-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MD4L3Q4GT3Kg4w1lDH2MUzNLk58ZI4F8b0YOqPOkBBpZJmtTpeDDTl8ur6qheBaF ltyZSCPfMqsetCS7Wlw5hQ== 0000950135-99-001863.txt : 19990407 0000950135-99-001863.hdr.sgml : 19990407 ACCESSION NUMBER: 0000950135-99-001863 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WANG LABORATORIES INC CENTRAL INDEX KEY: 0000104519 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 042192707 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-05677 FILM NUMBER: 99588172 BUSINESS ADDRESS: STREET 1: 600 TECHNOLOGY PARK DR CITY: BILLERICA STATE: MA ZIP: 01821-4120 BUSINESS PHONE: 9789675000 MAIL ADDRESS: STREET 1: 600 TECHNOLOGY PARK DRIVE STREET 2: MAILSTOP 014-B3C CITY: BILLERICA STATE: MA ZIP: 01821-4120 10-K405/A 1 WANG LABORATORIES, INC 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 1 TO FORM 10-K For Annual and Transition Reports Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year ended June 30, 1998 COMMISSION FILE NUMBER 1-5677 WANG LABORATORIES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 04-2192707 - ------------------------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 290 CONCORD ROAD, BILLERICA, MASSACHUSETTS 01821 ------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (978) 625-5000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Common Stock Purchase Warrants Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] On August 31, 1998, the aggregate market value of voting stock held by non-affiliates of the Registrant was $568,769,009 based on the closing price of Common Stock on the Nasdaq National Market on August 31, 1998 and assuming a market value of $50.00 per share for the Depositary Shares (each representing a 1/20 interest in a share of the 6 1/2% Cumulative Convertible Preferred Stock) and assuming a market value of $1,000.00 per share for the 4 1/2% Series A Cumulative Convertible Preferred Stock. The number of shares outstanding of Common Stock outstanding as of August 31, 1998 was 46,189,773 1 2 The Amendment to the Annual Report on Form 10-K of Wang Laboratories, Inc. ("Wang" or the "Company"), for the fiscal year ended June 30, 1998 gives effect to certain changes resulting from informal discussions with the staff of the Securities and Exchange Commission which were concluded in March 1999 concerning the accounting treatment related to certain aspects of the Olsy acquisition and the impairment of certain long-lived assets (See Note A to the Consolidated Financial Statements - Restatement for a complete description of changes and their restated effects). The results of these changes was to reduce the net loss and net loss per share for the fiscal year ended June 30, 1998 to $251.6 million or $6.54 per share from $281.6 million or $7.29 per share. Additionally, $3.1 million has been reclassified from research and development to cost of services - $0.5 million, cost of products - $1.2 million and selling, general and administrative expense - $1.4 million. PART I ITEM 1 BUSINESS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is quoted on the Nasdaq National Market under the symbol "WANG." The following table sets forth, for the periods indicated, the high and low sales prices per share of the Common Stock as reported on the Nasdaq National Market during fiscal years 1997 and 1998.
QUARTER ENDED HIGH LOW ------------- ------- ------- September 30, 1996 $20 1/8 $15 3/8 December 31, 1996 $24 1/16 $18 7/8 March 31, 1997 $23 3/4 $17 1/4 June 30, 1997 $21 1/2 $16 September 30, 1997 $23 1/8 $18 5/8 December 31, 1997 $24 13/16 $19 1/8 March 31, 1998 $31 5/8 $21 3/8 June 30, 1998 $32 1/4 $21
The number of stockholders of record on August 31, 1998 was approximately 12,400. The Company has paid no cash dividends on the Common Stock since its original issuance in December 1993. Its predecessor Massachusetts corporation had not paid any dividends on its capital stock for several years. The Company currently intends to retain any earnings for future growth, and, therefore, does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. Moreover, the Company's $500,000,000 credit facility with Bankers Trust Company and certain other financial institutions prohibits the payment of cash dividends other than regularly scheduled dividends to the holders of the Company's 6-1/2% Preferred Stock and 4-1/2% Preferred Stock. In March 1998, in completing the purchase of Olsy, Olivetti's wholly owned information technology solutions and service subsidiary, the Company issued 7,250,000 shares of Wang Common Stock to Olivetti. The Company also agreed to deliver an additional 1,500,000 shares of Wang Common Stock subject to the approval of the Company's stockholders. The 8,750,000 shares of Wang Common Stock together with a cash payment and 5,000,000 Stock Appreciation Rights constituted the consideration paid by Wang in its purchase of Olsy. The issuance of the Wang Common Stock was exempt from registration pursuant to Section 4(2) of the Securities Act since it is a transaction by an issuer not involving any public offering. ITEM 6 SELECTED FINANCIAL DATA See EXHIBIT A attached hereto. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See EXHIBIT B attached hereto. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See EXHIBIT C attached hereto. 2 3 PART I ITEM 1. BUSINESS Wang Laboratories, Inc., a Delaware corporation (together with its subsidiaries, "Wang" or the "Company"), provides information technology ("IT") services and solutions, including network and desktop design, integration, security and management, help desk, maintenance, resale and installation of IT and communications equipment, warranty support, procurement, electronic commerce and customer contact solutions for financial services institutions. The Company provides these services and solutions to customers on six continents and in major markets around the world. The Company's customers include banking and other financial institutions, insurance companies, governments and their affiliates, including the Governments of the United States, Italy, and the European Commission, and commercial enterprises in the retail, oil and gas and telecommunications sectors. The Company offers these services and solutions to enhance the ability of its customers to operate efficiently and more profitably through common operating environments ("COEs"), specialized solutions and the Internet. The Company has approximately 21,000 employees in 90 countries of which approximately 16,000 are technical. The Company is focused on the network and desktop integration and consulting, network management and multi-vendor services elements of the IT services industry in which the Company enjoys substantial technological expertise and global presence and which, in the Company's judgment, offer significant growth and market opportunities. The Company intends, by internal development and acquisition, to expand its position as a worldwide provider of value-added network design and integration, network management solutions, and network and desktop support services. The Company also intends to broaden its customer contact solutions for the financial services industry and broaden its electronic commerce capabilities to the financial, retail and telecom industries and the public sector. The Company will continue to service the needs of its traditional VS minicomputer customers by offering upgrade products, service and open system coexistence and migration products. In March 1998, the Company completed the purchase of Olsy, the wholly-owned information technology solutions and service subsidiary of Ing. C. Olivetti & Co. S.p.A. ("Olivetti"). Olsy is a provider of IT solutions and services to the Italian, European and other global markets. Olsy's primary geographical markets outside Italy are U.K., Netherlands, France, Belgium, North America and Japan. Olsy delivers solutions and services based on open computing standards, distributed client server architectures and network infrastructures to customers, principally in the banking, public authority, utility and retail sectors. The solutions range from the development of the initial computing environment to systems integration and include analysis, design, validation, procurement and production through to delivery and roll out of complete solutions. The services provided by Olsy include hardware, software and network maintenance and support, on-site support of distributed desktop computing environments and consultancy. The Company also acquired a 19.9% interest in Olivetti Ricerca, the Italian consortium supplying research and development services to both the IT and telecom sectors. In consideration for Olsy, the Company paid Olivetti $68.6 million in cash; issued 8,750,000 shares of Common Stock (of which 1,500,000 are to be delivered upon shareholder approval) with a value of $197.2 million at the time of closing; issued 5,000,000 stock appreciation rights ("SARs") which give Olivetti value for the increase in the market price of the Company's Common Stock above $30.00 per share at any time from March 2001 to March 2005 and are redeemable in cash or common stock at the Company's election; and agreed to pay an additional amount of up to $56.0 million payable in the year 2000, subject to meeting mutually-agreed performance targets for the calendar years 1998 and 1999. Wang and Microsoft Corporation entered into a worldwide multi-year technical, service and marketing alliance in 1995 pursuant to which Wang continues to be an authorized provider of end-user support services for Microsoft products. As one of Microsoft's Authorized Support Centers, Wang provides end-user support and training for Microsoft products. This support includes on-site system and integration design and installation, consulting, network integration, migration support, and end-user help desk services. As part of this agreement, Microsoft purchased $90.0 million face amount of 4-1/2% Series A Cumulative Convertible Preferred Stock of Wang due in 2002 (the "4-1/2% Preferred Stock") for $84.0 million. On March 23, 1998, the Company and Microsoft announced an expansion of their strategic alliance. The Company will significantly extend its services capacity by training and certifying 2,500 professionals as Microsoft Certified Systems Engineers and Microsoft Certified Solution Developers. In addition, the Company will open two customer demonstration facilities which are Microsoft Centers of Excellence, one in Billerica, Massachusetts and one in Milan, Italy. 