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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended September 26, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______________________
to __________________________
Commission File Number 1-7352
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Data General Corporation
(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
incorporation or organization) Identification Number)
4400 Computer Drive, Westboro, Massachusetts 01580
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 898-5000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 New York Stock Exchange
London Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
London Stock Exchange
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(Title of each class) (Name of each
exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
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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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Aggregate market value of common stock held by non-affiliates of the
registrant, as of November 30, 1998: $903,394,588
Number of shares outstanding of each of the registrant's classes of common
stock, as of November 30, 1998:
Common Stock, par value $.01 49,842,460
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(Title of each class) (Number of shares)
Documents incorporated by reference:
Parts I and II - Portions of registrant's Annual Report to Stockholders for the
year ended September 26, 1998.
Part III - Portions of registrant's Proxy Statement dated December 17, 1998.
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<PAGE>
AViiON, CLARalert, CLARiiON, Cluster-in-a-Box, DG/UX, DG/ViiSION, ECLIPSE,
Navisphere, and VALiiANT are registered trademarks; AVFlex, DG/UX Cluster,
Exchange-in-a-Box, Multidimensional Storage Architecture, NTerprise Manager,
QuickClusters, TermServer-in-a-Box, and THiiN are trademarks; and OMNiiCARE,
NTAlert and REPAIRiiON are service marks of Data General Corporation. Intel, the
Intel Inside logo and Pentium are registered trademarks and Xeon is a trademark
of Intel Corporation. Microsoft and Windows NT are registered trademarks of
Microsoft Corporation.
All other brand and product names may be trademarks or registered trademarks of
their respective holders.
<PAGE>
PART I
Item 1. Business.
Data General, incorporated in Delaware on April 15, 1968, designs,
manufactures, markets and supports a family of open computer systems including
servers and mass storage products. As used herein, the terms "Data General" and
the "Company" mean Data General Corporation, and, unless otherwise indicated,
its consolidated subsidiaries.
The Company's products provide solutions for high-performance customer
applications such as database management, transaction processing, decision
support, accounting and finance, healthcare information systems,
telecommunications and video storage, manufacturing planning and control, human
resources management and data warehousing. The Company focuses on providing
enterprise-level solutions for businesses of all sizes, healthcare providers and
government agencies, and has a worldwide sales, service and support network.
Data General, founded as a minicomputer company, has a history of
technology leadership in the computer industry. In 1988, the Company recognized
the impact which commodity microprocessors would have on proprietary systems and
on the overall economics of the computer business. To capitalize on this trend,
in 1989 Data General introduced the AViiON line of open systems, and in 1991 the
Company brought to market its first high-availability RAID (Redundant Array of
Inexpensive Disks) storage systems. During fiscal 1998, AViiON servers and
CLARiiON mass storage products constituted approximately 89 percent of the
Company's product revenues.
Strategy.
Data General's objective is to be a worldwide leader in open server and
mass storage products. The key elements of the Company's strategy are to:
Develop Value-Added and Innovative Systems Technologies. Data General
develops value-added and innovative systems technologies to provide a broad
spectrum of business-critical, enterprise solutions. The Company believes its
competitive position is strengthened by the differentiating features and
enhancements that it provides by leveraging its design and engineering
competencies with low cost commodity components and subassemblies, world class
manufacturing and the expertise of its suppliers.
Maintain Technology Leadership. Data General intends to continue to
identify market opportunities and rapidly deliver advanced technological
products that provide scalability, connectivity and price/performance
advantages. The Company believes that its ability to combine open technologies
with its own expertise in advanced systems architecture design, manufacturing
processes, project management and product development provides it with a
competitive advantage and enables it to be early to market with key products. In
1997 and 1998, the Company introduced next generation technologies, including
AViiON NT Cluster-in-a-Box, TermServer-in-a-Box, AV 20000 and AV 25000 servers
based on Non-Uniform Memory Architecture ("NUMA"), and CLARiiON Fibre Channel-
based storage systems, to meet the future computing and information access needs
of its customers.
<PAGE>
Utilize Multi-Channel Distribution and Strategic Alliances. The Company
plans to continue using multiple channels of distribution to expand its
worldwide market for enterprise server and storage solutions. In addition to
expanding its direct sales force, the Company intends to continue to leverage
and expand its extensive network of value-added resellers and its strong
original equipment manufacturers ("OEM") and other third-party distribution
relationships such as those with Dell, Hewlett-Packard, NEC, Silicon Graphics
and Storage Technology. Because enterprise customers often seek integrated
solutions, Data General has developed relationships with such companies as
Intel, Microsoft, Oracle, Informix, PeopleSoft, SAP, Baan, HBO and Company,
Meditech, and other selected component and software suppliers.
Provide Superior Customer Service and Support. Data General intends to
continue to provide superior customer service and support. Enterprise customers
often require 24-hour, seven-day-a-week support, and prefer a single point of
contact to ensure integrated hardware and software support and maintenance. This
level of service is often a key factor in selection of a systems vendor. The
Company believes that providing comprehensive, responsive service and support
gives it a competitive advantage and is a differentiating factor in developing
and maintaining customer relationships.
Products and Technologies.
Server Business
AViiON computers function as servers and multi-user systems for a wide
variety of applications providing solutions for businesses ranging from
departments and small businesses to large commercial enterprises that need high
availability systems to support large numbers of users, handle large volumes of
transactions and support large databases. The AViiON family of computer systems
includes two series: the newest series of AViiON servers, introduced in 1995,
based on the Intel microprocessor architecture; and an earlier series, available
since 1989, based on Reduced Instruction Set Computing ("RISC") microprocessors
from Motorola. AViiON now has an installed base of approximately 56,000 systems.
In fiscal 1998, revenues from the AViiON family were approximately $542 million.
Intel processor-based AViiON servers presently constitute the vast majority of
AViiON revenues.
The Intel processor-based AViiON product family includes enterprise
servers, high-end departmental and PC servers, and desk-side servers. The
Company's enterprise servers combine high performance with extensive
reliability, availability and serviceability features typically found on larger
computers. Together with a scalable and expandable design, these features make
AViiON servers suitable platforms for business-critical commercial applications
from independent software vendors such as SAP, Baan, PeopleSoft and Oracle.
These servers support several operating systems and are capable of running
applications from leading suppliers of databases, languages, office automation
and industry applications packages. Intel processor-based AViiON servers support
the Microsoft Windows NT Server operating system, the SCO UnixWare System,
various other open operating systems, and the DG/UX operating system, Data
General's commercial implementation of the UNIX operating system.
During 1997, the Company introduced the AV 20000 family and in 1998,
the AV 25000 family of high-performance systems based on Intel Standard High
Volume ("SHV") server boards and NUMA architecture. This class of product
extends the high end of the AViiON product line and enables customers to
capitalize on their existing investments in applications written for SMP
(symmetric multiprocessing) systems. AViiON NUMA systems are sold by the Data
General sales force and by channel distribution partners.
<PAGE>
Data General also sells a wide variety of peripheral equipment for use
with its computers. Peripheral equipment sold by the Company includes video
display terminals, printers, plotters, communication controllers, multiplexors,
disk storage, memory, magnetic tape equipment, analog-to-digital converters and
digital-to-analog converters.
The total purchase price of any computer system varies depending upon
the processing power, size of main memory and storage capacity, and upon the
types and quantities of accessory, peripheral controller subassembly, and
peripheral equipment ordered. Prices of the Company's various products range
from less than $500 to over $1,000,000. Dollar volume discounts are offered on
most products sold by the Company. The Company's new products and revisions to
existing products have typically resulted in improved price/performance ratios
for its customers.
AViiON servers and related systems, including personal computers and
earlier generation ECLIPSE MV computers, represented 43% of consolidated total
revenues for the year ended September 26, 1998, 42% of consolidated total
revenues for the fiscal year ended September 27, 1997, and 43% of consolidated
total revenues for the fiscal year ended September 28, 1996.
Storage Business
The CLARiiON division supports a wide range of open systems computing
platforms with a broad family of storage products ranging from disk arrays for
the PC/local area network market to high-capacity, high-availability arrays for
enterprise storage applications. CLARiiON mass storage disk arrays support the
UNIX operating system, Windows NT Server, SCO UnixWare and OS/2, as well as
Novell NetWare. CLARiiON products operate on a wide range of open systems
computing platforms, including systems from IBM, Compaq/Digital Equipment, Sun
Microsystems, Dell, Hewlett-Packard, Sequent and Silicon Graphics. The majority
of CLARiiON revenues are derived through OEM relationships with major systems
vendors and storage suppliers. However, CLARiiON products are also sold through
CLARiiON's direct sales force and through systems integrators and distributors.
Approximately 75,000 CLARiiON systems have been shipped since 1991.
In the past two years, the Company introduced and began delivering a
new generation of CLARiiON products based on "Fibre Channel" technology. Fibre
Channel technology has distinct advantages over SCSI technology, which is used
in the existing generation of CLARiiON and competitive storage systems. Fibre
Channel advantages include increased bandwidth, enabling the movement of up to
five times as much data, and greater scalability, permitting use of much larger
disk arrays. Fibre Channel technology will also allow a significant increase in
the permitted distance between servers and CLARiiON storage devices.
Data General believes that Fibre Channel-based CLARiiON products will
provide the Company with opportunities for incremental revenues with existing
customers as the new Fibre Channel architecture emerges to complement existing
SCSI products. The Company believes that Fibre Channel technology also will
permit the Company to pursue new applications and to expand its sales into new
markets such as telecommunications and video.
<PAGE>
Storage revenues represented 28% of consolidated total revenues for the
year ended September 26, 1998, 33% of consolidated total revenues for the fiscal
year ended September 27, 1997, and 27% of consolidated total revenues for the
fiscal year ended September 28, 1996.
Contract Manufacturing, Repair and Logistics
Data General also provides contract manufacturing services through the
VALiiANT business unit, and product repair and logistics services through the
REPAIRiiON business unit. Both units take advantage of the Company's world class
manufacturing expertise and facilities. Data General was the first U.S. computer
company to have its worldwide manufacturing operations gain ISO 9000
certification. By leveraging its world class manufacturing and product repair
capabilities, the Company believes VALiiANT and REPAIRiiON provide Data General
with opportunities to realize incremental revenues and profits.
Services.
Data General offers services and support in three primary areas:
customer service, professional services and customer training. Customer services
consist of maintenance of computer and computer peripheral products, on both a
contract and time-and-materials basis. The Company's professional services focus
on providing customer-specific solutions, such as the development of specialized
applications, configuration and installation of computer and network systems and
applications, and system migration, rehosting, and database implementation. The
Company also offers over 250 course titles of basic and advanced information
technology training.
The Company extends a limited service and/or parts warranty on
substantially all equipment sold and offers several types of maintenance
services and contracts at additional charges. Warranty and other maintenance
services are generally performed by service employees located in various offices
throughout the world. The Company offers a mail-in parts exchange and repair
service and a cooperative maintenance program for qualified organizations, VARs,
and other customers capable of performing maintenance services. The cooperative
program includes spare parts, back-up support, depot service, diagnostics,
training, documentation, tools and test equipment, and service planning and
support. Data General supports thousands of products made by other vendors. The
Company also offers an On-line Information Service, which provides customers
with immediate access to support information and personnel.
The majority of the Company's service revenues are related to the
Company's AViiON systems business. Service revenues represented 27% of
consolidated total revenues for the year ended September 26, 1998, 25% of
consolidated total revenues for the fiscal year ended September 27, 1997, and
30% of consolidated total revenues for the fiscal year ended September 28, 1996.
Marketing and Distribution.
The Company has two major divisions that are responsible for sales and
marketing: AViiON Enterprise Server Division and CLARiiON Advanced Storage
Division. The Company uses multiple distribution channels, including direct
sales, mass merchandising, reseller channels, and OEM sales. Sales divisions are
structured to cover the following major geographic areas: the United States,
Europe, Asia/Pacific, Canada, and Latin America. The Company also has a sales
division dedicated to the healthcare market.
<PAGE>
The Company sells its AViiON systems directly to end users by its sales
force of approximately 900 sales representatives and systems engineers. In
addition the Company uses indirect channels such as systems integrators,
software suppliers, distributors and industry-specific VARs to broaden sales of
its AViiON products into many specialized markets.
The Company's CLARiiON Advanced Storage Division uses primarily
third-party distribution channels such as OEMs, distributors and VARs. Major
customers include Dell, Hewlett-Packard, NEC, Sequent, Silicon Graphics, and
Storage Technology. The Company is also expanding its sales force to increase
sales of CLARiiON directly to end users.
The Company provides lease financing through various leasing and
financing programs arranged with third parties. Data General Leasing provides
flexible financing programs for all Data General products, as well as third-
party hardware, software and services. These programs are available worldwide
for resellers, distributors and end users.
The largest single customer during fiscal 1998 was Hewlett-Packard,
which purchases primarily CLARiiON storage systems for resale to its customers.
Hewlett-Packard accounted for 13% of consolidated total revenues in fiscal 1998.
The Company did not have any other customers with revenues exceeding 10% of the
Company's consolidated total revenues during fiscal 1998. The Company's business
is not subject to any unusual seasonal fluctuations.
The Company generally attempts to minimize the time from receipt of a
customer's order to shipment and virtually no orders are booked with shipment
dates in excess of one year from the date of order. As the Company's product mix
has shifted more towards industry-standard systems, the average time from order
date to shipment date has decreased. In addition, a substantial portion of the
orders received by the Company are subject to cancellation without significant
penalty, at the option of the customer at any time prior to shipment. Therefore,
the Company believes that disclosure of its backlog is not material to an
understanding of the Company's business.
<PAGE>
Organization and Structure.
The Company has two primary divisions: AViiON Enterprise Server
Division and CLARiiON Advanced Storage Division. These divisions are supported
by centralized operations for Manufacturing and Services, Finance and
Administration, and Corporate Marketing.
The AViiON Enterprise Server Division includes sales, marketing,
development, and professional services activities. Worldwide sales operations
are responsible for direct sales and reseller channels. Sales divisions are
structured to cover the following major geographic areas: the United States,
Europe, Asia, the Pacific Rim, Canada, and Latin America. The Worldwide
Healthcare Division is responsible for sales and marketing activities in the
healthcare market. The Company's AViiON Marketing activities are focused on
providing enterprise software solutions. Professional Services provides
customers with complete services to design, implement, and support commercial
computing environments. The Company's Open Systems Training business provides
lecture/lab courses, on-site training, and computer and video based training,
and is a Microsoft Authorized Technical Education Center and offers the
Microsoft Certified Professional Program.
The CLARiiON Advanced Storage Division is responsible for development
and marketing of the Company's CLARiiON family of open mass storage products.
The division includes organizations focused on OEM sales, Solutions sales,
marketing, product engineering, services, and advanced research and development.
The Manufacturing, Customer Service, and Information Management Group
("IMG") organization encompasses several functions. Manufacturing is responsible
for producing Data General systems; for procuring associated components,
subassemblies, peripherals, and various other products which are incorporated
into Data General systems or sold under the Data General label; for the
operation of the VALiiANT contract manufacturing and REPAIRiiON repair and
logistics business units; for Customer Order Fulfillment; and for overall
corporate quality assurance. Customer Service encompasses the Customer Support
Center, field engineering and other technical services. IMG is responsible for
the Company's information management technology and operations.
The Finance and Administration organization includes the Controller,
the Treasurer, Legal, Investor Relations, Property Management, and Human
Resources functions.
Corporate Marketing is responsible for increasing the Company's
visibility and awareness through public relations, advertising, tradeshows, and
a number of marketing and lead generation activities spanning both the AViiON
and CLARiiON divisions.
Raw Materials.
Data General's manufacturing operations employ a wide variety of
mechanical and electronic components, raw materials and other supplies. In the
design of its products, the Company routinely attempts to utilize
multiple-sourced components. However, in some instances, the Company selectively
uses sole-sourced components, such as microprocessors and gate arrays, in order
to achieve desired system performance. These components are typically based on
the manufacturer's proprietary underlying technology.
<PAGE>
In a few instances, the Company is dependent upon certain vendors for
the manufacture of significant components of its server and mass storage
systems. If these vendors were to become unwilling or unable to continue to
manufacture these products in required volumes, the Company would have to
identify and qualify acceptable alternative vendors. The inability to develop
alternate sources, if required in the future, could result in delays or
reductions in product shipments. With respect to sole-sourced materials, the
Company has not experienced significant problems with either the quality or the
sources and availability of materials.
Patents.
In November 1994 and in May 1996, the Company commenced patent
infringement litigation against International Business Machines Corporation
charging infringement of certain of the Company's patents (see "Item 3. Legal
Proceedings," below). Although the Company believes its claims are valid, it
cannot predict the outcome of the litigation. Should the Company prevail in the
litigation, such patents could play a significant role in the conduct of its
business and accordingly would be material. The Company believes that most of
its remaining patents do not presently play a significant role in the conduct of
its business or in its industry in general and most patents, granted or which
may be granted to it, while anticipated to be of value, are not expected to be
of material significance. The Company also owns certain copyrights, trademarks
and proprietary information.
From time to time, companies in the industry have claimed that products
and components similar to those manufactured by the Company are covered by valid
patents held by others. It may be necessary or desirable to obtain further
patent licenses in addition to those which the Company now holds. Although there
is no assurance that such additional patent licenses could be obtained, the
Company is of the opinion, based on industry practice and information presently
available, that such licenses could be obtained and on terms which would not
have a material effect on the Company's consolidated financial position or
results of operations.
Competition.
The computer industry has been characterized by rapid technological
change, product improvement, and price reductions. During fiscal 1998, the
Company experienced revenue growth in the AViiON business due to increased sales
of Intel processor-based servers, particularly for Microsoft Windows NT-based
applications, and revenue decline in the CLARiiON storage business due to the
transition from SCSI-based systems to new Fibre Channel-based systems. The
Company believes that the CLARiiON transition to Fibre Channel-based systems is
progressing smoothly. Data General's future may be adversely affected by new
technology developed by others or by price reductions initiated by competitors.
Some of the Company's competitors are larger companies and have substantially
greater resources than the Company. The Company also competes with a number of
smaller manufacturers. The Company believes that it is a significant
manufacturer of multi-user computer systems, servers, and mass storage devices
for commercial applications.
<PAGE>
The Company's AViiON systems have become increasingly competitive since
they were introduced in fiscal 1989. The Company believes its AViiON systems
compete favorably with standards-based systems from other industry-leading
vendors based upon a wide range of features and performance, including high
availability and clustering; the ability to run multiple operating systems,
including Windows NT Server, the Company's DG/UX operating system, and SCO
UnixWare; and the availability of an extensive range of applications software.
The Company believes its AViiON systems also compete favorably as a
result of their ability to connect with a variety of desktop systems
manufactured by the Company and by other vendors. The Company's worldwide
service and support capability, which includes service for certain products
manufactured by other vendors (such as PCs and workstations), also enhances the
competitive strength of the Company's product families.
The Company believes that its CLARiiON product was the first open,
RAID-based mass storage product. The CLARiiON product supports leading open
systems platforms, including Hewlett-Packard, IBM/AIX, Microsoft Windows NT, and
Sun Microsystems. The Company believes it is a leader in developing Fibre
Channel-based storage products.
Research and Development.
The Company believes that if it is to compete successfully in the
industry it will require a continuing commitment to research and development.
Research and development expenses were $118.7 million in fiscal 1998, $110.0
million in fiscal 1997, and $98.0 million in fiscal 1996. Gross expenditures on
research and development and software development in fiscal 1998, before
capitalization, increased 5% compared to fiscal 1997. Research and development
work contracted to third parties during fiscal 1997 was insignificant. During
fiscal 1998, the Company focused its research and development efforts on its
core business technology, multi-user computer systems, servers, and mass storage
devices, including related software and services. This includes development work
on systems based on NUMA architecture for high-end computer systems and Fibre
Channel storage systems.
Continued emphasis on applied research and development programs is
anticipated in order to improve existing products and to expand product line
capabilities. Research and development work is done primarily in the following
areas: general purpose computer systems, open mass storage devices, systems and
applications software, integrated circuit technology, network services and
products, and contracted special product design.
<PAGE>
Environmental Conditions.
The Company's various manufacturing facilities are subject to numerous
laws and regulations designed to protect the environment, particularly from
plant wastes and emissions. In the Company's opinion, it is in material
compliance with such laws and regulations. Compliance has not had, and is not
expected to have, a material effect upon the Company's capital expenditures,
results of operations, or competitive position.
Employees.
The Company had approximately 4,700 employees as of September 26, 1998,
compared with 5,100 employees as of September 27, 1997, and 4,900 employees as
of September 28, 1996. The Company's employees are not covered under any
collective bargaining agreements, and the Company has not experienced any
significant labor problems. The Company believes that its relationship with its
employees is good.
International Operations.
Foreign business is conducted through Company owned subsidiaries and
through a network of representatives and distributors. International revenues,
including U.S. direct export sales, amounted to approximately 38% of
consolidated total revenues in fiscal 1998, and 37% and 40% of consolidated
total revenues in fiscal 1997 and 1996, respectively. The majority of Data
General's international revenues are derived from western Europe, Asia and
Canada. In view of the locations and diversification of its international
activities, the Company does not believe that there are any special risks beyond
the normal business risks attendant to activities abroad. The Company maintains
a hedging program to minimize its exposure to foreign currency fluctuations.
Additional information relating to the Company's international operations,
including financial information by major geographic area, is included in "Note
12. Geographic Segment Data" on page 40 of the Company's Annual Report to
Stockholders for the fiscal year ended September 26, 1998.
<PAGE>
RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Actual results could differ materially from those projected or
contemplated in the forward-looking statements as a result of certain of the
risk factors set forth below and incorporated by reference in this Report. In
addition to the other information contained and incorporated by reference in
this Report, the following risk factors should be considered carefully in
evaluating the Company and its business.
Changing Technologies.
To compete effectively in the server and mass storage markets, the
Company must continue to introduce new products and features that address the
needs and preferences of its target markets. The server and storage markets are
characterized by short development cycles that are driven by rapidly changing
technology as well as declining product prices. There can be no assurance that
the Company will be able to continue to introduce new competitively priced
products, that the market will be receptive to its products or features, or that
competitors will not introduce advancements ahead of Data General. Furthermore,
there can be no assurance that the Company will develop or have access to new
competitive technology to permit it to introduce new products and features for
its target markets. In addition, the Company must make strategic decisions from
time to time as to which new technologies will result in products for sale to
markets that will experience future growth, and must form and maintain strategic
alliances for the design and marketing of its products. If the Company is not
successful in continuing to introduce new products in the growing segments of
the market or in forming and maintaining critical strategic relationships, there
could be a material adverse effect on the Company's business, financial
condition and results of operations.
Dependence on Suppliers.
Certain components and products that meet the Company's requirements
are available only from a limited number of suppliers. Among those components
are disk drives, microprocessors and certain proprietary integrated circuits.
The Company purchases each of these components from a single supplier or a small
number of qualified suppliers. The rapid rate of technological change, and the
necessity of developing and manufacturing products with short life-cycles may
intensify these risks. The inability to obtain components and products as
required, or to develop alternative sources if and as required in the future,
could result in delays or reductions in product shipments, which in turn could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Indirect Channels of Distribution.
Substantially all of the Company's CLARiiON sales, and a significant
portion of the Company's AViiON sales, are derived from reseller and OEM
channels. A single OEM channel customer during fiscal 1998 accounted for
approximately 13% of the Company's consolidated revenues. The Company's
financial results could be adversely affected if this customer or any other
material reseller or OEM were to substantially decrease its orders, or change
configurations, or terminate its relationship with the Company. Further, the
utilization of indirect channels of distribution tends to limit the Company's
ability to predict customer orders.
<PAGE>
Concentrated Manufacturing Operations.
Over the last several years, the Company has consolidated its various
manufacturing operations into three facilities where the Company conducts most
of its assembly, test, systems integration, and distribution operations. The
Company's ability to ship products and the Company's business, financial
condition and results of operations could be adversely affected were these
facilities not able to operate at required levels.
Capitalization of Software Development Costs.
The Company has made and continues to make significant investments in
software development efforts. The amount of expenditures that qualify for
capitalization under Statement of Financial Accounting Standards Number 86
("SFAS 86"), "Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed," may vary from period to period as software projects
progress through the development life cycle. These variations could impact the
Company's operating results in any given period. Unamortized software
development costs were $51.5 million at September 26, 1998. If technological
developments or other factors were to jeopardize the realizability of such
assets, the Company could be required to write off all or a substantial portion
of such capitalized values, which would have a material adverse effect on the
Company's results of operations for the period in which the write-off occurred.
Year 2000 Information and Readiness Disclosure Act.
