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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 28, 1997
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OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________________ to
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Commission File Number 1-7352
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Data General Corporation
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(Exact name of registrant as specified in its charter)
Delaware 04-2436397
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4400 Computer Drive, Westboro, Massachusetts 01580
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 898-5000
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Former name, former address and former fiscal year if changed since last report:
Not Applicable
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the registrant's classes of common
stock, as of July 25, 1997:
Common Stock, par value $.01 41,348,441
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(Title of each class) (Number of shares)
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<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
DATA GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
Jun. 28, Jun. 29, Jun. 28, Jun. 29,
in thousands, except net income per share 1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product ................................. $ 294,170 $ 224,083 $ 835,992 $ 688,444
Service ................................. 97,087 99,136 293,098 297,579
------- ------- --------- -------
Total revenues .................... 391,257 323,219 1,129,090 986,023
------- ------- --------- -------
Costs and expenses:
Cost of product revenues ................ 199,422 147,232 563,178 463,928
Cost of service revenues ................ 61,392 64,036 187,967 193,215
Research and development ................ 27,783 25,801 81,065 71,433
Selling, general, and administrative .... 85,531 76,563 251,584 231,927
------- ------- --------- -------
Total costs and expenses .......... 374,128 313,632 1,083,794 960,503
------- ------- --------- -------
Income from operations ....................... 17,129 9,587 45,296 25,520
Interest Income .............................. 2,695 1,833 6,268 5,759
Interest expense ............................. 4,479 3,279 10,823 10,095
----- ----- ------ ------
Income before income taxes ................... 15,345 8,141 40,741 21,184
Income tax provisions ........................ 600 1,000 1,800 3,000
------ ----- ------ ------
Net income ................................... $ 14,745 $ 7,141 $ 38,941 $ 18,184
======== ======= ======== ========
Net income per share ......................... $ 0.34 $ 0.17 $ 0.91 $ 0.44
======== ======= ======== ========
Weighted average shares outstanding, including
common stock equivalents, where applicable ... 43,576 41,514 42,858 41,060
<FN>
No cash dividends have been declared or paid since inception.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
Jun. 28, Sept. 28,
dollars in thousands 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and temporary cash investments .................. $ 310,789 $ 178,997
Marketable securities ................................ 25,381 25,624
Receivables, net ..................................... 256,977 257,815
Inventories .......................................... 163,387 129,783
Other current assets ................................. 25,736 24,593
----------- -----------
Total current assets ............................ 782,270 616,812
Property, plant, and equipment, net ....................... 175,304 167,672
Other assets .............................................. 92,606 75,959
----------- -----------
$ 1,050,180 $ 860,443
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Notes payable ........................................ $ -- $ 1,943
Accounts payable ..................................... 114,267 121,625
Other current liabilities ............................ 215,434 242,616
----------- -----------
Total current liabilities ................................. 329,701 366,184
----------- -----------
Long-term debt ............................................ 337,750 149,971
----------- -----------
Other liabilities ......................................... 14,463 15,224
----------- -----------
Stockholders' equity:
Common stock:
Outstanding - 40,877,000 shares at Jun. 28, 1997
and 39,601,000 shares at Sept. 28, 1996 (net of
deferred compensation of $14,591 at June 28, 1997
and $7,812 at Sept. 28, 1996) .................. 472,178 460,312
Accumulated deficit ....................................... (96,540) (135,481)
Unrealized gains on marketable securities ................. 2,637 9,708
Cumulative translation adjustment ......................... (10,009) (5,475)
------------ ------------
Total stockholders' equity ..................... 368,266 329,064
------------ ------------
$ 1,050,180 $ 860,443
=========== ===========
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
Jun. 28, Jun. 29,
in thousands 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 38,941 $ 18,184
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation ............................................. 60,331 61,736
Amortization of capitalized software development costs ... 14,633 14,647
Other non-cash items, net ................................ 12,721 3,044
Change in operating assets and liabilities ............... (62,647) (49,768)
--------- ---------
Net cash provided from operating activities .............. 63,979 47,843
--------- ---------
Cash flows from investing activities:
Expenditures for property, plant, and equipment ................ (82,629) (74,268)
Net proceeds from the sales (purchases) of marketable securities (6,828) 56,460
