31, 1998 and 1997, respectively (amounts in millions except per
share amounts):
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Revenues $1,818.0 $651.1
Gross Profit $ 364.2 $144.2
Income (loss) from continuing
operations before income taxes
and minority interests $ (23.5) $ 37.2
Provision for income taxes $ 14.2 $ 13.4
Income (loss) from continuing
operations $ (39.8) $ 23.8
Net income (loss) applicable to
common stockholders $ (46.8) $ 16.7
Diluted earnings (loss) per
common share $ (1.01) $ 0.42
Weighted average common shares 46.2 40.3
</TABLE>
6
<PAGE> 43
WANG LABORATORIES, INC. AND SUBSIDIARIES
RESTATEMENT OF FINANCIAL STATEMENTS
NOTE A--(CONTINUED)
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.
FOREIGN CURRENCY
Translation: For 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. The local currency for all foreign subsidiaries is considered to be the
functional currency and accordingly, translation adjustments are reported in
other comprehensive income. Exchange gains and losses on intercompany balances
of a long-term investment nature are also recorded as translation adjustments
and are reported in other comprehensive income.
Forward Exchange Contracts: The Company from time to time enters into forward
exchange contracts as a hedging instrument to reduce its exposure to foreign
currency risk from certain intercompany and third party transactions denominated
in foreign currency. A forward exchange contract obligates the Company to
exchange predetermined amounts of specified foreign currencies at specified
exchange rates on specified dates or to make an equivalent payment in U.S.
dollars or in a different currency equal to the value of such exchange. The
discounts or premiums (the difference between the spot exchange rate and the
forward exchange rate at inception of the contract) on these hedging instruments
are accreted or amortized to other expenses over the contract lives using the
straight-line method while realized and unrealized gains and losses resulting
from changes in the spot exchange rate (including those from open, matured, and
terminated contracts), are included in other income and offset gains and losses
on foreign currency assets or liabilities that are hedged. The Company does not
have open foreign exchange contracts at December 31, 1998.
Realized and unrealized foreign currency gains (losses)included in other income
are $3.5 million, $0.3 million,($0.6) million and ($0.1) million for the six
months ended December 31, 1998 and for the years ended June 30, 1998, 1997 and
1996, respectively.
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 $4.4 million, $9.2 million and
$12.7 million at December 31, 1998 and June 30, 1998 and 1997, respectively.
These restricted cash balances generally relate to normal trade practices and
arrangements and in the year ended June 30, 1997, also related to statutory
reserves for the Company's insurance subsidiaries.
7
<PAGE> 44
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 $85.7 million, $100.4 million and $77.7 million at December 31, 1998 and
June 30, 1998 and 1997, respectively, due from the United States government and
its agencies. Trade receivables from the Italian government and its agencies,
primarily attributable to the acquisition of Olsy, were $115.0 million and
$169.0 million at December 31, 1998 and June 30, 1998, respectively.
INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or
market.
DEPRECIABLE ASSETS: Property, plant and equipment, including spare parts, are
stated at cost less accumulated depreciation. Depreciation is computed
principally by use of the straight-line method.
Depreciable lives are summarized as follows:
<TABLE>
<S> <C>
Buildings and improvements 5 - 40 years
Machinery and equipment 3 - 10 years
Spare parts 3 - 5 years
</TABLE>
INTANGIBLE ASSETS: Intangible assets, including those identified as a result of
purchase accounting, and the related amortizable lives are as follows:
<TABLE>
<S> <C>
Trademarks 1-2 years
License agreements 3-5 years
Computer software 3-7 years
Installed base - service 5-8 years
Assembled workforce 7-10 years
Patents 15 years
Goodwill 15-25 years
</TABLE>
The Company periodically evaluates the carrying value of intangible assets to
determine if impairment exists based upon estimated undiscounted future cash
flows, net of taxes, 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, net of taxes, and is charged to expense
in the period identified.
Trademarks include rights to use the obtained Olsy or Olivetti name in certain
countries by the Company in connection with the Olsy acquisition.
Amortization is computed principally by use of the straight line method with the
exception of computer software, which is amortized over the greater of (a) the
ratio of current gross revenues for a product to total current and anticipated
future gross revenues for that product or (b) the straight-line method.
Unamortized computer software at December 31, 1998 and June 30, 1998 was $29.2
million and $37.8 million, respectively. Total amounts charged to expenses
during the six months ended December 31, 1998, and the year ended June 30, 1998
were $11.2 million and $5.4 million, respectively. Computer software in years
prior to the year ended June 30, 1998 was not material.
8
<PAGE> 45
WANG LABORATORIES, INC. AND SUBSIDIARIES
RESTATEMENT OF FINANCIAL STATEMENTS
NOTE A--(CONTINUED)
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.
INCOME TAXES: Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for 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.
STOCK BASED COMPENSATION: The Company continues 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 and has
elected the disclosure-only alternative permitted under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS
123"). 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.
EARNINGS PER SHARE: Basic earnings per share is calculated based on the weighted
average number of common shares outstanding. 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 1998, the Financial Accounting
Standards Board (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.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income", ("FAS 130") and Statement No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("FAS 131") and in February 1998 the FASB
issued Statement No. 132, "Employers' Disclosure about Pensions and Other
Post-retirement Benefits" ("FAS 132"). These recent accounting pronouncements
were adopted by the Company during the six months ended December 31, 1998. 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
132 establishes standards for reporting pensions and other post-retirement
benefits and supercedes the disclosure requirements in FASB Statement No. 87,
"Employers' Accounting for Pensions", No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and No. 106, "Employers' Accounting for Post-retirement
Benefits Other than Pensions".
9
<PAGE> 46
WANG LABORATORIES, INC. AND SUBSIDIARIES
RESTATEMENT OF 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.
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
upon shareholder approval) with a value of $197.2 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 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 $32.5 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 24 months ended December 31, 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.
The value of the shares was recorded at a discount of 20% 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, also
discounted by 20%, 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 supported 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.
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 APB 16.
A summary of the acquisition, follows (in millions) :
<TABLE>
<S> <C>
Cash, including transaction costs $ 90.2
Common stock and stock equivalents 197.2
Stock appreciation rights 32.5
-------
Total consideration 319.9
Estimated fair value of net liabilities
assumed 84.2
-------
Excess of purchase price over fair value of net
tangible assets acquired $ 404.1
=======
</TABLE>
10
<PAGE> 47
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
The excess of the purchase price over the fair value of the net tangible assets
acquired has been recorded based on a preliminary purchase price allocation
including an accrued restructuring liability of $199.0 million. Finalization of
the allocation of the purchase price to assets acquired and liabilities assumed
is subject to settlements with labor representatives, and other analyses of the
fair values of assets acquired and liabilities assumed. The purchase price
allocation is based on the report of an independent appraiser and includes $18.1
million for acquired in-process research and development ("IPR&D") for projects
that had not yet reached technological feasibility and had no future alternative
uses. This allocation represents the estimated fair value based on the present
value of future cash flows related to the IPR&D projects. Accordingly, these
costs were charged to expense in the June 1998 quarter upon completion of the
appraisal.
Olsy's IPR&D value is comprised of one primary R&D program focused on operating
on a Microsoft Distributed interNet Architecture for Financial Services
("Microsoft DNA FS"). This program is supported by several individual projects
which include the introduction of certain new technologies. At the acquisition
date, Olsy's IPR&D projects ranged in completion from 10% to 95%, and total
continuing R&D commitments to complete the projects were expected to be
approximately $11 million. Remaining development efforts for the Olsy programs
are complex and include the development and advancement of advance software
solutions.
The value assigned to purchased IPR&D was determined by estimating the costs to
develop the purchased in-process technologies into commercially viable products,
estimating the resulting cash flows from the projects and discounting the net
cash flows to their present value. The revenue projections used to value the
IPR&D projects are based on estimates of relevant market sizes and growth
factors, expected trends in technology and the nature and expected timing of new
product introductions by the Company and its competitors.
The rates utilized to discount the net cash flows to their present value were
25% based on consideration of the weighted average cost of capital adjusted for
certain risks associated with the in-process technology.