3 4 In March 1997, the Company completed the sale of its software business unit to Eastman Kodak Company ("Kodak") for $260 million in cash. The business sold to Kodak included the Company's software business unit management, employees, products, technology, customers and business partners, as well as its sales, marketing and research and development organizations worldwide. The results of operations of the Company's software business unit have been reported as discontinued operations and the financial statements of the Company have been restated accordingly. In May 1997, the Company entered into a worldwide arrangement that expanded its relationship with Cisco Systems, Inc. ("Cisco"). As a global partner of Cisco, the Company will be able to supply and service Cisco products to Wang customers in specified countries around the world. In November 1996, the Company acquired Advanced Paradigms, Inc. ("API"), a provider of enterprise-wide Microsoft specific LAN/WAN solutions including network architecture and design installation. In August 1996, the Company acquired I-NET, Inc. ("I-NET"), a vendor-independent provider of outsourced client/server, network and desktop management services for the commercial and federal sectors. These services include enterprise network integration and operations, on-site and remote network management, help desk services, LAN/WAN communications, document management services and IT outsourcing. In May 1996, the Company acquired Dataserv Computer Maintenance, Inc. ("Dataserv"), a provider of computer maintenance and support services for point-of-sale retail scanners and registers and popular industry-standard servers and desktop products, as well as application help desk and network integration services. Dataserv services companies in the banking and financial services, insurance, retail and manufacturing industries. On June 27, 1997, Dataserv was merged into the Company. In October 1995, the Company acquired BISS Limited ("BISS"), a United Kingdom company which specializes in the design, implementation and support of network computing solutions. This organization develops network infrastructure solutions, including local area network ("LAN") and wide area network ("WAN") interconnection, client/server architecture and network management systems. In January 1995, the Company completed a transaction with Compagnie des Machines Bull and certain of its affiliates (collectively, "Bull") in which the Company purchased Bull's U.S. customer services business, U.S. federal systems subsidiary and its sales and service subsidiaries in Canada, Mexico, Australia and New Zealand. The acquired customer services business included multivendor products and the Bull GCOS mainframe systems. The Company is the successor to Wang Laboratories, Inc., a Massachusetts corporation founded in 1955, which implemented a reorganization plan under Chapter 11 of the U.S. Bankruptcy Code that was approved by the bankruptcy court on September 20, 1993 (the "Reorganization Plan"). The predecessor company had filed for reorganization in August 1992. The Reorganization Plan was consummated on December 16, 1993, at which time the reorganized company was reincorporated as a Delaware corporation. On May 12, 1998, the court issued an order (i) authorizing the final distribution of the remaining shares to holders, and (ii) closing the Chapter 11 case. The Company does business under the trade-name "Wang Global" and expects to change its legal name to "Wang Global Corporation" upon approval of the Company's stockholders at the Company's 1998 Annual Meeting on November 24, 1998. INDUSTRY BACKGROUND OPEN SYSTEMS TECHNOLOGY. The Company built its success in the 1980s largely on its line of VS minicomputers with a proprietary operating system running office software applications. However, the computer and information technology industry moved from primarily proprietary hardware systems and software products to an emphasis on "open" systems, and more recently, COEs, and common support environments ("CSEs"), which are designed around a technology blueprint with standard products from industry-leading companies. This transition allows customers to buy hardware, software and services from a variety of vendors, to combine components into one integrated system and to more effectively manage their network computing environment. Until recent years, the personal computer was the primary open system in the marketplace. Today, however, open system technology is available on a range of higher performance processors, which are being used as servers to support networks of personal computers. The availability of open systems, COEs and CSEs, which provide customers with increased flexibility in addressing their productivity requirements, dramatically reduced the opportunity for sales of hardware and software systems based on proprietary technologies. 4 5 At the same time, the use of open systems has increased the complexity of deploying computer networks and information technology systems. Open systems can involve multiple interconnections and interfaces. Such complexity has led to opportunities for companies that are able to offer cost-effective sophisticated computer services to manage the open systems technology and design and deploy COEs and CSEs, and thereby, help customers manage the to cost of ownership of the network computing environment. The complexity of the network computing environment has been compounded by the advent of and increasing demand for inexpensive "thin-client" applications connected to servers across networks of all types, particularly the Internet. The Company believes that the concentration of component-based applications at the server level and the use of the Internet will result in a demand for high quality services to integrate and install this new class of applications. In addition, increasing sales and other commercial activity (electronic commerce) over Internet Protocol-based ("IP-based") networks will increase both network traffic and the sophistication of web-based computing. CLIENT/SERVER SYSTEMS. Concurrent with the adoption of open systems solutions, an increasing number of computer users have moved to a client/server architecture, which enables an organization to realize both the convenience of desktop systems and the power of shared processing. As users exploit the benefits of open systems, many conclude that by linking multiple personal computers (i.e., clients) and servers into client/server systems, they can achieve the functionality of traditional minicomputers or mainframes at a lower initial cost. Client/server applications combine the power and ease of use of the client with the price/performance of the server. Users of client/server systems often find that such systems are also easier to use and have added functionality, such as decision-support capabilities, graphical applications and imaging. The transition from centralized mainframe or host-based systems to client/server systems is time consuming and costly and requires highly trained network designers and application developers. These critical resources are not typically resident at a company undergoing the transition. Consequently, the Company believes system transitions will generate a demand for computer networking and integration services. INDUSTRY SOLUTIONS. The financial services, retail and telecom industries are seeking solutions for customer contact, electronic commerce, work management, smart card and point of sale ("POS") applications in order to more effectively service their customers. In the Company's judgment, solutions which focus on the development, customization and deployment of innovative delivery solutions will become increasingly important. The Company believes that the evolution of business in the telecom, retail and banking industries as well as the public sector requires an architectural vision which leverages advanced technologies like Microsoft products that enable a provider to deliver integrated solutions across all delivery channels sharing infrastructure and application components. The creation, roll-out and support of these new solutions require an intimate understanding of the industry and the customer's business and a dedication to high quality service. The Company believes that the ongoing change from centralized to network and desktop and IP-based computing and the design and implementation of industry solutions remains a major challenge across all sectors of industry and government. The market drivers, including financial services and telecommunication deregulation, the growth of the Internet and electronic commerce and the growth of collaborative and remote computing, are resulting in significant investments in information technology. These investments in turn have increased the demand for network and desktop services and integrated solutions which are the Company's core competencies. BUSINESS STRATEGY Wang's business strategy is: - to continue to build a global IT services and solutions business which provides network and desktop design, integration, security and management, help desk, maintenance, resale and installation of IT and communications equipment, warranty support, procurement, infrastructure support for and integration of electronic commerce and customer contact solutions for financial services institutions. - to continue to sell and provide support for multi-vendor products with an emphasis on deploying COEs and CSEs. - to continue to provide support for current VS, GCOS and Olsy customers and offer upgrades and interoperability options for such customers. 5 6 The Company is taking advantage of the opportunities created by recent developments in the IT industry by focusing on particular areas in which it has the technological, professional and marketing expertise to offer customer contact and other industry solutions and network based services, including network and desktop design, integration, security and management, help desk, maintenance, resale and installation of IT and communications equipment, warranty support, procurement, infrastructure support for electronic commerce and customer contact solutions for financial services institutions, that will permit its customers and clients to increase the performance and reliability of their computing networks. In addition, the Company will continue to support its base of existing VS and GCOS customers in maintaining and enhancing their systems or in transitioning their systems to the open client/server model of computing. The key elements of this business strategy are as follows: FOCUS ON NETWORK AND DESKTOP COMPUTER SERVICES AND SOLUTIONS. Wang offers a comprehensive range of network and desktop services and solutions on a worldwide basis, including infrastructure support for and integration of financial services delivery channel solutions and electronic commerce solutions. At the desktop, the Company offers services including product procurement and computer maintenance and warranty support, help desk and desktop administration (including moves, adds, changes and upgrades). Network services include LAN and WAN design, implementation and administration, as well as the associated applications for LANs, WANs and internet/intranet configurations. In addition, the Company offers enhanced and cost effective service delivery and remote network management through its Enterprise Service Centers in Houston, London and Sydney. The company's solutions offerings include electronic commerce, work management, petrol/convenience store, smart card and POS applications as well other integrated solutions. These services and solutions are offered individually or as a suite of service/solution offerings. By offering customers a full suite of services and solutions for the desktop through the WAN, the Company believes that it can offer customers an attractive comprehensive arrangement for providing desktop and network products and services. COMPLEMENT INTERNAL GROWTH WITH STRATEGIC ACQUISITIONS AND ALLIANCES. The Company believes that opportunities exist to extend and enhance its current line of business and distribution capabilities through investments in or acquisitions of businesses which are either synergistic with or extend the Company's offerings such as the Olsy, API, I-NET, Dataserv, BISS and Bull acquisitions or the creation of key strategic alliances. Such acquisitions or alliances would complement the Company's existing core competencies, leverage its existing strengths, such as its customer services and solutions business, and enhance cost efficiencies across the entire organization. The Company's