Capitalized software development costs ......................... (25,942) (22,603)
Other .......................................................... -- 10,599
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Net cash used by investing activities .................... (115,399) (29,812)
--------- ---------
Cash flows from financing activities:
Cash provided from stock plans ................................. 8,099 6,364
Decrease in notes payable ...................................... (1,794) --
Net proceeds from issuance of long term debt ................... 207,218 --
Repayment of long-term debt .................................... (26,901) (3,000)
--------- ---------
Net cash provided from financing activities .............. 186,622 3,364
--------- ---------
Effect of foreign currency rate fluctuations
on cash and temporary cash investments ............................. (3,410) (1,493)
--------- ---------
Increase in cash and temporary cash investments ..................... 131,792 19,902
Cash and temporary cash investments - beginning of period ........... 178,997 117,201
--------- ---------
Cash and temporary cash investments - end of period ................. $ 310,789 $ 137,103
========= =========
Supplemental disclosure of cash flow information:
Interest paid .................................................. $ 11,420 $ 11,095
Income taxes paid .............................................. $ 5,590 $ 1,679
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
DATA GENERAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Consolidated Balance Sheet Details
Jun. 28, Sept. 28,
in thousands 1997 1996
- --------------------------------------------------------------------------------
Inventories:
Raw materials............................... $ 12,954 $ 4,560
Work in process............................. 78,303 50,769
Finished systems............................ 44,671 43,710
Field engineering parts and components...... 27,459 30,744
--------- ---------
$ 163,387 129,783
========= =========
Property, plant, and equipment:
Property, plant, and equipment............... $ 647,031 $ 638,972
Accumulated depreciation..................... (471,727) (471,300)
--------- ---------
$ 175,304 $ 167,672
========= =========
Note 2. Accounting Policies
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share". SFAS 128 is effective for both interim and annual periods ending after
December 15, 1997. The Company is required by the Securities and Exchange
Commission to disclose proforma earnings per share ("EPS") amounts computed in
accordance with the SFAS 128 in the notes to the financial statements prior to
required adoption.
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------------------------
June 28, 1997 June 29, 1996
--------------------------------------- ---------------------------------------------
Income Shares Per-Share Income Shares Per-Share
in thousands, except per share amounts (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income available to
common stockholders $14,745 40,625 $ .36 $ 7,141 39,045 $ .18
======= ======
Effect of Dilutive Securities
Stock Options -- 2,951 -- 2,469
------- ------ ------- ------
Diluted Earnings Per Share
Net income available to common
stockholders and assumed
conversions $14,745 43,576 $ .34 $ 7,141 41,514 $ .17
======= ====== ======= ======= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------------------------------------------------
June 28, 1997 June 29, 1996
--------------------------------------- ---------------------------------------------
Income Shares Per-Share Income Shares Per-Share
in thousands, except per share amounts (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income available to
common stockholders $38,941 40,155 $ .97 $18,184 38,563 $ .47
------- -------
Effect of Dilutive Securities
Stock Options -- 2,703 -- 2,497
------- ------ ------- ------
Diluted Earnings Per Share
Net income available to common
stockholders and assumed
conversions $38,941 42,858 $ .91 $18,184 41,060 $ .44
======= ====== ======= ======= ====== =======
</TABLE>
For the quarters and nine-month periods ended June 28, 1997 and June
29, 1996, the assumed conversion of convertible debentures, giving effect to the
incremental shares and the adjustment to reduce interest expense, is
anti-dilutive and has therefore been excluded from the computation.
Note 3. Basis of Presentation and Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. The Company's
accounting policies are described in the Notes to Consolidated Financial
Statements in the Company's 1996 Annual Report. The results of operations for
the quarter ended June 28, 1997 are not necessarily indicative of the results of
the entire fiscal year.
<PAGE>
Note 4. Long-term Debt
On May 21,1997, the Company sold $212.8 million of its 6% Convertible
Subordinated Notes due 2004. The 6% Convertible Subordinated Notes are
convertible at the option of the holder, at any time after 90 days following the
original issuance and prior to maturity, into shares of Common Stock of the
Company at a conversion price of $26.194 per share, subject to adjustment for
certain events. The notes are subordinated to all Senior Indebtedness (as
defined in the indenture under which the notes were issued). The notes are not
redeemable by the Company prior to May 18, 2000. At any time on or after May 18,
2000, the Company may redeem the notes at decreasing redemption prices, and may
be redeemed at the option of the holder if there is a Fundamental Change (as
defined in the indenture) in the Company's operation. The indenture does not
contain any financial covenants or any restrictions on the payment of dividends
or the repurchase of the Company's securities. Deferred debt issuance costs at
June 28, 1997 of $5.5 million are being amortized to interest expense over the
life of the notes.
