================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 27, 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
------------------------------
Data General Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-2436397
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4400 Computer Drive, Westboro, Massachusetts 01580
- -------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (508) 898-5000
--------------
Former name, former address and former fiscal year if changed since last report:
Not Applicable
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the registrant's classes of common
stock, as of July 24, 1998:
Common Stock, par value $.01 49,502,402
---------------------------- ------------------
(Title of each class) (Number of shares)
================================================================================
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
DATA GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
in thousands, except net income (loss) per share 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product.................................................$ 253,802 $294,170 $ 784,723 $ 835,992
Service................................................. 97,468 97,087 293,632 293,098
-------- ---------- ---------- ---------
Total revenues..................................... 351,270 391,257 1,078,355 1,129,090
-------- --------- ---------- ---------
Costs and expenses:
Cost of product revenues (Note A)....................... 244,270 199,422 624,139 563,178
Cost of service revenues................................ 59,881 61,392 183,171 187,967
Research and development................................ 31,655 27,783 88,048 81,065
Selling, general, and administrative.................... 84,736 85,531 254,190 251,584
Restructuring charge.................................... 82,400 -- 82,400 --
------- --------- --------- ---------
Total costs and expenses........................... 502,942 374,128 1,231,948 1,083,794
-------- -------- --------- ---------
Income (loss) from operations............................... (151,672) 17,129 (153,593) 45,296
Interest Income............................................. 3,181 2,695 10,072 6,268
Interest Expense............................................ 3,599 4,479 10,814 10,823
Other Expense (income), net................................. 2,000 -- (240) --
-------- --------- --------- ---------
Income (loss) before income taxes........................... (154,090) 15,345 (154,095) 40,741
Income tax provisions....................................... 1,000 600 2,000 1,800
-------- ----------- --------- ---------
Net income (loss)...........................................$ (155,090) $14,745 $ (156,095) $ 38,941
========== ========= ========== =========
Net income (loss) per share................................. $(3.15) $0.34 $(3.19) $0.91
======= ===== ======= =====
Weighted average shares outstanding, including
common stock equivalents, where applicable.................. 49,159 43,576 48,895 42,858
<FN>
Note A: Included in the quarter and nine-month period ended June 27, 1998, is a
one-time restructuring related charge of $52.6.
No cash dividends have been declared or paid since inception.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
Jun. 27, Sept. 27,
dollars in thousands 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and temporary cash investments............................................ $ 112,146 $ 216,814
Marketable securities.......................................................... 175,426 151,455
Receivables, net............................................................... 270,315 296,375
Inventories.................................................................... 145,424 166,008
Other current assets........................................................... 34,191 27,584
---------- -----------
Total current assets...................................................... 737,502 858,236
Property, plant, and equipment, net................................................ 184,657 180,410
Other assets....................................................................... 66,310 96,222
---------- -----------
$ 988,469 $ 1,134,868
========= =========
Liabilities and stockholders' equity
Current liabilities
Accounts payable............................................................... $ 130,718 $ 154,624
Other current liabilities...................................................... 256,746 237,198
----------- -----------
Total current liabilities................................................. 387,464 391,822
----------- -----------
Long-term debt..................................................................... 212,750 212,750
----------- -----------
Other liabilities.................................................................. 9,192 11,516
----------- -----------
Stockholders' equity
Common stock
Outstanding - 49,218,000 shares at Jun. 27, 1998
and 48,588,000 shares at Sept. 27, 1997 (net of
deferred compensation of $13,166 at Jun. 27, 1998
and $14,157 at Sept. 27, 1997)............................................ 619,931 607,130
Accumulated deficit................................................................ (235,676) (79,581)
Unrealized gains on marketable securities.......................................... 7,995 2,812
Cumulative translation adjustment.................................................. (13,187) (11,581)
----------- -----------
Total stockholders' equity................................................ 379,063 518,780
----------- -----------