The excess of purchase price over the fair value of the net tangible assets
acquired was allocated to specific intangible asset categories as follows (in
millions):
<TABLE>
<S> <C>
In-process research and development $ 18.1
Capitalized software 43.2
Trademarks 57.0
Goodwill 285.8
-------
$ 404.1
=======
</TABLE>
The Company has recorded a total of $199.0 million of restructuring and
integration liabilities, primarily to eliminate redundancies, in connection with
the purchase accounting for the Olsy acquisition, of which $138.6 million is for
workforce, $26.2 million is for facilities, and $34.2 million is for other
costs. These restructuring and integration initiatives are expected to be
completed within one year.
Under certain conditions, costs related to the acquired Olsy business will be
accounted for as an adjustment of the acquisition cost at the time the formal
plan of restructuring is completed. Integration-related costs attributable to
Wang are being accounted for as charges to operations in the periods they are
determined and approved.
11
<PAGE> 48
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
The following pro forma results of operations have been prepared as though the
Olsy acquisition had occurred as of the beginning of the fiscal year prior to
acquisition. This pro forma financial information does not purport to be
indicative of the results of operations that would have been attained had the
acquisition been made as of those dates or of results of operations that may
occur in the future (in millions except per share data):
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues $ 3,527.7 $ 3,921.7
Loss from continuing operations $ (348.1) $ (228.0)
Loss attributable to common stockholders $ (362.2) $ (242.1)
Net loss per share applicable to common
stockholders $ (7.69) $ (5.26)
</TABLE>
I-NET
In August 1996, the Company acquired all of the outstanding shares of I-NET, 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. 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, and increased the principal balance through charges to
interest expense through the settlement date.
Pursuant to a settlement reached on November 13, 1997, the total amount due
under the note was reduced to $51.2 million and the Company reversed the unpaid
balance of $13.3 million of the notes during 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 fair value of
net tangible assets acquired is being amortized using the straight line method
over a period of twenty-five years (See Note E).
A summary of the acquisition follows (in millions):
<TABLE>
<S> <C>
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 liabilities assumed 46.7
-------
Excess of purchase price over fair value of net tangible
assets acquired $ 219.5
=======
</TABLE>
12
<PAGE> 49
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
The following pro forma results of operations have been prepared as though the
I-NET acquisition had occurred as of the beginning of the fiscal year prior to
acquisition. 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).
<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>
From time to time the Company acquires individually immaterial businesses and
has accounted for such business combinations under the purchase method. These
acquisitions do not have a material effect on the Company's results from
operations or financial position.
ACQUISITION-RELATED AND RESTRUCTURING CHARGES: During the six months ended
December 31, 1998, the Company recorded a $35.1 million integration charge.
During the year ended June 30, 1998, the Company recorded integration and
restructuring charges totaling $62 million, of which $38.8 million was recorded
in the fourth quarter, and $23.2 million was recorded in the third quarter. Of
the total charge, $52.6 million is recorded in acquisition-related charges
(including the $18.1 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 for the six months ended December
31, 1998 and the year ended June 30, 1998 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 and are expected to be
completed within one year. The acquisition-related and other restructuring
charges recorded for the six months ended December 31, 1998 and the year ended
June 30, 1998 consist of the following (in millions):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
December 31, June 30,
1998 1998
------- -------
<S> <C> <C>
Workforce $ 26.3 $ 14.4
Facilities 1.6 18.9
Depreciable assets 6.4 5.5
Other 0.8 5.1
------- -------
35.1 43.9
In-process research and development -- 18.1
------- -------
Total $ 35.1 $ 62.0
======= =======
</TABLE>
Workforce 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 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
13
<PAGE> 50
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
operations. Depreciable asset charges were provided to recognize, at net
realizable value, the write-down to disposal value of existing assets taken out
of service.
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 $110 million during the next 12 months and $15 million thereafter.
The Company originally estimated a total reduction in workforce of approximately
3,500 employees, of which 2,400 were to be released in connection with the Olsy
purchase accounting transaction, 1,000 were to be released in connection with
the integration charge to operations and 100 were to be released in connection
with the restructuring charge to operations. As of December 31, 1998,
approximately 2,700 employees had been released relative to these and previously
recorded initiatives.
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 the year
ended June 30, 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.
The acquisition-related charges during the six months ended December 31, 1998
and each of the years ended June 30, 1998, 1997 and 1996 is summarized in the
following table (in millions):
<TABLE>
<CAPTION>
Activity for the Year Ended June 30, 1996
----------------------------------------------------------------------
Charges/
(reversals)
changes
in Balance
Balance estimates June
June 30, and new Purchase Currency 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 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>
14
<PAGE> 51
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
<TABLE>
<CAPTION>
Activity for the Year Ended June 30, 1997
----------------------------------------------------------------------
Charges/
(reversals)
changes
in Balance
Balance estimates June
June 30, and new Purchase Currency 30,
1996 initiatives Accounting Utilization Other Translation 1997
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Facilities $ 1.0 $ 7.1 $ -- $ (1.4) $(0.1) $ -- $ 6.6
Depreciable assets 0.8 3.2 4.6 (4.4) (0.1) -- 4.1
Workforce 16.4 20.0 4.8 (18.1) 0.1 (0.6) 22.6
Other 5.8 6.4 1.0 (8.9) 0.3 -- 4.6
----- ----- ----- ------ ----- ----- -----
24.0 36.7(A) 10.4 (32.8) 0.2 (0.6) 37.9
Less amounts
included in
discontinued
operations (2.0) (1.7) -- 3.7 -- -- --
----- ----- ----- ------ ----- ----- -----
Acquisition-related
charges-continuing
operations $22.0 $35.0 $10.4 $(29.1) $ 0.2 $(0.6) $37.9
===== ===== ===== ====== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Activity for the Year Ended June 30, 1998
-----------------------------------------------------------------------------------
Charges/(reversals)
Balance changes in Balance
June 30, estimates and new Purchase Currency June 30,
1997 initiatives Accounting Utilization Other Translation 1998
---------------------------------------------------------------------------------------------------------
Integration-
Restructuring Related
Charges Charges
------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Facilities $ 6.6 $ 0.3 $ 18.6 $ 26.2 $(15.3) $ 0.7 $ (0.1) $ 37.0
Depreciable
assets 4.1 0.1 5.4 13.8 (1.6) -- (0.1) 21.7
Workforce 22.6 8.0 6.4 138.6 (35.9) (6.0) (0.7) 133.0
Other 4.6 1.0 22.2 20.4 (24.6) 5.6 0.1 29.3
------ ------ ------ ------ ------ ------ ------ ------
Acquisition-
related and
restructuring
charges $ 37.9 $ 9.4(A) $ 52.6(A) $199.0 $(77.4) $ 0.3 $ (0.8) $221.0
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Activity for the Six Months Ended December 31, 1998
-----------------------------------------------------------------------------------
Charges/(reversals)
Balance changes in Balance
June 30, estimates and new Purchase Currency December 31,
1998 initiatives Accounting Utilization Other Translation 1998
---------------------------------------------------------------------------------------------------------
Integration-
Restructuring Related
Charges Charges
------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Facilities $ 37.0 $ -- $ 1.6 $ -- $ (3.7) 0.6 $ 0.8 $ 36.3
Depreciable
assets 21.7 -- 6.4 -- (13.4) (0.9) 0.4 14.2
Workforce 133.0 -- 26.3 -- (61.2) 0.4 5.2 103.7
Other 29.3 -- 0.8 -- (11.8) (0.3) 0.4 18.4
------ ------ ------ ------ ------ ------ ------ ------
Acquisition-
related and
restructuring
charges $221.0 $ -- $ 35.1(A) $ -- $(90.1) $ (0.2) $ 6.8 $172.6
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
15
<PAGE> 52
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B -- (CONTINUED)
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
Six Months
Ended
December 31,
1998 1998 1997 1996
------------ ------------------------------- ------- ------
Integration
Integration Restructuring Related
Charges Charges Charges
------- ------- -------
<S> <C> <C> <C> <C> <C>
(A) Comprised of:
Initial charges $ 35.1 $ 9.4 $ 53.7 $ 37.7 $ 30.8
Increases of estimated
integration accruals
recognized in income -- -- -- -- 2.8
Reversals of estimated
integration accruals
recognized in income -- -- (1.1) (1.0) (2.8)
------ ------ ------ ------ ------
$ 35.1 $ 9.4 $ 52.6 $ 36.7 $ 30.8
====== ====== ====== ====== ======
</TABLE>
The December 31, 1998 and June 30, 1998 balances of acquisition-related reserves
are classified as follows (in millions):
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------ ------ ------
<S> <C> <C> <C>
Depreciable assets $ 14.2 $ 21.7 $ 4.1
Accounts payable, accrued expenses
and other 143.1 181.2 26.0
Non-current liabilities 15.3 18.1 7.8
------ ------ ------
$172.6 $221.0 $ 37.9
====== ====== ======
</TABLE>
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 sale 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):
<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>
16
<PAGE> 53
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
Six Months
Ended Year Ended June 30,
December ----------------------------
31, 1998 1997 1996
1998
----------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) from continuing operations $ (39.8) $(251.6) $ (6.7) $ 63.5
Dividends and accretion on 11% Exchangeable
Preferred Stock (14.6)
Dividends and accretion on Series A
Preferred Stock (2.3) (4.8) (4.8) (4.8)
Dividends on Series B Preferred Stock (4.7) (9.3) (9.3) (3.2)
------- ------- ------- -------
Numerator for basic and diluted earnings
per share - Income (loss) from continuing
operations available to Common
Shareholders $ (46.8) $(265.7) $ (20.8) $ 40.9
======= ======= ======= =======
Denominator:
Denominator for basic earnings per share -
weighted average shares 46.2 40.6 37.2 36.0
Effect of dilutive securities:
Stock options -- -- -- 1.8
Stock warrants -- -- -- 0.2
------- ------- ------- -------
Dilutive potential common shares -- -- -- 2.0
------- ------- ------- -------
Denominator for diluted earnings per share
- adjusted weighted-average shares and
assumed conversions 46.2 40.6 37.2 38.0
======= ======= ======= =======
Basic earnings (loss) per share-continuing
operations $ (1.01) $ (6.54) $ (0.56) $ 1.13
------- ------- ------- -------
Diluted earnings per share - continuing
operations $ (1.01) $ (6.54) $ (0.56) $ 1.07
======= ======= ======= =======
</TABLE>
Options and warrants to purchase approximately 15.1 million shares of common
stock, were excluded from the computation of diluted earnings per share for all
net loss periods as their effect would be antidilutive.