Approximately $23 million of the net proceeds from the issuance of 6%
Convertible Subordinated Notes was used for the early retirement of the
Company's remaining 8 3/8% Sinking Fund Debentures due 2002.
On July 18, 1997, the Company announced that it will redeem all $125
million of its 7 3/4% Convertible Subordinated Debentures due 2001. The
redemption will be effective August 18, 1997. The debentures will be redeemed at
a price of 103.1% of the principal face value plus accrued interest through
August 18, 1997. Alternatively, the debentures may be converted into Common
Stock of Data General at a conversion price of $19.20 anytime before the close
of business on August 18, 1997. Coordination of the redemption will be handled
by State Street Bank and Trust Company, Trustee of the debentures.
Note 5. Letter of Credit and Reimbursment
On May 19, 1997, the Company amended certain covenants of its $30
million unsecured letter of credit and reimbursement facility with a group of
banks. This agreement is available to secure issuances of letters of credit. The
current agreement has a duration of 364 days. The facility contains certain
covenants, including restrictions on the sale or pledge of certain assets, the
declaration of dividends, and the incurrence of other debt. There are $4.7
million letters of credit secured by this facility at June 28, 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Condition
Cash and temporary cash investments as of June 28, 1997 were $310.8
million, an increase of $131.8 million from the end of fiscal 1996. At the same
date, the Company held $25.4 million in marketable securities, a net decrease of
$.2 million during the current nine-month period. In total, cash and temporary
cash investments along with marketable securities increased $131.6 million for
the current nine-month period. The increase was mainly attributable to the net
proceeds received from the issuance of 6% Convertible Subordinated Notes due
2004, which was partly offset by the retirement of $26.9 million of the 8 3/8%
Sinking Fund Debentures and the purchases of inventory required for the growth
of the Company's server and storage businesses. The marketable securities held,
which supplement cash and temporary cash investments, include United States
treasury bills and notes, as well as an equity security recorded at the fair
market value of $3.8 million and classified as available-for-sale. The
unrealized gain on marketable securities of $2.6 million is recorded as a
separate component of shareholders' equity. Net cash provided from operations
for the nine months ended June 28, 1997 totaled $64 million; expenditures for
property, plant, and equipment were $82.6 million; capitalized software
development costs totaled $25.9 million; and cash provided from stock plans
totaled $8.1 million. The effect of foreign currency exchange rate fluctuations
on cash and temporary cash investments was a decrease of $3.4 million.
<PAGE>
Net receivables were $257 million, a decrease of $ .8 million from
$257.8 million at fiscal year-end 1996. Revenues for the current quarter ended
June 28, 1997 were higher than those of the quarter ended September 28, 1996;
however, the days sales outstanding decreased from 70 days to 60 days due to
increased cash collections from customers. Total inventories at June 28, 1997
were $163.4 million, an increase of $33.6 million from fiscal year-end 1996
primarily due to increased purchases related to the growth of the Company's
CLARiiON product line. Fixed asset dispositions related to the sale of
demonstration equipment totaled $7 million for the current nine-month period.
Management expects that sales of demonstration equipment will continue.
During the current nine-month period, the Company paid $1.9 million
to retire notes payable that had consisted of borrowings by Data General France
SAS. The decrease of $7.3 million in accounts payable from fiscal year-end 1996
levels was attributed mainly to the timing of payments related to material
purchases. Other current liabilities, excluding the current portion of long-term
debt, decreased $25.3 million from fiscal year-end 1996. This decrease was
primarily a result of payments made relating to previously recorded
restructuring accruals and state income taxes, as well as reduced
employee-related accruals. Long-term debt, including the current portion of
long-term debt, increased $185.9 million from fiscal 1996 year-end as a result
of the Company issuing $212.8 million 6% Convertible Subordinated Notes due
2004, which was partially offset by retiring $26.9 million of the 8 3/8% Sinking
Fund Debentures due 2002.
During fiscal years 1995 and 1994, the Company recorded restructuring
charges of $43 million and $35 million, respectively. No material changes in
estimates to prior provisions or additional charges were recorded during fiscal
1996 or the first nine-month period of fiscal 1997. The following table sets
forth the Company's restructuring activities for the nine-month period ended
June 28, 1997. All charges, excluding asset writedowns and certain other
charges, are cash in nature and are funded from operations.