The "Year 2000 issue" arises because many computer hardware and software systems
use only two digits to represent the year. As a result, these systems and
programs may not correctly handle dates beyond 1999, resulting in errors in
information or program or systems failures. As well, notwithstanding any
preparations taken by the Company, the Year 2000 issue presents risks and
uncertainties that could affect the Company's business, financial condition or
results of operations. The information and statements contained under the
heading "Year 2000 Information and Readiness Disclosure Act" on pages 24 to 26
of the Company's Annual Report to Stockholders for the fiscal year ended
September, 26, 1998, are incorporated here by reference.
Item 2. Properties.
The Company's executive offices are located in Westborough,
Massachusetts. Manufacturing, research and development, service, marketing, and
administrative support facilities are located in various states and countries
throughout the world. All buildings are modern, air conditioned, and suitable
and adequate for the present activities of the Company. Substantially all
manufacturing equipment is owned by the Company and is well maintained.
Additional information regarding the Company's principal plants and
properties is included under the heading "Facilities" on page 42 of the
Company's Annual Report to Stockholders for the fiscal year ended September 26,
1998.
<PAGE>
Item 3. Legal Proceedings.
The Company has been engaged in patent infringement litigation against
IBM Corporation since November 1994. Two lawsuits, both in the discovery stages,
are pending in the United States District Court for the District of
Massachusetts in Worcester. The Company alleges that several IBM products
including the AS/400 midrange systems and the AS/400 RISC-based computer product
line infringe various Company patents. Both suits seek compensatory damages and,
where appropriate, injunctive relief. IBM has answered both complaints, has
denied the Company's infringement claims and has interposed counterclaims
alleging that the Company's AViiON and CLARiiON computer systems infringe IBM
patents.
Although the Company believes its claims are valid, it cannot predict
the outcome of the litigation. In the opinion of management, based on
preliminary evaluation of the IBM patents covered in the counterclaims and
subject to the risks of litigation, the counterclaims are without merit, the
Company will prevail thereon and the counterclaims will not have a material
adverse impact on the results of operations or the financial position of the
Company.
The Company and certain of its subsidiaries are involved in various
other patent infringement, contractual, and proprietary rights suits. In the
opinion of management, the conclusion of these suits will not have a material
adverse effect on the financial position or results of operations and cash flows
of the Company and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Executive Officers of the Registrant.
Frederick R. Adler(1), Age 72, Chairman of the Executive Committee of the
Board of Directors since July 1982; Managing General Partner of Adler & Company,
a venture capital investment firm, and a general partner of its related
investment funds for more than five years; of counsel to Fulbright & Jaworski
L.L.P., Attorneys, and until December 1995, Senior Partner of such firm.
Ronald L. Skates(1), Age 57, President and Chief Executive Officer of the
Company since November 1989; Executive Vice President and Chief Operating
Officer of the Company from August 1988 to November 1989; Senior Vice President
of the Company from November 1986 to August 1988; Chief Financial Officer of the
Company from November 1986 to August 1987; Partner, Price Waterhouse from July
1976 to November 1986.
<PAGE>
William J. Cunningham, Age 60, Senior Vice President of the Company since
November 1996; Vice President of the Company from August 1989 to October 1996;
prior positions at Apollo Computer Inc. included Vice President and General
Manager, Manufacturing and Research and Development, from October 1988 to June
1989; and Vice President and General Manager, Manufacturing and Distribution,
from September 1987 to September 1988; Vice President, U.S. Manufacturing, for
Honeywell Bull from March 1986 to September 1987.
Arthur W. DeMelle (2), Age 58, Senior Vice President of the Company
since November 1996; Vice President of the Company from March 1992 to October
1996 and Chief Financial Officer of the Company since March 1992; prior
positions included Senior Vice President of Finance and Administration at Chep
USA from November 1989 to March 1992; Executive Vice President and Chief
Financial Officer at Emery Air Freight Corporation from April 1987 to May 1989;
and Executive Vice President and Chief Financial Officer at Purolator Courier
Corporation from July 1980 to April 1987.
Joel Schwartz, Age 56, Senior Vice President of the Company since
November 1996; Vice President of the Company from February 1989 to October 1996;
President and Chief Operating Officer of Polygen Corp. from August 1986 to
February 1989.
Ethan Allen, Age 51, Senior Vice President of the Company since
November 1998; Vice President of the Company from January 1992 to November 1998;
Division Vice President of the Company from January 1990 to January 1992.
Executive officers of the Company are elected annually and hold office
until the first meeting of the Board of Directors following the Annual Meeting
of Stockholders or until their successors have been elected and have duly
qualified.
(1) Member of Board of Directors and Executive Committee thereof.
(2) Arthur W. DeMelle died on December 10, 1998.
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The information contained under the headings "Stock Price Range" on
page 41; and "Number of Stockholders," "Dividend Policy," and "Stock Exchange
Listing" on page 43 of the Company's Annual Report to Stockholders for the
fiscal year ended September 26, 1998 is incorporated herein by reference.
Item 6. Selected Financial Data.
The information contained under the heading "Five Year Summary of
Selected Financial Data" on page 18 of the Company's Annual Report to
Stockholders for the fiscal year ended September 26, 1998 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 19
through 26 of the Company's Annual Report to Stockholders for the fiscal year
ended September 26, 1998 is incorporated herein by reference. This information
should be read in conjunction with the related consolidated financial statements
incorporated by reference under Item 8.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The information contained under the heading "Market Risk" on page 26 of
the Company's Annual Report to Stockholders for the fiscal year ended September
26, 1998, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The information contained in the consolidated financial statements,
notes to consolidated financial statements, and report of independent
accountants, under the heading "Quarterly Financial Data (Unaudited)," and
"Facilities," on pages 27 through 42 of the Company's Annual Report to
Stockholders for the fiscal year ended September 26, 1998 is incorporated herein
by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information contained under the heading "Proposal No. 1 - Election
of Seven Directors" on pages 4 through 7 of the Company's Proxy Statement dated
December 17, 1998 is incorporated herein by reference. See also "Executive
Officers of the Registrant" appearing in Part I hereof.
Item 11. Executive Compensation.
The information contained under the headings "Summary Compensation
Table," "Option Grants in the 1998 Fiscal Year," "Option Exercises in the 1998
Fiscal Year and Fiscal Year-End Option Values," "Compensation Pursuant to
Plans," "Employee Agreements" and "Compensation of Directors" on pages 9 through
20 of the Company's Proxy Statement dated December 17, 1998 is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information contained under the heading "Beneficial Ownership of
Common Stock" and in the second paragraph and related table under the heading
"Proposal No. 1 - Election of Seven Directors" on pages 2 through 7 of the
Company's Proxy Statement dated December 17, 1998 is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K.
(a) 1 and 2. Index to financial statements and related schedule:
Page
Five-year summary of selected financial data ................................18*
Management's discussion and analysis of financial condition and results of
operations ..........................................................19-26*
Consolidated balance sheets at September 26, 1998 and September 27, 1997 ..28*
For fiscal years ended September 26, 1998, September 27, 1997, and
September 28, 1996:
Consolidated statements of operations..............................27*
Consolidated statements of cash flows..............................29*
Consolidated statements of stockholders' equity....................30*
Notes to consolidated financial statements................................31-40*
Report of independent accountants............................................41*
Supplemental financial information...........................................41*
Facilities...................................................................42*
Report of independent accountants on financial statement schedules...........23
Financial statement schedule:
Schedule II - Valuation and qualifying accounts....................24
The financial statement schedule should be read in conjunction with the
financial statements in the 1998 Annual Report to Stockholders. All other
schedules have been omitted as they are not applicable, not required, or the
information is included in the consolidated financial statements or notes
thereto.
- ----------------------
* Page references are to the 1998 Annual Report to Stockholders. The 1998
Annual Report to Stockholders is not to be deemed filed as part of this
Report except for those parts thereof specifically incorporated by
reference into this Report.
<PAGE>
EXHIBITS
3. (a) Restated Certificate of Incorporation of the Company, as amended,
including the Company's Certificate of Designation dated October 17, 1986,
previously filed as Exhibit 3(a) to the Company's Annual Report on Form
10-K for the fiscal year ended September 27, 1986, which is incorporated
herein by reference.
(b) Amendment to Certificate of Incorporation of the Company, filed January
29, 1987, previously filed as Exhibit 3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 28, 1987, which is incorporated
herein by reference.
(c) By-Laws of the Company, as amended, previously filed as Exhibit 3 (c)
to Form 10-K/A dated April 21, 1998, which is incorporated herein by
reference.
(d) Certificate of Increase dated November 26, 1997, previously filed on
March 16, 1998 as Exhibit 4 to the Company's Registration Statement on Form
8-A, which is incorporated herein by reference.
4. (a) Rights Agreement Renewed and Restated as of October 19, 1996 between
the Company and The Bank of New York, as Rights Agent, previously filed on
June 27, 1996, as Exhibit 1 to the Company's Amendment to Registration
Statement on Form 8-A/A, which is incorporated herein by reference.
(b) Indenture, dated as of May 21, 1997, between the Company and The Bank
of New York, previously filed as Exhibit 4(d) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997, which is
incorporated herein by reference.
(c) Registration Rights Agreement dated as of May 15, 1997, between and
among the Company and Morgan Stanley and Co. Incorporated and Dillon, Read
& Co. Inc. previously filed as Exhibit 4(e) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997, which is
incorporated herein by reference.
(d) Form of 6% Convertible Subordinated Note due 2004, previously filed on
March 16, 1998 as Exhibit 2 to the Company's Registration Statement on Form
8-A, which is incorporated herein by reference.
10. (a) Restricted Stock Option Plan, Appendix A to the prospectus included in
the Company's Registration Statement on Form S-8, Registration Number
33-19759, which is incorporated herein by reference.
(b) Forms of Restricted Stock Option Agreement, previously filed as Exhibit
10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended
September 29, 1990, which is incorporated herein by reference.
<PAGE>
(c) Form of Amendment to Restricted Stock Option Agreement, previously
filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 25, 1988, which is incorporated herein by reference.
(d) Form of Amendments to Key Executive Restricted Stock Option Agreements,
previously filed as Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 25, 1989, which is incorporated herein by
reference.
(e) Form of Amended and Restated Restricted Stock Option Agreement, between
the Company and Ronald L. Skates, previously filed as Exhibit 10(f) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 25,
1989, which is incorporated herein by reference.
(f) Form of Amendment to Restricted Stock Option Agreements, between the
Company and Frederick R. Adler, previously filed as Exhibit 10(g) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 25,
1989, which is incorporated herein by reference.
(g) Amendment to Restricted and Employee Incentive Stock Option Agreements,
between the Company and Ronald L. Skates, dated November 14, 1988,
previously filed as Exhibit 10(e) to the Company's Annual Report on Form
10-K for the fiscal year ended September 24, 1988, which is incorporated
herein by reference.
(h) Forms of Incentive Stock Option Agreement, previously filed as Exhibit
10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended
September 26, 1987, which is incorporated herein by reference.
(i) Form of Amendment to Employee Incentive Stock Option Agreement,
previously filed as Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 25, 1988, which is incorporated herein by
reference.
(j) Form of Amended and Restated Employee Stock Option Agreement, between
the Company and Ronald L. Skates, previously filed as Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 25,
1989, which is incorporated herein by reference.
(k) Form of Amendments to Key Executive Stock Option Agreements, previously
filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 25, 1989, which is incorporated herein by
reference.
(l) Non-Employee Director Restricted Stock Option Plan, Appendix A to the
prospectus included in the Company's Registration Statement on Form S-8,
Registration Number 2-91481, which is incorporated herein by reference.
(m) Form of Non-Employee Director Restricted Stock Option Agreement,
previously filed as Exhibit 10(n) to the Company's Annual Report on Form
10-K for the fiscal year ended September 29, 1990, which is incorporated
herein by reference.
<PAGE>
(n) Form of Employment Agreements between the Company and its full-time
officers, previously filed as Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 25, 1989, which is
incorporated herein by reference.
(o) Form of Amendment dated September 1, 1993, to various Employment
Agreements between the Company and its full-time officers, previously filed
as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal
year ended September 25, 1993, which is incorporated herein by reference.
(p) Form of Amendment dated November 5, 1997 to various Employment
Agreements between the Company and its full-time officers, previously filed
as Exhibit 10(mm) to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 27, 1997, which is incorporated herein by reference.
(q) Form of Indemnity Agreement between the Company and its officers and
directors, previously filed as Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 28, 1987, which is incorporated
herein by reference.
(r) Form of Amendment dated November 5, 1997 to various Indemnity
Agreements between the Company and its officers and directors, previously
filed as Exhibit 10(ll) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 27, 1997, which is incorporated herein by
reference.
(s) Data General Corporation Supplemental Retirement Benefit Plan dated as
of October 1, 1989, between the Company and its highly compensated
employees, previously filed as Exhibit 10(x) to the Company's Annual Report
on Form 10-K for the fiscal year ended September 24, 1994, which is
incorporated herein by reference.
(t) Form of Supplemental Pension and Retiree Medical Agreement dated as of
December 7, 1994, between the Company and its current President and Chief
Executive Officer, previously filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K for the fiscal year ended September 24, 1994,
which is incorporated herein by reference.
(u) 1994 Non-Employee Director Stock Option Plan, Appendix A to the
prospectus included in the Company's Registration Statement on Form S-8,
Registration Number 33-53039, which is incorporated herein by reference.
(v) Form of 1994 Non-Employee Director Stock Option Agreement, previously
filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 24, 1994, which is incorporated herein by
reference.
(w) Employee Qualified Stock Purchase Plan, previously filed as Exhibit 4.1
to the Company's Registration Statement on Form S-8, Registration Number
333-31159, which is incorporated herein by reference.
<PAGE>
(x) Employee Stock Option Plan, Appendix A to the prospectus included in
the Company's Registration Statement on Form S-8, Registration Number
33-58237, which is incorporated herein by reference.
(y) Summary of 1998 Fiscal Year Bonus Opportunity for Chief Executive
Officer, previously filed as Exhibit 10(jj) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 27, 1997, which is
incorporated herein by reference.
(z) Summary of Retention Bonus for Chief Executive Officer, previously
filed as Exhibit 10(kk) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 27, 1997, which is incorporated herein by
reference.
(aa) Stock Compensation Plan for Non-Employee Directors, previously filed
as Exhibit 4.2 to the Company's Registration Statement on Form S-8,
Registration Number 333-31159, which is incorporated herein by reference.
(bb) Credit Agreement dated September 30, 1997 between the Company and
NationsBank of Texas, N.A., et al, previously filed as Exhibit 10(ee) to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 27, 1997, which is incorporated herein by reference.
(cc) 1997 Non-Officer Employee Stock Option Plan, previously filed as
Exhibit 10(ff) to the Company's Annual Report on Form 10-K for the fiscal
year ended September 27, 1997, which is incorporated herein by reference.
(dd) Form of 1997 Non-Officer Employee Stock Option Agreement, previously
filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 27, 1997, which is incorporated herein by
reference.
(ee) Amendment No. 1 to Credit Agreement dated as of January 28, 1998,
amending the Credit Agreement between the Company and NationsBank of Texas,
N.A., et al.
(ff) Amendment No. 2 to Credit Agreement dated as of August 28, 1998,
amending the Credit Agreement between the Company and NationsBank of Texas,
N.A., et al.
(gg) Deferred Compensation Plan dated January 1, 1998, previously filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8,
Registration Number 333-45153, which is incorporated herein by reference.
(hh) Deferred Compensation Plan Trust Agreement dated January 2, 1998,
previously filed as Exhibit 10(nn) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 28, 1998, which is incorporated
herein by reference.
(ii) Grant of Common Stock to Non-Employee Directors dated November 5,
1997, previously filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-8, Registration Number 333-45153, which is incorporated
herein by reference.
11. Computation of basic and diluted earnings per share.
<PAGE>
13. Annual report to stockholders for the fiscal year ended September 26, 1998,
certain portions of which have been incorporated herein by reference.
21. Subsidiaries of the registrant.
23. Consent of independent accountants.
Exhibits, other than those incorporated by reference, have been
included in copies of this Report filed with the Securities and Exchange
Commission. Stockholders of the Company will be provided with copies of these
exhibits upon written request to the Company.
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal year ended
September 26, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DATA GENERAL CORPORATION
(Registrant)
By: /s/ Ronald L. Skates
-------------------------------
Ronald L. Skates
President and Chief Executive Officer
December 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Ronald L. Skates President and Chief
- -------------------------------- Executive Officer;
Ronald L. Skates Director December 17, 1998
/s/ Frederick R. Adler Chairman of Executive
- -------------------------------- Committee of Board of
Frederick R. Adler Directors; Director December 17, 1998
/s/ Jeffrey M. Cunningham Director December 17, 1998
- --------------------------------
Jeffrey M. Cunningham
Senior Vice President;
- -------------------------------- Chief Financial Officer;
Arthur W. DeMelle Chief Accounting Officer
/s/ Ferdinand Colloredo-Mansfeld Director December 17, 1998
- --------------------------------
Ferdinand Colloredo-Mansfeld
/s/ Donald H. Trautlein Director December 17, 1998
- --------------------------------
Donald H. Trautlein
/s/ Richard L. Tucker Director December 17, 1998
- --------------------------------
Richard L. Tucker
/s/ W. Nicholas Thorndike Director December 17, 1998
- --------------------------------
W. Nicholas Thorndike
/s/ John J. Gavin Jr. Vice President; December 17, 1998
- --------------------------------- Controller;
John J. Gavin Jr. Acting Chief Financial
Officer
/s/ Robert C. McBride Vice President; Treasurer December 17, 1998
- --------------------------------- Acting Chief Accounting
Robert C. McBride Officer
<PAGE>
DATA GENERAL CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Data General Corporation
Our audits of the consolidated financial statements referred to in our
report dated October 28, 1998 appearing on page 41 of the 1998 Annual Report to
Stockholders of Data General Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the Financial Statement Schedule listed in Item
14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
October 28, 1998
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
DATA GENERAL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance at
Previous End Balance at
Description of Year Additions Deductions End of Year
- --------------------------------- ------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
SEPTEMBER 26, 1998
Allowance for doubtful accounts . . . . . . . . . $ 16,588 $ 11,814(a) $ (8,978)(b) $ 19,424
Valuation allowance on deferred tax asset (c) . . 195,071 82,492 (17,328) 260,235
SEPTEMBER 27, 1997
Allowance for doubtful accounts . . . . . . . . . 14,480 11,211(a) (9,103)(b) 16,588
Valuation allowance on deferred tax asset (c) . . 204,017 11,504 (20,450) 195,071
SEPTEMBER 28, 1996
Allowance for doubtful accounts . . . . . . . . . 14,079 10,276(a) (9,875)(b) 14,480
Valuation allowance on deferred tax asset (c) . . . 201,255 19,827 (17,065) 204,017
- --------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Charged to costs and expenses.
(b) Accounts deemed uncollectable.
(c) SFAS 109 "Accounting for Income Taxes" adopted September 26, 1993.
</FN>
</TABLE>
<PAGE>
EXHIBITS
Index to Exhibits.
3. (a) Restated Certificate of Incorporation of the Company, as amended,
including the Company's Certificate of Designation dated October 17, 1986,
previously filed as Exhibit 3(a) to the Company's Annual Report on Form
10-K for the fiscal year ended September 27, 1986, which is incorporated
herein by reference.
(b) Amendment to Certificate of Incorporation of the Company, filed January
29, 1987, previously filed as Exhibit 3 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 28, 1987, which is incorporated
herein by reference.
(c) By-Laws of the Company, as amended, previously filed as Exhibit 3(c) to
Form 10-K/A dated April 21, 1998, which is incorporated herein by
reference.
(d) Certificate of Increase dated November 26, 1997, previously filed on
March 16, 1998 as Exhibit 4 to the Company's Registration Statement on Form
8-A, which is incorporated herein by reference.
4. (a) Rights Agreement Renewed and Restated as of October 19, 1996 between
the Company and The Bank of New York, as Rights Agent, previously filed on
June 27, 1996, as Exhibit 1 to the Company's Amendment to Registration
Statement on Form 8-A/A, which is incorporated herein by reference.
(b) Indenture, dated as of May 21, 1997, between the Company and The Bank
of New York, previously filed as Exhibit 4(d) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997, which is
incorporated herein by reference.
(c) Registration Rights Agreement dated as of May 15, 1997, between and
among the Company and Morgan Stanley and Co. Incorporated and Dillon, Read
& Co. Inc. previously filed as Exhibit 4(e) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1997, which is
incorporated herein by reference.
(d) Form of 6% Convertible Subordinated Note due 2004, previously filed on
March 16, 1998 as Exhibit 2 to the Company's Registration Statement on Form
8-A, which is incorporated herein by reference.
10. (a) Restricted Stock Option Plan, Appendix A to the prospectus included in
the Company's Registration Statement on Form S-8, Registration Number
33-19759, which is incorporated herein by reference.
(b) Forms of Restricted Stock Option Agreement, previously filed as Exhibit
10(b) to the Company's Annual Report on Form 10-K for the fiscal year ended
September 29, 1990, which is incorporated herein by reference.
(c) Form of Amendment to Restricted Stock Option Agreement, previously
filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 25, 1988, which is incorporated herein by reference.
(d) Form of Amendments to Key Executive Restricted Stock Option Agreements,
previously filed as Exhibit 10(b) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 25, 1989, which is incorporated herein by
reference.
(e) Form of Amended and Restated Restricted Stock Option Agreement, between
the Company and Ronald L. Skates, previously filed as Exhibit 10(f) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 25,
1989, which is incorporated herein by reference.
(f) Form of Amendment to Restricted Stock Option Agreements, between the
Company and Frederick R. Adler, previously filed as Exhibit 10(g) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 25,
1989, which is incorporated herein by reference.
(g) Amendment to Restricted and Employee Incentive Stock Option Agreements,
between the Company and Ronald L. Skates, dated November 14, 1988,
previously filed as Exhibit 10(e) to the Company's Annual Report on Form
10-K for the fiscal year ended September 24, 1988, which is incorporated
herein by reference.
(h) Forms of Incentive Stock Option Agreement, previously filed as Exhibit
10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended
September 26, 1987, which is incorporated herein by reference.
(i) Form of Amendment to Employee Incentive Stock Option Agreement,
previously filed as Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 25, 1988, which is incorporated herein by
reference.
(j) Form of Amended and Restated Employee Stock Option Agreement, between
the Company and Ronald L. Skates, previously filed as Exhibit 10(e) to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 25,
1989, which is incorporated herein by reference.
(k) Form of Amendments to Key Executive Stock Option Agreements, previously
filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 25, 1989, which is incorporated herein by
reference.
(l) Non-Employee Director Restricted Stock Option Plan, Appendix A to the
prospectus included in the Company's Registration Statement on Form S-8,
Registration Number 2-91481, which is incorporated herein by reference.
(m) Form of Non-Employee Director Restricted Stock Option Agreement,
previously filed as Exhibit 10(n) to the Company's Annual Report on Form
10-K for the fiscal year ended September 29, 1990, which is incorporated
herein by reference.
(n) Form of Employment Agreements between the Company and its full-time
officers, previously filed as Exhibit 10(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 25, 1989, which is
incorporated herein by reference.
(o) Form of Amendment dated September 1, 1993, to various Employment
Agreements between the Company and its full-time officers, previously filed
as Exhibit 10(u) to the Company's Annual Report on Form 10-K for the fiscal
year ended September 25, 1993, which is incorporated herein by reference.
(p) Form of Amendment dated November 5, 1997 to various Employment
Agreements between the Company and its full-time officers, previously filed
as Exhibit 10(mm) to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 27, 1997, which is incorporated herein by reference.
(q) Form of Indemnity Agreement between the Company and its officers and
directors, previously filed as Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 28, 1987, which is incorporated
herein by reference.
(r) Form of Amendment dated November 5, 1997 to various Indemnity
Agreements between the Company and its officers and directors, previously
filed as Exhibit 10(ll) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 27, 1997, which is incorporated herein by
reference.
(s) Data General Corporation Supplemental Retirement Benefit Plan dated as
of October 1, 1989, between the Company and its highly compensated
employees, previously filed as Exhibit 10(x) to the Company's Annual Report
on Form 10-K for the fiscal year ended September 24, 1994, which is
incorporated herein by reference.
(t) Form of Supplemental Pension and Retiree Medical Agreement dated as of
December 7, 1994, between the Company and its current President and Chief
Executive Officer, previously filed as Exhibit 10(y) to the Company's
Annual Report on Form 10-K for the fiscal year ended September 24, 1994,
which is incorporated herein by reference.
(u) 1994 Non-Employee Director Stock Option Plan, Appendix A to the
prospectus included in the Company's Registration Statement on Form S-8,
Registration Number 33-53039, which is incorporated herein by reference.
(v) Form of 1994 Non-Employee Director Stock Option Agreement, previously
filed as Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 24, 1994, which is incorporated herein by
reference.
(w) Employee Qualified Stock Purchase Plan, previously filed as Exhibit 4.1
to the Company's Registration Statement on Form S-8, Registration Number
333-31159, which is incorporated herein by reference.