The 6,000,000 SARs issued to Olivetti (5,000,000)and Microsoft (1,000,000) (See
Note I) were excluded from the computation of diluted earnings per share for all
net loss periods as their effect would be antidilutive.
NOTE E -- IMPAIRMENT LOSSES ON LONG-LIVED ASSETS
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"), requires impairment losses to be recorded on long-lived assets used
in operations when indicators of impairment are present and the undiscounted
cash flows, net of taxes, 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, net of taxes, of
the underlying business.
17
<PAGE> 54
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E-- (CONTINUED)
During the year ended June 30, 1998, the Company identified an impairment of the
goodwill associated with the commercial outsourcing business of I-NET, based
upon estimated undiscounted cash flows, net of taxes, over the remaining useful
life of the asset. The impairment, which was primarily in the United States
segment, was the result of significantly lower than expected revenue and margin
growth in the post acquisition period which were 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,
net of taxes, at the Company's weighted average cost of capital over the
remaining useful life of the asset and resulted in an impairment charge of
$130.7 million which was charged to amortization expense in June 1998. The
remaining net asset of $2.3 million associated with commercial outsourcing
business and 69.2 million associated with the Federal business, which is not
impaired, will be amortized over its remaining useful life based on current
projections and the Company's plans for this business.
Also during the year ended June 30, 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 mainframe systems to networked technology. The cash flows
associated with the installed customer service base and assembled workforce
acquired in the Bull purchase were discounted, net of taxes, at the Company's
weighted average cost of capital over the remaining useful life of the asset and
resulted in charges of $21.4 million (United States segment) and $4.9 million
($3.4 million in United States segment, $0.8 million in Asia Pacific segment and
$0.7 million in Other Americas segment) respectively. The remaining balances of
$9.4 million relating to the installed customer service base and $2.2 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.
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 carrying value of $6.9 million. In order
to determine the carrying value of these assets, the Company discounted future
cash flows, net of taxes, 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 intangible assets is included with Amortization of
intangibles - acquisition and fresh-start in the Consolidated Statements of
Operations.
18
<PAGE> 55
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E -- (CONTINUED)
The Company periodically evaluates the carrying value of long-lived assets in
relation to the operating performance and future undiscounted cash flows, net of
taxes, of the underlying business. While the Company believes that its
long-lived assets are currently stated at appropriate carrying values,
significant changes in future operating and business conditions could result in
material impairment writedowns in the future.
NOTE F -- 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
Microsoft on or after May 30, 2002 at $1,000 per share plus accrued and unpaid
dividends. Redemption and liquidation preference of the preferred stock is $90.0
million. The initial carrying value of $84.0 million is being accreted to the
redemption amount over the life of the issue.
The Series A Preferred Stock is convertible into Common Stock of the Company at
$23.00 per share, subject to adjustment. The Company has reserved approximately
3.9 million shares of common stock for such conversion. 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. Cash dividends
outstanding as of December 31, 1998 are approximately $1.0 million. The Company
may redeem the Series A Preferred Stock with cash or with Common Stock.
BORROWING ARRANGEMENTS:
Long term debt consisted of (in millions):
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revolving Credit Facility $237.0 $110.6 $ --
Other borrowings 47.4 -- --
Capital lease obligations 1.2 32.6 --
Notes payable to former shareholders
of I-NET, non-interest bearing,
paid November 1997 -- -- 63.3
------ ------ ------
285.6 143.2 63.3
Less current maturities 34.9 26.3 63.3
------ ------ ------
$250.7 $116.9 $ --
====== ====== ======
</TABLE>
Interest paid amounted to $9.8 million, $8.1 million, $2.9 million and $2.4
million for the six months ended December 31, 1998 and the years ended June 30,
1998, 1997 and 1996, respectively, and is primarily related to the revolving
credit facility described below.
19
<PAGE> 56
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F-- (CONTINUED)
In connection with the acquisition of Olsy, 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. Weighted Average interest rate on
various BTC loans effective at December 31, 1998 was 6.04%. 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,
representing that portion of the facility used to replace the existing $225.0
million facility. The BTC agreement contains various financial covenants,
including those relating to operating results, working capital, net worth and
level of indebtedness. The Company was in compliance with these covenants as of
December 31, 1998. In addition to providing financing for the Olsy acquisition,
the credit facility will be used for general corporate purposes. As of December
31, 1998, borrowings of $237.0 million and letters of credit aggregating $7.8
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. In January 1999, the Company entered into
short term interest rate swaps for a notional amount of $150 million at an
effective fixed rate approximating 6.0% in order to assist in the management of
interest rate exposure.