management intends to continue to analyze additional acquisition opportunities and opportunities to form additional strategic alliances and to pursue those opportunities that further its overall business strategy. The Company evaluates such transactions from time to time, and one or more such transactions could occur at any time. PRINCIPAL PRODUCTS AND SERVICES Wang provides information technology ("IT") services and solutions, including network and desktop design, integration, security and management, help desk, maintenance, resale and installation of IT and communications equipment, infrastructure support for and integration of electronic commerce solutions, warranty support, procurement, and customer contact solutions for financial services institutions. Network and Desktop Design, Installation and Support. Wang has a long history of providing office automation and systems integration services, including the design, project management, application design, installation, ongoing support and administration of a network or interconnected networks. Additionally, the Company is a leading independent provider of network integration, security and management, installation, training and other value-added services to customers worldwide. With the acquisition and integration of Olsy, API, I-NET, and BISS, Wang believes that it now has the resources and capabilities to provide a full range of services and solutions at the desktop, including product sourcing, as well as at the LAN and WAN level for network computing, throughout the world. Wang focuses on assisting customers in maximizing the effectiveness of their organizations by using client/server technologies. Wang has on a global basis deployed NT, Exchange and SMS migrations for over 800,000 seats. Through a number of relationships with major technology providers, including, IBM, Dell, Hewlett Packard, Novell, Packard Bell and Compaq Wang offers customers leading hardware and software on a "one-stop" basis. The Company has extensive LAN and office network design and implementation expertise and designs and manages the installation, maintenance and administration of complex, heterogeneous, multi-site interconnected office and branch networks. Additionally, the Company provides specialty services and solutions to its desktop customers, offering both local or remote help desk support for hardware and software as well as COE and CSE computer infrastructure solutions. 6 7 Wang built upon its strength in the network integration business through the acquisition of BISS. At the time of acquisition, BISS, a United Kingdom company, was a leading independent network integrator in the United Kingdom. BISS specializes in the design, implementation and support of network computing solutions. Through the integration of BISS with the Company's existing network integrating operations in the United Kingdom and Ireland, Wang is focusing on developing network infrastructure solutions, including LAN and wide area network interconnection, client/server architecture and network management solutions. Wang added substantially to its networking expertise and market position by acquiring I-NET and API. The Company believes that I-NET possessed excellent LAN and WAN design, implementation and operations skills, and provided services that include enterprise network integration and operations, network management, LAN and WAN communications, document management services and IT outsourcing. I-NET's particular strength with agencies in the U.S. Government complemented Wang's existing federal business. With the addition of API, which possesses Microsoft expertise, Wang strengthened its ability to provide complex services, including network architecture and design installation. The Company believes that as a result of the combination of Wang, I-NET, BISS and API, the Company is positioned as a leading provider of IT services including computer networking and outsourcing services. The Company acquisition of Olsy, the Company expanded its presence in key European and Asian markets and increased its global capability for providing clients with global IT solutions and services in 130 countries. The combined company under the name Wang Global will implement its networked technology solutions and network services strategy on a global scale, leveraging the long-term business relationships of both the Company and Olsy, including Olsy's customers in banking and other vertical markets. Customers will also benefit from the combined organization's relationships with major software and hardware providers, including present strategic partners Microsoft and Cisco Systems. Wang Government Services, Inc., a wholly-owned Wang subsidiary formerly known as Wang Federal, Inc., is a leading provider of systems integration products and services to the United States federal government and to state and local governments. Wang Government Services has a long history of delivering to United States government departments and agencies a wide range of information technology products and services, from large centralized systems to distributed information networks. It is involved with numerous civilian and military organizations in developing, installing and maintaining their mission critical systems. Major customers of Wang Government Services include the NASA, Department of Defense and each of the military services; the Department of State; the General Services Administration; and the Department of Commerce and Transportation. The Company's offerings to the U.S. Government include security Tempest products developed by Wang in compliance with stringent regulations. Through the acquisition of Olsy Wang has become a leading provider of IT products and network and desktop integration services to government agencies and other public authorities in the European Community. Wang currently provides services to more than 90 major government and public authority customers in 11 countries. Warranty Support and Procurement. In addition to its networking and integration services, the Company sells and supports third-party hardware and software products, provides maintenance services to the Company's VS customers and for the Bull GCOS customers and installs and supports products developed by a number of other manufacturers. The Company offers a full range of services and support for major information technology manufacturers and suppliers in the client/server marketplace. The Company provides on-site and logistics and distribution services for numerous server/desktop systems and peripherals manufacturers (Dell, Canon, NEC, Packard Bell, Motorola, Bull and Siemens) and manufacturers of networking products (Cisco and Novell), help desk services and/or professional services (NEC, Packard Bell, GE Capital and Hughes Network Systems). Through the acquisition of Dataserv in 1996, the Company increased its business in the provision of support service and maintenance for POS retail scanners and register. In addition, the Company offers end user service and support on more than 3,500 third party products from more than 350 manufacturers through its worldwide network of customer engineers, telephone support centers and logistics operations. In particular, the expanded Wang-Microsoft alliance announced in March 1998 and the acquisition of API expanded Wang's role as an authorized provider of end-user support services for Microsoft products. This support includes on-site architectural and system network design and installation consulting, network integration and migration support. The Company employs approximately 16,000 technical professionals worldwide, and offers support through subsidiaries and affiliates from approximately 130 countries throughout the world. A source of the Company's revenue continues to be derived from the servicing, upgrading and enhancement of its installed base of its VS and GCOS systems as well as support for certain Automated Teller Machines ("ATMs") and other cash dispensing machines. The Company's support for its VS line not only allows customers to continue to benefit from their VS investments, but also facilitates their transition to open systems and COEs. The Company has addressed the calendar year 2000 issue (the inability of software to properly recognize dates after the year 1999) by announcing products such as hardware platforms and operating systems 7 8 software releases together with inventory, assessment and remediation services, to enable VS customers to continue their deployment of VS systems after the year 2000. Wang maintains an electronic gateway between Microsoft's Exchange communication server product and Wang's VS Office, the Company's internally developed electronic mail system. This allows the large installed base of VS Office to coexist with Microsoft Mail and Exchange. Wang provides service and support on an exclusive basis to users of Bull GCOS platforms in the United States (including the United States government), Canada, Mexico and Australia. In addition, the Company sells and services ATMs, banking Kiosks and other banking-related peripherals developed by its affiliates and third parties including Olivetti. The Company supports a strategy of transition from existing proprietary systems to client/server applications for its VS and GCOS customers by offering upgrade software, service and open system coexistence and migration software. The Company expects that due to a general move toward client-server solutions and COEs, the Company expects the revenues from servicing and enhancing its installed base of VS systems and Bull GCOS platforms, will continue to decline at a rate of approximately 25-30% per year over the next several years. From one period to the next, the decline rate could be highly variable. Customer Contact Solutions For Financial Services Institutions; Electronic Commerce Solutions. With the acquisition of Olsy, the Company has increased its ability to provide customer contact solutions for the financial services industry and cross-industry solutions for the retail and telecom industries and the public authority sector. These include solutions for Internet electronic commerce, work management, petrol/convenience store and smart-card applications. The Company's solutions for the financial services industry include Branch Automation, Travel Staff, Self-service (ATMs and Kiosks), Phone and Postal, Electronic Banking and Smart Card solutions. In providing industry solutions for these delivery channels, the Company has leveraged Microsoft technologies that enable Wang to provide integrated solutions across all delivery channels sharing infrastructure and applications components. Wang Global has more than 30 years of experience in branch banking automation and existing business relationships with 1 in 3 of the world's 100 largest banks. MARKETING The Company sells its services offerings predominantly through its direct sales effort to both end-user customers, including governmental agencies as well as large Original Equipment Manufacturers. The Company markets its products and services in the United States through its nationwide sales and customer service offices. At June 30, 1998, United States operations included approximately 480 sales, sales support and sales administration personnel and approximately 6,830 people in its service and support organization (compared to approximately 330 and 5,450 respectively, at June 30, 1997). The Company's products and services are marketed and serviced in Canada, Europe, Latin America, Asia and the South Pacific regions through subsidiaries that generally are wholly-owned. At June 30, 1998, these subsidiaries employed approximately 1,540 sales, sales support and administrative personnel and approximately 8,950 service personnel (compared to approximately 190 and 1,600, respectively, at June 30, 1997). The Company reaches customers directly in 44 countries and indirectly through independent distributors in approximately 90 additional countries. BACKLOG A majority of the Company's revenues are derived from services and solutions and products stocked for immediate delivery, meaning that a relatively small number of product orders are unfulfilled at any time. In addition, customers generally have the ability to change, reschedule or cancel orders prior to shipment without penalty. Accordingly, the Company believes that backlog information is neither necessarily indicative of future sales levels nor material to an understanding of the Company's business. CUSTOMERS The Company's customers include commercial customers, businesses, institutions and public authorities of varying sizes around the world. The Company's sales, marketing and professional services groups focus on customers with network and desktop productivity needs in selected markets. The United States government, together with its various agencies, is a significant customer of the Company, and provided revenues to the Company of approximately $383 million in fiscal 1998, $385 million in fiscal 1997 and $228 million in fiscal 1996, which represented approximately 20%, 30%, and 22% of consolidated revenues, respectively, in each of those periods. No other customer accounted for more than 10% of the Company's consolidated revenues in any of those periods. 