(x) Employee Stock Option Plan, Appendix A to the prospectus included in
the Company's Registration Statement on Form S-8, Registration Number
33-58237, which is incorporated herein by reference.
(y) Summary of 1998 Fiscal Year Bonus Opportunity for Chief Executive
Officer, previously filed as Exhibit 10(jj) to the Company's Quarterly
Report on Form 10-Q for the quarter ended December 27, 1997, which is
incorporated herein by reference.
(z) Summary of Retention Bonus for Chief Executive Officer, previously
filed as Exhibit 10(kk) to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 27, 1997, which is incorporated herein by
reference.
(aa) Stock Compensation Plan for Non-Employee Directors, previously filed
as Exhibit 4.2 to the Company's Registration Statement on Form S-8,
Registration Number 333-31159, which is incorporated herein by reference.
(bb) Credit Agreement dated September 30, 1997 between the Company and
NationsBank of Texas, N.A., et al, previously filed as Exhibit 10(ee) to
the Company's Annual Report on Form 10-K for the fiscal year ended
September 27, 1997, which is incorporated herein by reference.
(cc) 1997 Non-Officer Employee Stock Option Plan, previously filed as
Exhibit 10(ff) to the Company's Annual Report on Form 10-K for the fiscal
year ended September 27, 1997, which is incorporated herein by reference.
(dd) Form of 1997 Non-Officer Employee Stock Option Agreement, previously
filed as Exhibit 10(gg) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 27, 1997, which is incorporated herein by
reference.
(ee) Amendment No. 1 to Credit Agreement dated as of January 28, 1998,
amending the Credit Agreement between the Company and NationsBank of Texas,
N.A., et al.
(ff) Amendment No. 2 to Credit Agreement dated as of August 28, 1998,
amending the Credit Agreement between the Company and NationsBank of Texas,
N.A., et al.
(gg) Deferred Compensation Plan dated January 1, 1998, previously filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-8,
Registration Number 333-45153, which is incorporated herein by reference.
(hh) Deferred Compensation Plan Trust Agreement dated January 2, 1998,
previously filed as Exhibit 10(nn) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 28, 1998, which is incorporated
herein by reference.
(ii) Grant of Common Stock to Non-Employee Directors dated November 5,
1997, previously filed as Exhibit 4.2 to the Company's Registration
Statement on Form S-8, Registration Number 333-45153, which is incorporated
herein by reference.
11. Computation of basic and diluted earnings per share.
13. Annual report to stockholders for the fiscal year ended September 26, 1998,
certain portions of which have been incorporated herein by reference.
21. Subsidiaries of the registrant.
23. Consent of independent accountants.
Exhibits, other than those incorporated by reference, have been
included in copies of this Report filed with the Securities and Exchange
Commission. Stockholders of the Company will be provided with copies of these
exhibits upon written request to the Company.
<PAGE>
EXHIBIT 10 (ee)
THIS AMENDMENT NO. 1 TO CREDIT AGREEMENT (this "Agreement") is made
and entered into as of this 28th day of January, 1998 among:
DATA GENERAL CORPORATION, a Delaware corporation ("Borrower"),
NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking association, THE
BANK OF NEW YORK, FLEET NATIONAL BANK, formerly known as Fleet Bank of
Massachusetts, N.A, THE BANK OF NOVA SCOTIA, CREDIT LYONNAIS NEW YORK BRANCH and
US TRUST (each individually, a "Lender" and collectively, the "Lenders"); and
NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, a national banking
association, in its capacity as agent for the Lenders (in such capacity, the
"Agent");
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Agent have entered into a
Credit Agreement dated as of September 30, 1997, (the "Credit Agreement")
pursuant to which the Lenders agreed to make a Revolving Credit Facility
available to the Borrower; and
WHEREAS, the Borrower has requested that the Credit Agreement be
amended in the manner set forth herein and the Agent and the Lenders are willing
to agree to such amendment;
NOW, THEREFORE, in consideration of the mutual covenants and the
fulfillment of the conditions set forth herein, the parties hereto do hereby
agree as follows:
1. Definitions. Any capitalized terms used herein without
definition shall have the meaning set forth in the Credit Agreement.
2. Amendment. Subject to the terms and conditions set forth herein, the
Credit Agreement is hereby amended as follows:
(a) Section 1.01 of the Credit Agreement is hereby amended by
inserting therein the following new defined term in alphabetical
position:
"Stock Buyback Program" means the Data General
Corporation Stock Buyback Program as approved by the Board of
Directors of the Borrower from time to time;
(b) Section 8.6 of the Credit Agreement is hereby amended by (i)
deleting the word "and" at the end of clause (k) thereof, (ii)
deleting the period at the end of clause (l) thereof and inserting
"; and" in replacement thereof and (iii) by adding a new
clause (m) thereto which shall read as follows:
<PAGE>
(m) repurchase shares of its own capital stock in one
or more transactions on or prior to January 28, 1999 pursuant
to the Stock Buyback Program for an aggregate purchase price
of up to $60,000,000.
(c) Section 8.8 of the Credit Agreement is hereby
deleted in its entirety and the following new Section 8.8 is
inserted in replacement thereof:
8.8 Restricted Payments. Neither the Borrower nor any
Subsidiary shall make any Restricted Payment or apply or set
apart any of their assets therefor or agree to do any of the
foregoing, provided, however, the Borrower may repurchase
shares of its own capital stock in one or more transactions on
or prior January 28, 1999 pursuant to the Stock Buyback
Program for an aggregate purchase price of up to $60,000,000;
3. Effectiveness. This Agreement shall become effective as of the date
hereof upon receipt by the Agent of seven fully executed copies of this
Agreement (which may be signed in counterparts).
4. Representations and Warranties. In order to induce the Agent and the
Lender to enter into this Agreement, the Borrower represents and warrants to the
Agent and the Lenders as follows:
(a) The representations and warranties made by Borrower in
Article V of the Credit Agreement are true and correct on and as of the
date hereof, except to the extent that such representations and
warranties expressly relate to an earlier date and except that the
financial statements referred to in Section 6.6(a) of the Credit
Agreement shall be deemed to be those financial statements most
recently delivered to the Agent and the Lenders pursuant to Section 7.1
of the Credit Agreement;
(b) There has been no material adverse change in the
condition, financial or otherwise, of the Borrower and its
Subsidiaries, taken as a whole, since the date of the most recent
financial reports of the Borrower received by the Agent and the Lenders
under Section 7.1(a) of the Credit Agreement, other than changes in the
ordinary course of business;
(c) The business and properties of the Borrower and its
Subsidiaries, taken as a whole, are not, and since the date of the most
recent financial report of the Borrower and its Subsidiaries received
by the Agent and the Lenders under Section 7.1(a) of the Credit
Agreement, have not been, adversely affected in any substantial way as
the result of any fire, explosion, earthquake, accident, strike,
lockout, combination of workers, flood, embargo, riot, activities of
armed forces, war or acts of God or the public enemy, or cancellation
or loss of any major contracts; and
(d) No event has occurred and is continuing which constitutes,
and no condition exists which upon the consummation of the transaction
contemplated hereby would constitute, a Default or an Event of Default
on the part of the Borrower under the Credit Agreement.
5. Entire Agreement. This Agreement sets forth the entire understanding
and agreement of the parties hereto in relation to the subject matter hereof and
supersedes any prior negotiations and agreements among the parties relative to
such subject matter.
6. Full Force and Effect of Agreement. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all other Letter of
Credit Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original as against any party
whose signature appears thereon, and all of which shall together constitute one
and the same instrument.
8. Governing Law. This Agreement shall in all respects be governed by
the laws and judicial decisions of the State of New York.
9. Enforceability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable as to one or more of the
parties hereto, all other provisions nevertheless shall remain effective and
binding on the parties hereto.
10. Credit Agreement. All references in any of the Letter of Credit
Documents to the Credit Agreement shall mean the Credit Agreement as amended
hereby.
[Signature page follows.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
BORROWER:
DATA GENERAL CORPORATION
By: s/ Robert C. McBride
Name: Robert C. McBride
Title: VP/Treasurer
AGENT:
NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION, as Agent for
the Lenders
By: /s/ Timothy M. O'Connor
Name: Timothy M. O'Connor
Title: Vice President
LENDERS:
NATIONSBANK OF TEXAS, NATIONAL ASSOCIATION
By /s/ Timothy M. O'Connor
Name: Timothy M. O'Connor
Title: Vice President
THE BANK OF NEW YORK
By: /s/ Walter C. Parelli
Name: Walter C. Parelli
Title: Vice President
FLEET NATIONAL BANK
By: /s/ Thomas W. Davies
Name: Thomas W. Davies
Title: SVP
THE BANK OF NOVA SCOTIA
By: /s/ T. M. Pitcher
Name: T. M. Pitcher
Title:
Authorized Signatory
CREDIT LYONNAIS NEW YORK BRANCH
By: /s/ Vladimir Labun
Name: Vladimir Labun
Title: First Vice President-Manager
US TRUST
By: /s/ Anthony Wilson
Name: Anthony Wilson
Title: SVP
EXHIBIT 10 (ff)
THIS AMENDMENT NO. 2 TO CREDIT AGREEMENT (this "Agreement") is
made and entered into as of this 28th day of August, 1998 among:
DATA GENERAL CORPORATION, a Delaware corporation ("Borrower"),
NATIONSBANK, NATIONAL ASSOCIATION, a national banking association formerly known
as NationsBank of Texas, National Association, THE BANK OF NEW YORK, and FLEET
NATIONAL BANK, formerly known as Fleet Bank of Massachusetts, N.A, (each
individually, a "Lender" and collectively, the "Lenders"); and
NATIONSBANK, NATIONAL ASSOCIATION, a national banking association
formerly known as NationsBank of Texas, National Association, in its capacity as
agent for the Lenders (in such capacity, the "Agent");
W I T N E S S E T H:
WHEREAS, the Borrower, the Lenders and the Agent have entered into a
Credit Agreement dated as of September 30, 1997, as amended pursuant to that
certain Amendment No. 1 to Credit Agreement dated as of January 28, 1998 (as
amended and from time to time hereafter amended, restated, modified,
supplemented, replaced or amended and restated, the "Credit Agreement"),
pursuant to which the Lenders agreed to make a Revolving Credit Facility
available to the Borrower; and
WHEREAS, the Borrower has requested that the Credit Agreement be
amended in the manner set forth herein and the Agent and the Lenders are willing
to agree to such amendment, effective immediately after the effectiveness of the
Assignment and Acceptances of even date herewith by and between each of the
Lenders and certain other financial institutions;
NOW, THEREFORE, in consideration of the mutual covenants and the
fulfillment of the conditions set forth herein, the parties hereto do hereby
agree as follows:
1. Definitions. Any capitalized terms used herein without
definition shall have the meaning set forth in the Credit Agreement.
2. Amendment. Subject to the terms and conditions set forth herein, the
Credit Agreement is hereby amended as follows:
(a) Section 1.1 of the Credit Agreement is hereby amended by
deleting in its entirety the definition of "Applicable Margin" and
inserting in lieu thereof the following:
"Applicable Margin" means that percent per annum set
forth below, which shall be based upon the Consolidated
Leverage Ratio for the Four-Quarter Period most recently ended
as specified below:
<PAGE>
Applicable Margin
Consolidated Eurodollar Rate and
Leverage Ratio Letter of Credit Fee Base Rate Commitment
Fee
- -------------- -------------------- --------- ----------
(a)Less than .75 to 1.00 0.875% 0% .250%
(b)Less than 1.50 to 1.00
but greater than or equal
to .75 to 1.00 1.1250% 0% .350%
(c)Less than 2.25 to 1.00
but greater than or equal
to 1.50 to 1.00 1.250% 0% .375%
(d)Less than 2.75 to 1.00
but greater than or equal
to 2.25 to 1.00 1.375% .250% .500%
(e)Greater than or equal
to 2.75 to 1.00 1.500% .250% .625%
The Applicable Margin shall be established at the end of each
fiscal quarter of the Borrower (each, a "Determination Date").
Any change in the Applicable Margin following each
Determination Date shall be determined based upon the
computations set forth in the certificate furnished to the
Agent pursuant to Section 7.1(a)(ii) and Section 7.1(b)(ii)
hereof, subject to review and approval of such computations by
the Agent, and shall be effective commencing on the date such
certificate is received until the date on which a new
certificate is delivered; provided however, if the Borrower
shall fail to deliver any such certificate within the time
period required by Section 7.1 hereof, then the Applicable
Margin shall be 1.500% for Eurodollar Rate Loans and the fee
for Letters of Credit under Section 4.3 hereof, .250% for Base
Rate Loans and .625% for the Commitment Fee, in each case,
from the date such certificate was required to be delivered,
until the appropriate certificate is so delivered. Further,
notwithstanding the foregoing, the Applicable Margin shall be
1.375% for Eurodollar Rate Loans and the fee for Letters of
Credit, 0.250% for Base Rate Loans and 0.500% for the
Commitment Fee from the Closing Date until the earlier of (i)
the date on which the certificate for the period ending June
30, 1999 is delivered or (ii) a certificate is furnished to
the Agent that demonstrates a Consolidated Leverage Ratio of
not more than 2.25 to 1.00. For purposes of this definition of
"Applicable Margin" only, the Consolidated Leverage Ratio
shall be calculated without consideration of the final proviso
of the definition of "Consolidated EBITDA" relating to the
$135,000,000 worldwide restructuring charge taken by the
Borrower in its third fiscal quarter of 1998.
(b) Section 1.1 of the Credit Agreement is hereby amended by
deleting in its entirety the definition of "Consolidated EBITDA" and
inserting in lieu thereof the following:
"Consolidated EBITDA" means, with respect to the
Borrower and its Subsidiaries for any Four-Quarter Period
ending on the date of computation thereof, the sum of, without
duplication, (i) Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) taxes on income, (iv) amortization,
and (v) depreciation, all determined on a consolidated basis
in accordance with GAAP applied on a Consistent Basis;
provided, however, that for each of the first four fiscal
quarters following any Acquisition, the calculation of
Consolidated EBITDA for each Four-Quarter Period ending on the
last day of each such fiscal quarter shall include the
historical financial performance of the acquired business for
that portion of such Four-Quarter Period occurring prior to
such Acquisition; and provided further, however, that solely
for purposes of calculating Consolidated EBITDA for any
Four-Quarter Period which includes the Borrower's third fiscal
quarter of 1998, the Borrower shall include in the definition
of Consolidated Net Income in clause (i) above that portion of
the $135,000,000 worldwide restructuring charge against
earnings taken by the Borrower during the third fiscal quarter
of 1998 that does not constitute Consolidated Interest
Expense, taxes on income, depreciation or amortization in
clauses (ii) through (v) above.
(c) Section 1.1 of the Credit Agreement is hereby amended by
deleting in its entirety the definition of "Consolidated Fixed Charge
Ratio" and inserting in lieu thereof the following:
"Consolidated Fixed Charge Ratio" means, with respect
to the Borrower and its Subsidiaries for any Four-Quarter
Period ending on the date of computation thereof, the ratio of
(i) Consolidated EBITDA plus Consolidated Lease Expense for
such period, to (ii) Consolidated Fixed Charges for such
period.
(d) Section 1.1 of the Credit Agreement is hereby amended by
inserting in the proper alphabetical order the following definition of
"Consolidated Lease Expense":
"Consolidated Lease Expense" means, with respect to
any period of computation thereof, the gross expense related
to or arising out of the leases of the Borrower and its
Subsidiaries for such period, whether or not characterized as
rent, excluding expenses in respect of Capital Leases
constituting Indebtedness, all determined on a consolidated
basis in accordance with GAAP applied on a Consistent Basis.
(e) Section 1.1 of the Credit Agreement is hereby amended by
deleting in its entirety the definition of "Total Revolving Credit
Commitment" and inserting in lieu thereof the following:
"Total Revolving Credit Commitment" means a principal
amount equal to $45,000,000, as reduced from time to time in
accordance with Section 2.7 hereof.
(f) Section 8.1(a) of the Credit Agreement is hereby deleted
in its entirety and the following new Section 8.1(a) is inserted in
replacement thereof:
(a)Consolidated Leverage Ratio. Permit at any time
during any Four-Quarter Period of the Borrower, the
Consolidated Leverage Ratio to be greater than 3.00 to 1.00.
(g) Section 8.1(b) of the Credit Agreement is hereby deleted
in its entirety and the following new Section 8.1(b) is inserted in
replacement thereof:
(b)Consolidated Fixed Charge Ratio. Permit at any
time during any Four-Quarter Period of the Borrower the
Consolidated Fixed Charge Ratio to be less than 2.25 to 1.00.
(h)Section 8.1 of the Credit Agreement is hereby amended by
inserting the following new Section 8.1(e):
(e) Consolidated Cash and Eligible Securities. Permit
at any time the sum of cash and Eligible Securities of the
Borrower and its Subsidiaries on a consolidated basis to be
less than the sum of (i) Letter of Credit Outstandings, (ii)
Revolving Credit Outstandings and (iii) $30,000,000.00.
3. Representations and Warranties. In order to induce the Agent and the
Lender to enter into this Agreement, the Borrower represents and warrants to the
Agent and the Lenders as follows:
(a) The representations and warranties made by Borrower in
Article VI of the Credit Agreement are true and correct on and as of
the date hereof, except to the extent that such representations and
warranties expressly relate to an earlier date and except that the
financial statements referred to in Section 6.6(a) of the Credit
Agreement shall be deemed to be those financial statements most
recently delivered to the Agent and the Lenders pursuant to Section 7.1
of the Credit Agreement;
(b) There has been no material adverse change in the
condition, financial or otherwise, of the Borrower and its
Subsidiaries, taken as a whole, since the date of the most recent
financial reports of the Borrower received by the Agent and the Lenders
under Section 7.1(a) of the Credit Agreement, other than changes in the
ordinary course of business;
(c) The business and properties of the Borrower and its
Subsidiaries, taken as a whole, are not, and since the date of the most
recent financial report of the Borrower and its Subsidiaries received
by the Agent and the Lenders under Section 7.1(a) of the Credit
Agreement, have not been, adversely affected in any substantial way as
the result of any fire, explosion, earthquake, accident, strike,
lockout, combination of workers, flood, embargo, riot, activities of
armed forces, war or acts of God or the public enemy, or cancellation
or loss of any major contracts; and
(d) No event has occurred and is continuing which constitutes,
and no condition exists which upon the consummation of the transaction
contemplated hereby would constitute, a Default or an Event of Default
on the part of the Borrower under the Credit Agreement.
4. Conditions To Close. The effectiveness of this Amendment Agreement
is subject to the following:
(a) The Agent shall have received seven (7) counterparts of
this Amendment Agreement complete with all addenda and duly executed by
all signatories hereto; and
(b) The Lenders shall have each received payment of a fee
equal to 0.05% of the Total Revolving Credit Commitment, after giving
effectiveness to this Amendment Agreement.
5. Entire Agreement. This Agreement sets forth the entire understanding
and agreement of the parties hereto in relation to the subject matter hereof and
supersedes any prior negotiations and agreements among the parties relative to
such subject matter.
6. Full Force and Effect of Agreement. Except as hereby specifically
amended, modified or supplemented, the Credit Agreement and all other Letter of
Credit Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
7. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original as against any party
whose signature appears thereon, and all of which shall together constitute one
and the same instrument.
8. Governing Law. This Agreement shall in all respects be governed by
the laws and judicial decisions of the State of New York.
9. Enforceability. Should any one or more of the provisions of this
Agreement be determined to be illegal or unenforceable as to one or more of the
parties hereto, all other provisions nevertheless shall remain effective and
binding on the parties hereto.
10. Credit Agreement. All references in any of the Loan Documents to
the Credit Agreement shall mean the Credit Agreement as amended hereby.
[Signature page follows.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers, all as of the day and year
first above written.
BORROWER:
DATA GENERAL CORPORATION
By: /s/ Robert C. McBride
Name: Robert C. McBride
Title: Vice President; Treasurer
AGENT:
NATIONSBANK, NATIONAL ASSOCIATION, as Agent for the
Lenders
By: /s/ Yousuf Omar
Name: Yousuf Omar
Title: Senior Vice President
LENDERS:
NATIONSBANK, NATIONAL ASSOCIATION
By: /s/ Yousuf Omar
Name: Yousuf Omar
Title: Senior Vice President
THE BANK OF NEW YORK
By: /s/ David C. Judge
Name: David C. Judge
Title: Senior Vice President
<PAGE>
FLEET NATIONAL BANK
By: /s/ Scott D. Wheelock
Name: Scott D. Wheelock
Title: Vice President
<TABLE>
EXHIBIT 11
DATA GENERAL CORPORATION
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In thousands except per share amounts)
Fiscal Year Ended
----------------------------------------------------------------------------
Sept. 26, Sept. 27, Sept. 28, Sept. 30, Sept. 24,
1998 1997 1996 1995 1994
-------------- -------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) $ (152,395) $ 55,900 $ 28,145 $(46,703) $(87,693)
=============== ============= ============= ================ =============
Weighted average shares outstanding 49,038 41,347 38,769 37,052 35,774
============== ============== ============= =============== =============
Net income (loss) per share $ (3.11) $ 1.35 $ 0.73 $ (1.26) $ (2.45)
=============== ============= ============= ================ =============
Diluted earnings (loss) per share: (a)
Net income (loss) $ (152,395) $ 55,900 $28,145 $ (46,703) $(87,693)
=============== ============= ============= ================ =============
Weighted average shares outstanding 49,038 41,347 38,769 37,052 35,774
Incremental shares from use of treasury
stock method for stock options - 2,868 2,326 - -
-------------- -------------- ------------- --------------- --------------
Common and common equivalent shares
assuming full dilution, where applicable 49,038 44,215 41,095 37,052 35,774
============== ============== ============= =============== ==============
Net income (loss) per share $ (3.11) $ 1.26 $ 0.68 $ (1.26) $ (2.45)
=============== ============= ============= ================ =============
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
(a) For the years ended September 26, 1998, September 27, 1997, September 28,
1996, September 30, 1995, and September 24, 1994, the assumed conversion of
convertible debentures, giving effect to the incremental shares and the
adjustment to reduce interest expense, results in anti-dilution and has
therefore been excluded from the computation. For the years ended September 26,
1998, September 30, 1995, September 24, 1994, the assumed exercise of stock
options, giving effect to the incremental shares, results in anti-dilution and
has been excluded from the computation.
</FN>
</TABLE>
EXHIBIT 13
Data General Corporation
1998 Annual Report
Delivering storage and high-end computing solutions
<PAGE>
www.dg.com
www.clariion.com
Data General was built on technology leadership and innovation. Our objective is
to be a leader in delivering open server and storage solutions through multiple
distribution channels and strategic alliances. We provide superior customer
service and support. We have shipped more than 500,000 computers and 75,000
storage subsystems worldwide.
<PAGE>
Highlights of the past year
AViiON Enterprise Server Division
o Consolidated all AViiON(R) sales, marketing, product development, and
professional services into a single organization focused on enterprise
solutions
o Achieved market share leadership in systems running Microsoft(R) Windows
NT(R) Server priced between $100,000 and $1,000,000, according to 1997
revenue figures from International Data Corporation
o Established, in conjunction with Microsoft Corporation, the first
Healthcare Competency Center to provide technology labs for testing
interoperability of applications that conform to ActiveX for Healthcare
standards
o Introduced NTerprise Total Care services, featuring OMNiiCARE(SM), a 99.9
percent uptime guarantee for businesses running Microsoft Windows NT Server
as their enterprise operating system on AViiON systems, and extended this
guarantee to SQL Server 7.0, an industry first
o Continued to expand our AViiON family of high-availability "In-a-Box"
solutions for Windows NT with new systems based on Intel(R) Pentium(R) II
Xeon(R) processors
o Strengthened the AViiON NUMA (Non-Uniform Memory Access) family with
shipments of the AV 25000; unveiled AVFlex(TM) services that enable
customers to partition an AV 25000 server into multiple systems running the
DG/UX(R) operating system as well as Microsoft Windows NT Server
CLARiiON Advanced Storage Division
o Reached new milestones with more than 75,000 disk arrays and five Petabytes
(equivalent to two trillion typed pages) of RAID-protected storage shipped;
listed as the year's top OEM RAID supplier in revenues by Gartner Group's
Dataquest
o Became the first major storage vendor to ship full Fibre Channel disk
arrays, a revolutionary family of storage subsystems that provides
significantly greater performance, scalability, and flexibility than prior
generation products
o Announced a strategic worldwide OEM agreement with Dell Computer
Corporation to deliver enterprise storage products based on Data
General's proven CLARiiON(R) Fibre Channel RAID technology
o Introduced Navisphere(R), the industry's most advanced enterprise storage
management software, which allows system administrators to manage their
storage installations from a single management platform located anywhere in
the world
o Announced, with 3Com Corporation, the formation of a cross-industry
alliance to deliver Fibre Channel Storage Area Network (SAN) solutions for
Windows NT server platforms
o Began expansion of the sales and marketing force and transferred more than
100 engineers to CLARiiON to take advantage of storage market growth
opportunities
The CLARiiON division of Data General was the first major storage vendor to ship
full Fibre Channel subsystems.