$ 988,469 $ 1,134,868
=========== ==========
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
DATA GENERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Jun. 27, Jun. 28,
in thousands 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss).................................................................. $ (156,095) $ 38,941
Adjustments to reconcile net income (loss) to
net cash provided from operating activities
Depreciation and write-down of fixed assets................................... 75,583 60,331
Amortization and write-down of
capitalized software development costs....................................... 56,498 14,633
Other non-cash items, net..................................................... 14,664 12,721
Change in operating assets and liabilities.................................... 39,451 (62,647)
----------- --------
Net cash provided from operating activities................................... 30,101 63,979
----------- --------
Cash flows from investing activities
Expenditures for property, plant, and equipment.................................... (94,326) (82,629)
Net proceeds from the sales (purchases) of marketable securities................... (15,916) (6,828)
Capitalized software development costs ............................................ (28,709) (25,942)
---------- --------
Net cash used by investing activities......................................... (138,951) (115,399)
--------- --------
Cash flows from financing activities
Cash provided from stock plans..................................................... 5,853 8,099
Decrease in notes payable.......................................................... -- (1,794)
Net proceeds from issuance of long-term debt....................................... -- 207,218
Repayment of long-term debt........................................................ -- (26,901)
--------- --------
Net cash provided from financing activities................................... 5,853 186,622
--------- --------
Effect of foreign currency rate fluctuations
on cash and temporary cash investments................................................ (1,671) (3,410)
--------- --------
Increase (decrease) in cash and temporary cash investments............................. (104,668) 131,792
Cash and temporary cash investments - beginning of period.............................. 216,814 178,997
---------- --------
Cash and temporary cash investments - end of period.................................... $ 112,146 $310,789
========== =========
Supplemental disclosure of cash flow information
Interest paid...................................................................... $ 13,502 $ 11,420
Income taxes paid.................................................................. $ 1,194 $ 5,590
<FN>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
DATA GENERAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Consolidated Balance Sheet Details
Jun. 27, Sept. 27,
in thousands 1998 1997
- -------------------------------------------------------------------------------
Inventories
Raw materials................................. $ 7,697 $ 16,169
Work in process............................... 64,174 78,335
Finished systems.............................. 48,538 44,349
Field engineering parts and components........ 25,015 27,155
---------- ----------
$145,424 166,008
======== =========
Property, plant, and equipment
Property, plant, and equipment.................. $652,788 $657,351
Accumulated depreciation........................ (468,131) (476,941)
--------- --------
$184,657 $180,410
======== ========
Note 2. Accounting Policies
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 per share and the
effect on income and the weighted average number of shares of potentially
dilutive common stock.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
June 27, 1998 June 28, 1997
--------------------------------------- -------------------------------------
Loss Shares Per-Share Income Shares Per-Share
in thousands, except per share amounts (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income (loss) available to
common stockholders $(155,090) 49,159 $(3.15) $14,745 40,625 $0.36
======= =====
Effect of Dilutive Securities
Stock Options -- -- -- 2,951
-------- -------- -------- --------
Diluted Earnings Per Share
Net income (loss) available to
common stockholders and
assumed conversions $(155,090) 49,159 $(3.15) $14,745 43,576 $0.34
========= ======== ======= ======= ====== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------------------------------------
June 27, 1998 June 28, 1997
----------------------------------- ---------------------------------------
Loss Shares Per-Share Income Shares Per-Share
in thousands, except per share amounts (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Share
Net income (loss) available to
common stockholders $(156,095) 48,895 $(3.19) $38,941 40,155 $0.97
===== =====
Effect of Dilutive Securities
Stock Options -- -- -- 2,703
---------- ------- ------- ------
Diluted Earnings Per Share
Net income (loss) available to
common stockholders and
assumed conversions $(156,095) 48,895 $(3.19) $38,941 42,858 $0.91
========== ======= ====== ======= ====== =====
</TABLE>
For the quarter and nine-month periods ended June 27, 1998 and June 28,
1997, the assumed conversion of the 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
quarter and nine-month period ended June 27, 1998, the assumed exercise of stock
options, giving effect to the incremental shares, is anti-dilutive and has
therefore been excluded from the computation.