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 28, 1996 Jun. 28, 1997 Jun. 28, 1997
in millions Balance Charges Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provisions related to terminated employees $ 2.5 $ 1.4 $ 1.1
Provisions for leases 10.0 3.4 6.6
Writedown of assets to be sold
or discarded and other 2.0 .7 1.3
----- ----- -----
Total $14.5 $ 5.5 $ 9.0
===== ===== =====
</TABLE>
The employee terminations related to the 1995 restructuring charges
were substantially completed during fiscal 1996. The remaining reserves at June
28, 1997 are for the remaining severance payments due to employees impacted by
the restructuring actions. The charges and remaining provisions for leases are
for the closure of various domestic branch sales offices and excess vacant
rental properties, primarily located in Europe.
On July 18, 1997, the Company announced that it will redeem all $125
million of its 7 3/4% Convertible subordinated Debentures due 2001. The
redemption will be effective August 18, 1997. The debentures will be redeemed at
a price of 103.1% of the principal face value plus accrued interest through
August 18, 1997. Alternatively, the debentures may be converted into Common
Stock of Data General at a conversion price of $19.20 anytime before the close
of business on August 18, 1997.
<PAGE>
Results of Operations
The Company reported net income of $14.7 million for the current
quarter ended June 28, 1997, an increase of 107% from $7.1 million for the
comparable prior-year period. Net income was $38.9 million for the nine months
ended June 28, 1997, an increase of 114% from $18.2 million for the first
nine-month period of fiscal 1996.
<TABLE>
<CAPTION>
Revenues (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
--------------------------------------------- ----------------------------------------------------
6/28/97 Change 6/29/96 6/28/97 Change 6/29/96
--------------------------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $294.2 31% $224.1 $836.0 21% $688.4
% of Total Revenues 75% 69% 74% 70%
Service 97.1 (2%) 99.1 293.1 (2%) 297.6
% of Total Revenues 25% 31% 26% 30%
Total Revenues $391.3 21% $323.2 $1,129.1 15% $ 986.0
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the fiscal quarter ended June 28, 1997, product revenues of $131.7
million from the Company's AViiON family of open systems server products
represented an increase of 17% from the comparable period of the prior year. In
the current quarter, revenues from the Company's Intel-based AViiON systems
increased 89%, while revenues from the Motorola-based AViiON systems declined by
30% with the comparable period of the prior year. The Company anticipates that
the percentage of server product revenues generated by the Intel-based AViiON
products will continue to increase in fiscal 1997, while the Motorola-based
AViiON system revenues are expected to continue to decline in the future.
Product revenues from the Company's CLARiiON storage systems increased 77% from
the comparable prior-year period and accounted for 47% of total product revenues
in the current quarter. CLARiiON is sold primarily through the Company's
Original Equipment Manufacturer and distributor channels; thus sales in any
given period are subject to sales cycles and inventory levels of the Company's
customers. CLARiiON product revenues have been concentrated in a limited number
of customers, with a significant portion of the Company's CLARiiON product sales
to Hewlett-Packard Company. Product revenues from personal computers and
peripheral equipment decreased $5.4 million from the same period in the prior
year and currently represent 6% of total product revenues compared to 11% for
the comparable prior-year period. Proprietary MV revenues declined $3.6 million
from the same period in the prior year and currently represent 2% of total
product revenues compared to 4% for the comparable prior-year period.
<PAGE>
For the nine months ended June 28, 1997, product revenues of $380.1
million from the Company's AViiON family of open systems server products
increased 14% from $334.2 million for the first nine-month period of fiscal
1996. For the nine months ended June 28, 1997, the Company's Intel-based AViiON
revenues increased 148%, while product revenues from the Motorola-based AViiON
systems declined by 36% as compared with the first nine-month period of fiscal
1996. Product revenues from the Company's CLARiiON storage systems increased 37%
for the comparable nine-month period in fiscal 1996. Product revenues from
personal computer and peripheral equipment increased $9.1 million from the
comparable nine-month period in the prior year and represent 8% of total product
revenues for both the current nine-month period and the comparable prior-year
period. Proprietary MV system revenues declined $9 million from the comparable
period in the prior year, and represent 2% of total product revenues for the
current nine-month period as compared to 4% for the comparable period in fiscal
1996.