1
<PAGE>
To Our Stockholders, Customers, and Employees:
Throughout the 1990s, Data General has been building its capabilities
to deliver storage and high-end computing solutions. High-performance AViiON
servers have enabled Data General to achieve market-share leadership in
healthcare information systems technology and in segments of the fast-growing
market for solutions based on the Microsoft Windows NT Server operating system.
AViiON NUMA servers have enabled Data General to maintain momentum in the UNIX
market. Our advanced CLARiiON storage systems have made Data General the leader
in the OEM segment of the disk storage market.
Fiscal 1998 was a transitional year for Data General, following two
years of solid growth and profitability. After ten consecutive quarters of
profitability extending into the first quarter of this fiscal year, our
financial results were affected at mid-year by a delay in the transition from
SCSI to Fibre Channel technology in the storage business. We, nonetheless, made
significant progress by focusing additional resources on high-growth
opportunities in key market segments and by restructuring operations to achieve
greater efficiency. These actions helped us to return to profitability in the
fourth quarter.
For the full 1998 fiscal year, Data General reported a net loss of $152
million or $3.11 per share on revenues of $1.5 billion. The 1998 results include
a charge of $135 million, or $2.76 per share related to the mid-year corporate
restructuring. For fiscal 1997, the company reported net income of $56 million,
or $1.26 per share on a diluted basis on revenues of $1.5 billion.
As part of the June restructuring, we transferred approximately 100
people to the CLARiiON Advanced Storage Division where additional resources were
deployed to capitalize on the growth opportunities for Fibre Channel storage. In
our AViiON Enterprise Server Division, we consolidated sales, marketing,
development, and professional services to more efficiently meet our customers'
needs for comprehensive solutions. Our manufacturing, services, and
administrative operations were also streamlined. Overall, the restructuring
resulted in a net reduction in force of approximately 400 people, the
consolidation of certain facilities, and the write-off of non-strategic assets.
As a result of this restructuring, we expect net annual savings in the range of
$40 to $45 million.
2
<PAGE>
AViiON Business
Our objective in the AViiON Enterprise Server Division is to deliver
high-end computing solutions based on industry-leading Intel processor-based
servers, storage, and services. We focus on the enterprise level of the
Microsoft Windows NT Server market and high-end UNIX solutions using our NUMA
technology. We have a strong vertical market focus in healthcare and a vertical
sales focus, in conjunction with software partners, in several other markets,
including financial services, telecommunications, retail/distribution, and
government. We are increasingly using a "consultative selling" approach to
ensure that we meet our customers' business needs with solutions emphasizing
software and integration partners and the services we deliver as part of the
sale, such as networking and implementation, as well as maintenance.
Our Windows NT business grew nearly 65 percent in fiscal 1998 -- twice
the industry Windows NT growth rate -- and now represents nearly two-thirds of
our Intel processor-based AViiON revenues. Data General is the worldwide
market-share leader in midrange systems running Microsoft Windows NT Server
priced between $100,000 and $1,000,000, according to the latest revenue figures
from International Data Corporation.
Data General provides innovative "In-a-Box" Windows NT configurations
that include two AViiON servers, a highly available CLARiiON RAID storage
system, and our NTerprise Manager(TM) server management software, all in a
single rack-mounted system that is pre-loaded and pre-tested with the customer's
software. Our "In-a-Box" system packaging has received strong customer
acceptance and industry accolades.
Part of our customers' attraction to Microsoft Windows NT Server is
that it is an established operating system standard that enables systems vendors
like Data General to add value in services, systems packaging, high
availability, and other areas. There is no standard for the UNIX operating
system. While several recent attempts by industry consortiums hold the promise
of delivering a UNIX standard in the next few years, many versions of UNIX exist
today, including our sophisticated DG/UX implementation. We have added new
features and enhancements to DG/UX to increase the performance and functionality
of our solutions.
High-end NUMA-based AViiON servers drive the majority of our UNIX
revenues. Our NUMA-based servers provide high performance and scalability for
UNIX applications, including on-line transaction processing, enterprise resource
planning, data warehousing, server consolidation, and mainframe migration. At
fiscal year-end, we further strengthened the AViiON NUMA family with shipments
of the AV 25000 -- a new generation of high-end servers which supports up to 64
Intel Pentium II Xeon processors. We also unveiled the AVFlex architecture that
includes services and products that allow customers to partition an AV 25000
server into multiple independent DG/UX and Windows NT Server systems.
Our worldwide AViiON customer base now includes: more than 30 percent
of the hospitals in the United States, including Columbia/HCA, the largest
healthcare operation in the U.S.; Bloomberg Financial Markets, one of the
fastest-growing suppliers of financial data; Canadian-based Creo Products Inc.,
the world's leading supplier of computer-to-plate solutions for the graphic arts
industry; European-based Baan, one of the market leaders in enterprise-wide
software applications, which chose AViiON servers and CLARiiON storage for its
European Demo Centre; more than one thousand retail firms including, Jordan's
Furniture, a trendsetter in the marketing of retail home furnishings in the
U.S.; many of the world's largest petrochemical firms; and departments of
numerous national and local governments around the world.
3
<PAGE>
CLARiiON Business
Since 1992 when Data General created a business unit to focus on OEM
opportunities in the storage market, the CLARiiON product line has grown by
taking advantage of the latest developments in storage systems technology.
Over the past year, we have been transitioning from SCSI-based storage to a new
generation of CLARiiON systems based on end-to-end Fibre Channel technology
(full fibre connect to full fibre disks). CLARiiON revenues decreased in fiscal
1998 during the transition, but by year-end, total CLARiiON revenues were
increasing quarter to quarter, and full Fibre Channel based systems represented
over 40 percent of our storage business.
Data General was the first major vendor to ship full end-to-end Fibre
Channel storage systems. Our goal is to be the Fibre Channel storage vendor of
choice in the open systems market. We believe Fibre Channel will become the
dominant technology for disk array subsystems for the foreseeable future, and
that it is a requisite for implementation of Storage Area Networks (SANs). SANs,
which allow users the flexibility to choose best-of-breed storage to attach to
their servers, are predicted by industry analysts to be a $5.5 billion market by
2001. We believe that our early lead in this technology provides us a meaningful
opportunity to play a significant role in the growth of SANs.
Data General's Fibre Channel technology received a significant
endorsement when Dell Computer Corporation, the industry's fastest-growing
server company, unveiled its high-end enterprise storage system this past
summer. The PowerVault 650F, the first in Dell's family of server-attached
storage systems, is based on CLARiiON Fibre Channel technology.
We will increase our investment in CLARiiON during fiscal 1999,
primarily through the hiring of additional research and development and sales
and marketing professionals. Part of this investment will allow us to expand our
channel coverage beyond the OEM market to include support of new and existing
resellers as well as the implementation of a direct sales operation. While the
increased investment will impact growth in near-term profitability, we believe
that investing in CLARiiON is imperative if we are to take full advantage of the
market opportunity before us.
The worldwide CLARiiON installed base continues to grow, with more than
75,000 disk array subsystems and five Petabytes of RAID-protected storage
shipped. CLARiiON SCSI and Fibre Channel storage solutions are supported on
leading open systems platforms, including Hewlett-Packard, IBM AIX, Microsoft
Windows NT, and Sun Microsystems. CLARiiON is supported through OEM agreements
with companies such as ASC, Avid Technologies, Bull, Data General AViiON, DELL,
Hewlett-Packard, ICL, NEC, Samsung, Sequent, Silicon Graphics, Tektronix, and
others. CLARiiON storage is also sold around the world by value-added storage
resellers such as Storage Technology, Omron in Japan, and BIC Electronics, which
serves Tecnologica Informatica in Brazil and other distributors in Latin
America.
4
<PAGE>
Outlook
We believe that we have the people, products, services, and strategy to
succeed in the enterprise market. We are also well financed to pursue our growth
strategy, with cash and marketable securities of $319 million and total
capitalization of nearly $600 million at the end of fiscal 1998.
Our AViiON enterprise server business should benefit from continued
strong growth in the Microsoft Windows NT Server market and from our ability to
leverage AViiON NUMA servers. Our CLARiiON storage business should benefit from
increasing market acceptance of Fibre Channel technology where we are the only
major storage vendor currently shipping full fibre RAID disk arrays. We are the
leader in this advanced technology, which many industry analysts believe will
soon become the dominant storage architecture. The growth opportunity that we
see for the next several years with our full Fibre Channel CLARiiON disk arrays
may be the best since we launched the product family in the early 1990s.
Going forward, we believe we are well positioned for continued growth
and profitability.
Respectfully submitted,
Ronald L. Skates
President and Chief Executive Officer
December 16, 1998
5
<PAGE>
Data General AViiON servers and CLARiiON storage are at the heart of many
critical applications at some of the world's largest petrochemical firms.
6
<PAGE>
Meeting Customer Needs for Solutions
Technology excellence and innovation have been the sustaining factors
in Data General's growth since the company's founding in 1968. Technology
continues to be at the core of our strategy to deliver industry-leading open
servers and storage products, and provide our customers with complete business
solutions and premier services. Over the past several years, Data General has
taken a number of steps to deliver the type of solutions our customers need and
to provide the company with new growth opportunities. These include:
o Adopting the Intel architecture, the world's leading computer platform, in
our AViiON server family to ensure that our customers have access to the
broadest range of software applications and solutions
o Pioneering Fibre Channel technology for CLARiiON storage, and being the first
to deliver full Fibre Channel disk arrays
o Focusing on high-availability and clustering technologies which enable AViiON
servers and CLARiiON storage to run mission-critical applications
o Developing highly scalable servers based on the NUMA architecture, which
opens new opportunities such as data warehousing and server consolidation
o Pioneering the pre-loaded, pre-tested "In-a-Box" system packaging for the
Microsoft Windows NT Server market, which expedites implementation and
minimizes deployment risk
o Expanding the market for our CLARiiON storage products by establishing strong
OEM and reseller alliances
o Continuing our focus on UNIX while dedicating new resources to Microsoft
Windows NT Server, the fastest-growing operating system
o Supporting UNIX and Windows NT server strategies with premier services,
including networking, data warehousing, integration, migration,
installation, and life-cycle support
o Helping customers better utilize their computing assets by becoming a
Microsoft Authorized Support Center, Microsoft Authorized Technical Education
Center, and SCO Authorized Support Center
o Providing complete business solutions by strengthening strategic
partnerships with Microsoft, other leading suppliers of databases and
applications, major vendors of enterprise resource planning (ERP), and
other applications
o Delivering the industry's first uptime guarantee for the Microsoft Windows
NT Server operating system and Microsoft SQL Server 7.0 database
o Extending our manufacturing expertise to third parties through VALiiANT(R)
contract manufacturing and design services, and REPAIRiiON(SM) product repair
and logistics services, businesses which take advantage of our ISO
9000-certified operations
o Using the World Wide Web to expand Data General's market presence through
our www.dg.com and www.clariion.com web sites, which include e-commerce
product ordering features
7
<PAGE>
Among Data General's AViiON customers, are over 30 percent of the hospitals in
the United States. These critical operations count on the unparalleled
performance, security, and high availability of AViiON enterprise servers.
8
<PAGE>
AViiON Solutions
Delivering high-end computing solutions begins with understanding each
customer's unique business problem; then, assembling the hardware platform,
software partners, services, and system integration to implement and deploy the
solution. Accomplishing this requires Data General to provide an ever-changing
variety of services, systems, and software from a wide range of sources, both
internal and external.
Services
Data General's portfolio of services covers the spectrum of customer needs,
including consulting, implementation, integration, networking, migration, and
training, as well as 24-hour-a-day, 7-day-a-week, life-cycle support. We provide
our customers with significant value through our services. One example is our
NTerprise Total Care services, featuring a 99.9 percent uptime guarantee for
businesses running Microsoft Windows NT Server as their enterprise operating
system on AViiON systems. We are also the first company to make this guarantee
available for Microsoft SQL Server 7.0 users.
Our Business Practices services are focused on Windows NT solutions, database
and data warehousing, and migrations, essential areas in which customers benefit
from our in-depth expertise and comprehensive service offerings. To ensure that
mission-critical and general-purpose business applications function smoothly
across the enterprise, we provide packaged Professional Services to help
customers implement, integrate, and manage their system solutions quickly and
easily.
Our Open Systems Training business provides lecture/lab courses, on-site
training, and computer- and video-based training for many mission-critical
components, including the operating system, network, database, off-the-shelf
applications, and custom programs. In addition, our Open Systems Training
organization is a Microsoft Authorized Technical Education Center and offers the
Microsoft Certified Professional Program, which certifies a computer
professional's ability to design, develop, implement, and support solutions with
Microsoft products.
In fiscal 1998, Data General continued to expand its family of "In-a-Box" system
packaging with TermServer-in-a-Box and Exchange-in-a-Box and new systems based
on the latest technologies including Intel Pentium II Xeon processors.
9
<PAGE>
Systems
Data General's AViiON family uses the power of the Intel architecture to provide
customers with a broad and scalable family of high-performance systems ranging
from departmental servers to enterprise systems. AViiON servers feature
comprehensive security, reliability, high availability, and serviceability.
AViiON servers provide an excellent platform for deploying business solutions.
Operating systems supported on AViiON servers include Microsoft Windows NT
Server; Data General's own DG/UX, one of the most technically advanced UNIX
operating systems on the market; and Citrix WinFrame/Enterprise Server.
Our top-of-the-line AV 25000 servers, with support for up to 64 processors, are
based on NUMA technology. NUMA technology redefines price/performance levels and
extends the capabilities of symmetric multiprocessing (SMP) systems, without
requiring modifications to existing SMP applications. AVFlex, based on the AV
25000 server, is a comprehensive set of services and products that eases
long-range IT planning with cost-effective system growth and the ability to
adapt to changing business or application conditions.
Data General's clustering solutions for Microsoft Windows NT Server and DG/UX
provide reliability, high availability and data protection for critical
applications. Introduced in 1997, AViiON NT Cluster-in-a-Box(R) was the
industry's first Microsoft Windows NT Server clustering solution in a
pre-installed, pre-tested, single rack-mounted system. Cluster-in-a-Box combines
two powerful AViiON Windows NT servers with NTerprise Manager server-management
software, NTAlert(SM)automatic diagnostics, a CLARiiON disk array, and Microsoft
Cluster Server clustering software. In fiscal 1998, we continued to expand our
family of "In-a-Box" system packaging with TermServer-in-a-Box(TM) and
Exchange-in-a-Box(TM) and new systems based on the latest technologies including
Intel Pentium II Xeon processors. The AViiON servers that are used in our
In-a-Box configurations are also available as stand-alone servers for thousands
of Windows NT and UNIX applications.
Our UNIX clustering solution -- DG/UX Cluster(TM) -- includes two or more AViiON
servers, a full Fibre Channel CLARiiON disk array, and a PC with
cluster-management software. This year, Data General expanded clustering with
Disaster Recovery Clusters, enabling customers to have widely dispersed back-up
systems that keep businesses going even if their main data center is down. We
also offer Failover Clusters and QuickClusters(TM), which provide customers with
quick deployment and dedicated functionality in a single site.
Introduced in 1997, AViiON NT Cluster-in-a-Box was the industry's first
Microsoft Windows NT Server clustering solution in a pre-installed, pre-tested,
single rack-mounted system.
10
<PAGE>
With our AViiON servers, we offer the DG/ViiSION(R) family of personal
computers, which includes desktop, minitower, and laptop products featuring
Intel processors.
For customers with special equipment or application requirements, our Special
Systems team integrates third-party products into Data General systems and
adapts standard Data General products to exact customer specifications. One
example is our handheld computer family, which is designed for data collection
environments in which long battery life, rugged design, and ease of use are
critical features.
Strategic Business Partners
Data General works closely with leading software and integration services
suppliers that understand specific customer problems and provide efficient,
effective, and affordable computing solutions. Their complementary products and
services add significant value to Data General's products, and allow us to bring
complete business solutions to customers in diverse markets.
Data General teams with a multitude of solutions suppliers to offer a portfolio
of applications for a variety of industries and markets, including healthcare,
manufacturing, distribution, financial services, telecommunications, and
government.
Delivering high-end computing solutions begins by understanding each customer's
unique business problem; then, assembling the hardware platform, business
partners, services, and system integration to implement and deploy the solution.
11
<PAGE>
CLARiiON advanced storage systems provide the high availability and performance
customers require for their most demanding applications in such areas as
financial services and government.
Used with permission of NYSE
12
CLARiiON Storage Solutions
Our market-leading CLARiiON disk arrays are innovative, highly available storage
subsystems based on RAID technology. Powerful, competitively priced, and
compact, the CLARiiON family offers a wide range of storage systems, from disk
arrays for servers on local area networks to high-capacity, high-availability
arrays for enterprise servers with applications needing multiple Terabytes of
storage.
The CLARiiON family continues to grow by taking advantage of the latest
developments in information systems technology. CLARiiON was the first to ship
full Fibre Channel technology -- the next-generation serial interface. Industry
analysts expect the Fibre Channel storage market to grow exponentially over the
next few years.
Staying ahead of the next storage trend, Data General CLARiiON, together with
3Com Corporation, announced the formation of a cross-industry alliance to
deliver Fibre Channel Storage Area Network (SAN) solutions for Windows NT server
platforms. The cross-industry alliance represents a commitment between CLARiiON,
the leader in Fibre Channel storage technology, and 3Com, the leader in
enterprise networking products, to work together to develop, qualify, and
support total solutions for Storage Area Networks and we expect further
penetration of the SAN market through new partnerships we will form in the
coming year.
From mainframes to two-processor servers, CLARiiON disk arrays provide the high
availability and performance customers require for their most demanding
applications. Redundant subsystems within the CLARiiON arrays -- drives, storage
control processors, power supplies, and fans -- eliminate many single points of
failure. In the event of a problem, on-line maintenance allows replacement or
repair of the component while under power and fully operational.
CLARiiON disk arrays allow concurrent multi-RAID configurations to maximize each
application's performance. In addition, CLARiiON disk arrays offer an innovative
mirrored cache feature that actually improves data integrity while dramatically
improving performance.
In 1998, CLARiiON introduced Navisphere, the industry's most advanced storage
management software, which allows system administrators to manage their storage
installations from a single management platform located anywhere in the world.
This Navisphere capability is a requisite for the successful implementation of
SANs.
Multidimensional Storage Architecture(TM) (MSA) is the CLARiiON strategic
framework for deploying open systems storage throughout an enterprise. MSA
provides virtually unlimited flexibility to configure centrally managed storage
pools through SANs that scale independently in five dimensions -- capacity,
transaction performance, data throughput, connectivity, and availability of
business information.
13
<PAGE>
Services
CLARiiON delivers expert technical support, warranty and material programs,
training, and professional services to our customers around the world. These
same services support our strategic partners, enabling them to provide a
complete set of services to their end customers.
As Storage Area Networks grow and become more distributed geographically,
professional service providers increasingly must deliver sophisticated levels of
support for these complex configurations. Tools to gather and analyze data more
quickly and efficiently are required.
CLARiiON offers a comprehensive collection of storage maintenance and diagnostic
software, including CLARalert(R), an enterprise-wide, network-based service
solution. CLARalert delivers early notification of service events and provides
remote diagnostic capabilities, 24 hours a day, 7 days a week, 365 days a year.
CLARiiON Service Powertools, packaged on a single CD-ROM, provides tools for
support diagnostics, performance monitoring, event logging and notification,
advanced scripting, disk array management, remote access, and serial port
access. CLARiiON Service Powertools runs on an Windows NT platform, and delivers
faster, more flexible service functionality, maximizing a support team's
efficiency. Using Powertools results in more efficient disk array support, lower
overall service costs, and higher user satisfaction.
Business Partners
CLARiiON disk arrays are installed in enterprises around the globe. Some of the
world's leading server vendors and storage suppliers offer CLARiiON arrays in
their products under their own labels. In addition to our growing direct sales
operation, a variety of resellers and independent distributors offer our storage
systems under the CLARiiON label.
Each CLARiiON partner has its own unique set of benefits. For example, server
vendors (OEMs) offer direct support for their host platforms, as well as the
CLARiiON disk array connect, while private labelers offer multiple CPU support
and service. Value-added Resellers offer industry expertise, enabling them to
recommend the best CLARiiON storage solution that meets the application's needs.
Our distributors have chosen CLARiiON as their high-availability storage
solution of choice, as part of the set of diverse products and services that
they sell.
14
<PAGE>
Data General teams with a multitude of solutions suppliers to offer a portfolio
of applications for a variety of industries, including distribution and
manufacturing.
15
<PAGE>
Customer Services and Manufacturing
Data General's Customer Services and Manufacturing groups support our AViiON and
CLARiiON businesses. Our worldwide Customer Service network is ready to provide
our customers with service and support whenever and wherever they need it. With
more than 200 U.S. field offices, 130 international service locations, three
primary Customer Support Centers, and numerous secondary customer support
organizations worldwide, our service is always available -- seven days a week,
24 hours a day.
Whether a customer needs full on-site service from a knowledgeable engineer,
on-line telephone support from our Customer Support Centers, or customized
support services, we have a ready-to-go solution. As a Microsoft Authorized
Support Center (ASC), the Data General Customer Support Center provides software
support services for Microsoft Windows NT for Workstations and Windows NT
Server, the full set of Microsoft desktop and BackOffice products, as well as
hundreds of other software products. Data General is also a SCO Authorized
Support Center, and has been certified to support SCO's operating system and
client-integration products and customers in North America.
Data General was the first major computer vendor in the industry to have its
entire U.S. Service and Support Organization registered with the Underwriters
Laboratories (UL) and certified to the ISO 9001 Standard.
We also offer our manufacturing expertise to customers through our VALiiANT
electronic manufacturing and design services business. With facilities in the
U.S. and Asia, VALiiANT is a full-service supplier, offering design services for
layout and metal fabrication, quick-turn prototype runs, volume manufacturing,
and repair/engineering change services.
Data General also recently formed the REPAIRiiON business unit to provide
product repair and logistics services for companies worldwide. This unit
provides a one-stop source for customized repair and logistics solutions for
businesses that wish to offer their customers quality service and extend the
life of their key products while reducing their costs.
The company's manufacturing organization received two major awards in 1998. The
Manufacturing Services operation received an "Excellence in Logistics" award
from Transportation and Distribution Magazine, based on high marks in supply
chain programs, inventory management, technology, strategic planning, and
logistics activities. The company's Manila operations received the Philippine
Quality Award. Based on Malcolm Baldridge award criteria, it is the highest form
of national recognition accorded to organizations for outstanding quality
performance in the Philippines.
16
<PAGE>
Five-Year Summary of Selected Financial Data .................................18
Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................19
Consolidated Statements of Operations ........................................27
Consolidated Balance Sheets ..................................................28
Consolidated Statements of Cash Flows ........................................29
Consolidated Statements of Stockholders' Equity ..............................30
Notes to Consolidated Financial Statements ...................................31
Report of Independent Accountants ............................................41
Supplemental Financial Information ...........................................41
Directors and Senior Management ..............................................42
Facilities ...................................................................42
Corporate Information ........................................................43
17
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------
SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24,
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $1,462,109 $1,533,169 $1,322,250 $1,159,316 $1,120,505
---------- ---------- ---------- ---------- ----------
Total cost of revenues 1,071,491 1,021,569 877,692 772,047 733,114
Research and development 118,731 109,984 98,022 85,886 90,826
Selling, general, and administrative 338,108 338,443 309,259 334,337 341,343
Restructuring charge 82,400 - - 43,000 35,000
------------- ------------- ------------ ------------ ------------
Total costs and expenses 1,610,730 1,469,996 1,284,973 1,235,270 1,200,283
------------- ------------- ------------ ------------ ------------
Income (loss) from operations (148,621) 63,173 37,277 (75,954) (79,778)
Interest expense, net 1,014 4,873 5,632 4,116 8,168
Other income, net 240 - - 41,972 2,353
------------- ------------- ------------ ------------ ------------
Income (loss) before income taxes (149,395) 58,300 31,645 (38,098) (85,593)
Income tax provision 3,000 2,400 3,500 8,605 2,100
------------- ------------- ------------ ------------ ------------
Net income (loss) $(152,395) $ 55,900 $ 28,145 $ (46,703) $ (87,693)
============= ============= ============ ============ ============
Basic net income (loss) per share $(3.11) $1.35 $0.73 $(1.26) $(2.45)
Diluted net income (loss) per share $(3.11) $1.26 $0.68 $(1.26) $(2.45)
<CAPTION>
AS OF
----------------------------------------------------------------------
SEPT. 26, SEPT. 27, SEPT. 28, SEPT. 30, SEPT. 24,
DOLLARS IN THOUSANDS 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
Current assets $ 795,961 $ 858,236 $616,812 $ 591,485 $ 598,076
Current liabilities 430,714 391,822 366,184 370,226 326,865
-------------- ------------- ------------- ------------- -------------
Working capital $ 365,247 $ 466,414 $250,628 $ 221,259 $ 271,211
============== ============= ============= ============= =============
Total assets $1,065,064 $1,134,868 $860,443 $ 832,018 $ 821,864
Annual expenditures for property,
plant, and equipment $ 114,247 $ 110,505 $ 94,670 $ 96,471 $ 92,955
Long-term debt $ 212,750 $ 212,750 $149,971 $ 153,457 $ 156,942
Other liabilities $ 36,645 $ 11,516 $ 15,224 $ 28,791 $ 29,445
Stockholders' equity $ 384,955 $ 518,780 $329,064 $ 279,544 $ 308,612
Employees 4,700 5,100 4,900 5,000 5,800
<FN>
Results of operations are for 52-week periods except 1995, which is for a
53-week period. The company has not declared or paid cash dividends since its
inception.