Note 3. Basis of Presentation and Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements reflect all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation. The Company's
accounting policies are described in the Notes to Consolidated Financial
Statements in the Company's 1997 Annual Report. The results of operations for
the quarter ended June 27, 1998 are not necessarily indicative of the results of
the entire fiscal year.
Note 4. Other Recent Pronouncements
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 evaluating the effect, if
any, the future adoption of SFAS 133 will have on the consolidated financial
position or results of operations.
<PAGE>
Note 5. Restructuring Charge
In the quarter ended June 27, 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 approximately 480 employee terminations, offset by additional
employees hired to support the Company's storage business initiatives. The
program also included the discontinuation of the Company's THiiN Line internet
server products and of 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 quarter, the Company recorded a charge
of approximately $135 million related to the restructuring program and certain
asset write-downs resulting from the plan. 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 sales.
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 270 were terminated during the quarter ended June 27, 1998 and the
remaining terminations are expected to be substantially complete by the end of
calendar year 1998. Asset write-downs are comprised 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 sales for the quarter ended June 27,
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.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Financial Condition
Cash and temporary cash investments as of June 27, 1998 were $112.1
million, a decrease of $104.7 million from the end of fiscal 1997. At the same
date, the Company held $175.4 million in marketable securities, a net increase
of $24 million during the current nine-month period. In total, cash and
temporary cash investments along with marketable securities decreased $80.7
million for the current nine-month period. The decrease was mainly attributable
to the purchases of equipment required for the Company's server and storage
businesses and payments reducing employee-related accruals. 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 $9.3 million and classified as
available-for-sale. The unrealized gain on marketable securities of $8 million
is recorded as a separate component of stockholders' equity. During the current
nine-month period, the Company recorded a gain of $2.2 million on the sale of an
equity security. Net cash provided from operations for the nine months ended
June 27, 1998 totaled $30.1 million; expenditures for property, plant, and
equipment were $94.3 million; capitalized software development costs totaled
$28.7 million; and cash provided from stock plans totaled $5.9 million. The
effect of foreign currency exchange rate fluctuations on cash and temporary cash
investments was a decrease of $1.7 million.
Net receivables at June 27, 1998 were $270.3 million, a decrease of
$26.1 million from $296.4 million at September 27, 1997, primarily as a result
of decreasing revenues. Total inventories at June 27, 1998 were $145.4 million,
a decrease of $20.6 million from September 27, 1997, primarily as a result of
the write-down of inventory related to the Company's restructuring program and
improved supply management. Net property, plant, and equipment increased $4.2
million from September 27, 1997, principally due to the purchases of equipment
and capital expenditures for developing both operating and financial systems and
to support the new product initiatives in the server and storage businesses
offset, in part, by the write-down of non-strategic assets which will be
disposed of in connection with the restructuring program. Fixed asset
dispositions related to the sale of demonstration equipment totaled $5.6 million
for the current nine-month period. Management expects that sales of
demonstration equipment will continue.
The decrease of $29.9 million in other assets from September 27, 1997
was attributed mainly to the write-down to net realizable value of previously
capitalized software development costs due to changes in the Company's focus for
certain server products' software-based solutions.
The decrease of $23.9 million in accounts payable from September 27,
1997 levels was attributed mainly to the timing of payments related to material
purchases. Other current liabilities increased $19.5 million from September 27,
1997, primarily as a result of charges related to employee termination benefits
and provisions for lease abandonments related to vacated lease properties
resulting from the Company's restructuring program. Long-term debt of $212.8
million remained unchanged from September 27, 1997.
<PAGE>
Results of Operations
The Company reported a net loss of $155.1 million for the current
quarter ended June 27, 1998, compared with net income of $14.7 million for the
same period of the prior year. The net loss was $156.1 million for the
nine-month period ended June 27, 1998, compared with net income of $38.9 million
for the same nine-month period ended June 28, 1997.