8 9 COMPETITION Competition is vigorous in all parts of the worldwide market for network computing services and solutions. The Company's competitors are numerous and vary widely in size and resources. Some have substantially greater resources, stronger reference accounts, larger research and engineering staffs and larger marketing organizations than the Company. Competitors differ significantly depending upon the market, customer and geographic area involved. In many of the Company's markets, traditional computer hardware companies provide the most significant competition. In other areas, systems integrators, consulting organizations and telecommunications companies are significant competitors. The Company competes primarily on the basis of service delivery quality, the ability to offer a range of services and solutions at a competitive price, and the geographic breadth and scope of its service and support organizations. The Company competes in a variety of markets with a variety of service and solution offerings. With respect to competitive factors such as service delivery quality, range of services and solutions, geographic breadth and support organization, the Company believes it generally fares favorably as compared to its competitors. Wang believes that the Company's ability to compete on price alone is more limited due to the fact that many of its competitors either have larger organizations and the ability to more fully realize economies of scale or because such competitors are regional IT companies that have lower overhead costs. RESEARCH AND DEVELOPMENT The Company has a research and development program that is primarily focused on continuing support of its VS customers, specialized client-server products sold to the United States Government, integration of service delivery technologies and Olsy's support of software technology for the banking industry. The Company's research and development expenses for fiscal 1998 were $8.7 million. In fiscal 1997, the Company spent $3.7 million on research and development in support of its continuing operations. Approximately $5.0 million was spent in fiscal 1996 in the same operations. These figures include direct labor costs and some allowances for material and overhead expenses. The increase in 1998 was due primarily to the acquisition of the Olsy operations. PATENTS, TRADEMARKS AND LICENSES The Company owns a number of patents and patent applications, both in the United States and in various foreign countries. The Company has approximately fifteen major U.S. patents, covering Single In-line Memory Modules, database management, and the Internet. These patents will expire at various times during the period 2003 through 2013. The size of the patent portfolio may vary over time, either because certain patents may become abandoned if they no longer are of significant value to the Company, or because new patents may be added if research and development activities yield inventions of particular value, or because patents may be sold pursuant to an ongoing sales program. In addition, the Company receives license royalties from some of these patents and has cross-licensed some of these patents to other companies, in return for receiving usage rights under the other companies' patents and patent applications. Certain software licensed from third parties is important to the internal business operations and to certain services provided by the Company. Where applicable, such software is typically licensed to other parties on reasonable terms and conditions. The Company does not anticipate any difficulty in maintaining its licenses on such terms. The Company believes it will continue to maintain adequate software license rights for the conduct of its business. The Company licenses certain other intellectual property from others for amounts that are not material to the Company's business as a whole. In the event that products, services or internal business operations of the Company may be covered in whole or in part by intellectual property rights owned by others, the Company may find it necessary or desirable to obtain one or more additional licenses. The Company also owns certain copyrights, trademarks, trade secret and other proprietary information used in the conduct of its business operations. The Company has taken, and will continue to take, measures to enforce its intellectual property rights when it deems such action appropriate. The results of such enforcement measures and future awards or royalties, if any, related thereto cannot be predicted with any certainty at this time, but, if successful, one or more of these actions could result in a significant recovery for or other relief granted the Company. In addition, as a result of the recent Olsy acquisition, the Company is now conducting business in countries in which it has not previously had a presence. Therefore, to the extent that the Company introduces any of its traditional products or services into these countries, patents and other forms of intellectual property protection may not be available. Furthermore, to the extent that protection is available under the intellectual property laws of those countries, the level of protection may not be as extensive as that afforded by the intellectual property laws of the United States. Also, the Company's activities in those countries may be subject to the pre-existing intellectual property rights of third parties already present in those countries. MANUFACTURING At June 30, 1998, the Company employed approximately 194 personnel in its manufacturing and related distribution operations (compared to approximately 125 at June 30, 1997). The continuing decline in demand for the Company's proprietary computer hardware products, the decision to discontinue the manufacture of PCs, increased reliance on third-party manufacturing sources and contract fabricators of subassemblies and components, and increasing reliance on direct shipment by suppliers to the Company's customers have allowed the Company to scale back its own manufacturing operations. However, this decline was offset by the Company's acquisition of Olsy and the related increase in its manufacturing operations related to ATMs, banking kiosks and other cash dispensing equipment. 9 10 The Company is experiencing no substantial difficulties in obtaining necessary components, subassemblies and products, although delays have been experienced from time to time due to temporary shortages of certain components. Except in the case of some banking peripherals, the Company maintains multiple sources of supply for most items. In the case of certain proprietary ATMs, cash dispenser units and other component parts for banking peripherals, the Company relies on a single source supplier. In either case, the Company believes that alternative sources could be developed for most existing single sources of supply, if required. ENVIRONMENTAL COMPLIANCE The Company does not believe that compliance with federal, state and local laws and regulations that have been enacted or adopted regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect on the capital expenditures, earnings or competitive position of the Company. EMPLOYEES At June 30, 1998, the Company employed approximately 21,000 people in its worldwide operations, compared to approximately 9,300 at June 30, 1997. The Company has not experienced any sustained, material strikes or work stoppages and considers its relations with its employees to be good. 10 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements. 1. The following documents are filed as Exhibit C hereto and are included as part of this Annual Report on Form 10-K. Financial Statements: Consolidated Statements of Operations for the fiscal years ended June 30, 1998 (restated), 1997 and 1996. Consolidated Balance Sheets as of June 30, 1998 (restated) and 1997. Consolidated Statements of Cash Flows for the fiscal years ended June 30, 1998 (restated), 1997 and 1996. Consolidated Statements of Stockholders' Equity for the fiscal years ended June 30, 1998 (restated), 1997 and 1996. Notes to Consolidated Financial Statements (restated). 2. The following documents are filed as Exhibit D hereto and are included as part of this Annual Report on Form 10-K/A, Amendment No. 1 to Form 10-K. Exhibit 12.1 -- Calculation of Ratio of Earnings to Fixed Charges (restated) Exhibit 23.1 -- Consent of Independent Auditors Exhibit 27.1 -- Financial Data Schedule (restated) (b) During the quarter ended June 30, 1998, the Registrant filed a Current Report on Form 8-K dated May 15, 1998 regarding the Registrants Rights Agreement and a Current Report on Form 8-K/A, Amendment No. 2 to Form 8-K dated April 5, 1999 containing Combined Consolidated Financial Statements and Pro Forma Combined Condensed Financial Statements for the Olsy transaction pursuant to the Stock Purchase Agreement among Wang Laboratories, Inc., Wang Nederland B.V., Ing. C. Olivetti & C. S.p.A. Olivetti Sistemas e Servicios Limitada and Olivetti do Brasil S.A. 11 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WANG LABORATORIES, INC. BY: /s/ PAUL A. BRAUNEIS ---------------------------------------------------- Paul A. Brauneis Vice President and Corporate Controller April 5, 1999 12 13 EXHIBIT A WANG LABORATORIES, INC. AND SUBSIDIARIES FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA (Dollars in millions except per share data)