NOTE G -- INCOME TAXES
Pretax income/(loss) from continuing operations is as follows (in millions):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31 --------------------------------
1998 1998 1997 1996
------- -------- ------- ------
<S> <C> <C> <C> <C>
U.S. $ (17.1) $ (227.7) $ (49.8) $ 56.0
Non-U.S. (6.4) (9.8) 27.5 38.9
------- -------- ------- ------
Total $ (23.5) $ (237.5) $ (22.3) $ 94.9
======= ======== ======= ======
</TABLE>
The provision for income taxes consisted of (in millions):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31 -------------------------------
1998 1998 1997 1996
------ ------ ------- ------
<S> <C> <C> <C> <C>
Continuing operations $ 14.2 $ 13.4 $ (15.6) $ 31.4
Discontinued operations -- -- 65.9 (20.4)
------ ------ ------- ------
Net income tax provision $ 14.2 $ 13.4 $ 50.3 $ 11.0
====== ====== ======= ======
</TABLE>
20
<PAGE> 57
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- (CONTINUED)
The income tax provision (benefit) from continuing operations consists of the
following:
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31 -------------------------------
1998 1998 1997 1996
------ ------ -------- ------
<S> <C> <C> <C> <C>
Current:
Federal $ -- $ 0.1 $ 3.5 $ --
Non-US 5.0 3.6 2.2 0.7
State -- -- 1.5 --
Deferred:
Federal -- -- (23.3) 20.4
Non-US 9.2 9.7 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
------ ------ -------- ------
$ 14.2 $ 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):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31 ---------------------------------
1998 1998 1997 1996
------ ------- ------- -------
<S> <C> <C> <C> <C>
Taxes (benefit) at statutory rate
of 35% $ (8.2) $ (83.1) $ (7.8) $ 33.2
Amortization of excess
reorganization value -- -- 0.9 2.4
Non-deductible expenses 8.3 60.1 1.8 2.0
Foreign tax differential (4.8) 2.2 (0.6) 0.7
State taxes -- -- (2.6) --
Loss carryforwards not currently
utilizable 21.2 36.0 1.7 3.7
Loss carryforwards utilized (3.0) (4.2) (6.7) (5.3)
Change in Valuation allowance -- -- -- (2.5)
Other, net 0.7 2.4 (2.3) (2.8)
------ ------- ------- -------
$ 14.2 $ 13.4 $ (15.6) $ 31.4
====== ======= ======= =======
</TABLE>
21
<PAGE> 58
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- (CONTINUED)
The significant components of deferred tax assets and liabilities are as follows
(in millions):
<TABLE>
<CAPTION>
Six Months
Ended
December Year Ended June 30,
31, --------------------
1998 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net operating loss and credit carryforwards $ 655.4 $ 667.7 $ 477.2
Accrued restructuring expenses 67.3 91.0 43.7
Capitalized research and development
expenses 3.5 2.1 8.3
Depreciation 19.9 34.1 17.8
Provision for doubtful accounts 3.9 13.3 --
Other 33.6 41.0 52.1
--------- --------- ---------
Gross deferred tax assets 783.6 849.2 599.1
--------- --------- ---------
Goodwill and other acquired intangibles -- (10.9) (12.7)
Other (29.8) (32.5) (57.8)
--------- --------- ---------
Gross deferred tax liabilities (29.8) (43.4) (70.5)
--------- --------- ---------
Valuation allowance (728.5) (772.2) (488.5)
--------- --------- ---------
Net deferred tax asset $ 25.3 $ 33.6 $ 40.1
========= ========= =========
</TABLE>
The $46.3 million decrease in valuation allowance in the six months ended
December 31, 1998 is primarily due to realization of deductible restructuring
expenses and net operating loss carryforwards.
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. 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. The Company has tax planning strategies to prevent tax net
operating loss carryforwards from expiring unused.
Under fresh start reporting, any tax benefits for cumulative temporary
differences and tax basis net operating loss carryforwards existing at September
30, 1993, do not reduce the tax provision for income taxes, but instead, reduce
reorganization value in excess of amounts allocated to identifiable intangible
assets to zero, and thereafter increase capital in excess of par value.
22
<PAGE> 59
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G -- (CONTINUED)
Tax benefits which are recognized through a reduction in the valuation allowance
will be recorded as follows (in millions):
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Reduction in income tax provision 421.8
Increase in capital in excess of par value 274.5
Reduction of goodwill and other non-current
intangible assets 32.2
-------
$ 728.5
=======
</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 $187.8 million
of cumulative earnings on non-U.S. subsidiaries at December 31, 1998, since such
amounts are considered to be permanently reinvested.
At December 31, 1998, the Company and its subsidiaries have tax basis net
operating loss carryforwards of approximately $1.6 billion and tax credit
carryforwards of approximately $45.8 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 $ 150.1 $ 37.6 $ 448.2
Non-U.S. tax loss
carryforwards $ 51.8 $ 65.2 $ 96.2 $ 81.9 $ 62.6 $ 541.2
Investment tax
credits and
R&D tax credit
carryforwards $ 20.7 $ 13.8 $ 3.4 $ 4.2 $ 3.2 $ .5
</TABLE>
Net taxes paid amounted to $4.3 million for the six months ended December 31,
1998, $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 H -- POSTRETIREMENT BENEFITS
DEFINED BENEFIT PLANS (U.S.): The Company has four frozen defined benefit plans
in the United States, two of which were frozen during the period ended December
31, 1998. As a result no increase in compensation is assumed subsequent to the
dates that the plans were frozen. Amounts related to the Olsy acquisition are
included in the amounts effective from the date of acquisition.
23
<PAGE> 60
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- (CONTINUED)
The benefit obligation, plan assets and funded status are as follows (in
millions):
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Change in Benefit Obligation
Net benefit obligation at
beginning of period $ 150.4 $ 99.3 $ 93.9
Service cost 0.4 0.6 --
Interest cost 5.2 8.5 7.8
Actuarial (gain)loss (0.7) 20.9 2.5
Curtailments (1.0) -- --
Settlements (0.7) -- --
Acquisitions -- 26.6 --
Gross benefits paid (3.2) (5.5) (4.9)
-------- -------- --------
Net benefit obligation at end of
period 150.4 150.4 99.3
-------- -------- --------
Change in Plan Assets
Fair value of plan assets at
beginning of period 144.5 114.4 99.6
Actual return on plan assets 1.0 19.8 19.7
Employer contributions 1.1 0.4 --
Settlements (0.6) -- --
Acquisitions/divestitures -- 15.4 --
Gross benefits paid (3.2) (5.5) (4.9)
-------- -------- --------
Fair value of plan assets at end
of period 142.8 144.5 114.4
-------- -------- --------
Funded Status
Funded status (7.6) (5.9) 15.1
Unrecognized net actuarial
(gain)loss 2.5 (2.6) (13.8)
Unrecognized net transition
obligation(asset) (0.4) (0.4) (0.5)
-------- -------- --------
Prepaid(accrued), benefit cost $ (5.5) $ (8.9) $ 0.8
======== ======== ========
Weighted-average assumption as of
end of period:
Discount rate 7.0% 7.0% 8.25%
Expected return on plan assets 9.5% 9.5% 9.0%
Rate of compensation increase 0% 4.0% 0%
</TABLE>
U.S. net pension cost (credits) consisted of (in millions):
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -----------------------
1998 1998 1997 1996
----------------------------------------
<S> <C> <C> <C> <C>
Service cost $ 0.4 $ 0.6 $ -- $ 0.6
Interest cost 5.2 8.5 7.8 7.0
Expected return on assets (6.6) (10.3) (8.8) (7.2)
Recognized transition (asset)
obligation (0.1) (0.1) (0.1) (0.1)
Recognized actuarial (gain)
or loss (0.2) -- --
------- ------- ------- -------
Net periodic benefit
(credits) cost $ (1.1) $ (1.5) $ (1.1) $ 0.3
======= ======= ======= =======
</TABLE>
24
<PAGE> 61
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Projected benefit obligation $25.3 $28.1 $ --
Accumulated benefit obligation 25.3 24.3 --
Fair value of plan asset 16.0 15.8 --
</TABLE>
DEFINED BENEFIT PLANS (NON-U.S.): The Company has various defined benefit plans
in foreign countries, including several obtained in the Olsy acquisition. The
Company's international subsidiaries maintain defined benefit pension plans that
provide 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 amounts effective from the date of acquisition.