<TABLE>
<CAPTION>
Revenues (in millions)
- -------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
---------------------------------------------- -------------------------------------------
6/27/98 Change 6/28/97 6/27/98 Change 6/28/97
---------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $253.8 (14%) $294.2 $ 784.7 (6%) $ 836.0
% of Total Revenues 72% 75% 73% 74%
Service 97.5 -- 97.1 293.7 -- 293.1
% of Total Revenues 28% 25% 27% 26%
Total $351.3 (10%) $391.3 $1,078.4 (4%) $1,129.1
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In the fiscal quarter ended June 27, 1998, product revenues were $131.4
million from the Company's AViiON family of open systems server products
compared with product revenues of $131.1 million in the comparable period of the
prior year. In the current quarter, revenues from the Company's Intel-based
AViiON systems increased 41%, while revenues from the Motorola-based AViiON
systems declined by 71% compared with the same period of the prior year. The
Company anticipates that the percentage of server product revenues generated by
the Intel-based AViiON products will continue to increase in fiscal 1998, while
the Motorola-based AViiON system revenues are expected to continue to decline.
Product revenues from the Company's CLARiiON storage systems decreased 31% from
the comparable prior-year period and accounted for 38% of total product revenues
in the current quarter. This decline is primarily the result of the longer than
anticipated product transition from SCSI-based systems to the Company's newer
fibre-based storage products. CLARiiON is sold primarily through the Company's
original equipment manufacturer and distributor channels; thus sales in any
given period are subject to sales cycles and inventory levels of the Company's
customers. CLARiiON product revenues have been concentrated in a limited number
of customers, with a significant portion of the Company's CLARiiON product sales
to a single OEM customer. Product revenues from personal computers and other
equipment decreased 36% from the same period in the prior year and represented
6% of total product revenues compared to 9% for the comparable prior-year
period. 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
quarter ended June 27, 1998 represented 4% of total product revenues.
<PAGE>
For the nine-month period ended June 27, 1998, product revenues of
$398.2 million from the Company's AViiON family of open systems server products
increased 5% from $379.5 million for the first nine-month period of fiscal 1997.
For the current nine-month period, the Company's Intel-based AViiON revenues
increased 51%, while product revenues from the Motorola-based AViiON systems
declined by 62% as compared with the first nine-month period of fiscal 1997.
Product revenues from the Company's CLARiiON storage systems decreased 22%
compared to the same nine-month period in fiscal 1997. Product revenues from
personal computers and other equipment decreased by 20% from the same nine-month
period in the prior year and represent 8% of total product revenues for the
current nine-month period compared to 10% for the comparable prior-year period.
The VALiiANT product revenues for the nine-month period ended June 27, 1998
represented 4% of total product revenues.
In the service business, the Company experienced an 8% and 12% increase
in professional service revenues in the current quarter and nine-month period
ended June 27, 1998, respectively, as compared with the same periods in fiscal
1997. This increase was completely offset by a 2% and 3% decline in contract
maintenance revenues in the current quarter and nine-month periods ended June
27, 1998, respectively, as compared with the quarter and nine-month periods
ended June 28, 1997.