<TABLE>
<CAPTION>
Revenues by Geographic Marketplace
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of Percentage Change of
Consolidated Revenues $ of Revenues
----------------------------------------------------- ----------------------------------------
Quarter ended Nine months ended 6/28/97 - 6/29/96
----------------------------------------------------- ----------------------------------------
6/28/97 6/29/96 6/28/97 6/29/96 Quarter ended Nine months ended
------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Product 68% 63% 64% 59% 42% 31%
Service 59% 58% 58% 57% 1% (1%)
Total Revenues 65% 61% 63% 59% 30% 22%
Europe
Product 20% 21% 22% 26% 24% 4%
Service 30% 31% 32% 32% (4%) (2%)
Total Revenues 23% 24% 24% 27% 13% 2%
Other International
Product 12% 16% 14% 15% 1% 13%
Service 11% 11% 10% 11% (11%) (4%)
Total Revenues 12% 15% 13% 14% (2%) 9%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the current quarter ended June 28, 1997, the increase in domestic
product revenues was primarily a result of increased shipments of CLARiiON and
the Company's Intel-based AViiON systems, which was partly offset by the
decrease in Motorola-based AViiON system, MV, personal computer and peripheral
equipment revenues. The increase in European product revenues, including U.S.
direct export sales, for the quarter ended June 28, 1997 was mainly attributable
to the increase in CLARiiON and Intel-based AViiON revenues. The increase in
other international product revenues, including U.S. direct export sales, for
the current quarter was attributable to the increase in Intel-based AViiON
revenues.
In the service business, the Company experienced a 3% decline in
contract maintenance revenues in the current quarter ended June 28, 1997 as
compared with the quarter ended June 29, 1996, which was partly offset by an 1%
growth in professional service revenues during the same period. In Europe, the
decrease in service revenues for the current quarter was mainly attributable to
the effect of foreign exchange due to a stronger U.S. dollar.
The increase in domestic product revenues for the nine-month period
ended June 28, 1997 was a result of increased CLARiiON shipments, increased
shipments of the Company's Intel-based AViiON systems, as well as increased
personal computer and peripheral equipment shipments. The increase was partly
offset by the decrease in Motorola-based AViiON system and MV revenues. The
increase in European product revenues, including U.S. direct export sales, for
the nine-month period ended June 28, 1997, was mainly attributable to the
increase in Intel-based AViiON and personal computer and peripheral equipment
product revenues, which was partly offset by a decrease in MV revenues. The
increase in other international product revenues, including U.S. direct export
sales, for the nine-month period ended June 28, 1997 was primarily due to the
increase in revenues from the CLARiiON and Intel-based AViiON product lines,
which was partly offset by decreased personal computer and peripheral equipment
revenues.
For the current nine-month period, total revenues in the European
marketplace were also negatively impacted by approximately 3% due to a stronger
U.S. dollar as compared to the nine-month period ended June 29, 1996.
<TABLE>
<CAPTION>
Cost of Revenues (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
---------------------------------------------- ----------------------------------------------
6/28/97 Change 6/29/96 6/28/97 Change 6/29/96
---------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $199.4 35% $147.2 $563.2 21% $463.9
% of Product Revenues 68% 66% 67% 67%
Service 61.4 (4%) 64.0 188.0 (3%) 193.2
% of Service Revenues 63% 65% 64% 65%
Total Cost of Revenues $260.8 23% $211.2 $751.2 14% $657.1
% of Total Revenues 67% 65% 67% 67%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in the product cost as a percentage of product revenues
for the quarter ended June 28, 1997 was primarily caused by the increased
proportion of CLARiiON revenues in the Company's product revenue mix. Generally,
CLARiiON revenues yield a lower product margin than the Company's AViiON
revenues.
The product cost as a percentage of product revenues for the nine
months ended June 28, 1997 was relatively unchanged compared to the same period
in the prior year.
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses (in millions)
- ------------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
-------------------------------------- -----------------------------------------
6/28/97 Change 6/29/96 6/28/97 Change 6/29/96
-------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research & Development $27.8 8% $25.8 $81.1 14% $71.4
% of Total Revenues 7% 8% 7% 7%
Selling, general & administrative $85.5 12% $76.6 $251.6 8% $231.9
% of Total Revenues 22% 24% 22% 24%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company continued to focus its research and development efforts
on its core business technology, multi-user computer systems, servers, and mass
storage devices. In the current nine-month period, gross expenditures on
research and development and software development before capitalization were
$107 million, an increase of 14% from $94 million for the comparable prior-year
period. The increase in research and development expenditures is being driven by
investment in the next generation of CLARiiON products, in the Company's
Non-Uniform Memory Access (NUMA) architecture for high-end servers and in THiiN
Line products for the internet.
The increase in selling, general and administrative expenses was the
result of increased sales and marketing efforts in the server and storage
businesses. Management believes that in the future, increases of selling,
general and administrative expenses may be required to support business growth.
However, the Company's objective is to have the ratio of these expenses as a
proportion of total revenues continue to decline. At June 28, 1997 the number of
employees totaled 5,064, a net increase of 201 and 189 employees from September
28, 1996 and June 29, 1996, respectively.