The benefit obligation, plan assets and funded status are as follows (in
millions):
25
<PAGE> 62
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- (CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Change in Benefit Obligation
Net benefit obligation at
beginning of period $ 345.9 $ 31.3 $ 51.5
Service cost 6.0 3.2 0.4
Interest cost 9.1 7.6 2.2
Plan participants' contributions 1.1 0.1 0.1
Actuarial (gain)loss (9.7) 3.6 (0.2)
Curtailments (8.4) -- (5.7)
Settlements (8.9) -- (11.7)
Acquisitions -- 310.9 --
Gross benefits paid (9.6) (4.4) (4.2)
Change in foreign currency
exchange rates 11.0 (6.4) (1.1)
-------- -------- --------
Net benefit obligation at end of
period 336.5 345.9 31.3
-------- -------- --------
Change in Plan Assets
Fair value of plan assets at
beginning of period 293.0 45.6 58.8
Actual return on plan assets (0.2) 7.2 6.8
Employer contributions 1.4 (0.5) (2.7)
Plan participants' contributions 1.1 0.1 0.1
Settlements (6.8) -- (11.7)
Acquisitions/divestitures -- 252.7 --
Gross benefits paid (9.6) (4.4) (4.2)
Change in foreign currency
exchange rates 3.5 (7.7) (1.5)
-------- -------- --------
Fair value of plan assets at end
of period 282.4 293.0 45.6
-------- -------- --------
Funded Status
Funded status $ (54.1) $ (52.9) $ 14.3
Unrecognized net actuarial
(gain)loss 4.0 1.8 (3.5)
Unrecognized net transition
obligation(asset) 0.3 0.2 .4
-------- -------- --------
Prepaid(accrued) benefit cost $ (49.8) $ (50.9) $ 11.2
======== ======== ========
Weighted-average assumption as of
end of period:
Discount rate 5.09% 5.10% 6.21%
Expected return on plan assets 8.25% 8.28% 7.04%
Rate of compensation increase 3.81% 3.83% 3.39%
</TABLE>
Non-U.S. net pension cost (credits) consisted of (in millions):
<TABLE>
<CAPTION>
Six Months Ended Year Ended June 30,
December 31, -------------------------
1998 1998 1997 1996
-------- -------------------------------
<S> <C> <C> <C> <C>
Service cost $ 6.0 $ 3.2 $ 0.4 $ 1.9
Interest cost 9.1 7.6 2.2 2.4
Expected return on assets (12.0) (13.3) (5.8) (3.7)
Recognized actuarial
(gain) or loss -- 2.7 2.3 (0.3)
Other 1.2 4.2 1.3 0.7
------- ------- ------- -------
Net periodic benefit cost $ 4.3 $ 4.4 $ 0.4 $ 1.0
======= ======= ======= =======
</TABLE>
26
<PAGE> 63
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H -- (CONTINUED)
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were as follows:
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------------ -------- --------
<S> <C> <C> <C>
Projected benefit obligation $139.8 $ 156.7 $ 4.4
Accumulated benefit obligation 120.9 139.0 4.1
Fair value of plan assets 54.9 78.5 --
</TABLE>
The net accrued benefits at December 31, 1998 are primarily related to certain
non-U.S. pension plans 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 on one such plan, at a time
stipulated in the agreement, for a portion of the net after tax amount of its
unfunded liability. The estimated reimbursable amount is carried in other
non-current assets.
During the six months ended December 31, 1998, the Company recognized a
reduction of goodwill for the net gain of $11.6 million attributable to the
curtailments and settlements in the U.S. and non-U.S. pension plans as a result
of acquisition-related restructuring activity in connection with the Olsy
acquisition. (See Note B).
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. The Company's expense for U.S. and non-U.S. plans totaled
$3.4 million for the six months ended December 31, 1998, $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.
ITALIAN TFR: Under Italian law, deferred compensation accrues in favor of
employees and agents and is payable upon termination of employment or under
certain other circumstances. The annual compensation accrual is based upon
employee remuneration and is subject to adjustment based on the Italian
cost-of-living index. The unfunded obligation as of December 31, 1998 and June
30, 1998 is $87.1 million and $91.6 million, respectively, and is included in
other long-term liabilities.
27
<PAGE> 64
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Stock"), par value $0.01 per share, at a purchase price of $120,
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: Each share of 6 1/2% Series B Cumulative Convertible
Preferred Stock (the "Series B Preferred Stock") is convertible at the option of
the holder into Common Stock at a conversion price of $26.5625 per share of
Common Stock, subject to adjustment. The Company has reserved approximately 5.4
million shares of common stock for the conversion of the Series B Preferred
Stock. Subsequent to March 1, 1999, 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 share of Series B Preferred Stock
effectively entitles the holder to one vote. Cash dividends are cumulative at
the rate of $65.00 per annum per share payable quarterly in arrears. Cash
dividends accrued as of December 31, 1998 are approximately $1.6 million.
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 to the Class B and C Common
stockholders at the rate of one warrant for each 24 shares of stock of the
Predecessor Company. Each warrant is exercisable into one share of Common Stock
at 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. During the six months ended December 31,
1998, approximately 553 warrants were exercised. The Company has reserved
approximately 7.2 million shares of common stock for the exercise of the
outstanding warrants at December 31, 1998.
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, the value of 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,
or $4.00 per SAR, whichever is higher. The SARs are redeemable in cash or common
stock at the Company's election. At the time of issuance, the SARs were valued
at $32.5 million.
In connection with the sale of its software business, 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
until the redemption date of the Series A Preferred Stock. If exercised, the SAR
will be closed out on a net share basis.
28
<PAGE> 65
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
1995 EMPLOYEES' STOCK PURCHASE PLAN: The 1995 Employees' Stock Purchase Plan
(the "1995 Plan" or "ESPP"), as amended, permits purchases on a voluntary basis
by eligible employees of up to 809,607 shares of Common Stock. During the six
months ended December 31, 1998, the Company issued 95,834 shares of Common Stock
under the 1995 plan and 510,760 shares are available for future purchase at
December 31, 1998. 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.
RESTRICTED STOCK: There were 322,000 shares of restricted stock issued on
October 21, 1998. Shares vest upon the occurrence of two conditions, the passage
of time and the performance of the Company's common stock per share price. For
the shares to vest, the closing price of the stock must average $33.00 per share
over a 40 day trading period. As long as this target price is reached by July 1,
2001, the performance restriction on the shares will be satisfied and all
restrictions lapse. If the price is not achieved by then, the shares will vest
on June 30, 2005. If the target price is reached before July 1, 2000, 1/3 of the
shares will vest at that time (the remaining 2/3 will vest July 1, 2001). The
recipient must continue to be an employee on the date the shares vest.
STOCK OPTIONS: The Company has a series of stock incentive option plans for
eligible employees and directors with terms and vesting schedules as may be set
from time to time by the Board of Directors. Options granted to date generally
vest ratably over three to four years from the date of the grant and expire
seven or ten years after the date of the grant. The Company has reserved
approximately 10.1 million shares of common stock pursuant to the stock
incentive option plans.
Pro forma information regarding net income and earnings per share is required by
FAS 123, and has been determined as if the Company had accounted for its
employee stock options 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 assumptions:
<TABLE>
<CAPTION>
Six Months Ended Year Ended June 30,
December 31, -------------------
1998 1998 1997 1996
-------------- ------------------------------------------
<S> <C> <C> <C> <C>
Risk-free interest rate 4.13% - 4.95% 5.4% - 6.06% 5.14% - 6.65% 5.14% - 6.65%
Volatility 39% 39% 42% 42%
Expected life (years) 3.6 3.8 3 5
Expected Life (years)-ESPP 0.5 0.5 0.5 0.5
Dividend yield 0% 0% 0% 0%
</TABLE>
29
<PAGE> 66
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do no necessarily provide a reliable single measure
of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The company's pro
forma information follows (in millions except for earning per share
information).
<TABLE>
<CAPTION>
Six Months
Ended Year Ended June 30,
December 31, -------------------
1998 1998 1997 1996
------------ ------------------------------
<S> <C> <C> <C> <C>
Pro forma income (loss) (in
millions)
Continuing operations $(44.0) $(257.7) $(13.4) $ 60.8
Net income $(44.0) $(257.7) $ 63.3 $ (8.2)
Pro forma earnings (loss) per share
Basic
Continuing operations $(1.11) $ (6.69) $(0.45) $ 1.05
Net income $(1.11) $ (6.69) $ 1.31 $(0.85)
Diluted
Continuing operations $(1.11) $ (6.69) $(0.32) $ 1.05
Net income $(1.11) $ (6.69) $ 1.30 $(0.85)
Weighted average fair value per
option granted during the period $ 5.22 $ 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 (share amounts in thousands):
<TABLE>
<CAPTION>
Year Ended June 30,
Six Months Ended -----------------------------------------------------
December 31, 1998 1998 1997 1996
---------------------- --------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Shares Price Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 6,960 $ 17.53 5,987 $ 14.68 4,602 $ 12.45 3,453 $ 9.73
Granted 2,213 $ 17.50 2,191 $ 23.07 2,820 $ 17.62 2,176 $ 15.66
Exercised 117 $ 15.39 756 $ 11.93 773 $ 11.28 599 $ 8.41
Canceled 598 $ 24.88 462 $ 17.27 662 $ 15.97 428 $ 12.20
----- ----- ----- -----
Options outstanding at end
of year 8,458 $ 16.97 6,960 $ 17.53 5,987 $ 14.68 4,602 $ 12.45
===== ===== ===== =====
Options exercisable at end
of year 4,122 3,101 1,959 1,040
===== ===== ===== =====
Options available for
future grants 1,653 2,914 374 1,942
===== ===== ===== =====
</TABLE>
30
<PAGE> 67
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I -- (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------
Weighted-Average
Remaining
Contractual Life Weighted-Average Weighted-Average
Range of Exercise Prices Shares (Years) Exercise Price Shares Exercise Price
- ---------------------------- ------------------------------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.07 - $ 0.07 53,002 7.6 $ 0.07 44,651 $ 0.07
$ 0.96 - $ 0.96 915 4.8 $ 0.96 457 $ 0.96
$ 1.68 - $ 1.68 25,405 6.7 $ 1.68 447 $ 1.68
$ 7.35 - $10.22 632,780 5.0 $ 7.45 632,780 $ 7.45
$11.15 - $16.63 3,127,305 6.8 $14.48 1,820,645 $13.66
$16.88 - $25.18 4,406,416 7.2 $19.95 1,619,992 $19.34
$25.56 - $30.94 211,500 6.8 $26.25 3,500 $25.56
--------------- --------- --- ------ --------- ------
$ 0.07 - $30.94 8,457,323 6.9 $16.97 4,122,472 $14.80
========= =========
</TABLE>
NOTE J -- COMMITMENTS AND CONTINGENCIES
LEASES: Rental expense for the six months ended December 31, 1998 was $22.1
million. Rental expense for the three 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 December 31,
------------------------------------------
1999 2000 2001 2002 2003 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Future minimum lease
commitments on
noncancelable leases $41.9 $28.8 $21.1 $15.6 $13.3 $48.5
Future minimum
non-cancelable
sublease income $ 5.2 $ 3.5 $ 2.9 $ 2.8 $ 2.1 $ 8.1
</TABLE>
These future minimum lease commitments include approximately $32 million, net of
sublease income, related to facilities the Company has elected to abandon in
connection with the restructuring and acquisition-related initiatives.