<TABLE>
<CAPTION>
Revenues by Geographic Marketplace
- ---------------------------------------------------------------------------------------------------------------------------
Percentage of Percentage Change of
Consolidated Revenues $ of Revenues
---------------------------------------------------- ---------------------------------------
Quarter ended Nine months ended 6/27/98 - 6/28/97
---------------------------------------------------- ---------------------------------------
6/27/98 6/28/97 6/27/98 6/28/97 Quarter ended Nine months ended
---------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Product 65% 68% 61% 64% (17%) (10%)
Service 60% 59% 60% 58% 1% 3%
Total 64% 65% 61% 63% (13%) (7%)
Europe
Product 22% 20% 24% 22% (8%) 1%
Service 31% 30% 31% 32% 4% (2%)
Total 24% 23% 26% 24% (4%) --
Other International
Product 13% 12% 15% 14% (5%) 3%
Service 9% 11% 9% 10% (13%) (10%)
Total 12% 12% 14% 13% (7%) --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The decrease in domestic product revenues for the current quarter and
nine-month periods ended June 27, 1998 was primarily a result of decreased
shipments of CLARiiON, Motorola-based AViiON systems, and personal computer and
other equipment product revenues, which was partly offset by the increase in the
Company's Intel-based AViiON systems and product revenues from VALiiANT. The
decrease in European product revenues, including U.S. direct export sales, for
the current quarter was mainly attributable to decreases in CLARiiON and
personal computer and other equipment product revenues, which is partly offset
by increases in Intel-based AViiON product revenues. The increase in European
product revenues, including U.S. direct export sales, for the nine-month period
ended June 27, 1998 was mainly attributable to the increase in Intel-based
AViiON product revenues, partially offset by decreases in CLARiiON product
revenues. Other international product revenues, including U.S. direct export
sales, for the current quarter decreased 5% as compared with the same fiscal
quarter in 1997. The increase in other international product revenues for the
nine-month period ended June 27, 1998 was primarily due to an increase in
revenues from the CLARiiON product line.
For the current nine-month period, total revenues in the European
marketplace decreased by approximately 3% due to a stronger U.S. dollar as
compared to the nine-month period ended June 28, 1997.
<TABLE>
<CAPTION>
Cost of Revenues (in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
--------------------------------------------------- -------------------------------------------
6/27/98 Change 6/28/97 6/27/98 Change 6/28/97
--------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Product $244.3 23% $199.4 $624.2 11% $563.2
% of Product Revenues 96% 68% 80% 67%
Service 59.9 (2%) 61.4 183.2 (3%) 188.0
% of Service Revenues 61% 63% 62% 64%
Total Cost of Revenues $304.2 17% $260.8 $807.4 7% $751.2
% of Total Revenues 87% 67% 75% 67%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the quarter ended June 27, 1998, the Company recorded certain
one-time charges of $52.6 million related to the Company's restructuring plan
which are included in product cost of sales. These charges are primarily related
to the write-down of capitalized software development costs related to 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 one-time charge is the write-down of certain inventory associated with the
Company's THiiN Line business unit and the refocused server strategy. Without
these special one-time charges, the pro-forma product cost of sales as a
percentage of product revenues was 76% and 73% for the quarter and nine-month
period ended June 27, 1998, respectively. The increase in the pro-forma product
cost as a percentage of product revenues from the comparable year-ago periods
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 quarter and nine months ended June 27, 1998 was the result of
continued improvements in spare parts inventory management and improved gross
margins in the professional service business related to cost savings from the
Company's restructuring program.
<PAGE>
<TABLE>
<CAPTION>
Operating Expenses (in millions)
- -------------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
------------------------------------- ------------------------------------
6/27/98 Change 6/28/97 6/27/98 Change 6/28/97
------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Research & Development $31.7 14% $27.8 $ 88.1 9% $ 81.1
% of Total Revenues 9% 7% 8% 7%
Selling, general & administrative $84.7 (1%) $85.5 $254.2 1% $251.6
% of Total Revenues 24% 22% 24% 22%
Restructuring charge $82.4 -- $ 82.4 --
% of Total Revenues 23% -- 8% --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company continued to focus its research and development efforts on
its core business technology: multi-user computer systems, servers, and mass
storage devices. In the current nine-month period, gross expenditures on
research and development and software development before capitalization were
$116.8 million, an increase of 9% from $107 million for the comparable
prior-year period. The increase in research and development expenditures was
driven by investment in CLARiiON fibre products and in the Company's Non-Uniform
Memory Access (NUMA) architecture for high-end servers. Additionally, in the
current quarter, changes in the strategic focus for the Company's server
products resulted in the expensing of software development costs that had
previously been capitalized.