PREDECESSOR COMPANY THREE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED NINE MONTHS MONTHS JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, ENDED 1998 1997 1996 1995 1994 SEPT 30, 1993 ---------- ---------- ---------- ---------- ----------- ------------- (restated)(A) Revenues $1,887.0 $1,268.4 $1,013.9 $ 901.9 $ 644.4 $210.9 Income (loss) from continuing operations before reorganization expenses and discontinued operations $ (251.6) $ (6.7) $ 63.5 $ (14.2) $ 8.6 $ 11.9 Reorganization expenses -- -- -- -- -- (20.8) Income (loss) from discontinued operations -- 76.6 (69.0) (53.9) -- -- Fresh-start reporting adjustment -- -- -- -- -- 193.6 Gain on debt discharge -- -- -- -- -- 329.3 -------- -------- -------- ------- ------- ------ Net income (loss) $ (251.6) 69.9 (5.5) (68.1) 8.6 514.0 Dividends and accretion on preferred stock (14.1) (14.1) (22.6) (8.7) (4.2) -- -------- -------- -------- ------- ------- ------ Net income (loss) applicable to common stockholders $ (265.7) $ 55.8 $ (28.1) $ (76.8) $ 4.4 $514.0 ======== ======== ======== ======= ======= ====== Net income (loss) per share: Basic Continuing operations $ (6.54) $ (0.56) $ 1.13 $ (0.70) $ 0.13 Discontinued operations -- 2.06 (1.91) (1.64) -- -------- -------- ------- ------- Net income (loss) $ (6.54) $ 1.50 $ (0.78) $ (2.34) $ 0.13 * ======== ======== ======== ======= ======= ====== Diluted Continuing operations $ (6.54) $ (0.56) $ 1.07 $ (0.70) $ 0.13 Discontinued operations -- 2.06 (1.81) (1.64) -- -------- -------- ------- ------- Net income (loss) $ (6.54) $ 1.50 $ (0.74) $ (2.34) $ 0.13 * ======== ======== ======== ======= ======= ====== Average number of employees 13,300 9,300 6,200 5,200 5,900 6,700
AT JUNE 30, 1998 1997 1996 1995 1994 - ----------- --------- -------- -------- ------- ------- (restated)(A) Total assets $2,249.4 $1,034.8 $ 856.6 $ 852.5 $ 677.1 Depreciable assets, net $ 214.1 $ 123.0 $ 137.3 $ 134.4 $ 79.6 Working capital $ 50.1 $ 126.1 $ 86.7 $ 34.1 $ 95.1 Long-term debt, excluding liabilities subject to compromise $ 116.9 $ -- $ -- $ 23.0 $ 2.0 Series A preferred stock $ 86.2 $ 85.5 $ 84.8 $ 84.1 $ -- Exchangeable preferred stock $ -- $ -- $ -- $ 61.5 $ 53.2 Stockholders' equity (deficit) $ 382.5 $ 422.8 $ 343.1 $ 220.8 $ 272.3 Number of employees 20,800 9,300 7,200 6,200 5,300
Certain prior years' amounts have been reclassified to conform to the presentation for fiscal 1998. Employee data excludes discontinued operations and businesses held for sale. * Per share data is not presented for the period ended September 30, 1993, the confirmation date of the Company's Reorganization Plan, due to the general lack of comparability as a result of the revised capital structure of the Company. (A) The consolidated financial position as of June 30, 1998 and the consolidated results of operations for the year then ended have been restated to reflect certain modifications as described in Note A to the accompanying consolidated financial statements. 13 14 EXHIBIT B WANG LABORATORIES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This discussion includes certain forward-looking statements about matters such as the Company's revenue, expected expenses, operating results and the need for additional investment. Any such statements are subject to normal business risks that could cause the actual results or needs to differ from those described herein. For a further discussion of the various risks affecting the business, refer to "Risks and Uncertainties" appearing at the end of this Management's Discussion and Analysis of Financial Condition and Results of Operations. BASIS OF PRESENTATION The Amendment to the Annual Report on Form 10-K of Wang Laboratories, Inc. ("Wang" or the "Company"), for the fiscal year ended June 30, 1998 gives effect to certain changes resulting from informal discussions with the staff of the Securities and Exchange Commission which were concluded in March 1999 concerning the accounting treatment related to certain aspects of the Olsy acquisition and the impairment of certain long-lived assets (See Note A to the Consolidated Financial Statements - Restatement for a complete description of changes and their restated effects). The results of these changes was to reduce the net loss and net loss per share for the fiscal year ended June 30, 1998 to $251.6 million or $6.54 per share from $281.6 million or $7.29 per share. On March 17, 1998, the Company completed the purchase of Olivetti Solutions ("Olsy"), the wholly-owned information technology ("IT") solutions and service subsidiary of Olivetti S.p.A. ("Olivetti"), except for Olivetti Corporation of Japan ("OCJ"), Olsy's subsidiary in Japan, which was completed April 7, 1998. Accordingly, the Company's Consolidated Balance Sheet and Statements of Operations and of Cash Flows include the results of Olsy and OCJ subsequent to their respective dates of acquisition. Olsy develops, implements and manages IT solutions for large public and private corporate customers, mainly in banking, the public authorities and utilities sector, and retail. The Company provides a broad range of services, including application development and systems integration, network integration and management services and distributed IT management services to a worldwide customer portfolio. At the time of acquisition, Olsy had more than 12,000 employees in more than 40 countries, with revenues of approximately $2.4 billion in calendar 1997. In connection with the Olsy acquisition, the Company has allocated $18.1 million for acquired in-process research and development ("IPR&D"). This allocation represents the estimated fair market value of the IPR&D based on the present value of future cash flows related to such projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the IPR&D had no alternative future uses. Accordingly, the value of the acquired IPR&D was written off in the fiscal quarter ended June 30, 1998. On the date of acquisition, Olsy had approximately fourteen R&D projects which were expected to reach completion principally by the end of calendar 1998. These projects related primarily to software development activities focused on operating on a Microsoft Distributed interNet Architecture for Financial Services ("Microsoft DNA FS"). At the acquisition date, these R&D projects ranged in completion from 10% to 95% and total R&D commitments to complete the projects were expected to be approximately $11 million. As of June 30, the projects ranged in completion from 20% to 100%, and remaining R&D commitments on these projects totaled approximately $9 million. Revenues and operating profits from projects are estimated to be substantially earned between 1999 and 2002 and to diminish thereafter. These estimates are subject to change, given the uncertainties of the development process, and no assurance can be given that deviations from these estimates will not occur. Management believes the Company is positioned to complete the major R&D projects valued hereunder principally during calendar 1998. However, there is risk associated with the completion of the projects, and there is no assurance that any project will meet with either technological or commercial success. In connection with the Company's acquisition of Olsy, the management of the Company began doing business under the name Wang Global. The change of the name of the Company is subject to shareholder approval. During the interim, the Company's legal name will continue to be Wang Laboratories, Inc., although the Company will conduct its business under the name Wang Global. On March 17, 1997, the Company completed the sale of its software business unit to Eastman Kodak Company ("Kodak") for $260.0 million in cash. The business sold to Kodak included Wang's software business unit management, employees, products, technology, customers and partners, as well as its sales, marketing and research and development organizations worldwide. Cash proceeds, net of transaction costs paid to date, were $239.9 million. Approximately $10 million of cash is estimated to be required in the future for payment of transaction costs and guarantees. As a result of the sale, the results of operations of the software business unit for all periods presented and the gain on the sale realized in the third quarter of fiscal 1997 have been reported as discontinued operations in the accompanying Statements of Operations and of Cash Flows. 14 15 On August 29, 1996, the Company completed the acquisition of I-NET, Inc. ("I-NET") for approximately $152 million in cash and notes, including final settlement of the notes to the selling stockholders on November 13, 1997. I-NET is a vendor-independent provider of outsourced network and desktop management services. These services include enterprise network integration and operations, network management, client/server technologies, LAN/WAN communications, and IT outsourcing. The acquisition was accounted for using the purchase method of accounting. The accompanying financial statements include I-NET's results of operations from the date of acquisition. During fiscal 1997, the Company also acquired Advanced Paradigms, Inc. ("API"). This acquisition was completed on November 13, 1996. During fiscal 1996, the Company completed the acquisitions of BISS Limited ("BISS") on October 18, 1995 and Dataserv Computer Maintenance, Inc. ("Dataserv") on May 3, 1996. The Company's consolidated Statements of Operations and of Cash Flows include the results of the acquired businesses since acquisition. RESULTS OF CONTINUING OPERATIONS YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997 For the year ended June 30, 1998, the Company reported revenues of $1,887.0 million, a 48.8% increase compared to revenues of $1,268.4 million for the prior year. Substantially all of the increase in consolidated revenues is attributable to acquisitions of Olsy and I-NET offsetting the decline in traditional revenues. The operating loss for the year ended June 30, 1998 was $243.2 million and relates primarily to nonrecurring charges of $266.3 million during the year, of which $214.1 million was recorded in the quarter ended June 30, 1998 and $52.2 million was recorded in the quarter ended March 31, 1998. These costs include $158.8 million related to reductions in the carrying value of certain intangible assets which were determined to be impaired, $18.1 million related to charges for in-process research and development, $43.9 million of Wang acquisition- related and restructuring costs, $10.3 million for advertising related to the Olsy acquisition, $2.3 million for transition costs related to integrating Olsy into the existing Wang structure, and $32.9 million of other operating charges. The $266.3 million is recorded in the Consolidated Statements of Operations as follows: $0.5 million in Cost of services, $5.6 million in Cost of products, $37.8 million in Selling, general and administrative expenses; $160.4 million in Amortization of intangibles; $52.6 million in Acquisition-related charges and $9.4 million in Other restructuring charges. The operating loss for the year ended June 30, 1997 includes $52.5 million of costs provided in the quarter ended March 31, 1997 associated with the Company's organization of its then ongoing services business around four global service delivery units after the sale of its software business. Of that total, $13.3 million resulted from the sale of the software business, $15.2 million was for organizational realignment and reductions in the G&A infrastructure, $19.0 million related to reductions in the carrying value of certain assets (including $14.4 million of intangible assets determined to be impaired) and $5.0 million was for other charges. The writedown of the impaired intangible assets is included in the $22.7 million of amortization of acquired and fresh-start intangible assets reported in the Statement of Operations for the year ended June 30, 1997. The Company had also recorded acquisition-related charges of $27.4 million in the three months ended September 30, 1996. Excluding the nonrecurring operating charges of $266.3 million and $79.9 million for the years ended June 30, 1998 and 1997, respectively, operating income was $23.1 million compared to $57.1 million in the prior fiscal year. The decline in operating profit in fiscal 1998 is primarily attributable to the previously anticipated decline in higher margin traditional VS and GCOS and service revenues, the increase in lower margin desktop and management services revenues resulting from the acquisition of I-NET and the inclusion of Olsy's lower margin structure. The Company anticipates that this shift in revenue mix will continue and proprietary revenues will continue to decline, both absolutely and as a percentage of total revenues. EBITDA (earnings before interest, income taxes, depreciation and amortization) from continuing operations for the year ended June 30, 1998 was $159.5 million and is calculated by adjusting the loss from operations of $243.2 million for nonrecurring charges of $266.3 million, depreciation and amortization expenses not included in the nonrecurring charges of $74.0 million and $55.0 million, respectively, and other income of $7.4 million not reflected in the nonrecurring charges. For the year ended June 30, 1998, cash used in operating and investing activities was $10.1 million and $65.0 million, respectively, and cash provided by financing activities was $59.5 million. 