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 litigation will be material to
the Company's consolidated financial position, results of operations, or cash
flows.
31
<PAGE> 68
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -- SEGMENT INFORMATION
The Company is organized in theaters offering similar services and products into
various geographic markets. The theaters, aggregating approximately 140
countries, are United States, Other Americas, Europe/Middle East/Africa and
Asia/Pacific. Each theater is managed and the performance assessed separately
based upon market characteristics of the various geographies, and accordingly,
represent the Company's reportable segments. The Company operates primarily in
one industry which includes design, installation, operation and maintenance
services for global computing and telecommunications networks. Services include
systems architecture design, installation, warranty, help desk, maintenance,
software support, and management of enterprise networks to the desktop.
The Company evaluates performance and allocates resources based on EBITA
(earnings before interest, taxes and amortization), which is calculated by
excluding from net income(loss): acquisition-related, Chapter 11-related and
restructuring costs and other non-recurring charges, including certain period
costs related to the integration of Wang and Olsy; income taxes; interest
expense; interest income; and amortization. Management does not evaluate
performance of theaters based on asset balances within each theater. Accordingly
segment assets are not disclosed in this footnote. The accounting policies of
the reportable segments are the same as those described in the Summary of
Significant Accounting Policies.
Financial information for the Company's business segments is as follows (in
millions):
<TABLE>
<CAPTION>
Six Months Ended Year Ended June 30,
December 31, ---------------------------------
1998 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues from unaffiliated customers:
United States $ 533.3 $ 883.2 $ 837.5 $ 529.2
Other Americas 58.2 86.8 69.4 63.8
Europe/Middle
East/Africa* 1,018.7 689.9 216.5 251.1
Asia/Pacific 204.9 216.4 123.6 161.4
--------- --------- --------- ---------
Total Segment 1,815.1 1,876.3 1,247.0 1,005.5
Corporate 2.9 10.7 21.4 8.4
--------- --------- --------- ---------
$ 1,818.0 $ 1,887.0 $ 1,268.4 $ 1,013.9
========= ========= ========= =========
* The Company generated revenues from unaffiliated customers of $399 million in
Italy during the six months ended December 31, 1998.
Business segment profit or (loss):
United States $ 6.9 $ 40.6 $ 50.4 $ 77.8
Other Americas 3.4 10.2 9.1 10.1
Europe/Middle East/Africa 64.4 24.1 26.1 37.6
Asia/Pacific 11.8 (6.8) 11.4 18.0
Elimination and adjustments -- 1.2 -- --
--------- --------- --------- ---------
Total Segment Profit/(loss) $ 86.5 $ 69.3 $ 97.0 $ 143.5
Corporate 1.5 18.5 (0.6) (16.5)
Amortization of Intangibles-
acquisition and fresh-start (46.6) (215.4) (49.7) (37.1)
Acquisition related charges (35.1) (52.6) (35.0) --
Other restructuring charges -- (9.4) -- (2.2)
Other non-recurring costs (19.9) (45.5) (28.8) --
Chapter 11 Charges/(credits) -- -- (1.3) 3.3
Interest Income (expense) (9.9) (2.4) (3.9) 3.9
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes and minority
interests $ (23.5) $ (237.5) $ (22.3) $ 94.9
========= ========= ========= =========
</TABLE>
32
<PAGE> 69
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K -- (CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended Year Ended June 30,
December 31, ---------------------------------------------
1998 1998 1997 1996
---------------- ---------------------------------------------
<S> <C> <C> <C> <C>
Depreciation expense:
United States $ 22.5 $ 42.6 $ 40.8 $ 22.2
Other Americas 1.8 4.6 5.6 4.5
Europe/Middle East/Africa 23.7 17.6 8.9 10.8
Asia/Pacific 3.0 5.0 6.9 5.5
------- -------- -------- --------
Total segment 51.0 69.8 62.2 43.0
Corporate 2.4 4.2 5.4 2.9
------- -------- -------- --------
$ 53.4 $ 74.0 $ 67.6 $ 45.9
======= ======== ======== ========
Revenues by product and service group:
Networked Technology
Services and Solutions $1,167.6 $ 1,319.6 $ 942.2 $ 584.4
Standard Products 196.0 124.0 -- --
Traditional Products and
Services 454.4 443.4 326.2 429.5
-------- -------- -------- --------
$1,818.0 $1,887.0 $1,268.4 $1,013.9
======== ======== ======== ========
<CAPTION>
June 30,
December 31, ---------------------------------------------
1998 1998 1997 1996
------------ ---------------------------------------------
<S> <C> <C> <C> <C>
Long-lived assets:
United States(including
Corporate) $ 143.6 $ 122.3 $ 96.5 $ 100.3
Other Americas 9.9 9.0 6.5 8.7
Europe/Middle East/Africa 71.7 61.4 14.3 17.9
Asia/Pacific 10.8 16.6 6.0 11.5
Elimination and other -- 4.8 (0.3) (1.1)
-------- -------- -------- -------
$ 236.0 $ 214.1 $ 123.0 $ 137.3
======== ======== ======== =======
</TABLE>
SIGNIFICANT CUSTOMERS: The Company had total revenues from the U.S. government
and its agencies of approximately $205 million for the six months ended December
31, 1998 and $383 million, $385 million and $228 million for the years ended
June 30, 1998, 1997 and 1996, respectively, most of which were in the "United
States" segment. Revenues from the Italian government and its agencies,
primarily resulting from the Olsy acquisition, were approximately $172 million
for the six months ended December 31, 1998. These revenues were in the
"Europe/Middle East/Africa" segment.