For the current quarter ended June 27, 1998, the decrease in selling,
general, and administrative expenses over the comparable quarter, is a result of
the impact of the Company's restructuring program. The increase in selling,
general, and administrative expenses for the nine-month period ended June 27,
1998 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
restructuring program in the server business will result in decreases in
selling, general, and administrative expenses in the second half of calendar
year 1998, offset, in part, by increases from the continued investment in the
Clariion storage business. At June 27, 1998, the number of employees totaled
4,784, a net decrease of 339 and 280 employees from September 27, 1997 and June
28, 1997, respectively.
In the quarter ended June 27, 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 storage business initiatives. The plan also included
the discontinuation of the Company's THiiN Line internet server products and of
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.
<PAGE>
Accordingly, during the current quarter, the Company recorded a charge
of approximately $135 million related to the restructuring program and certain
asset write-downs resulting from the plan. 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 sales. A summary of the restructuring
charge included in operating expense and the related accrued liability balance
at June 27, 1998 is as follows:
<TABLE>
- --------------------------------------------------------------------------------------------------------------------------
Restructuring Less:
Charge Cash payments and Jun. 27, 1998
in millions June 27, 1998 Asset write-downs Balance
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee termination benefits $ 43.7 $ 5.8 $ 37.9
Asset write-downs 19.9 7.4 12.5
Lease abandonments 11.3 .1 11.2
Other exit costs 7.5 1.3 6.2
----- ----- -----
Total $ 82.4 $ 14.6 $ 67.8
====== ====== ======
- --------------------------------------------------------------------------------------------------------------------------
</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 270 were terminated during the quarter ended June 27, 1998 and the
remaining terminations are expected to be substantially complete by the end of
calendar year 1998. Asset write-downs are comprised primarily of fixed assets,
including leasehold improvements and demonstration equipment which will be
disposed of in connection with the restructuring plan. 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 sales for the quarter ended June 27,
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.
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. Based on current forecasts, the Company believes that such cost
reductions will benefit future operations. While the Company does not currently
foresee any significant additional restructuring charges in the near future, the
successful implementation of the action plans associated with this restructuring
is critical to achieving improved operating results in future periods. There can
be no assurance that the Company's restructuring activities will be successful
or sufficient to allow the Company to generate improved operating results in
future periods.
During fiscal year 1995, the Company recorded a restructuring charge of
$43 million. No material changes in estimates to prior provisions or additional
charges were recorded during the first nine-month period of fiscal 1998. All
charges, excluding asset write-downs and certain other charges, are cash in
nature and are funded from operations. The remaining reserves of $4.6 million at
June 27, 1998 are for excess vacant rental properties, primarily located in
Europe.
<PAGE>
Interest income for the current quarter was $3.2 million, an 18%
increase from $2.7 million for the comparable period of fiscal 1997, due to
higher levels of invested cash. Interest expense for the current quarter was
$3.6 million, a 20% decrease from $4.5 million for the comparable period of
fiscal 1997 due to interest expense savings from the retirement in fiscal 1997
of the 7 3/4% Convertible Subordinated Debentures due 2001. Other expense for
the current quarter includes a loss of $2 million from the write-off of an
equity investment in a non-affiliated company which had been previously carried
at cost. For the nine-month period ended June 27, 1998, the write-off is offset
by a gain on the sale of an equity security.
The income tax provision for the current quarter was $1.0 million
compared to $.6 million for the comparable prior-year period. The current year
tax provision relates primarily to foreign, state, and federal alternative
minimum taxes. The Company has a valuation allowance which offsets substantially
all deferred tax assets as of June 27, 1998 and June 28, 1997. The amount of the
deferred tax assets considered realizable is subject to change based on
estimates of future 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.