15 16 EBITDA from continuing operations for the year ended June 30, 1997 was $159.7 million and is calculated by adjusting the loss from operations of $22.8 million for nonrecurring charges of $79.9 million, depreciation and amortization expenses not included in the nonrecurring charges of $63.4 million and $35.4 million, respectively, and other income of $3.8 million not reflected in the nonrecurring charges. For the year ended June 30, 1997, cash provided by operations was $287.9 million, and cash used in investing and financing activities was $264.9 million and $4.0 million, respectively. EBITDA can be calculated differently from one company to the next, so this measure may not be comparable to EBITDA reported by other companies. Despite the reduction in operating profit, EBITDA remained relatively flat primarily as a result of higher depreciation and amortization resulting from the Olsy acquisition. REVENUES The Company's revenues are classified and defined as follows: (a) networked technology services and solutions, comprised of services and products related to the design, installation, operation and maintenance of global computing and telecommunications networks; (b) traditional products and services, comprised of VS, GCOS and Olsy proprietary products and services; and (c) standard products, which are commodity products (primarily related to Olsy) sold without accompanying services. 16 17 The Company expects traditional revenues associated with VS and GCOS products and services to continue to decline at a rate approximating 25 to 30% per year on a constant currency basis, but that rate may accelerate as the Company's customers make systems decisions regarding Year 2000 compliance. Additionally, from one period to the next, the rate of decline could be highly variable. Services revenues increased by 31.7%, to $1,269.5 million, compared to $963.9 million in the prior year. The increase in services revenues was primarily attributable to the acquisition of Olsy. Networked technology services revenues increased by 44.3%, or $313.9 million, to $1,022.1 million, compared to $708.2 million in the prior year, and is primarily attributable to the Olsy acquisition. Networked technology services revenues for the years ended June 30, 1998 and 1997 included approximately $11 million and $14 million, respectively, of revenues derived from the sale of certain intellectual property. Traditional services revenues decreased by 3.3%, to $247.4 million compared to $255.7 million in the prior year. The anticipated decline in traditional VS and GCOS services was virtually offset by the addition of Olsy traditional services revenues. A third, new classification of revenues, called `standard products', has been added to capture separately the commodity products that are sold without accompanying services. Had this change not been reflected in the quarter ended June 30, 1998, reported networked technology products and traditional products would have been $92.8 million and $31.2 million higher, respectively, for the year. Product revenues more than doubled, to $617.5 million in the year ended June 30, 1998, compared to $304.5 million in the prior year. Networked technology product revenues increased by 27.1%, or $63.5 million, to $297.5 million. Traditional product revenues increased by $125.5 million, to $196.0 million, compared to $70.5 million in the prior year. The increase in traditional product revenues is primarily the net result of the acquisition of Olsy, offset by the anticipated decline in VS and GCOS product revenues. Standard product revenues were $124.0 million. GROSS MARGIN Services gross margin decreased to 21.4% compared to 23.8% in the prior year. Margins were negatively affected by the increase in lower-margin maintenance revenues on multi-vendor services products, the decline in higher-margin revenues from traditional maintenance contracts. The services gross margin continues to be adversely affected by consolidation in the industry, resulting in competitive and technological pressures. Pressure will continue to be exerted on the Company's services gross margin as a result of increased networked technology maintenance revenues, which have historically lower margins than the Company's traditional VS and GCOS business, coupled with the inclusion of both I-NET and Olsy's lower margin structures going forward. Although it is anticipated that these factors will continue to exert pressure on services gross margin, the Company believes that the effect can be managed by the continuing implementation of cost reduction, integration and consolidation initiatives. Product gross margin was 19.6%, compared to 25.6% in the prior year. This decrease is primarily the result of the decline in traditional VS and GCOS product sales, which have historically higher margins than the margins on resold client-server products, coupled with Olsy's lower margin structure. The Company anticipates that the decline in traditional VS and GCOS product revenues will continue to exert downward pressure on product gross margin. RESEARCH AND DEVELOPMENT Research and development costs were $8.7 million compared to $3.7 million in the prior year, representing 0.5% and 0.3% of revenues in fiscal 1998 and 1997, respectively. Research and development costs include amounts spent by Olsy since the acquisition and development by Oli Ricerca (a minority investee company) under contract with Wang Global. The Company's research and development spending is primarily related to development of software technology for the banking industry and to continuing support for its traditional VS products and specialized client server products sold to the U.S. government. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased by $113.1 million, or 46.5%, to $356.3 million, in the year ended June 30, 1998. This increase is attributable to the inclusion of Olsy as well as $37.8 million of nonrecurring and other operating charges, and compares to $243.2 million, including $23.1 million of nonrecurring and other operating charges, in the prior fiscal year. During fiscal years 1998 and 1997, selling, general and administrative expenses were 18.9% and 19.2% of revenues, respectively. Nonrecurring and other operating charges of $37.8 million recorded in Selling, general and administrative expenses in fiscal 1998 included $10.3 million for advertising branding and positioning initiatives to launch the new combined company, $1.7 million of transition costs related to integrating Olsy into the existing Wang structure, $14.5 million related to reductions in the carrying value 17 18 of certain assets and $11.3 million for other operating costs. Excluding these nonrecurring charges, selling, general and administrative expenses were $317.1 million, or 16.8% of revenues. Nonrecurring and other operating charges of $23.1 million recorded in fiscal 1997 included $13.3 million which resulted from the sale of the software business, $8.3 million related to reductions in the carrying value of certain assets and $1.5 million for other costs. Excluding these charges, selling, general and administrative expenses were $221.4 million, or 17.5% of revenues. The overall reduction in selling, general and administrative expenses relative to revenues reflects the results of integration activities initiated in connection with the Company's recent acquisitions, in addition to other cost control activities. AMORTIZATION Amortization of acquired intangible assets totaled $208.7 million in the year ended June 30, 1998, including $22.8 million for intangible assets established as part of the Olsy acquisition, and $158.8 million for the writedown of intangible assets associated with the acquisitions of I-NET, Bull and BISS which were determined to be impaired. The impairment charge amounts were $130.7 million relating to the goodwill attributable to the I-NET commercial outsourcing business, $26.3 million attributable to the Bull installed contracts and assembled workforce, and $1.8 million attributable to the assembled workforce at BISS. The impairment charge on the goodwill attributable to the I-NET commercial outsourcing business was the result of significantly lower than expected revenues and margin growth in the post acquisition period, which is currently expected to grow at a rate insufficient to recover the carrying value of the related goodwill. The impairment charge attributable to the installed customer service base and assembled workforce is the result of an accelerated decline rate for the proprietary GCOS revenue and gross margin stream acquired from Bull due to Year 2000 issues and market changes as customers migrate from mainframe systems to networked technology. The impairment charge attributable to the assembled workforce acquired in the BISS transaction was the result of faster than expected attrition of the acquired workforce. Impairment of these assets was determined to exist because the estimate of undiscounted cash flows of the revenue streams to which each asset relates, net of the carrying amount of tangible net assets, was less than the carrying amount of the intangible asset. The undiscounted future cash flows are calculated based upon historical results, current projections and internal earnings targets, net of applicable income taxes, for each revenue stream. The impairment is then measured using a discount rate equal to the Company's estimated cost of capital. During fiscal 1997, the Company had eliminated its remaining fresh-start intangible assets following the sale of its software business unit to Kodak through the recognition of a deferred tax asset attributable to the realization and expected utilization of tax net operating loss carryforwards which existed at September 30, 1993. Amortization of fresh-start and acquired intangible assets in the year ended June 30, 1997 was $47.0 million, of which $12.0 million relates to the implementation of fresh-start reporting, $20.6 million relates to assets established in connection with business acquisitions and $14.4 million is for the writedown of acquired intangible assets determined to be impaired. ACQUISITION-RELATED, RESTRUCTURING AND REORGANIZATION-RELATED CHARGES