33
<PAGE> 70
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L -- OTHER BALANCE SHEET INFORMATION
Components of other selected captions in the Consolidated Balance Sheet follow
(in millions):
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
------- ------- -------
<S> <C> <C> <C>
Accounts receivable
Billed $ 854.8 $ 816.3 $ 226.2
Unbilled 52.7 43.3 36.0
------- ------- -------
907.5 859.6 262.2
Less allowances 25.8 20.9 17.9
------- ------- -------
$ 881.7 $ 838.7 $ 244.3
======= ======= =======
Inventories
Finished products $ 136.1 $ 63.3 $ 5.6
Raw materials and work-in-process 17.3 55.6 7.8
Service parts and supplies 15.1 49.4 1.1
------- ------- -------
$ 168.5 $ 168.3 $ 14.5
======= ======= =======
Depreciable assets
Land $ 7.0 $ 7.0 $ 4.5
Buildings and improvements 78.0 103.0 25.0
Machinery and equipment 122.8 122.0 84.9
Spare parts 173.1 137.8 140.3
------- ------- -------
380.9 369.8 254.7
Less accumulated depreciation 144.9 155.7 131.7
------- ------- -------
$ 236.0 $ 214.1 $ 123.0
======= ======= =======
</TABLE>
34
<PAGE> 71
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L -- (CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30, June 30,
1998 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Intangible assets
Trademarks $ 57.0 $ 57.0 $ --
Patents 2.8 4.6 4.1
Computer software 47.5 43.5 0.3
Installed base - service 14.3 14.3 61.6
License agreements 9.1 6.4 6.3
Assembled workforce 2.2 2.2 13.9
Goodwill 465.7 428.2 266.1
------- ------- ------
598.6 556.2 352.3
Less accumulated amortization 96.6 47.3 40.7
------- ------- ------
$ 502.0 $ 508.9 $311.6
======= ======= ======
Accrued expenses and other current
liabilities
Accrued expenses (unvouchered
payable) $ 226.2 $ 250.0 126.5
Compensation and benefits 108.0 56.1 57.9
Restructuring, reorganization and
acquisition-related 144.6 181.3 28.7
Warranty 20.7 39.0 1.5
Income and other taxes 68.2 77.6 15.5
Other 93.3 138.2 1.2
------- ------- ------
$ 661.0 $ 742.2 $231.3
======= ======= ======
Other long-term liabilities
Postretirement $ 18.1 $ 16.1 $ 16.8
Pension 90.4 94.3 7.1
Acquisition related lease accrual 5.9 6.5 9.2
Restructuring, reorganization and
acquisition-related 15.3 18.1 7.8
Insurance 7.0 7.7 5.6
Deferred compensation and benefits 87.1 99.0 --
Deferred income taxes 22.0 21.2 22.1
Other 20.2 9.7 29.4
------- ------- ------
$ 266.0 $ 272.6 $ 98.0
======= ======= ======
</TABLE>
NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents, 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, long and short-term debt and preferred stock 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
Company's SARs is determined by the Black Scholes pricing (with assumptions
consistent to those shown in Note I). The fair values of Warrants and SARs are
as follows (in millions):
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998 June 30, 1997
----------------- ------------- -------------
<S> <C> <C> <C>
Warrants $75.7 $63.0 $45.1
SARs $63.3 $50.0 $ 5.0
</TABLE>
35
<PAGE> 72
WANG LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - REORGANIZATION
In 1993 the Company was reorganized and restructured in connection with its
emergence from Chapter 11 and the implementation of a related reorganization
plan. At that time, an accrual was recorded for the estimated amount of the
predecessor company's liabilities that would be settled in cash and anticipated
costs of reorganization and restructuring activities. At December 31, 1998 and
June 30, 1998 this accrual balance was $0.5 million and related to liabilities
yet to be settled. Since inception, this accrual has been periodically reviewed
and compared to its requirements. Whenever necessary, the accrual has been
adjusted for changes in the cost and timing assumptions of previously approved
initiatives. No adjustments were required for the year ended June 30, 1998 or
the six months ended December 31, 1998. During fiscal 1996 and 1997, such
reviews resulted in immaterial adjustments which were included in Chapter
11-related Charges and Other Restructuring Costs in the accompanying Statements
of Operations.
36
<PAGE> 73
WANG LABORATORIES, INC. AND SUBSIDIARIES
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in millions except per share data)
September 30(*) December 31 March 31 June 30
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Six Months ended December 31, 1998
Revenues $ 786.0 $1,032.0
Costs 629.3 824.5
Expenses 138.3 164.4
Amortization of intangibles - acquisition 26.1 18.2
Acquisition-related charges (credits) 8.3 26.8
Restructuring charges (credits) -- $ --
------- -------
Operating income (loss) (16.0) (1.9)
Interest and other (income) expense - net 2.8 2.8
Provision (benefit) for income taxes 3.6 10.6
Minority interests in earnings of subsidiaries 0.4 1.7
------- -------
Net income (loss) (22.8) (17.0)
Dividends and accretion - preferred stock (3.5) (3.5)
------- -------
Net income (loss) applicable to common
stockholders $ (26.3) $ (20.5)
======= =======
Net income (loss) per share:
Basic $ (0.57) $ (0.44)
======= ========
Diluted $ (0.57) $ (0.44)
======= ========
Year ended June 30, 1998
Revenues $ 312.2 $ 338.9 $ 402.6 $ 833.3
Costs 246.0 260.9 318.3 669.3
Expenses 49.8 54.7 93.7 166.8
Amortization of intangibles - acquisition 6.3 6.3 8.5 187.6
Acquisition-related charges (credits) -- -- 14.0 38.6
Restructuring charges (credits) -- -- 9.2 0.2
------- -------- -------- --------
Operating income (loss) 10.1 17.0 (41.1) (229.2)
Interest and other (income) expense - net (7.7) (2.4) 3.8 0.6
Provision (benefit) for income taxes 6.4 7.0 -- --
Minority interests in earnings of
subsidiaries -- -- -- 0.7
------- -------- -------- --------
Net income (loss) 11.4 12.4 (44.9) (230.5)
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) $ (234.0)
======= ======== ======== ========
Net income (loss) per share:
Basic $ 0.21 $ 0.23 $ (1.22) $ (5.08)
======= ======== ======== ========
Diluted $ 0.20 $ 0.22 $ (1.22) $ (5.08)
======= ======== ======== ========
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>
(*) September 30, 1998 quarterly information as restated in Form 10-Q/A.
37
<PAGE> 74
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>
Six months ended December 31, 1998:
Allowances for doubtful
accounts and sale credits $20.9 $ 2.3 $4.6(A) $(2.0)(B) $25.8
Year ended June 30, 1998:
Allowances for doubtful
accounts and sale credits $17.9 $ 9.6 $ - $(6.6)(B) $20.9
Year ended June 30, 1997:
Allowances for doubtful
accounts and sale credits $10.8 $10.3 $ - $(3.2)(B) $17.9
Year ended June 30, 1996:
Allowances for doubtful
accounts and sale credits $10.8 $ 0.6 $ - $(0.6)(B) $10.8
</TABLE>
(A) Foreign exchange and transfers from other accruals.
(B) Accounts charged off, net of recoveries.
<PAGE> 75
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/ Paul A. Brauneis
----------------------------
Paul A. Brauneis
Vice President and
Corporate Controller
April 6, 1999
13
<PAGE> 76
(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 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(5) Employee Retention Agreement with James J. Hogan
10.6(7) Stock Incentive Plan, as Amended
10.7(8) Contingent Severance Compensation, as Amended with Franklyn A.
Caine (Employment Agreement)
10.8(8) Employees' Stock Incentive Plan
10.9(8) 1995 Director Stock Option Plan
10.10(9) Employment Agreement with Donald P. Casey, as Amended
10.11(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
10.12(11) 1994 Employees' Stock Incentive Plan, as Amended
10.13(11) Form of Amendment to Employment Letter Agreement for David I.
Goulden, Albert A. Notini and Franklyn A. Caine
<PAGE> 77
Exhibit No. Description
- ----------- -----------
10.14(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
10.15(12) Registration Rights Agreement 6 1/2% Cumulative Convertible
Preferred Stock
10.16(14) Employment Agreement of Lucy A. Flynn
10.17(15) 1995 Employees' Stock Purchase Plan, as Amended
10.18(15) Employees' Stock Incentive Plan, as Amended
10.19(1) 1995 Director Stock Option Plan, as Amended
10.20(16) Asset Purchase Agreement, as amended, with respect to the
Registrant's sale of its software business unit to Eastman Kodak
Company
10.21(17) Amended and Restated Employment Agreement of Joseph M. Tucci
10.22(17) Restricted Stock Agreement of Joseph M. Tucci
10.23(17) Non-Qualified Long Term Incentive Stock Option Agreement of Joseph
M. Tucci
10.24(17) Second Amendment to the Change in Control Severance Agreement of
Joseph M. Tucci
10.25(17) Form of Non-Qualified Long Term Incentive Stock Option Agreement
with Messrs. Caine, Goulden and Notini, each an executive officer
of the Registrant
10.26(17) Form of Restricted Stock Agreement with Messrs. Caine, Goulden and
Notini, each an executive officer of the Registrant
10.27(17) Letter Agreement of Employment of Jose Ofman
10.28(17) Amendment Number 1 to Letter Agreement of Employment of Jose Ofman
10.29(17) Non-Qualified Long Term Stock Option Agreement with Jeremiah J. J.