Statements concerning the Company's business outlook or future economic
performance; anticipated profitability, revenues, expenses or other financial
items; product or service line growth, plans or objectives; and statements
concerning assumptions made or expectations as to any future events, conditions,
performance or other matters, are "forward-looking statements", as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. Such risks,
uncertainties and factors include, but are not limited to, fluctuations in
customer demand, order patterns and inventory levels, changes and delays in
product development plans and schedules, customer acceptance of new products,
changes in pricing or other actions by competitors, general economic conditions,
as well as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including Data General's Report on Form 10-K for the 1997
fiscal year ended September 27, 1997 and this Quarterly Report on Form 10-Q for
the third fiscal quarter of 1998, which ended June 27, 1998.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. 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's 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 CLARiiON storage products 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 5. Other Matters
Stockholder Proposals
August 17, 1998 is the deadline for submitting stockholder proposals
for inclusion in the Board of Directors' proxy statement and form of proxy
relating to the January, 1999 Annual Meeting of Stockholders (the "1999 Proxy
Statement"). Further, proxies received in connection with the January 1999
Annual Meeting of Stockholders will confer on the Company discretionary
authority (i) to vote on any stockholder proposal which is received by the
Company after November 2, 1998, and (ii) to vote on any stockholder proposal
which is received by the Company on or before November 2, 1998 if the proxy
statement includes advice on the nature of the matter and how the Company
intends to vote.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3. (c) By-Laws of the Company, as amended, previously filed on 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. (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. (nn) 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.
11. Computation of basic and diluted earnings per share.
(b) No reports on Form 8-K were filed during the current quarter ended June 27,
1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATA GENERAL CORPORATION
(Registrant)
/s/ Arthur W. DeMelle
--------------------------------
Arthur W. DeMelle
Senior Vice President
Chief Financial Officer
Dated: August 6, 1998
<PAGE>
EXHIBITS
Index to Exhibits.
3. (c) By-Laws of the Company, as amended, previously filed on 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. (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.(nn) 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.
11. Computation of basic and diluted earnings per share.
EXHIBIT 11
<TABLE>
DATA GENERAL CORPORATION
COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(Unaudited)
(In thousands except per share amounts)
Quarter Ended Nine Months Ended
---------------------------------- ---------------------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income (loss)........................................... $(155,090) $ 14,745 $(156,095) $ 38,941
========== ======== ========= =========
Weighted average shares outstanding......................... 49,159 40,625 48,895 40,155
====== ====== ====== ======
Net income (loss) per share................................. $(3.15) $0.36 $(3.19) 0.97
======= ===== ======= =====
Earnings per share assuming full dilution: (a)
Net income (loss)........................................... $(155,090) $ 14,745 $(156,095) $ 38,941
========== ======== ========== =========
Weighted average shares outstanding......................... 49,159 40,625 48,895 40,155
Incremental shares from use of treasury
stock method for stock options............................ -- 2,951 -- 2,703
----------- -------- ----------- ---------
Common and common equivalent shares,
assuming full dilution, where applicable.................. 49,159 43,576 48,895 42,858
====== ====== ======= =======
Net income (loss) per share................................. $(3.15) $0.34 $(3.19) $0.91
======= ===== ======= =====
<FN>
(a) For the quarters and nine-month periods ended June 27, 1998 and June 28,
1997, 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 quarter and nine-month period ended June 27, 1998,
the assumed exercise of stock options, giving effect to the incremental
shares, results in anti-dilution and has been excluded from the
calculation.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE Q3 FY98 CONDENSED CONSOLIDATED BALANCE SHEET AND
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-END> JUN-27-1998
<CASH> 112,146
<SECURITIES> 175,426
<RECEIVABLES> 270,315
<ALLOWANCES> 0
<INVENTORY> 145,424
<CURRENT-ASSETS> 737,502
<PP&E> 652,788
<DEPRECIATION> 468,131
<TOTAL-ASSETS> 988,469
<CURRENT-LIABILITIES> 387,464
<BONDS> 212,750
0
0
<COMMON> 619,931
<OTHER-SE> (240,868)
<TOTAL-LIABILITY-AND-EQUITY> 988,469
<SALES> 253,802
<TOTAL-REVENUES> 351,270
<CGS> 244,270
<TOTAL-COSTS> 304,151
<OTHER-EXPENSES> 198,791
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,599
<INCOME-PRETAX> (154,090)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (155,090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (155,090)
<EPS-PRIMARY> (3.15)
<EPS-DILUTED> (3.15)
</TABLE>