</FN>
</TABLE>
18
<PAGE>
Data General Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported a net loss of $152 million for fiscal 1998 compared with
net income of $56 million and $28 million for fiscal years 1997 and 1996,
respectively. Included in the net loss for fiscal year 1998 was a charge of $135
million related to a restructuring program and certain asset write-downs
resulting from the program.
Revenues (in millions)
===============================================================================
1998 Change 1997 Change 1996
------------------------------------------------------
Product $1,068 (6%) $1,142 24% $ 924
% of Total Revenues 73% 74% 70%
Service 394 1% 391 (2%) 398
% of Total Revenues 27% 26% 30%
Total $1,462 (5%) $1,533 16% $1,322
================================================================================
In fiscal 1998, product revenues were $542 million from the Company's AViiON
family of open systems products, a 3% increase over fiscal 1997. Since 1989, the
Company has established a customer base of approximately 56,000 AViiON
installations, with a total sales value of over $3.5 billion. In fiscal 1996,
the Company introduced its Intel processor-based AViiON systems. These systems
represented 86% of total fiscal 1998 AViiON revenues and 64% of total fiscal
1997 AViiON revenues. In fiscal 1998, revenues from the Company's Intel
processor-based AViiON systems increased by 38% while revenues from the
Motorola-based AViiON systems declined by 60% compared to the prior fiscal year.
The Company anticipates that the percentage of server product revenues generated
by the Intel processor-based AViiON products will continue to increase in fiscal
1999 while the Motorola-based AViiON system revenues are expected to continue to
decline. Product revenues from the Company's CLARiiON storage systems decreased
19% compared to the prior fiscal year and accounted for 38% of total product
revenues in the current year. This decline is primarily the result of the longer
than anticipated product transition from SCSI-based storage systems to the
Company's newer fibre-based storage products. CLARiiON is sold primarily through
the Company's original equipment manufacturer ("OEM") and distributor channels;
thus sales in any given period are subject to the sales cycles and inventory
levels of the Company's customers. CLARiiON product revenues have been
concentrated in a limited number of customers, with a significant portion of the
Company's CLARiiON product sales to a single OEM customer. Product revenues from
personal computers and other equipment decreased 21% from the prior fiscal year
and represented 8% of total product revenues compared to 10% for the prior
fiscal year. In fiscal 1996, the Company formed the VALiiANT Business Unit, a
contract manufacturing operation, to take advantage of the Company's
manufacturing expertise and facilities. VALiiANT product revenues for the
current fiscal year represented 3% of total product revenues.
19
<PAGE>
Revenues by Geographic Marketplace
================================================================================
Percentage of Percentage Change of
Consolidated Revenues $ of Revenues
--------------------------------------------------------------
1998 1997 1996 1998-97 1997-96
--------------------------------------------------------------
Domestic
Product 63% 64% 61% (7%) 30%
Service 60% 59% 57% 3% -
Total 62% 63% 60% (5%) 22%
Europe
Product 22% 22% 24% (4%) 11%
Service 31% 31% 32% 1% (4%)
Total 25% 24% 26% (3%) 5%
Other International
Product 15% 14% 15% (6%) 18%
Service 9% 10% 11% (11%) (6%)
Total 13% 13% 14% (7%) 12%
================================================================================
In fiscal 1998, domestic marketplace revenues from the CLARiiON product line
decreased 21% and personal computer and other equipment decreased 29% from the
prior year. This was offset, in part, by a 2% increase in AViiON product
revenues and an increase in VALiiANT product revenues. The increase in AViiON
product revenues in the current year resulted from an increase in Intel
processor-based AViiON systems, offset, in part, by a decrease in Motorola-based
AViiON systems. In the prior year, domestic product revenues from the CLARiiON,
AViiON, and PC and other equipment product lines had increased by 52%, 14%, and
5%, respectively. The decrease in European product revenues, including U.S.
direct export sales, for the current fiscal year was mainly attributable to
decreases in CLARiiON and personal computer and other equipment product
revenues, which was partly offset by increases in Intel processor-based AViiON
product revenues. In fiscal 1998, total revenues in the European marketplace
decreased by approximately 3% due, in great part, to a stronger U.S. dollar in
relation to European currencies. In fiscal 1997, European product revenues
increased 11% due to increases in AViiON and CLARiiON product revenues. Other
international product revenues, including U.S. direct export sales, for the
current fiscal year decreased 6% as compared with the prior fiscal year, due to
a 9% decrease in AViiON product revenues, offset, in part, by a 4% increase in
CLARiiON product revenues. The fiscal 1997 increase in other international
product revenues was due to increases in the CLARiiON, AViiON, and PC product
revenues.
In the service business, the Company increased professional services revenues by
9% in fiscal 1998 as compared with fiscal 1997. Professional services revenues
experienced modest growth in fiscal 1997 as compared with the prior fiscal year.
These increases were partially offset by a 1% and 3% decline in contract
maintenance revenue in fiscal years 1998 and 1997, respectively, as compared
with prior years. These declines are the result of the continued shift from
proprietary to open systems service maintenance contracts. In Europe, foreign
exchange negatively impacted current year service revenues by 3%, when compared
to fiscal 1997. In fiscal 1997, foreign exchange accounted for the 4% decrease
in service revenues over fiscal 1996.
Cost of Revenues (in millions)
================================================================================
1998 Change 1997 Change 1996
------------------------------------------------------
Product $ 826 7% $ 773 25% $ 619
% of Product Revenues 77% 68% 67%
Service 246 (1%) 249 (4%) 259
% of Service Revenues 62% 64% 65%
Total $1,072 5% $1,022 16% $ 878
% of Total Revenues 73% 67% 66%
================================================================================
20
<PAGE>
During fiscal year 1998, the Company recorded certain unusual charges, which are
included in product cost of revenues, of $52.6 million related to the Company's
restructuring program. These charges are primarily related to the write-down of
capitalized software development costs associated with products no longer
considered to be part of the Company's core strategy. As a result of the change
in the Company's strategic focus, the evaluation of the recoverability of the
capitalized software development costs resulted in a write-down of its carrying
value to its net realizable value. Also included in the charge is the write-down
of certain inventory associated with the Company's THiiN(TM) Line business unit
and the refocused server strategy. Without these charges, the pro-forma product
cost of revenues as a percentage of product revenues was 72%. The increase in
the pro-forma product cost as a percentage of product revenues from the prior
fiscal year was primarily caused by competitive pricing pressures and a shift in
product mix. The decrease in the service cost as a percentage of service
revenues for the current fiscal year was the result of continued improvements in
spare parts inventory management and improved gross margins in the professional
services business related to cost savings from the Company's restructuring
program.
Operating Expenses (in millions)
================================================================================
1998 Change 1997 Change 1996
-----------------------------------------------
Research & Development $119 8% $110 12% $ 98
% of Total Revenues 8% 7% 7%
Selling, general, & administrative $338 - $338 9% $309
% of Total Revenues 23% 22% 23%
Restructuring charge $ 82 - - - -
% of Total Revenues 6% - -
================================================================================
The Company continued to focus its research and development efforts on its core
business technology: multi-user computer systems and mass storage devices. In
the current fiscal year, gross expenditures on research and development and
software development before capitalization were $154 million, an increase of 5%
from $146 million for the prior fiscal year. The increase in research and
development expenditures was driven by investment in CLARiiON Fibre Channel
products and in the NUMA architecture for high-end AViiON servers. Additionally,
in the current fiscal year, changes in the strategic focus for the Company's
server products resulted in expensing software development costs that had
previously been capitalized.
For fiscal years 1998 and 1997, the increase in selling, general, and
administrative expenses was the result of increased marketing efforts in the
server and storage businesses. It is anticipated that savings as a result of the
Company's fiscal 1998 restructuring program in the server business will result
in decreases in selling, general, and administrative expenses in fiscal year
1999, offset by increases arising from the continued investment in the CLARiiON
storage business. It is the Company's objective that the ratio of selling,
general, and administrative expenses decline as a proportion of total revenues.
In fiscal year 1998, the Company approved and implemented a restructuring
program designed to strengthen the Company's focus on storage and enterprise
computing solutions and reduce costs in non-strategic areas. The restructuring
was adopted in response to the increasing price competition within the computer
hardware industry. The program included a net reduction of the Company's
worldwide workforce by approximately 400 employees, which included 480 employee
terminations, offset by additional employees hired to support the Company's
CLARiiON storage business. The program also included the discontinuation of the
Company's THiiN Line Internet server products and the development and
manufacturing of certain low-end AViiON server products; a restructuring of
research and development activities; and the cancellation of certain development
and vendor supply agreements with various third parties. As a result of the
employee terminations and other actions noted above, the Company will also close
certain offices related to sales and marketing activities.
Accordingly, during the current fiscal year, the Company recorded a charge of
$135 million related to the restructuring program and certain asset write-downs
resulting from the program. The charge included approximately $82.4 million
related to employee termination benefits, asset write-downs, and other exit
costs that the Company has recorded in operating expenses, and approximately
$52.6 million for capitalized software and inventory write-downs, which are
included in product cost of revenues. A summary of the restructuring charge
included in operating expense and the related accrued liability balance at
September 26, 1998 is as follows:
21
<PAGE>
<TABLE>
Restructuring Charge (in millions)
<CAPTION>
- -----------------------------------------------------------------------------------------------
Restructuring Less:
Charge Cash Payments and September 26, 1998
Fiscal Year 1998 Asset Write-downs Balance
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee termination benefits $ 43.7 $ 16.7 $ 27.0
Asset write-downs 19.9 13.2 6.7
Lease abandonments 11.3 0.7 10.6
Other exit costs 7.5 3.8 3.7
------ ------ ------
Total $ 82.4 $ 34.4 $ 48.0
====== ====== ======
- -----------------------------------------------------------------------------------------------
</TABLE>
This provision includes severance benefits for approximately 480 employees, of
which approximately 65% were based in the United States and the remainder in
Europe and Asia/Pacific. Of the 480 employees identified, approximately 345 were
terminated during the fiscal year ended September 26, 1998, and the remaining
terminations are expected to be substantially complete by the end of calendar
year 1998. Asset write-downs are composed primarily of fixed assets, including
leasehold improvements and demonstration equipment, which are being disposed of
in connection with the restructuring program. The provision for lease
abandonments relates to vacated lease properties, mainly in Europe and Asia, and
includes a change in estimate of $1.3 million for lease abandonment costs
accrued in prior years.
In addition, the Company recorded charges related to the write-down of certain
capitalized software costs ($43 million) and inventory ($10 million) which have
been recorded in product cost of revenues. Changes in the Company's focus for
its server products resulting from the restructuring program significantly
lowered the future gross revenue estimates for certain software-based solutions,
requiring that these previously capitalized costs be reduced to their net
realizable value. Also, the Company disposed of inventory related to its THiiN
Line business and certain other discontinued products.
The Company expects cost savings of approximately $40 to $45 million annually
from the restructuring program. The Company does not expect to realize the full
benefit of the expense reductions until the first quarter of calendar year 1999.
The Company does not currently foresee any significant additional restructuring
charges in the near future.
During fiscal year 1995, the Company recorded a restructuring charge of $43
million. As of September 26, 1998, the remaining reserves of $3.9 million from
the 1995 restructuring program are for excess vacant rental properties,
primarily located in Europe.
At September 26, 1998, the number of employees totaled approximately 4,700, a
net decrease of 400 employees from September 27, 1997. During fiscal year 1997,
there was a net increase of 200 employees from the 4,900 employed as of
September 28, 1996.
Net Income (Loss) (in millions)
================================================================================
1998 1997 1996
------ ------ ------
Income (loss) from operations $(149) $63 $37
Interest and other income - (5) (5)
Tax provision (3) (2) (4)
------ ------ -----
Net income (loss) $(152) $56 $28
================================================================================
The loss from operations in fiscal 1998 of $149 million was composed of losses
of $120 million, $24 million, and $5 million from the domestic marketplace,
Europe, and other international locations, respectively. The loss in the current
fiscal year includes a charge of $135 million related to the Company's
restructuring program and certain asset write-downs resulting from the program.
The income from operations for fiscal 1997 of $63 million was composed of $73
million domestically, partially offset by losses from operations of $5 million
each from Europe and other international locations. In fiscal 1996, income from
operations was $44 million domestically and $3 million in Europe, offset by a
loss from operations of $10 million from other international markets.
Interest income for fiscal 1998 increased 27% from fiscal 1997, following a 42%
increase from fiscal 1996 to fiscal 1997. The increases were primarily due to
higher levels of invested cash. Interest expense was $14 million, $15 million,
and $13 million for fiscal years 1998, 1997, and 1996, respectively. The
interest expense for fiscal year 1998 relates primarily to interest expense and
amortization of issuance costs associated with the Company's 6% Convertible
Subordinated Notes due 2004, which were issued during the second half of fiscal
1997. In fiscal 1997, the Company converted $125 million of the 7 3/4%
Convertible Subordinated Debentures due 2001 and retired $27
22
<PAGE>
million of the 8 3/8% Sinking Fund Debentures due 2002. In fiscal 1998, other
income, net, includes a gain on the sale of an equity security of $2.2 million,
offset, in part, by the write-off of a $2 million equity investment which had
been previously carried at cost.
The provision for income taxes in fiscal years 1998, 1997, and 1996 related
primarily to foreign, state, and federal alternative minimum taxes. The Company
has a valuation allowance which substantially offsets all deferred tax assets
existing as of September 26, 1998 and September 27, 1997. The amount of the
deferred tax asset considered realizable is subject to change based on estimates
of future taxable income during the carryforward period. The Company will assess
the need for the valuation allowance at each balance sheet date, based on all
available evidence, and may adjust the level of the valuation allowance, if
appropriate.
In the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards Number 128 ("SFAS 128"), "Earnings per Share." SFAS 128
specifies modifications to the calculation of earnings per share from the method
previously used by the Company as prescribed by APB Opinion Number 15. As
required by the Securities and Exchange Commission, Note 11 to the Consolidated
Financial Statements discloses earnings per share amounts in accordance with
SFAS 128 for fiscal years 1998, 1997, and 1996.
In July 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and
SFAS 131, "Disclosures About Segments of an Enterprise and Related Information."
In October 1997, the Accounting Standards Executive Committee of American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
97-2, "Software Revenue Recognition." All these statements are effective for
fiscal years beginning after December 15, 1997. The Company will implement these
statements as required. The future adoption of SFAS 130, SFAS 131, and SOP 97-2
is not expected to have a material effect on the Company's consolidated
financial position or results of operations.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 132 revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. This Statement is
effective for fiscal years beginning after December 15, 1997. The Company will
implement the Statement as required.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. The Company will implement this
statement as required. The Company is currently evaluating the effect, if any,
the future adoption of SFAS 133 will have on the consolidated financial position
or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments as of September 26, 1998 were $158 million,
a decrease of $59 million from fiscal 1997. At the same date, the Company held
$160 million in marketable securities, a net increase of $9 million from the
prior fiscal year. In total, cash and temporary cash investments, along with
marketable securities, decreased $50 million in the current fiscal year. The
decrease was mainly attributable to the purchases of equipment required for the
company's server and storage businesses, payments reducing employee-related
accruals, and payments related to the restructuring program implemented in June
of 1998. The marketable securities held, which supplement cash and temporary
cash investments, include United States Treasury bills and notes, notes issued
by U.S. government agencies, commercial paper and certificates of deposit, as
well as equity securities recorded at their fair market value of $9.8 million
and classified as available-for-sale. The unrealized gain on marketable
securities of $8.5 million is recorded as a separate component of stockholders'
equity. Net cash provided from operations in fiscal 1998 was $80 million.
Expenditures for property, plant, and equipment were $114 million, capitalized
software development costs totaled $36 million, and cash provided from stock
plans equaled $11 million. The effect of foreign currency exchange rate
fluctuations on cash and temporary cash investments was an increase of $1
million for fiscal year 1998.
Net receivables increased $11 million to $307 million as of September 26, 1998.
Total inventories as of September 26, 1998 were $142 million, a decrease of $24
million from September 27, 1997, primarily as a result of the reduction in
inventory levels related to the Company's restructuring program and improved
supply management. Net property, plant, and equipment remained at $180 million.
The purchases of the equipment and capital expenditures for developing both
operating and financial systems and to support the new product initiatives in
the server and storage businesses were offset, in part, by the write-down of
non-strategic assets, which are being disposed of in connection with the
restructuring program. Fixed asset dispositions related to the sale of
demonstration equipment totaled $8.7 million for the current fiscal year.
Management expects that sales of demonstration equipment will continue. Other
long-term assets decreased by approximately $8 million to $89 million as of
September 26, 1998. This decrease was primarily the result of the write-down of
certain capitalized software costs to the net realizable value, due to the
Company's restructuring program, partly offset by recording an intangible asset
of $20.4 million equal to the amount of unrecognized prior service cost of the
Company's domestic pension plan. The amount of the accumulated benefit
obligation in excess of the intangible asset of $6.3 million has been recorded
as a separate component of stockholders' equity.
Accounts payable increased $6 million, partly due to an increase in the value of
unmatured foreign exchange contracts as of September 26, 1998. Other current
liabilities and other liabilities increased $58 million, primarily as a result
of charges related to employee
23
<PAGE>
termination benefits and provisions for lease abandonments related to vacated
lease properties resulting from the Company's restructuring program.
Additionally, the Company recorded a pension liability of approximately $27
million related to the excess of the accumulated benefit obligation over the
pension plan assets. Long-term debt of $212.8 million remained unchanged from
September 27, 1997.
For the three-year period ending September 26, 1998, cash and temporary cash
investments increased $41 million. Net cash provided from operations was $312
million. The sale of non-operating facilities and other assets provided $13
million. Proceeds from the Company's employee stock plans provided $37 million.
Net cash provided from long-term debt was $177 million, as a result of the
Company issuing $213 million of 6% Convertible Subordinated Notes due 2004, in
fiscal 1997, which was partially offset by the retirement of $30 million of 8
3/8% Sinking Fund Debentures due 2002, and the payment of $6 million in debt
issuance costs on the 6% Convertible Subordinated Notes due 2004. Net cash used
for the purchase of marketable securities was $67 million. Expenditures for
property, plant, and equipment totaled $319 million and the Company's investment
in capitalized software development costs was $103 million. Notes payable were
paid in the amount of $2 million during this three-year period. The effect of
foreign exchange on this three-year period was a $4 million decrease to cash.
Operations have generally been the primary source of the Company's cash. Cash
provided from operations has been augmented by proceeds from the issuance of 6%
Convertible Subordinated Notes, sales of stock under the Company's stock plans,
and sales of facilities and other non-operating assets. The Company has not paid
cash dividends since its inception in order to reinvest available cash in
operations.
At September 26, 1998, the Company had a $45 million unsecured letter of credit
and reimbursement facility with a group of banks. This facility is available for
working capital, capital expenditures, permitted acquisitions, and to secure the
issuance of letters of credit. It contains certain covenants, including
restrictions on particular liens, other indebtedness, and certain investments.
The interest rate for borrowings under the letter of credit and reimbursement
facility is the lower of 1.375% per annum above LIBOR or the prime rate plus
0.25%. Commitment fees paid on available funds during fiscal years 1998 and 1997
were not material. There were $4.7 million and $5.0 million of letters of credit
secured by the $45 million letter of credit and reimbursement facility at
September 26, 1998 and September 27, 1997, respectively. During fiscal years
1998 and 1997, there were no borrowings under this facility. The facility has a
duration of three years and expires on September 30, 2000.
The Company believes it is important to maintain a conservative capital
structure and a strong cash position. Cash is primarily invested in liquid
temporary investments pending its utilization. The Company's investment policy
is to minimize risk while maximizing return on cash, and to keep uninvested cash
at a minimum. Cash is generally centralized domestically, although some cash is
also held at various subsidiaries around the world to meet local operating
funding requirements. All cash is freely remittable to the United States.
Although the actual level of spending will be influenced by many factors, the
Company anticipates that expenditures for property, plant, and equipment will
continue to be the primary non-operating use of cash during fiscal year 1999.
Most of the expenditures will be for capital assets directly related to the
Company's open systems product sales, marketing, support, and development.
During fiscal 1999, cash totaling $40 million is expected to be utilized to
settle liabilities arising from the Company's restructuring programs.
The Company believes it has sufficient resources to provide for its current
operations and to continue to invest in the future.
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT
The "Year 2000 issue" arises because many computer hardware and software systems
use only two digits to represent the year. As a result, these systems and
programs may not correctly handle dates beyond 1999, resulting in errors in
information or program or systems failures. Assessments of the potential effects
of the Year 2000 issues vary markedly among different companies, governments,
consultants, economists and commentators. It is not possible to accurately
predict what the actual impact may be. In this context, the Company offers the
following statements concerning the Year 2000 issues. All statements made and
referred to here are Year 2000 Readiness Disclosures under the U.S. Year 2000
Readiness Disclosure Act.
1. Product Readiness and Customer Communications
The Company is communicating with its customers concerning the Year 2000 issue
by letters to the Company's current service customers, and creation of Data
General and CLARiiON Year 2000 Internet web sites at http://www.dg.com/year2000
and http://www.clariion.com/corporat/yr2000readiness.html where Year 2000
Readiness Disclosures concerning various products and the Company's Year 2000
program are made available to customers and the general public.
The Company has established teams to codify and confirm the Year 2000 readiness
of Data General's AViiON, CLARiiON, and 32-bit ECLIPSE(R) MV computer products,
as well as Data General Pentium processor-based and later generation personal
computers. Based on these efforts as of November 1, 1998, and subject to ongoing
investigation, the Company has identified many products which are either Year
2000 Ready or may be made so by means of Year 2000 updates which the Company
intends to make available. The Company is making no assurance of Year 2000
Readiness for products not so identified. As well, the Company does not intend
to generally address the Year 2000 readiness of third-party products (i.e.,
products not marketed under the "Data General" brand name).
24
<PAGE>
2. Data General's Internal Systems, Manufacturing Processes and Facilities
With regard to the Company's own business systems, Data General has been
preparing for Year 2000 since mid-1996, and has established teams to coordinate
solutions to the Year 2000 issue for its own internal information systems and
applications across the Company's operations worldwide. As of October, 1998, the
Company's assessment was that a significant proportion of the Company's
information system and applications have been rendered Year 2000 ready, through
a combination of re-engineering, software updates, or replacement with new
technologies. The Company is continuing its assessment and remediation of Year
2000 issues. Based on existing plans and schedules, and subject in any event to
the possibilities of delays, the Company plans to complete the process of making
all its significant internal information systems Year 2000 Ready in time to meet
the Company's specific business requirements. Although Data General's evaluation
of its information management systems is still in process, the Company believes
that the impact of the Year 2000 issues on its business systems and applications
should not have a material adverse impact on future results.
The Company has also undertaken an assessment of the Year 2000 issue as related
to its manufacturing facilities and processes. Although work remains to be done,
a significant portion of this evaluation has been completed and the Company is
not aware at November 1, 1998, of any material Year 2000 concerns with respect
to its manufacturing facilities and processes. The Company is also assessing the
possible impact of Year 2000 issues on the operations of its facilities
(including such matters as security systems, building equipment, and potential
interruptions to utilities). This evaluation is ongoing at this time. It is the
Company's intention that all material Year 2000 issues regarding the operation
of the Company's facilities will be addressed as the requisite information is
received by the Company.
3. Data General's Suppliers
The Company's procurement organizations are seeking to monitor the Year 2000
readiness of the Company's key suppliers. In 1997, the Company sought to contact
over 200 of its significant suppliers to determine their Year 2000 readiness.
The Company is continuing its efforts to monitor its suppliers regarding Year
2000 readiness assessments. Since the Company views Year 2000 preparations as
ongoing, both within Data General and at our suppliers' operations, and since
suppliers' reported Year 2000 readiness can change, efforts to monitor the
status of suppliers will be continuing. As Year 2000 readiness issues are
identified and as the Company gains more certain information concerning the Year
2000 readiness of its suppliers, the Company intends to evaluate contingency
plans as needed to address the Company's business requirements.