Van Vuuren
10.30(17) Letter Agreement for Special Bonus of Franklyn A. Caine
10.31(17) Change in Control Severance Agreement, as amended of Franklyn A.
Caine
10.32(17) Letter Agreement for Special Bonus of Albert A. Notini
10.33(17) Change in Control Severance Agreement, as amended of Albert A.
Notini
10.34(17) Letter Agreement for Special Bonus of David I. Goulden
10.35(17) Change in Control Severance Agreement, as amended of David I.
Goulden
10.36(17) Amendment Number 1 to the 1993 Directors' Stock Option Plan
10.37(17) Amendment Number 2 to the Stock Incentive Plan
<PAGE> 78
Exhibit No. Description
- ----------- -----------
10.38(17) Amendment Number 3 to the Employees' Stock Incentive Plan
10.39(18) Restricted Stock Agreement of Jeremiah J. J. Van Vuuren with
Registrant
10.40(18) Employment Agreement of Jeremiah J. J. Van Vuuren with Wang
Laboratories Ireland B.V.
10.41(18) Employment Agreement of Jeremiah J. J. Van Vuuren
10.42(18) Change in Control Severance Agreement, as amended of Jeremiah J.
J. Van Vuuren
10.43(19) Form of Change in Control Severance Agreement with Messrs.
Buckingham and Brauneis
10.44(20) Amendment No. 4 to the 1995 Employee Stock Incentive Plan
10.45(20) Amendment No. 5 to the 1995 Employee Stock Incentive Plan
10.46(20) Amendment No. 2 to the 1995 Director Stock Option Plan
10.47(20) Amendment No. 2 to the 1995 Employee Stock Purchase Plan
10.48(20) Short Term Incentive Plan
10.49(21) Stock Purchase Agreement and Wang Laboratories, Inc. and Wang
Nederlands B.V., Ing. C. Olivetti SpA and certain subsidiaries
10.50(21) Credit Agreement among Wang Laboratories, Inc., various subsidiary
borrowers and Bankers Trust Company and various financial
institutions
10.51(22) Olsy Employees Stock Incentive Plan
10.52(23) Rights Agreement, dated April 22, 1998, between Wang Laboratories,
Inc. and American Stock Transfer & Trust Company, as Rights Agent,
including all exhibits thereto
10.53(24) Amendment to Employment Agreement with Franklyn A. Caine
10.54(24) Amendment to Employment Agreement with Donald P. Casey
10.55(24) Amendment to Employment Agreement with Lucy A. Flynn
10.56(24) Amendment to Employment Agreement with David I. Goulden
10.57(24) Amendment to Employment Agreement with James J. Hogan
10.58(24) Amendment to Employment Agreement with Albert A. Notini
10.59(24) Amendment to Employment Agreement with Jose Ofman
10.60(24) Amendment to Employment Agreement with Jerimiah J.J. van Vuuren
with Wang Laboratories Ireland B.V.
10.61(24) Amendment to Employment Agreement with Jerimiah J.J. van Vuuren
with Wang Laboratories, Inc.
10.62(24) Amendment to Change of Control Severance Agreement with Franklyn
A. Caine
<PAGE> 79
Exhibit No. Description
- ----------- -----------
10.63(24) Amendment to Change of Control Severance Agreement with Donald P.
Casey
10.64(24) Amendment to Change of Control Severance Agreement with Lucy A.
Flynn
10.65(24) Amendment to Change of Control Severance Agreement with David I.
Goulden
10.66(24) Amendment to Change of Control Severance Agreement with James J.
Hogan
10.67(24) Amendment to Change of Control Severance Agreement with Albert A.
Notini
10.68(24) Amendment to Change of Control Severance Agreement with Jose Ofman
10.69(24) Amendment to Change of Control Severance Agreement with Jeremiah
J.J. van Vuuren
10.70(25) Amendment to Employment Agreement with Jose Ofman
10.71(25) Amendment to Rights Agreement
12.1 Calculation of Ratio of Earnings to Fixed Charges
21.1(25) Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
27.1 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.
(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.
<PAGE> 80
(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.
(24) Filed as an Exhibit to the Registrant's quarterly report on Form 10-Q for
the quarter ended September 30, 1998.
(25) Filed as an Exhibit to the Registrant's annual report on Form 10-K for
the six months ended December 31, 1998.
<PAGE> 1
EXHIBIT 12.1 - CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions except ratios)
<TABLE>
<CAPTION>
Predecessor
Company
-------------
Six months Nine months Three months
ended Year ended Year ended Year ended Year ended ended ended
December 31, June 30, June 30, June 30, June 30, June 30, September 30,
1998 1998 1997 1996 1995 1994 1993
----------- --------- -------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FIXED CHARGES
Interest expense $ 14.4 $ 10.4 $ 10.9 $ 5.1 $ 3.7 $ 3.5 $ 1.2
Portion of rent expense
representative of interest 7.4 15.0 9.4 9.4 5.9 5.6 2.7
------ ------- ------ ------ ------ ------ -----
21.8 25.4 20.3 14.5 9.6 9.1 3.9
Preferred dividend requirement 11.7 23.5 23.5 37.7 14.5 8.7 --
------ ------- ------ ------ ------ ------ -----
Combined fixed charges and
preferred dividend $ 33.5 $ 48.9 $ 43.8 $ 52.2 $ 24.1 $ 17.8 $ 3.9
====== ======= ====== ====== ====== ====== =====
EARNINGS
Income (loss) from continuing
operations before income
taxes, discontinued operations,
fresh-start reporting adjustment
and extraordinary item ($23.5)(1) (237.5)(2) ($22.3)(3) $ 94.9(4) ($6.9(5) $ 18.4 ($8.5)
Fixed charges per above 21.8 25.4 20.3 14.5 9.6 9.1 3.9
------ ------- ------ ------ ------ ------ -----
($ 1.7) ($212.1) ($ 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 $(35.2) $(261.0) $(45.8) -- $ (7.6) -- $(8.5)
====== ======= ====== ====== ====== ====== =====
</TABLE>
(1) Includes $35.1 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
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-3 and S-3/A Nos. 333-06611, 333-19789, 333-27969 and 333-27971 and Form
S-8 Nos. 33-73210, 33-75350, 33-89910, 33-89912, 33-89914, 333-01333, 333-01335,
333-12943, 333-12963, 333-26635, 333-26637, 333-26661, 333-46075, 333-46079,
333-46081 and 333-46103) of Wang Laboratories, Inc. of our report dated March
22, 1999, with respect to the consolidated financial statements and schedule of
Wang Laboratories, Inc. included in this Annual Report (Form 10-K/A) for the six
months ended December 31, 1998.
/s/ Ernst & Young LLP
Boston, Massachusetts
April 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS CONSOLIDATED STATEMENTS OF OPERATIONS, MANAGEMENT'S
DISCUSSION AND ANALYSIS, NOTE L - OTHER BALANCE SHEET INFORMATION AND SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 301,300
<SECURITIES> 0
<RECEIVABLES> 907,500
<ALLOWANCES> 25,800
<INVENTORY> 168,500
<CURRENT-ASSETS> 1,508,300
<PP&E> 380,900<F1>
<DEPRECIATION> 144,900<F1>
<TOTAL-ASSETS> 2,369,800
<CURRENT-LIABILITIES> 1,407,700
<BONDS> 285,600
500
86,500
<COMMON> 138,300
<OTHER-SE> 209,400
<TOTAL-LIABILITY-AND-EQUITY> 2,369,800
<SALES> 763,700
<TOTAL-REVENUES> 1,818,000
<CGS> 614,800
<TOTAL-COSTS> 1,453,800
<OTHER-EXPENSES> 84,800<F2>
<LOSS-PROVISION> 2,300
<INTEREST-EXPENSE> 14,400
<INCOME-PRETAX> (23,500)
<INCOME-TAX> 14,200
<INCOME-CONTINUING> (39,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,800)
<EPS-PRIMARY> (1.01)
<EPS-DILUTED> (1.01)
<FN>
<F1>PP&E COST AND ACCUMULATED DEPRECIATION INCLUDE CAPITALIZED NONCONSUMABLE
SPARES INVENTORY.
<F2>OTHER COSTS AND EXPENSES INCLUDE $351 MILLION OF ACQUISITION-RELATED CHARGES.
</FN>
</TABLE>