Acquisition-related charges of $52.6 million in the year ended June 30, 1998 include $18.1 million for in-process research and development related to Olsy. The remainder consists of $34.5 million for integration charges which reflect the costs associated with combining the operations of Wang and Olsy. Acquisition-related charges of $35.0 million in the year ended June 30, 1997 primarily reflect the costs associated with combining the operations of the Company and I-NET and other business consolidation activities. Restructuring charges of $9.4 million in the year ended June 30, 1998 primarily reflect the costs associated with workforce reductions relative to the Company's declining VS revenue stream. Periodically, the accruals related to reorganization-related and restructuring charges are reviewed and compared to their respective requirements. As a result of those reviews, the accruals are adjusted for changes in cost and timing assumptions of previously approved and recorded initiatives. Review of these accruals in fiscal 1998 determined that no adjustments were required. Review of these accruals in fiscal 1997 determined that no adjustments were required to restructuring; however, additional reorganization-related requirements of $1.3 million were incurred and charged to expense. This adjustment is reported in Chapter 11-related charges (credits) in the Consolidated Statements of Operations. INTEREST INCOME AND EXPENSE Net interest expense of $2.4 million in the year ended June 30, 1998 is primarily comprised of $10.4 million of interest expense, including $7.2 million related to the Company's new $500 million Revolving Credit Facility with Bankers Trust Company ("BTC"), net of $8.0 million of interest income. This compares to net interest expense of $3.9 million in the prior year which is comprised of $10.9 million of interest expense which is principally the result of amounts outstanding under the previous $225 million Revolving Credit Facility and on the note issued to the selling stockholders of I-NET, net of $7.0 million of interest income. OTHER INCOME AND EXPENSE Net other income of $8.1 million was reported in the year ended June 30, 1998, and primarily consisted of a $6.5 million gain realized in the first quarter of the fiscal year on the sale of certain land and facilities owned by the Company in Billerica, Massachusetts, compared to net other income of $4.4 million in the prior fiscal year. 18 19 INCOME TAXES The provision for income taxes in the year ended June 30, 1998 was $13.4 million, and included $9.7 million of non-cash expense, and is attributable to taxes on income of foreign subsidiaries which do not have available net operating loss carryforwards. The benefit for income taxes in the prior fiscal year was $15.6 million, and relates to the utilization of certain foreign net operating loss carryforwards incurred subsequent to the Company's emergence from Chapter 11. The Company has a net Deferred tax asset balance at June 30, 1998 of $33.6 million, of which $20.4 million is included in Current assets and $13.2 is included in Other assets, and relates to the expected utilization of tax net operating loss carryforwards which existed at September 30, 1993, reducing reorganization value in excess of identifiable intangible assets. During fiscal 1998, $9.7 million of deferred tax asset was realized. During fiscal 1997, $21.0 million of deferred tax asset was realized as a result of the Company's sale of the software business, and the Company recorded an additional net deferred tax asset of $13.5 million. Although realization is not assured, management believes that the net deferred tax asset will be realized by generating future taxable income as well as the implementation of tax planning strategies. The estimate of future taxable income relates to the Company's operations outside the United States which have, in the past, consistently generated a level of taxable income similar to the amounts of future taxable income necessary to realize the net deferred tax asset. In addition, the Company has tax planning strategies to prevent the tax net operating loss carryforwards from expiring unused. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. EMPLOYEES At June 30, 1998 and 1997, the Company's continuing operations had approximately 20,800 employees and 9,300 employees, respectively. The increase is a result of acquisitions, net of reductions resulting from integration activities. YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996 For the year ended June 30, 1997, the Company reported revenues of $1,268.4 million, a 25.1% increase compared to revenues of $1,013.9 million for the prior year. Substantially all of the increase in consolidated revenues is attributable to acquisitions and internal growth offsetting the decline in traditional revenues. The Company reported an operating loss of $22.8 million, including nonrecurring and operating charges of $79.9 million for its fiscal year ended June 30, 1997, compared to an operating profit of $86.3 million for the fiscal year ended June 30, 1996. Excluding these nonrecurring and other operating charges, operating income was $57.1 million. The decline in operating profit in fiscal 1997 is primarily attributable to the previously anticipated decline in higher margin proprietary product and lower margin service revenues resulting from the acquisition of I-NET offsetting the decline in traditional revenues. Total EBITDA was $289.5 million for the year ended June 30, 1997, compared to $138.0 million in the prior year. EBITDA from continuing operations for the year ended June 30, 1997 is calculated by adjusting the loss from operations of $22.8 million for nonrecurring charges of $79.9 million, depreciation and amortization expenses not included in the nonrecurring charges of $63.4 million and $35.4 million, respectively, and other income of $3.8 million not reflected in the nonrecurring charges. For the year ended June 30, 1997, cash provided by operations was $287.9 million, and cash used in investing and financing activities was $214.9 million and $4.0 million respectively. EBITDA from continuing operations for the year ended June 30, 1996 is calculated by adjusting operating income of $86.3 million for depreciation expense of $45.9 million, amortization expense of $44.7 million, Chapter 11-related credits net of restructuring charges of $1.1 million, and other income of $8.0 million. For the year ended June 30, 1996, cash provided by operations and financing activities was $36.5 million and $55.3 million, respectively, and cash used in investing activities was $98.5 million. EBITDA can be calculated differently from one company to the next, so this measure may not be comparable to EBITDA reported by other companies. REVENUES Services revenues increased by 37.9%, to $963.9 million, compared to $699.0 million in the prior year. The increase in services revenues was primarily attributable to the acquisitions of Dataserv and I-NET offsetting the decline in traditional services. Product revenues decreased by 3.3%, to $304.5 million. Traditional product sales totaled $70.5 million, a decline of 10.2%. Networked technology product sales were stable at $234.0 million, compared to $236.4 million in the prior year. 19 20 The decline in revenues from traditional sources was $103.3 million, or 24.1%, compared to the prior year. GROSS MARGIN Services gross margin decreased to 23.8% compared to 31.2% in the prior year. Margins were negatively affected by the increase in mix of maintenance revenues from lower-margin multi-vendor services ("MVS") products, the acquisition of I-NET (which has historically lower margins than the Company's existing business) and $3.5 million of nonrecurring charges recorded in the third quarter of fiscal 1997, offset by the favorable margin impact from the sale of certain intellectual property. Product gross margin was 25.6%, compared to 31.2% in the prior year. The decrease in gross margin is primarily a result of the changing mix resulting from the decline in traditional products, the I-NET acquisition, which has historically lower margins than the Company's traditional business, as well as $2.2 million of nonrecurring charges recorded in the third quarter of fiscal 1997. RESEARCH AND DEVELOPMENT Research and development costs decreased by $1.3 million, or 26.0%, from $5.0 million during the prior year, representing 0.3% and 0.5% of revenues in fiscal 1997 and 1996, respectively. The Company's modest level of research and development spending is primarily related to continuing support of its proprietary VS products. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses increased $51.2 million, compared to the prior year, and also increased slightly as a percentage of revenues, to 19.2% in fiscal 1997, compared to 18.9% in fiscal 1996. The increase includes $23.1 million of nonrecurring charges which were recorded in fiscal 1997 and pension plan-related credits associated with the termination of four international plans approximating $1.3 million. AMORTIZATION Amortization of fresh-start and acquired intangible assets totaled $47.0 million in the year ended June 30, 1997, and is comprised of $12.0 million related to the implementation of fresh-start reporting, $20.6 million for intangible assets established in connection with business acquisitions and $14.4 million for the writedown of impaired acquired intangible assets. Amortization of fresh-start and acquired intangible assets in the year ended June 30, 1996 was $34.5 million, of which $18.4 million relates to the implementation of fresh-start reporting and $16.1 million relates to intangible assets established in connection with business acquisitions. ACQUISITION, RESTRUCTURING AND CHAPTER 11-RELATED CHARGES Acquisition-related charges of $35.0 million in the year ended June 30, 1997, primarily reflect the costs associated with combining the operations of the Company and I-NET and the writedown of legacy information systems being replaced. There were no acquisition-related charges recorded in continuing operations in the year ended June 30, 1996. Periodically, the accruals related to reorganization-related and restructuring charges are reviewed and compared to their respective requirements. As a result of those reviews, the accruals are adjusted for changes in cost and timing assumptions of previously approved and recorded initiatives. In fiscal 1997, additional costs of $1.3 million were incurred and charged to expense. Review of the reorganization-related accruals in fiscal 1996 identified $1.1 million of excess reorganization reserves and $2.2 million of excess Chapter 11 accounts payable accruals, which were reversed. These items are reported as Chapter 11-related charges (credits) in the Consolidated Statements of Operations. Review of the restructuring accruals in fiscal 1997 determined that no adjustments were required, while the fiscal 1996 review identified net additional requirements of $2.2 million related to previously approved and recorded initiatives. This adjustment is reported as Other restructuring charges in the Consolidated Statements of Operations. INTEREST INCOME AND EXPENSE Interest expense increased to $10.9 million for the year ended June 30, 1997, compared to $5.1 million in the prior year. The increase in interest expense is principally the result of amounts outstanding under the Revolving Credit Facility with Bankers Trust Company and interest on the note issued to the selling stockholders of I-NET. Interest income was $7.0 million, compared to $9.0 million in the prior year. The reduction in interest income is primarily due to the decrease in cash available for investment during most of fiscal 1997 primarily as a result of the cash paid to acquire I-NET. OTHER INCOME AND EXPENSE Net other income of $4.4 million for the year ended June 30, 1997 was primarily comprised of gains realized on the sale of certain land and facilities owned by the Company in both Massachusetts and Australia. This compares to net other income of $4.7 million, in the year ended June 30, 1996. 