Since determining the Year 2000 readiness of suppliers depends upon their
cooperation and upon their disclosure of often imprecise or estimated
information, it is likely that the Company's inquiries will not be entirely
successful, and it remains possible that actual results may deviate from
assurances which were given to the Company. It is possible that notwithstanding
the Company's efforts, interruptions of key components or services could have an
adverse impact on the Company's operations and future results. If significant
exposures are identified, the Company expects during 1999 to assess the efficacy
and reasonability of contingency plans to mitigate or avoid potential
interruptions to delivery of critical supplies or services, but alternatives -
particularly for single-sourced components or suppliers -- may not always be
readily available or economically reasonable. It is likely that not every
potential Year 2000 exposure will be protected by a contingency plan; a measure
of reasonable business risk will be undertaken relative to the Year 2000
problem, both by Data General and by other companies.
4. Risks of Claims
In addition, there may be a potential for claims against the Company arising
from products and services that were not Year 2000 ready. Because the Company is
in the business of selling computer system products, the Company's risk of being
subjected to lawsuits relating to Year 2000 issues with its products is likely
to be greater than that of companies in other industries. The outcomes of any
Year 2000 claims and the impact of such claims on the Company cannot be
determined at this time; such outcomes will depend on the facts and
circumstances of each situation and an evolving state of law as these types of
claims are addressed by legal systems worldwide.
5. Accounting Treatment of Year 2000 Expenses
The cost of addressing Year 2000 issues is presently being funded through
operating cash flows. During the fiscal year ended September, 1998, the Company
expensed approximately $840,000 in Year 2000 costs for internal labor and
outside consultants in connection with internal projects supporting the
Company's critical systems. The Company is expensing costs associated with
identification and resulting changes to its systems, but does not expect the
amounts to have a material effect on its financial position or results of
operations. As of November 1, 1998, the Company believes the cost of
administering its Year 2000 readiness program will not have a material adverse
impact on future earnings.
<PAGE>
6. Certain Additional Risk Factors
It is unknown how the Company's sales may be impacted by Year 2000 issues. As
the Company's customers focus on preparing their businesses for Year 2000,
capital budgets in the near term may be redirected toward remediation efforts,
potentially delaying the purchase and implementation of new systems, thereby
creating less demand for the Company's products and services. Alternatively,
sales of Year 2000 ready Data General products could be increased, to replace
older products. As well, the Company's sales during 1999 could be affected by
the customers' perceptions of Data General's own state of Year 2000 readiness.
All these factors could affect the Company's future revenues.
25
<PAGE>
Overriding any preparations taken by the Company, the Year 2000 issue presents
risks and uncertainties that could affect the Company; these include unexpected
Year 2000 issues, or unexpected problems arising from plans implemented to
anticipate Year 2000 problems; extended interruptions to power, water or
telecommunications utility services; potential unavailability of skilled or
critical personnel; delays or interruptions in national or international
transportation systems; and potential governments' responses to Year 2000
emergencies, among others. Further, there can be no assurance that there will
not be delays in, or increased costs associated with, the Company's Year 2000
readiness efforts, or that the Company's suppliers and other parties will
adequately prepare for the Year 2000. The nature of these uncertainties is such
that it remains possible that Year 2000 issues could have a material adverse
impact on the Company's operations and financial results. While the Company does
not currently expect that this will be the case, and continues to aggressively
pursue its preparations for the Year 2000, the Company can offer no express
assurance whether or to what extent the Company may be affected by matters which
it has not anticipated or by matters outside of the Company's control. The
Company recognizes the need to continue its analysis, assessment, monitoring,
and planning for the various Year 2000 issues, across its businesses worldwide,
and to address Year 2000 issues as they are identified. Within that uncertain
context, however, and subject to the various factors discussed above, the
Company believes that the impact of Year 2000 issues on its business should not
have a material adverse effect on the Company's financial position or results of
operations.
MARKET RISK
The Company is exposed to market risk primarily in its cash and foreign currency
transactions. Because a substantial portion of the Company's operations and
revenue occur outside the United States, the Company's results can be
significantly impacted by changes in foreign currency exchange rates. The
Company manages its foreign currency risk through the use of forward foreign
currency contracts. The Company does not hold or enter into derivative financial
instruments for trading purposes. At inception, the forward foreign currency
contracts are designated as hedges of intercompany accounts receivable and
foreign sales which are firmly committed or forecasted. These contracts
generally mature within three months. Market value gains and losses on these
contracts are included in the cost of product revenues and generally offset
exchange gains or losses on the related transactions.
See Note 2 and 7 to the Consolidated Financial Statements for a description of
the Company's use of derivative and other financial instruments and related
market risk.
As of September 26, 1998, the Company had entered into forward foreign currency
contracts to purchase $81.5 million and sell $153.7 million in various foreign
currencies. Between September 26, 1998, and September 30, 1998, forward foreign
currency contracts to purchase $81.5 million and $78.0 million were settled
resulting in a net loss of approximately $4.0 million. This loss was partially
offset by exchange gains on the hedged transactions. The potential gain or loss
for a hypothetical 10% beneficial or adverse change in foreign currency exchange
rates on the forward foreign currency contracts to sell $75.7 million maturing
after September 30, 1998 would result in a gain or loss of approximately $8.0
million. The Company expects that this gain or loss would be substantially
offset by exchange gains or losses on the related hedged transactions
26
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED
-------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Product $ 1,067,888 $ 1,142,561 $ 924,140
Service 394,221 390,608 398,110
----------------- --------------- ------------------
Total revenues 1,462,109 1,533,169 1,322,250
----------------- --------------- ------------------
COSTS AND EXPENSES
Cost of product revenues 825,954 772,721 618,351
Cost of service revenues 245,537 248,848 259,341
Research and development 118,731 109,984 98,022
Selling, general, and administrative 338,108 338,443 309,259
Restructuring charge 82,400 - -
----------------- --------------- ------------------
Total costs and expenses 1,610,730 1,469,996 1,284,973
----------------- --------------- ------------------
Income (loss) from operations (148,621) 63,173 37,277
Interest income 13,425 10,549 7,440
Interest expense 14,439 15,422 13,072
Other income, net 240 - -
----------------- --------------- ------------------
Income (loss) before income taxes (149,395) 58,300 31,645
Income tax provision 3,000 2,400 3,500
----------------- --------------- ------------------
Net income (loss) $ (152,395) $ 55,900 $ 28,145
================= =============== ==================
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) per share $(3.11) $1.35 $0.73
Weighted average shares outstanding 49,038 41,347 38,769
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) per share $(3.11) $1.26 $0.68
Weighted average shares outstanding, including
common stock equivalents, where applicable 49,038 44,215 41,095
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
27
<PAGE>
DATA GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
-------------------------------------
DOLLARS IN THOUSANDS, EXCEPT PAR VALUE SEPT. 26, 1998 SEPT. 27, 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments $ 158,220 $ 216,814
Marketable securities 160,354 151,455
Receivables, less allowances of $19,424 at
Sept. 26, 1998 and $16,588 at Sept. 27, 1997 307,428 296,375
Inventories 141,639 166,008
Other current assets 28,320 27,584
----------------- ------------------
Total current assets 795,961 858,236
Property, plant, and equipment, net 180,454 180,410
Other assets 88,649 96,222
----------------- ------------------
Total Assets $ 1,065,064 $ 1,134,868
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 160,940 $ 154,624
Other current liabilities 269,774 237,198
----------------- ------------------
Total current liabilities 430,714 391,822
----------------- ------------------
Long-term debt 212,750 212,750
----------------- ------------------
Other liabilities 36,645 11,516
----------------- ------------------
Commitments and Contingencies
Stockholders' equity
Common Stock, $.01 par value
Outstanding - 49,689,000 shares at Sept. 26, 1998
and 48,588,000 shares at Sept. 27, 1997 (net of
deferred compensation of $15,444 at Sept. 26, 1998
and $14,157 at Sept. 27, 1997) 626,137 607,130
Accumulated deficit (231,976) (79,581)
Unrealized gains on marketable securities 8,513 2,812
Equity adjustment for minimum pension liability (6,252) -
Cumulative translation adjustment (11,467) (11,581)
----------------- ------------------
Total stockholders' equity 384,955 518,780
----------------- ------------------
Total Liabilities and Stockholders' Equity $ 1,065,064 $ 1,134,868
================= ==================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
28
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED
----------------------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (152,395) $ 55,900 $ 28,145
Adjustments to reconcile net income (loss) to net cash
provided from operating activities
Depreciation 95,345 79,203 82,330
Amortization of capitalized software development costs 60,881 20,180 19,130
Amortization of deferred compensation 8,461 4,669 3,866
Decrease in other liabilities (1,507) (3,708) (8,263)
Net book value of fixed asset disposals 8,735 8,858 6,399
Gain on sale of marketable securities (2,239) - -
Other non-cash items, net 8,348 2,368 (299)
Changes in operating assets and liabilities, net of
effects from sale of facilities and other assets
(Increase) in receivables (11,463) (46,514) (9,268)
(Increase) decrease in inventories 33,363 (28,876) 1,567
(Increase) decrease in other current assets (655) (4,313) 2,080
Increase in accounts payable 1,784 36,389 6,627
Increase (decrease) in other current liabilities, excluding debt 31,196 2,484 (27,191)
--------------- --------------- -----------------
Net cash provided from operating activities 79,854 126,640 105,123
--------------- --------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (114,247) (110,505) (94,670)
Purchase of marketable securities (302,798) (221,859) (84,224)
Proceeds from sales and maturity of marketable securities 302,472 89,131 150,080
Capitalized software development costs (35,554) (36,283) (30,714)
Net proceeds from sale of facilities and other assets - - 12,797
Investment in equity securities - - (2,000)
--------------- --------------- -----------------
Net cash used by investing activities (150,127) (279,516) (48,731)
--------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash provided from stock plans, net 10,547 17,049 9,684
Repayment of notes payable - (1,794) -
Repayment of long-term debt - (27,177) (3,000)
Proceeds from long-term debt, net - 206,853 -
--------------- --------------- -----------------
Net cash provided from financing activities 10,547 194,931 6,684
--------------- --------------- -----------------
Effect of foreign currency rate fluctuations on cash
and temporary cash investments 1,132 (4,238) (1,280)
--------------- --------------- -----------------
Increase (decrease) in cash and temporary cash investments (58,594) 37,817 61,796
Cash and temporary cash investments - beginning
of the period 216,814 178,997 117,201
=============== =============== =================
Cash and temporary cash investments - end of the period $ 158,220 $ 216,814 $ 178,997
=============== =============== =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 14,382 $ 11,772 $ 12,797
Income taxes paid $ 2,074 $ 5,951 $ 1,716
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
29
<PAGE>
DATA GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK
Beginning balance $ 607,130 $ 460,312 $ 446,762
Shares issued under stock plans, net 10,547 17,049 9,684
Amortization of deferred compensation 8,460 4,669 3,866
Debt conversion to Common Stock - 125,100 -
---------------- ---------------- ----------------
Ending balance 626,137 607,130 460,312
---------------- ---------------- ----------------
ACCUMULATED DEFICIT
Beginning balance (79,581) (135,481) (163,626)
Net income (loss) for year (152,395) 55,900 28,145
----------------- ---------------- ----------------
Ending balance (231,976) (79,581) (135,481)
----------------- ---------------- ----------------
UNREALIZED GAINS ON MARKETABLE SECURITIES
Beginning balance 2,812 9,708 -
Net adjustment for year 5,701 (6,896) 9,708
----------------- ---------------- ----------------
Ending balance 8,513 2,812 9,708
----------------- ---------------- ----------------
EQUITY ADJUSTMENT FOR MINIMUM PENSION LIABILITY
Beginning balance - - -
Net adjustment for year (6,252) - -
----------------- ---------------- ----------------
Ending balance (6,252) - -
----------------- ---------------- ----------------
CUMULATIVE TRANSLATION ADJUSTMENT
Beginning balance (11,581) (5,475) (3,592)
Net translation adjustment for year 114 (6,106) (1,883)
----------------- ----------------- ----------------
Ending balance (11,467) (11,581) (5,475)
----------------- ---------------- ----------------
Total stockholders' equity $ 384,955 $ 518,780 $ 329,064
================= ================ ================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
</FN>
</TABLE>
30
<PAGE>
DATA GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
Data General Corporation (the "Company") designs, manufactures, markets, and
supports a family of open computer systems including servers and mass storage
products. The Company's products provide solutions for high-performance customer
applications such as database management, transaction processing, decision
support, accounting and finance, healthcare information systems,
telecommunications and video storage, manufacturing planning and control, human
resources management, and data warehousing. The Company focuses on providing
enterprise-level solutions for businesses of all sizes, healthcare providers,
and government agencies, and has a worldwide sales, service, and support
network. The principal markets are North America and Europe.
NOTE 2. ACCOUNTING POLICIES
FISCAL YEAR. The Company's fiscal year ends on the last Saturday in September.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of Data General Corporation and its domestic and foreign subsidiaries.
All significant intercompany transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSACTIONS. The functional currencies for the Company's
operations in Australia, Canada, Europe, Japan, and New Zealand are the local
currencies. Assets and liabilities of these operations are translated into U.S.
dollars at exchange rates in effect at the balance sheet date. Income and
expense items are translated at average exchange rates for the period.
Translation adjustments are reported as a separate component of stockholders'
equity.
For the Company's other foreign operations, the U.S. dollar is the functional
currency. Assets and liabilities of these operations are remeasured into U.S.
dollars at exchange rates in effect at the balance sheet date, except for
inventories and property, plant, and equipment, which are remeasured at
historical exchange rates. Income and expense items are remeasured at average
rates for the period, except for cost of sales and depreciation, which are
remeasured at historical exchange rates. Gains and losses resulting from
remeasurement, not material in amount, are included in the results of
operations.
The Company enters into foreign exchange contracts as a hedge against exposure
to fluctuations in exchange rates associated with certain transactions
denominated in foreign currencies, principally intercompany accounts receivable.
Market value gains or losses on these contracts are included in the cost of
product revenues and generally offset exchange gains or losses on the related
transactions.
Foreign exchange transaction gains and losses for the periods ended September
26, 1998, September 27, 1997, and September 28, 1996, are included in the cost
of product revenues.
Cash flows from foreign exchange contracts that are accounted for as hedges of
identifiable foreign exchange transactions are classified as cash flows from
operating activities in accordance with the nature of the transactions being
hedged.
TEMPORARY CASH INVESTMENTS AND MARKETABLE SECURITIES. Temporary cash investments
consist of highly liquid time deposits, commercial paper, and U.S. Treasury
bills and notes with original maturities of 90 days or less. Marketable
securities consist of U.S. Treasury bills and notes, commercial paper, and notes
issued by U.S. government agencies with original maturities of 91 to 365 days,
as well as equity securities.
All of the Company's investments in U.S. Treasury bills and notes, commercial
paper, and notes issued by U.S. government agencies have maturities of less than
one year, and have been classified as held-to-maturity. These investments are
recorded at amortized cost, which approximates market value. The Company also
holds three publicly traded equity securities as part of its marketable security
portfolio. These securities are considered to be readily marketable and are
classified as available-for-sale. These investments, which are accounted for at
fair market value at September 26, 1998 and September 27, 1997 totaled $9.8
million and $4.0 million, respectively. The unrealized gain on marketable
securities of $8.5 million and $2.8 million is recorded as a separate component
of stockholders' equity at September 26, 1998 and September 27, 1997,
respectively.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventories consist primarily
of components and subassemblies and finished products held for sale. Rapid
technological change and new product introductions and enhancements could result
in excess or obsolete inventory. To minimize this risk, the Company evaluates
inventory levels and expected usage on a periodic basis and records adjustments
as required.
Certain components and products that meet the Company's requirements are
available only from a single supplier or a limited number of suppliers. Among
those components are disk drives, microprocessors, and certain proprietary
integrated circuits. The rapid rate of technological change and the necessity of
developing and manufacturing products with short life cycles may intensify these
risks. The inability to obtain components and products as required, or to
develop alternative sources, if and as required in the future, could result in
delays or reductions in product shipments, which in turn could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is stated at
cost, less accumulated depreciation. Depreciation is computed using the
straight-line method, based on the following estimated useful lives: land
improvements, 10-12 years; buildings and building improvements, 3-25 years;
equipment, 3-10 years;
31
<PAGE>
application software, 5-10 years. Included in property, plant, and equipment are
computer equipment spares which are not available for resale. These spares are
used to support systems the Company has sold or is using internally. Spares are
depreciated over a three-year estimated useful life.
REVENUE RECOGNITION AND MAJOR CUSTOMERS. Product revenues are recognized at the
time of shipment, provided that there are no significant uncertainties regarding
the customer's acceptance and collection of the related receivable is probable.
Service revenues, including post-contract customer support, are recognized
ratably over applicable contractual periods or as services are performed. The
costs of these service revenues are charged to expense when incurred.
During the years ended September 26, 1998, September 27, 1997, and September 28,
1996, revenues from a single customer totaled $192 million, $238 million, and
$201 million, or approximately 13%, 16%, and 15% of total revenues,
respectively.
RESEARCH & DEVELOPMENT, SOFTWARE DEVELOPMENT, AND WARRANTY COSTS. Research,
engineering, and product development costs are expensed as incurred. Software
development costs incurred after reaching technological feasibility and prior to
first customer shipment are capitalized and amortized to cost of product
revenues over a period not to exceed four years for operating system software
and three years for application software, which approximates the estimated
economic lives of these software products. On a quarterly basis, the Company
evaluates the recoverability of capitalized software costs. In performing its
evaluation, the Company must make estimates of anticipated future gross revenues
as well as the remaining economic life of the product. As discussed further in
Note 3 to the Consolidated Financial Statements, during fiscal year 1998, the
Company's evaluation of anticipated future gross revenue for certain
software-based solutions required that the previously capitalized costs be
reduced. Unamortized software development costs were $51.5 million at September
26, 1998 and $76.8 million at September 27, 1997. Write-offs of certain
capitalized software development costs totaled approximately $39.4 million, $0.5
million, and $2.7 million for fiscal years 1998, 1997, and 1996, respectively.
Estimated direct on-line diagnostic support and warranty costs are accrued at
the time of product shipment.
ADVERTISING. Advertising costs are charged to operations when incurred. The
Company has not incurred any costs associated with direct-response advertising
during fiscal years 1998, 1997, and 1996, and there were no capitalized
advertising costs as of September 26, 1998 or September 27, 1997. Advertising
expenses for fiscal 1998, 1997, and 1996 were $8.3 million, $14.7 million, and
$12.6 million, respectively.
RETIREMENT/POST-EMPLOYMENT BENEFITS. Net pension cost for the Company's domestic
defined benefit pension plan is funded as accrued, to the extent that current
pension cost is deductible for U.S. Federal tax purposes and to comply with the
General Agreement on Tariff and Trade Bureau (GATT) additional minimum funding
requirements for the plan year beginning October 1, 1995. The plan's transition
surplus is amortized over 18 years. Net pension cost for the Company's
international defined benefit pension plans is generally funded as accrued. The
net transition surplus or obligation for these plans is amortized over periods
ranging from 15 to 20 years.
Net post-retirement benefit costs for the Company's domestic post-retirement
benefits plan are generally funded as accrued, to the extent that current cost
is deductible for U.S. Federal tax purposes. The net transition obligation for
the plan is amortized over 18 years.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically assesses whether any
events or changes in circumstances have occurred that would indicate that the
carrying amount of a long-lived asset may not be recoverable. If such an event
or change in circumstance occurs, the Company evaluates whether the carrying
amount of such asset is recoverable by comparing the net book value of the asset
to estimated future undiscounted cash flows, excluding interest charges,
attributable to such asset. If it is determined that the carrying amount is not
recoverable, the Company will recognize an impairment loss equal to the excess
of the carrying amount of the asset over its estimated fair value of such asset.
STOCK-BASED COMPENSATION PLANS. The Company applies Accounting Principles Board
Opinion Number 25 and related Interpretations in accounting for its stock option
and purchase plans. Note 9 to the Consolidated Financial Statements contains a
summary of the pro-forma effects to reported net income (loss) and earnings
(loss) per share for fiscal years 1998, 1997, and 1996, as if the Company had
elected to recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by Statement of Financial Accounting
Standards Number 123 ("SFAS 123"), "Accounting for Stock-Based Compensation".
EARNINGS PER SHARE. In the first quarter of fiscal 1998, the Company adopted
SFAS 128, "Earnings per Share." Basic net income (loss) per share is based upon
the weighted average number of common shares outstanding. Diluted net income
(loss) per share is based upon the weighted average number of common shares
outstanding, including dilutive common stock equivalents and the assumed
conversion of the Company's convertible debentures, if dilutive. Common stock
equivalents represent the net additional shares resulting from the assumed
exercise of options outstanding under the Company's stock option plans, using
the "treasury stock" method. For fiscal 1998, 1997, and 1996, the debentures are
anti-dilutive and have been excluded from the calculation.
OTHER RECENT PRONOUNCEMENTS. In July 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income" and SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information." In October 1997, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition." These
statements are effective for fiscal years beginning after December 31, 1997. In
February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This Statement is effective for fiscal years
beginning after December 15, 1997. In June 1998, the FASB issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
is effective for all fiscal quarters of all fiscal years beginning
32
<PAGE>
after June 15, 1999. The Company will implement these statements as required.
The future adoption of SFAS 130, SFAS 131, SFAS 132, and SOP 97-2 is not
expected to have a material effect on the Company's consolidated financial
position or results of operations. The Company is evaluating the effect, if any,
the future adoption of SFAS 133 will have on the consolidated financial position
or results of operations.
NOTE 3. RESTRUCTURING
During fiscal year 1998, the Company approved and implemented a restructuring
program designed to strengthen the Company's focus on storage and enterprise
computing solutions and reduce costs in non-strategic areas. The restructuring
program was adopted in response to the increasing price competition within the
computer hardware industry. The program included a net reduction of the
Company's worldwide workforce by approximately 400 employees which included
approximately 480 employee terminations, offset by additional employees hired to
support the Company's CLARiiON storage business. The program also included the
discontinuation of the Company's THiiN Line Internet server products and the
development and manufacturing of certain low-end AViiON server products, a
restructuring of research and development activities, and the cancellation of
certain development and vendor supply agreements with various third parties. As
a result of the employee terminations and other actions noted above, the Company
will also close certain offices related to sales and marketing activities.
Accordingly, during the current fiscal year, the Company recorded a charge of
$135 million related to the restructuring program and certain asset write-downs
resulting from the program. The charge included approximately $82.4 million
related to employee termination benefits, asset write-downs and other exit costs
which the Company has recorded in operating expenses, and approximately $52.6
million for capitalized software and inventory write-downs which are included in
product cost of revenues.
This provision includes severance benefits for approximately 480 employees, of
whom approximately 65% were based in the United States and the remainder in
Europe and Asia/Pacific. Of the 480 employees identified, approximately 345 were
terminated during the year ended September 26, 1998 and the remaining
terminations are expected to be substantially complete by the end of calendar
year 1998. Asset write-downs are composed primarily of fixed assets, including
leasehold improvements and demonstration equipment, which will be disposed of in
connection with the restructuring program. The provision for lease abandonments
relates to vacated lease properties, mainly in Europe and Asia, and includes a
change in estimate of $1.3 million for lease abandonment costs accrued in prior
years.
In addition, the Company recorded charges related to the write-down of certain
capitalized software costs ($43 million) and inventory ($10 million) which have
been recorded in product cost of revenues for the year ended September 26, 1998.
Changes in the Company's focus for its server products resulting from the
restructuring program significantly lowered the future gross revenue estimates
for certain software-based solutions, requiring that these previously
capitalized costs be reduced to their net realizable value. Also, the Company
disposed of inventory related to its THiiN Line business and certain other
discontinued products.
During fiscal 1995, the Company recorded a restructuring charge of $43 million.
As of September 26, 1998 the remaining reserves of $3.9 million from the 1995
restructuring program are for excess vacant rental properties, primarily located
in Europe.