Interest income for the current quarter was $2.7 million, a 47%
increase from $1.8 million for the comparable period of fiscal 1996, due to
higher levels of invested cash. Interest expense for the current quarter was
$4.5 million, a 37% increase from $3.3 million for the comparable period of
fiscal 1996 due to the interest expense related to the 6% Convertible
Subordinated Notes due 2004 which were issued during the fiscal quarter ended
June 28, 1997.
The income tax provision for the current quarter was $.6 million
compared to $1.0 million for the comparable prior-year period. The current year
tax provision relates primarily to foreign, state and federal alternative
minimum taxes.
<PAGE>
Statements concerning the Company's business outlook or future
economic performance; anticipated profitability, revenues, expenses or other
financial items; product or service line growth, plans or objectives; and
statements concerning assumptions made or expectations as to any future events,
conditions, performance or other matters, are "forward-looking statements", as
that term is defined under the Federal Securities Laws. Forward-looking
statements are subject to risks, uncertainties and other factors which could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to,
fluctuations in customer demand, order patterns and inventory levels, changes
and delays in product development plans and schedules, customer acceptance of
new products, changes in pricing or other actions by competitors, general
economic conditions, as well as other risks detailed in the Company's filings
with the Securities and Exchange Commission, including Data General's Report on
Form 10-K for the 1996 fiscal year ended September 28, 1996 and this Quarterly
Report on Form 10-Q for the third fiscal quarter of 1997, which ended June 28,
1997.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
The Company's patent infringement suit against IBM Corporation which
commenced in 1994, and IBM's countersuit against the Company, are in the
discovery stage in the United States District Court in Worcester, Massachusetts.
See Part II, Item 1, "Legal Proceedings" to the Company's Quarterly Report on
Form 10-Q for the quarter ended December 24, 1994. The Company alleges, among
other matters, that IBM's AS/400 CISC-based and System/390 computer product
lines infringe certain of the Company's patents, and seeks, among other relief,
compensatory damages. IBM's countersuit alleges that certain of the Company's
AViiON and CLARiiON products infringe various IBM patents.
The Company's second patent infringement suit against IBM Corporation
which commenced in May 1996, is in the discovery stage in the United States
District Court in Worcester, Massachusetts. See Part II, Item 1, "Legal
Proceedings" to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 29, 1996. The Company alleges, among other matters, that several IBM
products, including IBM's AS/400 RISC-based computer product line, infringe
certain of the Company's patents and seeks, among other relief, injunctive and
compensatory damages. In July 1997, IBM answered the Company's complaint, denied
the Company's infringement claims and counterclaimed against the Company,
alleging that the Company's CLARiiON computer systems infringe one IBM patent.
The Company believes its claims are valid, but it cannot predict the
outcome of either litigation.
Item 2. Changes in Securities
On May 21, 1997, the Company sold an aggregate of $212,750,000
principal amount of 6% Convertible Subordinated Notes (the "Notes") through a
private offering to qualified institutional buyers and to certain institutional
accredited investors. The initial purchasers were Morgan Stanley & Co.
Incorporated and Dillon, Read & Co. Inc. The aggregate of the discounts and
commissions of the offering was $5,318,750. The Notes were sold in reliance on
Rule 144A under the Securities Act to "qualified institutional buyers", and Rule
501(a)(1), (2), (3) or (7) under the Securities Act to a limited number of other
"accredited investors". The Notes are convertible into Common Stock of the
Company at any time after 90 days following the original issuance thereof and
prior to maturity, unless previously redeemed, at a conversion price of $26.194
per share, subject to adjustment in certain events.
The Company has filed a Registration Statement on Form S-3 with the
Securities and Exchange Commission under the Securities Act, which became
effective July 10, 1997, and which permits the resale, on a registered basis, of
the Notes and of the shares of Common Stock issuable upon conversion of the
Notes from time to time by the selling securityholders. The shares of Common
Stock issuable upon conversion of the notes have been approved for listing on
the New York Stock Exchange upon official notice of issuance.
Approximately $23 million of the net proceeds from the issuance of 6%
Convertible Subordinated Notes was used for the early retirement of the
Company's remaining 8 3/8% Sinking Fund Debentures due 2002.