The amounts accrued and charged against the established provisions described
above were as follows:
<TABLE>
<CAPTION>
BEGINNING CURRENT YEAR CURRENT YEAR ENDING
IN MILLIONS BALANCE PROVISION CHARGES BALANCE
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
FISCAL 1998 ACTIVITY
Employee termination benefits $ 0.8 $ 43.7 $ (17.3) $27.2
Lease abandonments 5.6 11.3 (3.6) 13.3
Asset write-downs - 19.9 (13.4) 6.5
Other exit costs 1.2 7.5 (3.8) 4.9
------ ------- ---------- --------
Total $7.6 $ 82.4 $ (38.1) $51.9
------ ------- ---------- --------
FISCAL 1997 ACTIVITY
Employee termination benefits $ 2.5 - $(1.7) $0.8
Lease abandonments 10.0 - (4.4) 5.6
Other exit costs 2.0 - (0.8) 1.2
------- ------- ---------- --------
Total $14.5 - $(6.9) $ 7.6
------- ------- ---------- --------
</TABLE>
<PAGE>
NOTE 4. CONSOLIDATED BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
AS OF
-------------------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVENTORIES
Raw materials $ 1,420 $ 16,169
Work in process 64,200 78,335
Finished systems 50,632 44,349
Field engineering parts and components 25,387 27,155
-------- --------
Total inventories $141,639 $166,008
-------- --------
PROPERTY, PLANT, AND EQUIPMENT
Land $ 3,512 $ 3,512
Buildings and improvements 81,350 75,819
Manufacturing and design equipment 100,452 95,931
Data processing, office, and other equipment 381,945 399,812
Computer equipment spares 74,353 82,277
-------- --------
Total property, plant, and equipment 641,612 657,351
Accumulated depreciation (461,158) (476,941)
-------- --------
Total property, plant, and equipment, net $180,454 $180,410
-------- --------
OTHER CURRENT LIABILITIES
Accrued employee compensation and benefits $ 62,279 $86,268
Deferred revenues 56,321 50,574
Accrued restructuring charges 45,114 7,649
Other accrued expenses 106,060 92,707
-------- --------
Total other current liabilities $269,774 $237,198
-------- --------
</TABLE>
During the current fiscal year, the Company retired fully depreciated
computer equipment spares with an original cost of $19.4 million.
33
<PAGE>
NOTE 5. INCOME TAXES
Domestic and foreign income (loss) before taxes, and details of the income tax
provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE TAXES
Domestic $(124,886) $62,125 $32,200
Foreign (24,509) (3,825) (555)
--------- -------- --------
$(149,395) $58,300 $31,645
--------- -------- --------
INCOME TAX PROVISION (BENEFIT)
Current
Federal $ - $ 250 $ 650
Foreign 1,589 1,091 1,076
State 700 800 800
------ ------ ------
Total Current 2,289 2,141 2,526
------ ------ ------
Deferred
Federal - - 1,350
Foreign 711 259 (376)
------ ------ ------
Total Deferred 711 259 974
------- ------ -------
Total Tax Provision $ 3,000 $ 2,400 $ 3,500
------- ------ -------
</TABLE>
Deferred income taxes reflect the tax impact of temporary differences between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. Under SFAS 109, the benefit
associated with future deductible temporary differences is recognized if it is
more likely than not that a benefit will be realized. The Company has recorded a
valuation allowance that offsets substantially all deferred tax assets as of the
end of each related year. The amount of the deferred tax asset considered
realizable is subject to change based on estimates of future taxable income
during the carryforward period. The Company will assess the need for the
valuation allowance at each balance sheet date based on all available evidence.
Principal components of the deferred tax assets and liabilities included on the
balance sheet at September 26, 1998 and September 27, 1997 were as follows:
<PAGE>
<TABLE>
<CAPTION>
AS OF
---------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS
Inventory $ 10,278 $ 10,618
Operating expenses 44,732 54,218
Intercompany profit in inventory and fixed assets 6,345 7,334
Depreciation 12,110 5,933
Restructuring 40,663 1,403
Stock option plans 7,503 6,026
Interest on convertible debentures 1,940 1,842
Net operating losses 150,129 116,043
Tax credits 19,090 17,696
-------- --------
Gross deferred tax assets 292,790 221,113
Less: Valuation allowances 260,235 195,071
-------- --------
Total deferred tax assets 32,555 26,042
-------- --------
DEFERRED TAX LIABILITIES
Capitalized software development costs (35,132) (28,695)
Other (3,535) (2,748)
-------- --------
Total deferred tax liabilities (38,667) (31,443)
-------- --------
Net deferred tax liabilities $ (6,112) $ (5,401)
-------- --------
</TABLE>
Reconciliation of the U.S. Federal statutory rate to the Company's effective tax
rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------
SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Federal statutory rate (35.0%) 35.0% 35.0%
State income taxes 0.5 1.4 2.5
Net domestic and foreign
losses without tax benefits 37.9 3.7 15.0
Net operating loss carryforwards utilized (0.2) (36.8) (42.1)
Foreign income taxed at different rates (1.1) 0.4 (1.5)
Alternative minimum tax - 0.4 2.1
Other - - 0.1
----- ----- -----
Effective tax rate 2.1% 4.1% 11.1%
----- --- ----- -----
</TABLE>
The Company has U.S. Federal and foreign operating loss carryforwards of
approximately $395 million and tax credit carryforwards of approximately $18
million. The operating loss carryforwards expire in the years 1999 through 2018.
The operating loss carryforward expiring in 1999 is an immaterial amount. The
tax credit carryforwards expire in the years 2000 through 2017.
Provision has not been made for U.S. or additional foreign taxes on
approximately $89 million of undistributed earnings of foreign subsidiaries, as
those earnings are considered to be permanently reinvested. Such earnings would
become taxable upon the sale or liquidation of these foreign subsidiaries or
upon the remittance of dividends. It is not practicable to estimate the amount
of the deferred tax liability on such earnings. Upon remittance, certain foreign
countries impose withholding taxes that are then available, subject to certain
limitations, for use as credits against the Company's U.S. tax liability, if
any. The amount of withholding tax that would be payable upon remittance of the
entire amount of undistributed earnings would approximate $1.0 million.
<PAGE>
NOTE 6. DEBT
<TABLE>
<CAPTION>
AS OF
--------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
6% Convertible Subordinated Notes due 2004 $212,750 $212,750
--------- --------
</TABLE>
The 6% Convertible Subordinated Notes are convertible at the option of the
holder, at any time prior to maturity, into shares of Common Stock of the
Company at a conversion price of $26.194 per share, subject to adjustment for
certain events. The Notes are subordinated to all Senior Indebtedness (as
defined in an indenture under which the Notes were issued.) At any time on or
after May 18, 2000, the Company may redeem the Notes at decreasing redemption
prices; and they may be redeemed at the option of the holder if there is a
Fundamental Change (as defined in the indenture) in the Company's operations.
The indenture does not contain any financial covenants or any restrictions on
the payment of dividends or the repurchase of the Company's securities. Deferred
debt issuance costs at September 26, 1998 and September 27, 1997 of $4.8 and
$5.6 million, respectively, are being amortized to interest expense over the
life of the Notes. The Company does not have any maturity requirements for
long-term debt for the next five fiscal years.
34
<PAGE>
At September 26, 1998, the Company had a $45 million unsecured letter of credit
and reimbursement facility with a group of banks. This facility is available for
working capital, capital expenditures, permitted acquisitions, and to secure the
issuance of letters of credit. It contains certain covenants, including
restrictions on particular liens, other indebtedness, and certain investments.
The interest rate for borrowings under the letter of credit and reimbursement
facility is the lower of 1.375% per annum above LIBOR or the prime rate plus
0.25%. Commitment fees paid on available funds during fiscal years 1998 and 1997
were not material. There were $4.7 million and $5.0 million of letters of credit
secured by the $45 million letter of credit and reimbursement facility at
September 26, 1998 and September 27, 1997, respectively. During fiscal years
1998 and 1997, there were no borrowings under this facility. The facility has a
duration of three years and expires on September 30, 2000.
On October 10, 1996, the Company acquired a $3.9 million principal amount of the
8 3/8% Sinking Fund Debentures at a discount. The transaction resulted in an
immaterial gain. On May 21, 1997, the Company redeemed the remaining Sinking
Fund Debentures. The Company paid a premium to debenture holders, and the
transaction resulted in an immaterial loss. The debentures were retired using a
portion of the proceeds of the issuance of 6% Convertible Subordinated Notes due
2004.
On August 18, 1997, the Company redeemed $125 million of its 7 3/4% Convertible
Subordinated Debentures due 2001 at a redemption price of 103.1% of the
principal face value plus accrued interest to the redemption date. The
debentures provided for conversion into Common Stock of Data General at a
conversion price of $19.20 any time before the redemption date. Prior to August
18, 1997, $124.8 million of debentures were converted, which resulted in the
issuance of 6.5 million shares of Common Stock.
NOTE 7. FINANCIAL INSTRUMENTS, COMMITMENTS, AND CONTINGENCIES
FINANCIAL INSTRUMENTS. The Company enters into various types of financial
instruments in the normal course of business. Fair values for certain financial
instruments are based on quoted market prices. For other financial instruments,
fair values are estimated based on assumptions concerning the amount and timing
of estimated future cash flows and assumed discount rates reflecting varying
degrees of perceived risk. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as of year end
or that will be realized in the future.
Fair values for cash and temporary cash investments, marketable debt securities,
accounts receivable, notes payable, accounts payable, and accrued expenses
approximate carrying value at September 26, 1998 and September 27, 1997, due to
the relatively short maturity of these financial instruments. The Company holds
three publicly traded equity securities as part of its marketable securities
portfolio. These securities are considered to be readily marketable and are
classified as available-for-sale. The fair value of these marketable equity
securities totaled $9.8 million and $4.0 million at September 26, 1998 and
September 27, 1997, respectively. The fair value of investments and notes
receivable, included in other assets, was $1.6 million and $4.0 million at
September 26, 1998 and September 27, 1997, respectively, which is equal to their
carrying values. The fair value of long-term debt, including debt due within one
year, at September 26, 1998 and September 27, 1997 was $170.7 million and $267.8
million, respectively, compared to carrying values of $212.8 million for the
years ended September 26, 1998 and September 27, 1997.
The Company enters into various forward contracts to limit its exposure to
fluctuations in foreign currency exchange rates. As of September 26, 1998, in
connection with the Company's foreign exchange hedging programs, the Company had
entered into forward exchange contracts to purchase $81.5 million and to sell
$153.7 million in various foreign currencies. The Company's exposure to credit
risk is believed to be minimal since the counterparties are major financial
institutions. The market risk exposure is limited to risk related to currency
rate movements. As substantially all of these contracts were entered into
shortly before year end, the fair value of outstanding contracts at September
26, 1998 approximates the original value of the forward contracts. Between
September 26, 1998 and September 30, 1998, forward exchange contracts to
purchase $81.5 million and to sell $78.0 million in various foreign currencies
matured and were settled. The remaining contracts mature at various dates
through January 27, 1999 and are not concentrated in any one currency.
The Company's temporary cash investments, marketable securities, and accounts
receivable are subject to potential concentrations of credit risk. The Company's
investment policies limit the amount of investments in a single institution and
restrict investments to low-risk, highly liquid securities. Portions of the
Company's trade receivables are concentrated in the U.S. government and in the
healthcare industry. Management does not believe that the Company is subject to
any unusual risk beyond the normal credit risk attendant to operating its
business. Ongoing credit evaluations of customers' financial condition are
performed, and generally, collateral is not required. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations.
In the normal course of business, the Company enters into certain sales-type
lease arrangements with customers. These leases are generally sold to
third-party financing institutions. A portion of these arrangements contains
certain recourse provisions under which the Company remains liable. The
Company's maximum exposure under the recourse provisions was approximately $15.3
million, net of related reserves. A portion of this contingent obligation is
collateralized by security interests in the related equipment. The fair value of
the recourse obligation at September 26, 1998 was not determinable as no market
exists for these obligations.
LEASE COMMITMENTS. Lease agreements are primarily for sales and service offices
and the Company's corporate headquarters. The leases expire at various dates
through 2015 and some contain options for renewal. Rental expense, including
amounts charged against previously established restructuring reserves for vacant
and sublet properties, was $28.9 million, $29.9 million, and $32.2 million for
fiscal years 1998, 1997, and 1996, respectively.
35
<PAGE>
Future minimum rental payments under existing non-cancelable operating leases as
of September 26, 1998 are as follows:
FISCAL YEAR IN MILLIONS
- -------------------------------------------------
1999 $ 20.7
2000 18.2
2001 15.4
2002 12.7
2003 9.9
Subsequent to 2003 73.6
---------
$150.5
---------
The majority of the leases contain escalation clauses which provide for
increases in base rentals to recover increases in future operating costs. The
future minimum rental payments shown above include base rentals, exclusive of
any future escalation. Approximately $64.8 million, prior to amounts expected to
be recovered through subleases, of the future minimum rental payments shown
above relate to facilities which have been closed or are expected to be closed
as the result of the Company's restructuring and cost reduction programs. A
portion of the future rental obligations for these facilities, net of amounts
expected to be recovered through existing and future subleases, has been accrued
as part of the restructuring charges.
LITIGATION. The Company has been engaged in patent infringement litigation
against IBM Corporation since November 1994. Two lawsuits, both in the discovery
stages, are pending in the United States District Court for the District of
Massachusetts in Worcester. The Company alleges that several IBM products,
including the AS/400 midrange systems and the AS/400 RISC-based computer product
line, infringe various Company patents. Both suits seek compensatory damages
and, where appropriate, injunctive relief. IBM has answered both complaints, has
denied the Company's infringement claims, and has interposed counterclaims
alleging that the Company's AViiON and CLARiiON computer systems infringe IBM
patents.
Although the Company believes its claims are valid, it cannot predict the
outcome of the litigation. In the opinion of management, based on preliminary
evaluation of the IBM patents covered in the counterclaim, and subject to the
risks of litigation, the counterclaims are without merit, the Company will
prevail thereon and the counterclaims will not have a material adverse impact on
the results of operations or the financial position of the Company.
The Company and certain of its subsidiaries are involved in various other patent
infringement, contractual, and proprietary rights suits. In the opinion of
management, the conclusion of these suits will not have a material adverse
effect on the financial position or results of operations and cash flows of the
Company and its subsidiaries.
NOTE 8. STOCKHOLDERS' EQUITY
The Company has 100,000,000 authorized shares of Common Stock. As of September
26, 1998, 49,898,000 shares of Common Stock have been issued, of which 209,000
shares with a cost of $5.9 million are held by the Company as treasury shares.
As of September 27, 1997, 48,808,000 shares of Common Stock had been issued, of
which 220,000 shares with a cost of $6.5 million were held by the Company as
treasury shares.
The Company has 1,000,000 authorized shares of $.01 par value preferred stock.
The Company's Board of Directors (the "Board") is authorized to issue shares of
preferred stock in such series and with such terms and conditions as the Board
may determine. In connection with the adoption of the Company's Stockholder
Rights Plan (see below), as of September 26, 1998, 600,000 shares of preferred
stock had been designated as Series A Junior Participating Preferred Stock. No
shares of preferred stock have been issued as of September 26, 1998.
Under the Stockholder Rights Plan adopted in 1986, as amended, a dividend of
Stock Purchase Rights (the "Rights") was paid. The Rights enable common
stockholders to purchase from the Company shares of Series A Junior
Participating Preferred Stock under certain circumstances following the
acquisition of, or attempt to acquire, 20% or more of the Company's Common Stock
or a determination that an "adverse person" has purchased 15% or more of the
Common Stock. The Rights also entitle common stockholders to purchase shares of
the Company's or an acquirer's Common Stock at one-half of market value under
circumstances which include certain transactions by or with a potential
acquirer, including "adverse persons," and mergers and certain asset sales. The
Rights may be redeemed by the Company under certain circumstances.
NOTE 9. STOCK PLANS
The Company adopted SFAS 123, "Accounting for Stock-Based Compensation" in
fiscal 1997. As permitted by SFAS 123, the Company continues to measure
compensation cost in accordance with APB Opinion Number 25 and related
Interpretations in accounting for its plans. Had compensation cost for the
Company's stock-based compensation plans, including the employee stock purchase
plan, been determined based on the fair value at the grant dates for awards
under these plans consistent with the method of SFAS 123, the Company's net
income (loss) and earnings (loss) per share would have been reduced to the
pro-forma amounts indicated below:
<TABLE>
YEAR ENDED
--- ---------------------------------- -----------------
SEPT. 26, 1998 SEPT. 27,1997 SEPT. 28, 1996
------------------- ------------------ -----------------
<S> <C> <C> <C>
Net income (loss) (in thousands) As reported $(152,395) $55,900 $28,145
Pro forma $(158,790) $52,473 $26,161
Diluted earnings (loss) per share As reported $(3.11) $1.26 $0.68
Pro forma $(3.24) $1.19 $0.64
</TABLE>
The effect on net income (loss) and earnings (loss) per share is not expected to
be indicative of the effects in future years. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions:
<TABLE>
YEAR ENDED
------------------- ------------------------------------
SEPT. 26,1998 SEPT. 27, 1997 SEPT. 28, 1996
------------------- ------------------ -----------------
<S> <C> <C> <C>
Expected volatility 41.22% 38.75% 42.91%
Risk-free interest rate 5.6% 5.9% 5.6%
Expected life of options in years 3.9 4.2 4.2
Expected dividend yield - - -
</TABLE>
During fiscal years 1998, 1997, and 1996, the weighted average grant-date fair
value of options granted was $8.31, $10.73, and $6.09 per share, respectively,
and the exercise price of options granted was $11.46, $11.70, and $8.65 per
share, respectively.
36
<PAGE>
EMPLOYEE STOCK OPTION PLANS. As of September 26, 1998 the Company had three
employee stock option plans that authorize the grant of either incentive stock
options or non-qualified stock options to key employees to purchase up to
21,500,000 shares of Common Stock. For incentive options, the purchase price is
equal to the fair market value on the date of grant. For non-qualified options,
the purchase price is determined by the plan committees within limits as set
forth in the plans. Options granted under the plans generally are immediately
exercisable and include restrictions against disposition of the shares and a
requirement, upon termination of employment, to offer unvested shares for resale
to the Company at their original purchase price. The periods over which
restrictions lapse are determined by the plan committees. Options may expire up
to ten years after date of grant.
<PAGE>
A summary of the status of these stock option plans as of September 26, 1998,
September 27, 1997, and September 28, 1996 and changes during the years ending
on those dates is presented as follows:
<TABLE>
NUMBER WTD.
OF OPTIONS AVG. PRICE
(000's) PER SHARE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, September 30, 1995 5,442 $5.49
Options granted 624 $6.43
Options exercised (958) $4.25
Options canceled (298) $5.63
------
Outstanding, September 28, 1996 4,810 $5.88
Options granted 1,274 $9.40
Options exercised (1,900) $5.39
Options canceled (151) $6.14
------
Outstanding, September 27, 1997 4,033 $7.22
Options granted 1,885 $12.32
Options exercised (390) $5.14
Options canceled (334) $8.18
------
Outstanding, September 26, 1998 5,194 $9.16
Exercisable, September 26, 1998 1,812 $7.05
Options reserved for future grants, September 26, 1998 3,351
</TABLE>
The following table summarizes information about these plans at September 26,
1998:
<TABLE>
<CAPTION>
Options
Options Outstanding Currently Exercisable
------------------------------------------------- -----------------------------
Wtd. Avg.
Exercise No. of Contractual Wtd. Avg. No. of Wtd. Avg.
Price Range Options Life (in years) Exercise Options Exercise Price
(000's) Price (000's)
- ----------------------- ------------- ----------------- ------------------ -- ---------- ------------------
<S> <C> <C> <C> <C> <C>
$1.06 - $3.97 384 6.14 $3.27 255 $3.19
$4.00 - $7.94 2,326 7.44 $6.09 785 $5.09
$8.00 - $20.00 2,484 7.81 $12.96 772 $10.31
</TABLE>
1998 EMPLOYEE STOCK OPTION PLAN. On November 4, 1998, the Board of Directors
established a fourth employee stock option plan (the "1998 Plan"). The 1998 Plan
is a broadly based plan in which all employees of the Company are eligible to
participate. The 1998 Plan authorizes the grant of stock options to employees to
purchase up to 2,500,000 shares of Common Stock. The purchase price per share is
at the discretion of the 1998 Employee Stock Option Plan Committee appointed by
the Board of Directors, but shall not be lower than 25% of the fair market value
of the Company's Common Stock on the date of grant or 50% of the Company's book
value per share of the Common Stock as of the fiscal year end preceding the date
of grant. Options granted under the plan are generally immediately exercisable
and include restrictions against disposition of the shares and a requirement,
upon termination of employment, to offer unvested shares for resale to the
Company at their original purchase price. The periods over which restrictions
lapse is determined by the Board of Directors or the 1998 Employee Stock Option
Plan Committee. Options may expire up to ten years after date of grant.
EMPLOYEE QUALIFIED STOCK PURCHASE PLAN. This plan covers substantially all
employees and authorizes the issuance of a maximum of 11,100,000 shares of
Common Stock upon exercise of nontransferable options granted semiannually. The
options are exercisable six months after grant, at the lower of 85% of market
value at the beginning or end of the six-month period, through accumulation of
payroll deductions of up to 10% of each participating employee's regular base
pay at the beginning of each period. During fiscal 1998, options were exercised
to purchase 682,000 shares at an average price of $12.18 per share. Unissued
shares of Common Stock reserved for future issuance under this plan were
1,598,000 shares at September 26, 1998 and 2,280,000 shares at September 27,
1997.
1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. This plan authorizes the grant of
an option to purchase 4,000 shares of Common Stock to each non-employee director
on the date of the director's annual election(s) to the Board of Directors. The
exercise price of options granted is 100% of the closing price per share of
Common Stock on the date of grant. An aggregate of 150,000 shares of Common
Stock may be issued under the plan. Options granted are immediately exercisable
and include restrictions against disposition of the shares. Should the optionee
cease to serve as a director, except under certain circumstances, any restricted
shares must be offered to the Company at their original purchase price.
Restrictions lapse cumulatively to the extent of 25% of the grant on each
anniversary of the date of grant.
During fiscal 1998, 1997, and 1996, 24,000, 28,000, and 24,000 options were
granted at a weighted average price of $15.44, $20.30, and $15.75 per share,
respectively. During fiscal 1998 and 1997, options were exercised to purchase
16,000 and 11,000 shares at a weighted average price of $12.69 and $9.12 per
share, respectively. There were no options exercised during fiscal year 1996.
There were no options canceled during fiscal years 1998, 1997, and 1996. Options
to purchase 89,000, 81,000, and 64,000 shares at a weighted average price of
$15.18, $14.61, and $11.17 per share, respectively, were outstanding at the end
of fiscal 1998, 1997, and 1996. As of September 26, 1998, the 89,000 options
outstanding in this plan have exercise prices between $8.39 and $33.31, with a
weighted average remaining contractual life of 7.9 years, and 29,000 shares were
exercisable at a weighted average price of $12.72 per share. There were 34,000
shares reserved for future grants at September 26, 1998.
37
<PAGE>
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN. On November 4, 1998, the 1998
Non-Employee Director Stock Option Plan was approved. This plan authorizes the
grant of an option to purchase 7,500 shares of Common Stock reduced by the
number of shares available for purchase under options granted from the 1994
Non-Employee Director Stock Plan described above on the date of the director's
annual election(s) to the Board of Directors. The exercise price of options
granted is 100% of the closing price per share of Common Stock on the date of
grant. An aggregate of 150,000 shares of Common Stock may be issued under the
plan. The Board of Directors has reserved 150,000 of the Company's treasury
shares to utilize under this plan. Options granted are immediately exercisable
and include restrictions against disposition of the shares. Should the optionee
cease to serve as a director, except under certain circumstances, any restricted
shares must be offered to the Company at their original purchase price.
Restrictions lapse cumulatively to the extent of 25% of the grant on each
anniversary of the date of grant.
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK OPTION PLAN. This plan authorized the
grant of an option to purchase 4,000 shares of Common Stock to each non-employee
director upon the director's initial election to the Board of Directors. The
exercise price of options granted is the lesser of 50% of the book value per
share of Common Stock at the end of the fiscal year preceding the date of grant
or 25% of the fair market value per share on the date of grant. An aggregate of
32,000 shares of Common Stock may be issued under the plan. Options granted are
immediately exercisable and include restrictions against disposition of the
shares. Should the optionee cease to serve as a director, except under certain
circumstances, any restricted shares must be offered to the Company at their
original purchase price. Restrictions lapse cumulatively to the extent of 25% of
the grant on each anniversary of the date of grant.
During fiscal year 1998 and 1996, options were exercised to purchase 2,000 and
4,000 shares, respectively, at a weighted average price of $4.38 per share.
There were no options exercised in fiscal 1997. There were no options canceled
during fiscal years 1998, 1997, and 1996. At September 26, 1998, options to
purchase 8,000 shares at exercise prices between $1.81 and $2.66, with a
weighted average remaining contractual life of 6.0 years, were outstanding, and
7,000 shares were exercisable at a weighted average price of $2.17 per share.
This plan terminated on December 31, 1994. Outstanding options can be exercised
until their expiration date. No new options can be issued.
NOTE 10. BENEFIT PLANS
The Company has a noncontributory defined benefit pension plan which covers
substantially all U.S. employees. The Company also has a supplemental retirement
benefit plan, which covers certain U.S. employees. Benefits under the plans are
based on an employee's regular base pay and creditable years of service, as
defined in the plans. Certain of the Company's foreign subsidiaries also have
retirement plans covering substantially all of their employees. Benefits under
these plans are generally based on either career average or final average
salaries and creditable years of service, as defined in the plans. The annual
cost for these plans is determined using the projected unit credit actuarial
cost method which includes significant actuarial assumptions and estimates which
are subject to change in the near term. Prior service cost is amortized over the
average remaining service period of employees expected to receive benefits under
the plan. Funds contributed to the plans are invested primarily in common
stocks, mutual funds, global bond funds, and cash equivalent securities.
The components of net pension expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 9,992 $ 7,886 $ 7,468
Interest on projected benefit obligation 16,981 14,127 12,736
Actual return on plan assets 4,080 (32,325) (14,362)
Deferral of net actuarial gains/(loss) and
amortization of transition surplus and
prior service cost (23,861) 17,261 2,283
Special termination benefit charge 1,044 - -
Curtailment loss, net of settlement gain 1,197 316 (50)
------- ------- -------
Net pension expense $ 9,433 $ 7,265 $ 8,075
------- ------- -------
</TABLE>
The funded status of the plans is as follows:
<TABLE>
<CAPTION>
AS OF
-------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS
Vested benefit obligation $240,339 $174,673
-------- --------
Accumulated benefit obligation $252,334 $183,164
-------- --------
Projected benefit obligation $274,216 $203,070
Market value of plan assets 213,472 192,424
-------- --------
Excess of projected benefit obligation over plan assets 60,744 10,646
Unrecognized actuarial gain/(loss) (38,277) 15,560
Unrecognized prior service cost (23,388) (16,561)
Unrecognized transition surplus, net 5,402 6,236
-------- --------
Net pension liability included in current and other liabilities $ 4,481 $ 15,881
-------- --------
ASSUMPTIONS USED IN COMPUTING THE FUNDED
STATUS OF THE PLANS
Weighted average discount rate 6.96% 7.63%
Expected long-term weighted average rate of return of assets 9.28% 9.41%
Weighted average rate of increase in compensation levels 4.00% 4.16%
</TABLE>
38
<PAGE>
As of October 1, 1997, the U.S. plan was amended to change the benefit for
creditable service prior to October 1, 1997 to 1 1/2% of a participant's average
base pay on October 1, 1997. The benefit formula for future service did not
change. The update generally resulted in increased benefits to participants with
creditable service prior to October 1, 1997.
As of September 26, 1998, the Company recorded a liability of $26.7 million to
recognize the accumulated benefit obligation in excess of plan assets and an
intangible asset of $20.4 million equal to the amount of unrecognized prior
service cost for the U.S pension plan. The amount of the accumulated benefit
obligation in excess of the intangible asset of $6.3 million has been recorded
as a separate component of stockholders' equity.
The Company also has foreign defined contribution pension plans. Total pension
cost charged to expense for these plans was $2.3 million in fiscal 1998, and
$1.6 million in both fiscal years 1997 and 1996.
The Company's post-retirement benefit plan provides certain medical and life
insurance benefits for retired employees. Substantially all U.S. employees of
the Company may become eligible for these benefits if they remain employed until
normal retirement age and fulfill other eligibility requirements as specified by
the plan. With the exception of certain participants who retired prior to 1986,
the medical benefit plan requires monthly contributions by retired participants
in amounts equal to insured equivalent costs less a fixed Company contribution
which is dependent on the participant's length of service and Medicare
eligibility. Benefits are continued to dependents of eligible retiree
participants for 39 weeks after the death of the retiree. The life insurance
benefit plan is noncontributory. Funds contributed to the plan are invested
primarily in common stocks, mutual funds, and cash equivalent securities.
The components of net periodic post-retirement benefit cost are as follows:
<TABLE>
YEAR ENDED
----------------------------------------------------------
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 325 $ 296 $ 293
Interest on projected benefit obligation 722 687 655
Actual return on plan assets 7 (26) (56)
Deferral of net actuarial gains and
amortization of transition surplus and
prior service cost 288 247 282
------ ------ ------
Net pension expense $1,342 $1,204 $1,174
------ ------ ------
</TABLE>
The funded status of the plan is as follows:
<TABLE>
AS OF
IN THOUSANDS SEPT. 26, 1998 SEPT. 27, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ACCUMULATED POST-RETIREMENT BENEFIT OBLIGATION
Retirees $4,464 $4,273
Fully eligible active plan participants 1,370 1,206
Other active plan participants 4,637 4,085
------ ------
Total accumulated post-retirement benefit obligation 10,471 9,564
Market value of plan assets 301 88
------ ------
Excess of accumulated post-retirement benefit obligation
over plan assets 10,170 9,476
Unrecognized transition obligation (1,973) (2,292)
Unrecognized prior service cost (603) (719)
Unrecognized actuarial gain 662 1,293
------ ------
Net post-retirement benefit liability included
in current and other liabilities $8,256 $7,758
------ ------
ASSUMPTIONS USED IN COMPUTING THE FUNDED
STATUS OF THE PLAN
Weighted average discount rate 7.25% 7.75%
Expected long-term weighted average rate of return of assets 10.00% 10.00%
</TABLE>
<PAGE>
For participants who receive full retiree medical benefits, the medical premium
rates were assumed to increase at 7% for fiscal 1998 and thereafter. A 1%
increase in the medical trend rate would not have a significant impact on the
accumulated post-retirement benefit obligation as of September 26, 1998.
NOTE 11. EARNINGS PER SHARE
In the first quarter of fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share." The following
data show the amounts used in computing earnings (loss) per share and the effect
on income (loss) and the weighted average number of shares of potentially
dilutive common stock.
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------------------------------------
SEPT. 26, 1998 SEPT. 27, 1997 SEPT. 28, 1996
------------------------- ------------------------- -------------------------
(LOSS) SHARES PER-SHARE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
IN THOUSANDS, EXCEPT PER-SHARE (NUM.) (DEN.) AMOUNT (NUM.) (DEN.) AMOUNT (NUM.) (DEN.) AMOUNT
AMOUNTS ------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) available to
common stockholders $(152,395) 49,038 $(3.11) $55,900 41,347 $1.35 $28,145 38,769 $0.73
EFFECT OF DILUTIVE SECURITIES
Stock options - - - 2,868 - 2,326
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) available to
common stockholders and assumed
conversions $(152,395) 49,038 $(3.11) $55,900 44,215 $1.26 $28,145 41,095 $0.68
--------- ------ ------- ------- ------ ----- ------- ------ -----
</TABLE>
For the years ended September 26, 1998, September 27, 1997, and September 28,
1996, the assumed conversion of convertible debentures, giving effect to the
incremental shares and the adjustment to reduce interest expense, is
anti-dilutive and has, therefore, been excluded from the computation. For the
year ended September 26, 1998, the assumed exercise of stock options, giving
effect to the incremental shares is anti-dilutive and has been excluded from the
calculation.
39
<PAGE>
NOTE 12. GEOGRAPHIC SEGMENT DATA
The Company's operations involve a single industry segment - the design,
manufacture, sale, and support of multi-user computer systems, servers, and mass
storage devices. Financial information, summarized by geographic area, is
presented below.
<TABLE>
<CAPTION>
OTHER
IN THOUSANDS UNITED STATES EUROPE INTERNATIONAL ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 26, 1998
Total revenues
Unaffiliated customers $1,057,684 $286,362 $118,063 $1,462,109
Inter-area transfers 121,531 - 23,933 $(145,464) -
---------- -------- -------- ---------- ----------
Total $1,179,215 $286,362 $141,996 $(145,464) $1,462,109
---------- -------- -------- ---------- ----------
Restructuring Charge $ 49,660 $ 26,927 $ 5,813 - $ 82,400
---------- -------- -------- ---------- ----------
Loss from operations $ (118,356) $(23,841) $ (5,145) $ (1,279) $ (148,621)
---------- -------- -------- ---------- ----------
Identifiable assets $ 616,740 $216,296 $ 85,632 $ (82,704) $ 835,964
---------- -------- -------- ----------
Corporate assets 229,100
----------
Total assets $1,065,064
----------
YEAR ENDED SEPTEMBER 27, 1997
Total revenues
Unaffiliated customers $1,133,230 $273,838 $126,101 $1,533,169
Inter-area transfers 115,620 - 29,608 $(145,228) -
---------- -------- -------- ----------- ----------
Total $1,248,850 $273,838 $155,709 $(145,228) $1,533,169
---------- -------- -------- ----------- ----------
Income (loss) from operations $ 70,274 $ (5,031) $ (4,563) $ 2,493 $ 63,173
---------- -------- -------- ----------- ----------
Identifiable assets $ 684,899 $184,554 $ 94,684 $(129,523) $ 834,614
---------- -------- -------- -----------
Corporate assets 300,254
----------
Total assets $1,134,868
----------
YEAR ENDED SEPTEMBER 28, 1996
Total revenues
Unaffiliated customers $ 941,916 $263,461 $116,873 $1,322,250
Inter-area transfers 120,810 - 26,497 $(147,307) -
---------- -------- -------- ---------- ----------
Total $1,062,726 $263,461 $143,370 $(147,307) $1,322,250
---------- -------- -------- ---------- ----------
Income (loss) from operations $ 42,277 $ 3,054 $(9,613) $ 1,559 $ 37,277
--------- -------- -------- ---------- ----------
Identifiable assets $ 562,845 $177,903 $88,614 $(106,897) $ 722,465
---------- --------- -------- ----------
Corporate assets 137,978
----------
Total assets $ 860,443
----------
</TABLE>
United States inter-area transfers primarily represent shipments of equipment
and parts to international subsidiaries. Other international inter-area
transfers primarily represent shipments of work in process and finished goods
inventory from manufacturing facilities to domestic operations. These inter-area
shipments are made at transfer prices which approximate prices charged to
unaffiliated customers and have been eliminated from consolidated net revenues.
United States revenues from unaffiliated customers include direct export sales.
Corporate assets consist primarily of temporary cash investments and marketable
securities.
Total liabilities of international subsidiaries, before intercompany
eliminations, were $252.3 million as of September 26, 1998 and $247.2 million as
of September 27, 1997. Cumulative retained earnings of international
subsidiaries were $94.1 million as of September 26, 1998 and $87.7 million as of
September 27, 1997.
40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF DATA GENERAL CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows, and of stockholders'
equity present fairly, in all material respects, the financial position of Data
General Corporation and its subsidiaries at September 26, 1998 and September 27,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended September 26, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 28, 1998
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FISCAL
IN MILLIONS, EXCEPT PER SHARE AMOUNTS QUARTER QUARTER QUARTER QUARTER YEAR
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1998
Total revenues $365.3 $361.8 $351.3 $383.7 $1,462.1
Total cost of revenues 249.3 253.8 304.2 264.2 1,071.5
Net income (loss) 3.5 (4.5) (155.1) 3.7 (152.4)
Net income (loss) per share $0.07 $(0.09) $(3.15) $0.07 $(3.11)
FISCAL 1997
Total revenues $348.5 $389.3 $391.3 $404.1 $1,533.2
Total cost of revenues 229.5 260.8 260.9 270.4 1,021.6
Net income 10.4 13.8 14.7 17.0 55.9
Net income per share $0.25 $0.32 $0.34 $0.35 $1.26
</TABLE>
STOCK PRICE RANGE
The principal markets on which the Company's stock is traded are the New York
Stock Exchange ("NYSE") under the symbol "DGN," and the London Stock Exchange.
The table below shows the range of reported last sale prices on the NYSE for the
Company's Common Stock during each quarterly period for the last two fiscal
years.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------- -------------------------
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter 27 16 5/16 15 5/8 13
Second quarter 21 5/16 13 13/16 20 3/8 14 1/2
Third quarter 19 1/8 14 1/16 26 1/2 15 5/8
Fourth quarter 15 15/16 7 7/16 37 1/4 25 3/4
</TABLE>
41
<PAGE>
DIRECTORS AND SENIOR MANAGEMENT
DATA GENERAL CORPORATION
Frederick R. Adler Director, Chairman of the Executive Committee;
of counsel to Fulbright & Jaworski L.L.P.
Attorneys at Law, New York, New York
Ethan Allen Jr. Senior Vice President and General Manager,
AViiON Enterprise Server Division
Stephen P. Baxter Vice President, Europe/Pacific
Ferdinand Colloredo-Mansfeld Director; Chairman of the Board and Chief
Executive Officer, Cabot Industrial Trust,
Boston, Massachusetts
Jeffrey M. Cunningham Director; Business Consultant
William J. Cunningham Senior Vice President, Manufacturing,
Information Management, and Customer Services
Arthur W. DeMelle Senior Vice President; Chief Financial Officer
Jacob Frank Vice President and General Counsel
John J. Gavin Jr. Vice President; Controller
Joel Schwartz Senior Vice President and General Manager,
CLARiiON Advanced Storage Division
Carl E. Kaplan Secretary; Senior Partner, Fulbright &
Jaworski L.L.P.
Attorneys at Law, New York, New York
Robert C. McBride Vice President; Treasurer
Anthony C. Nicoletti Vice President, Asia and CLARiiON Asia/Pacific
Ronald L. Skates President and Chief Executive Officer;
Director
W. Nicholas Thorndike Director; Corporate Director and Trustee
Donald H. Trautlein Director; Retired Chairman, Bethlehem Steel
Corporation, Bethlehem, Pennsylvania
Richard L. Tucker Director; Managing Director, Trinity
Investment Management Corporation, Boston,
Massachusetts
FACILITIES
Data General does business in more than 70 countries through direct sales,
subsidiaries, distributors, and representatives. The company has approximately
220 sales and service offices. Major administrative, development, manufacturing,
and support facilities, and subsidiaries' headquarters locations are listed
below.
FACILITY LOCATION
Westborough, Massachusetts corporate headquarters; administration; product
(512,000/Leased) development; special systems
Southborough, Massachusetts manufacturing service division; software
(545,000) reproduction; distribution center; equipment
refurbishment; major unit repair; custom product
manufacturing; field engineering services and
logistics; and the CLARiiON Storage Division
Apex, North Carolina assembly, test and systems integration facility
(388,000)
Research Triangle Park, advanced systems research and development
North Carolina
(174,000)
Duluth, Georgia customer support center
(86,000/Leased)
Mississauga, Ontario, Canada sales; field engineering; administration
(32,000/Leased)*
Etobicoke, Ontario, Canada product repair center
(18,000/Leased)
Chihuahua, Mexico product repair center
(55,000/Leased)
Schwalbach, Germany sales; customer education; services
(23,000/Leased)
Brentford, England sales; services; administration; customer
(120,000/Leased)** education
Manila, Philippines power supply and transformer manufacturing;
(68,000) communications products assembly and test
Melbourne, Australia product repair center; logistics and equipment
(31,000/Leased) refurbishment
SUBSIDIARY HEADQUARTERS
Canada Toronto/Mississauga
ASIA/PACIFIC
Australia Sydney
Hong Kong
Japan Tokyo
Korea Seoul
Malaysia Kuala Lumpur
New Zealand Wellington
Singapore
Thailand Bangkok
<PAGE>
EUROPE
Austria Vienna
Belgium Brussels
Denmark Copenhagen/Smedeholm
France Paris/Velizy
Germany Frankfurt/Schwalbach
Italy Milan
Netherlands Amsterdam
Norway Oslo/Voyenenga
Spain Madrid
Sweden Stockholm/Kista
Switzerland Zurich
United Kingdom and Ireland London/Brentford
LATIN AMERICA
Argentina Buenos Aires
Brazil Sao Paulo
Chile Santiago
Mexico Monterrey
Peru Lima
Puerto Rico San Juan
Venezuela Caracas
* Includes 6,000 square-feet of sub-leased space.
** Includes 42,000 square-feet of sub-leased space.
42
<PAGE>
CORPORATE INFORMATION
CORPORATE HEADQUARTERS Data General Corporation
4400 Computer Drive
Westborough, Massachusetts 01580
508-898-5000
LEGAL COUNSEL Fulbright & Jaworski L.L.P.
New York, New York
INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP
Boston, Massachusetts
DEBENTURE TRUSTEE The Bank of New York
Corporate Trust Office
101 Barclay St., Floor 21 West
New York, New York 10286
TRANSFER AGENT AND REGISTRAR The Bank of New York
800-524-4458
Address Shareholder Inquiries to:
The Bank of New York
Shareholder Relations Department - 11E
Post Office Box 11258
Church Street Station
New York, New York 10286
Send Certificates For Transfer and Address
Changes to:
The Bank of New York
Receive and Deliver Department - 11W
Post Office Box 11002
Church Street Station
New York, New York 10286
STOCK EXCHANGE LISTING New York Stock Exchange
London Stock Exchange
Unlisted trading privileges on Boston,
Midwest, Philadelphia, Pacific, and
Cincinnati exchanges
TRADING SYMBOL DGN
Listed
NYSE
ANNUAL MEETING The Annual Meeting of Stockholders will be
held at 1:00 p.m., January 27, 1999, in the
Enterprise Room, State Street Bank Building,
225 Franklin Street, Boston, Massachusetts.
NUMBER OF STOCKHOLDERS As of September 26, 1998, there were
approximately 10,500 stockholders of record.
This number excludes individual stockholders
holding stock under nominee security
position listings
DIVIDEND POLICY No cash dividends have been declared or
paid by the Company since its inception.
It is the policy of the Company to retain
any cash flow for future business expansion.
The Company anticipates no changes in this
policy in the foreseeable future.
PUBLISHED INFORMATION The Company's Annual Report,Interim
Reports, Form 10-K, and Quarterly Reports
on Form 10-Q as filed with the Securities
and Exchange Commission, and other
published information are available on
request to:
Investor Relations Department
Data General Corporation
4400 Computer Drive, Mail Stop 9S/22
Westborough, Massachusetts 01580
Published information, as well as mailed or
faxed copies of quarterly financial press
releases, can be obtained by calling
1-800-941-2382.
All information is available on Data
General's internet web site at www.dg.com.
In the section titled "About Data General,"
select"Financial Information for Investors."
Investors may also choose to:
o Request information using e-mail to
[email protected]
o Dial the Company's FAX-back system at
1-800-99-DGFAX (North America only) and
press 411 to receive a menu of
publications by facsimile
o Call Data General Corporation at
1-800-DATAGEN
This report contains forward-looking statements under the captions "To Our
Stockholders, Customers, and Employees" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" which reflect
Management's current views of future events and financial performance. These
forward-looking statements involve risks and uncertainties, and are based upon
many assumptions and factors, including the effects of period-to-period
fluctuations, OEM inventory positions, and new product development and
marketing. Many of these factors are discussed in the Company's Securities and
Exchange Commission filings, including its annual report on Form 10-K for the
year ended September 26, 1998. Any changes in such assumptions or factors could
produce significantly different results.
Data General
An Equal Opportunity / Affirmative Action Employer
Making a Commitment to Workforce Diversity
AViiON, CLARalert, CLARiiON, Cluster-in-a-Box, DG/UX, DG/ViiSION, ECLIPSE,
Navisphere, and VALiiANT are registered trademarks; AVFlex, DG/UX Cluster,
Exchange-in-a-Box, Multidimensional Storage Architecture, NTerprise Manager,
QuickClusters, TermServer-in-a-Box, and THiiN are trademarks; and OMNiiCARE,
NTAlert and REPAIRiiON are service marks of Data General Corporation. Intel, the
Intel Inside logo and Pentium are registered trademarks and Xeon is a trademark
of Intel Corporation. Microsoft and Windows NT are registered trademarks of
Microsoft Corporation.
All other brand and product names may be trademarks or registered trademarks of
their respective holders.
The terms and conditions governing the sale of Data General hardware products
and services, and the licensing of Data General software consist solely of those
set forth in the written contracts between Data General and its customers. The
materials contained herein are summary in nature, subject to change, and
intended for general information only. Details and specifications regarding Data
General equipment, services, and software are included in the applicable
technical manuals, available from local sales representatives. All rights
reserved. Printed in the U.S.A.
43
<PAGE>
(BACK COVER)
How to contact Data General
World Wide Web
www.dg.com
E-Mail
[email protected]
Mail, Telephone, FAX
Worldwide Headquarters
Data General Corporation
4400 Computer Drive
Westborough, Massachusetts 01580
Telephone: 508-898-5000
Literature Requests: 1-800-DATA-GEN
FAX: 508-898-7568
European Headquarters
Data General Europe
Data General Tower
Great West Road, Brentford
Middlesex TW8 9AN
United Kingdom
Telephone: +44 (0)181.758.6000
FAX: +44 (0)181.758.6950
Asia/Pacific Headquarters
Data General Ltd.
11/F Southwest Wing
Warwick House
Taikoo Place, 979 Kings Road
Quarry Bay, Hong Kong, China
Telephone: (852) 2599-6688
FAX: (852) 2506-0221
Latin American Headquarters
Data General Corporation
3400 Computer Drive
Westborough, Massachusetts 01580
Telephone: 508-898-6680
FAX: 508-898-7924
012-005183-00 Copyright (C) Data General Corporation, 1998.
<PAGE>
EXHIBIT 21
Subsidiaries of Data General Corporation.
The following are the Company's subsidiaries as of September 26, 1998. All
beneficial interests are wholly-owned, directly or indirectly, by the Company,
with the exception of Data General Technology (1990) Limited which is 45% owned.
All subsidiaries are included in the Company's consolidated financial
statements.
State or
Jurisdiction of
Name Organization
---------------
Asia Data General Corporation Delaware
China Data General Corporation Delaware
CLARiiON Storage Systems, Inc. Delaware
Data General (Canada) Company Nova Scotia
Data General A.G. Switzerland
Data General A/S Norway
Data General A/S Denmark
Data General AB Sweden
Data General Africa SARL France
Data General Australia Pty., Ltd. Australia
Data General Bahamas Limited Bahamas
Data General BVI, Ltd. British Virgin Islands
Data General Chile S.A. Chile
Data General Computers Sdn, Bhd. Malaysia
Data General Costa Rica S.A. Costa Rica
Data General de Mexico, S.A. de C.V. Mexico
Data General del Peru, S.A. Peru
Data General France S.A.S. France
Data General Gesellschaft mbH Austria
Data General GmbH Germany
Data General Graphics, Inc. Delaware
Data General Hong Kong Sales and Service, Ltd. Hong Kong
Data General Hong Kong, Ltd. Hong Kong
Data General Computers Hungary Ltd. Hungary
Data General International Manufacturing Pte., Ltd. Singapore
Data General International Sales Corporation Delaware
Data General International, Inc. Delaware
Data General Investment Corporation Delaware
<PAGE>
State or
Jurisdiction of
Name Organization
---------------
Data General Ireland, Ltd. Ireland
Data General Israel, Ltd. Israel
Data General Japan KK Japan
Data General Korea, Ltd. Korea
Data General Latin America, Inc. Delaware
Data General Limited United Kingdom
Data General do Brasil Ltda. Brazil
Data General Nederland BV The Netherlands
Data General New Zealand, Limited New Zealand
Data General Philippines, Inc. Philippines
Data General (Portugal) Sociedade de Computadores Lda. Portugal
Data General Puerto Rico, Inc. Delaware
Data General S.A. Belgium
Data General S.A. Spain
Data General S.p.A. Italy
Data General Singapore Pte., Ltd. Singapore
Data General Systems (Thailand) Limited Thailand
Data General Technology (1990) Limited Israel
Data General Telecommunications, Inc. Delaware
D G Venezula, C.A. Venezuela
Data General Wholesale Pty., Ltd. Australia
Datagen Investment Trust Massachusetts
Datagen, Inc. Delaware
DG Argentina S.A. Argentina
D G Foreign Sales Corporation, Inc. Barbados
Digital Computer Controls, Inc. Delaware
Digital Computer Controls International, Inc. Delaware
General Risk Insurance Company Ltd. Bermuda
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-91481, 33-19759, 33-53039, 33-58237, 333-31159,
333-31549, and 333-45153) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 333-30199) of Data General Corporation
of our report dated October 28, 1998 appearing in the 1998 Annual Report to
Stockholders which is incorporated by reference in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears on page 23 of this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
December 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FY98 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 158,220
<SECURITIES> 160,354
<RECEIVABLES> 326,852
<ALLOWANCES> 19,424
<INVENTORY> 141,639
<CURRENT-ASSETS> 795,961
<PP&E> 641,612
<DEPRECIATION> 461,158
<TOTAL-ASSETS> 1,065,064
<CURRENT-LIABILITIES> 430,714
<BONDS> 212,750
0
0
<COMMON> 626,137
<OTHER-SE> (241,182)
<TOTAL-LIABILITY-AND-EQUITY> 1,065,064
<SALES> 1,067,888
<TOTAL-REVENUES> 1,462,109
<CGS> 825,954
<TOTAL-COSTS> 1,071,491
<OTHER-EXPENSES> 539,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,439
<INCOME-PRETAX> (149,395)
<INCOME-TAX> 3,000
<INCOME-CONTINUING> (152,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,395)
<EPS-PRIMARY> (3.11)
<EPS-DILUTED> (3.11)
</TABLE>