On July 18, 1997, the Company announced that it will redeem all $125
million of its 7 3/4% Convertible Subordinated Debentures due 2001. The
redemption will be effective August 18, 1997. The debentures will be redeemed at
a price of 103.1% of the principal face value plus accrued interest through
August 18, 1997. Alternatively, the debentures may be converted into Common
Stock of Data General at a conversion price of $19.20 anytime before the close
of business on August 19, 1997.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
10. (dd) Amendment dated May 19, 1997 to Letter of Credit and
Reimbursement Agreement
11. Computation of primary and fully diluted earnings per share.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 15, 1997, which
included a copy of a press release regarding the sale of $212.8 million of 6%
Convertible Subordinated Notes due 2004 and the retirement of $23 million of 8
3/8% Sinking Fund Debentures due 2002.
The Company filed a report on Form 8-K on July 21, 1997, which
included a copy of a press release regarding the retirement of $125 million of
7 3/4% Convertible Subordinated Debentures due 2001.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATA GENERAL CORPORATION
(Registrant)
/s/ Arthur W. DeMelle
--------------------------------------------
Arthur W. DeMelle
Senior Vice President
Chief Financial Officer
Dated: August 8, 1997
<PAGE>
EXHIBITS
Index to Exhibits.
10. (dd) Amendment dated May 19, 1997 to letter of Credit and
Reimbursement Aggreeement
11. Computation of primary and fully diluted earnings per share.
<PAGE>
EXHIBIT 10 (dd)
AMENDMENT NO. 5 TO LETTER OF CREDIT
AND REIMBURSEMENT AGREEMENT
THIS AMENDMENT NO. 5 TO LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this
"Agreement") is made and entered into as of this 19th day of May, 1997 among:
DATA GENERAL CORPORATION, a Delaware corporation ("Borrower"), NATIONSBANK OF
TEXAS, NATIONAL ASSOCIATION, a national banking association, THE BANK OF NEW
YORK and FLEET NATIONAL BANK, formerly known as Fleet Bank of Massachusetts,
N.A. (each individually, a "Lender" and collectively, the"Lenders"); and
NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association, in
its capacity as agent for the Lenders (in such capacity, the "Agent");
W I T N E S S E T H:
--------------------
WHEREAS, the Borrower, the Lenders and the Agent have entered into a Letter
of Credit and Reimbursement Agreement dated as of December 21, 1994, as amended
by Amendment No. 1 to Letter of Credit and Reimbursement Agreement dated as of
October 5, 1995, as further amended by Amendment No. 2 to Letter of Credit and
Reimbursement Agreement dated as of December 10, 1995, as further amended by
Amendment No. 3 to Letter of Credit and Reimbursement Agreement dated as of
December 11, 1996, and as further amended by Amendment No. 4 to Letter of Credit
and Reimbursement Agreement dated as of April 18, 1997 among the Borrower, the
Lenders and the Agent (as amended, the "Credit Agreement") pursuant to which the
Lenders agreed to issue certain letters of credit on behalf of the Borrower; and
WHEREAS, the Borrower has requested that the Credit Agreement be amended in
the manner set forth herein and the Agent and the Lenders are willing to agree
to such amendment;
NOW, THEREFORE, in consideration of the mutual covenants and the
fulfillment of the conditions set forth herein, the parties hereto do hereby
agree as follows:
1. Definitions. Any capitalized terms used herein without definition
shall have the meaning set forth in the Credit Agreement.
2. Amendment. Subject to the terms and conditions set forth herein,
Section 7.05 of the Credit Agreement is hereby amended by deleting the dollar
figure "$200,000,000" in clause (v) thereof and inserting in replacement thereof
the dollar figure "$250,000,000".
3. Effectiveness. This Agreement shall become effective as of the date
hereof upon receipt by the Agent of seven fully executed copies of this
Agreement (which may be signed in counterparts).
4. Representations and Warranties. In order to induce the Agent and
the Lender to enter into this Agreement, the Borrower represents and warrants
to the Agent and the Lenders as follows:
(a) The representations and warranties made by Borrower in Article V
of the Credit Agreement are true and correct on and as of the date hereof,
except to the extent that such representations and warranties expressly relate
to an earlier date and except that the financial statements referred to in
Section 5.01(e)(i) of the Credit Agreement shall be deemed to be those financial
statements most recently delivered to the Agent and the Lenders pursuant to
Section 6.01 of the Credit Agreement;
(b) There has been no material adverse change in the condition,
financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole
since the date of the most recent financial reports of the Borrower received by
the Agent and the Lenders under Section 6.01(a) of the Credit Agreement, other
than changes in the ordinary course of business;
(c) The business and properties of the Borrower and its Subsidiaries,
taken as a whole, are not, and since the date of the most recent financial
report of the Borrower and its Subsidiaries received by the Agent and the
Lenders under Section 6.01(a) of the Credit Agreement, have not been, adversely
affected in any substantial way as the result of any fire, explosion,
earthquake, accident, strike, lockout, combination of workers, flood, embargo,
riot, activities of armed forces, war or acts of God or the public enemy, or
cancellation or loss of any major contracts; and
(d) No event has occurred and is continuing which constitutes, and no
condition exists which upon the consummation of the transaction contemplated
hereby would constitute, a Default or an Event of Default on the part of the
Borrower under the Credit Agreement, either immediately or with lapse of time or
the giving of notice, or both.
5. Entire Agreement. This Agreement sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter.
6. Full Force and Effect of Agreement. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all other Letter of
Credit Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original as against any party
whose signature appears thereon, and all of which shall together constitute one
and the same instrument.
8. Governing Law. This Agreement shall in all respects be governed by
the laws and judicial decisions of the State of New York.
9. Enforceability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable as to one or more of the
parties hereto, all other provisions nevertheless shall remain effective and
binding on the parties hereto.
10. Credit Agreement. All references in any of the Letter of Credit
Documents to the Credit Agreement shall mean the Credit Agreement as amended
hereby.
[Signature page follows.]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
BORROWER:
DATA GENERAL CORPORATION
By:
Name:
Title:
LENDERS:
NATIONSBANK OF TEXAS,
NATIONAL ASSOCIATION
By:
Name:
Title:
THE BANK OF NEW YORK
By:
Name:
Title:
FLEET NATIONAL BANK
By:
Name:
Title:
AGENT:
NATIONSBANK OF TEXAS,
NATIONAL ASSOCIATION,
as Agent for the Lenders
By:
Name:
Title:
EXHIBIT 11
<TABLE>
DATA GENERAL CORPORATION
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(Unaudited)
(In thousands except per share amounts)
<CAPTION>
Quarter Ended Nine Months Ended
---------------------- ------------------------
Jun. 28, Jun. 29, Jun. 28, Jun. 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary earnings per share:
Net income............................................................ $14,745 $ 7,141 $38,941 $18,184
======= ======= ======= =======
Weighted average shares outstanding................................... 40,625 39,045 40,155 38,563
Incremental shares from use of treasury
stock method for stock options...................................... 2,951 2,469 2,703 2,497
------- ------- ------- -------
Common and common equivalent
shares, where applicable............................................ 43,576 41,514 42,858 41,060
======= ======= ======= =======
Net income per share.................................................. $.34 $.17 $.91 $.44
======= ======= ======= =======
Earnings per share assuming full dilution: (a)
Net income............................................................ $14,745 $ 7,141 $38,941 $18,184
======= ======= ======= =======
Weighted average shares outstanding................................... 40,625 39,045 40,155 38,563
Incremental shares from use of treasury
stock method for stock options...................................... 3,387 2,501 2,902 2,647
------- ------- ------- -------
Common and common equivalent shares,
assuming full dilution, where applicable............................ 44,012 41,546 43,057 41,210
======= ======= ======= =======
Net income per share.................................................. $.34 $.17 $.91 $.44
======= ======= ======= =======
<FN>
(a) For the quarters and nine-month periods ended June 28, 1997 and June 29,
1996, the assumed conversion of convertible debentures, giving effect to
the incremental shares and the adjustment to reduce interest expense, is
anti-dilutive and has therefore been excluded from the computation.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
Q3 FY97 CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENT OF OPERATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> JUN-28-1997
<CASH> 310,789
<SECURITIES> 25,381
<RECEIVABLES> 256,977
<ALLOWANCES> 0
<INVENTORY> 163,387
<CURRENT-ASSETS> 782,270
<PP&E> 647,031
<DEPRECIATION> 471,727
<TOTAL-ASSETS> 1,050,180
<CURRENT-LIABILITIES> 329,701
<BONDS> 337,750
0
0
<COMMON> 472,178
<OTHER-SE> (103,912)
<TOTAL-LIABILITY-AND-EQUITY> 1,050,180
<SALES> 835,992
<TOTAL-REVENUES> 1,129,090
<CGS> 563,178
<TOTAL-COSTS> 751,145
<OTHER-EXPENSES> 332,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,823
<INCOME-PRETAX> 40,741
<INCOME-TAX> 1,800
<INCOME-CONTINUING> 38,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,941
<EPS-PRIMARY> .91
<EPS-DILUTED> .91
</TABLE>