20 21 INCOME TAXES The benefit for income taxes for the year ended June 30, 1997, was 70%, compared to the provision for the prior year, which was 33%. The higher benefit in fiscal 1997 relates to the utilization of the Company's net operating loss carryforwards. The provision for income taxes of $31.4 million in the prior year included $30.7 million of non-cash expense. EMPLOYEES At June 30, 1997 and 1996, the Company's continuing operations had approximately 9,300 employees and 7,200 employees, respectively. LIQUIDITY AND SOURCES OF CAPITAL Cash and equivalents were $225.0 million at June 30, 1998, a decrease of $17.2 million from June 30, 1997. Cash used in operations during the year ended June 30, 1998 was $10.1 million, including $9.4 million used for costs associated with prior discontinued operations. Cash used in investing activities during the year ended June 30, 1997 was $65.0 million, and includes $91.1 million used for capital additions, including $40.8 million for nonconsumable spares and $12.6 million towards the construction of new facilities, offset by $25.6 million of proceeds on asset sales, of which $16.8 million relates to sales of land and buildings located on the Company's Billerica, Massachusetts headquarters. Net cash acquired in connection with the Olsy acquisition was $29.2 million and consists of $112.3 million acquired cash less $68.6 million of cash consideration paid to Olivetti and transaction costs of $14.5 million. In connection with the acquisition of Olsy, the Company entered into a revolving credit facility with Bankers Trust Company ("BTC") and certain other financial institutions. The five-year facility provides for borrowings up to $500.0 million, including $200.0 million for letters of credit. At June 30, 1998, the Company had long-term borrowings of $110.6 million and had available to it the unused portion of the revolving credit facility, providing for additional borrowings and/or the issuance of letters of credit of up to $380.6 million. Cash provided by financing activities was $59.5 million in the year ended June 30, 1998, and consists primarily of net borrowings under the Revolving Credit Facility with BTC of $110.6 million, principal payments in connection with the settlement of the notes to the selling stockholders of I-NET of $47.4 million, cash dividends on preferred stock paid of $13.4 million, and $11.9 million proceeds from stock plans. In addition to normal operating activities, capital expenditures and payment of preferred dividends, the Company estimates that expenditures of as much as $380 million will be required in connection with the integration and rightsizing of the combined company over the next two years. The Company has recorded a total of $282.1 million for these activities, of which $83.1 million was recorded as a charge to operations and $199.0 million was recorded as part of purchase accounting for the acquisition of Olsy, as of June 30, 1998. The $282.1 million includes approximately $153 million related to organizational redundancies, $45 million related to facilities and $84 million related to systems and other costs. A total of $187 million remains to be expended. The Company currently estimates that such expenditures will approximate $120 million through the remainder of calendar year 1998 and $61 million and $6 million in calendar years 1999 and 2000, respectively. The Company estimates that the $380 million will be recovered through cost savings through calendar year 2000. Additionally, the Company has announced that it would spend an additional $16 million for advertising, branding and positioning initiatives to launch the newly combined company, of which approximately $4 million remains to be spent, and approximately $6 million for the completion of the construction and fit-up of the Company's new Corporate headquarters in Billerica, Massachusetts. The estimated total cost of the construction activities is $20 million, which approximates the cumulative proceeds, realized or expected to be realized, from the disposition of other land and facilities. The Company expects to spend approximately $11 million, principally over the remainder of calendar 1998, to attain technological feasibility on Olsy in-process research and development activities. The Company believes that existing cash balances, cash generated from operations, and borrowing availability under its Revolving Credit Facility will be sufficient to meet the Company's operational cash requirements as well as the integration and restructuring initiatives previously discussed, and for pursuing potential investments, acquisitions and other expansion opportunities. As part of furthering its business strategy, the Company explores acquisitions and strategic relationships with other businesses on an on-going basis. One or more of these opportunities could have an impact on the Company's liquidity through the use of cash or could involve 21 22 the issuance of debt or equity securities of the Company. While the Company believes that the facility provides sufficient capital availability there can be no assurance that sufficient capital will be available on terms acceptable to the Company. YEAR 2000 OVERVIEW. Ensuring that the Company's business and service delivery processes are not disrupted by Year 2000 ("Y2K") related problems is a top priority. The Company is taking necessary steps to ensure that the products and services of its suppliers and sub-contractors upon whom the Company relies will not be adversely affected by millennium problems. 22 23 Prior to the acquisition of Olsy, the Company was in the process of replacing many of the systems used to operate its business. OLSY was involved in a similar venture to achieve Y2K compliance for its systems. Although Y2K compliance is a key consideration, the driving force behind the introduction of new systems has been the need to consolidate multiple service management and delivery systems into a new generation of systems that allow the Company to operate as a larger enterprise in the service environment. Wang's IT strategy has been to select and implement, Y2K compliant solutions to replace the majority of legacy systems currently in use in the Company. In many cases, the rollout of these systems is well underway. For the remaining applications the Company is implementing and piloting programs in 1998 and plans to complete a rollout in the first half of 1999. For functions where replacement systems cannot be deployed before the third quarter of 1999, the Company is upgrading existing legacy based systems to be Y2K compliant. This strategy will allow Wang to continue its program of development, while minimizing risk through continued use of its existing systems during the transition. IMPLEMENTATION. In describing the detailed plans for implementing compliance of the Company's major Management Information Systems, support systems can be divided into two general categories: - - Infrastructure, including network, network and mail servers and desktop systems; and - - Business Application Systems, including Service Support Systems and Enterprise, Resource & Planning (ERP) Systems. Infrastructure. Wang operates more than 20,000 personal computers and 400 NT servers. Since 1996, the Company has been implementing a common operating environment that is Y2K compliant. Desktop systems are being migrated to Windows 95, NT and 98 with Microsoft Office, Explorer and Outlook applications. Servers will be migrated to compliant releases of Windows NT. The underlying infrastructure is implemented on routers which have been certified as Y2K compliant from the Company's strategic partner, CISCO. The Company plans to complete this project by early 1999, at a cost of $11 million for Infrastructure and $9 million to bring Olsy up to Wang's common operating environment. The roll-out of this new infrastructure is already well under way. By December 1998 the Company will have completed its assessment at the small country level. Business Applications. Business applications fall into two categories: corporate (addressing common global business practices) and local (reflecting unique geographic, business and operating needs). The comments below relate to the corporate or common systems assessment. Additional work is underway to review both the expanded implementation of corporate systems and the Y2K actions that relate to the ongoing use of local systems. 1. SERVICE DELIVERY SYSTEMS. The Company is consolidating eight service delivery systems in the Americas into a single service delivery system model ("SDSM") that has been certified as Y2K compliant. In Europe there is a consolidation around the three Olsy legacy service delivery systems (already Y2K compliant). This activity is expected to be completed before the end of 1998, with the exception of Italy, which is expected to be compliant in the first quarter of calendar year 1999. Between 1999 and 2001, Wang will migrate from these systems to the corporate service delivery system model in North America. The process in Asia Pacific is the same as in Europe. SDSM refers to a combination of "best of breed" packaged solutions blended with Internet & EDI technology to support its service delivery. Among the key components are Metrix and Vantive. Scopus (another package solution) is already widely used in our International Service Centers. Vantive, a customer support package, ultimately will replace Scopus, is used both in Network Control Centers and North American-based Service Centers. Metrix, which automates field service delivery, has been piloted in Australia, implemented in Canada and is being prepared for a global roll-out. The manufacturers of each of these packages have certified that they are Y2K compliant. The Company plans to implement its SDSM in North America in 1999, and partially in the international arena in the same timeframe. A contingency plan, around using Y2K compliant legacy systems, exists and addresses unforeseen delays in rolling out the SDSM. A major component of its contingency plan involves Wang enhancing certain legacy service delivery systems in order to allow them to operate past 2000. This will both allow International to deploy the SDSM at a pace and sequence that accommodates the intensive management attention required to integrate Wang and Olsy while serving to mitigate the risk associated with any SDSM implementation delay. 23 24 2. ENTERPRISE RESOURCE PLANNING SYSTEMS. Wang has chosen SAP R/3 as its strategic ERP solution, and has already installed the software in many of its subsidiaries. The Company plans to implement SAP R/3 as a replacement for the Olsy subsidiary legacy systems in the United States, Italy, and the U.K. In the second half of 1998. Other SAP modules will be used to replace a number of systems previously used in Olsy headquarters. During 1999, the Company plans to roll out the SAP systems to the eighteen remaining countries, replacing all the Olsy legacy ERP systems. SAP has certified SAP R/3 as Y2K compliant. Twenty-three small countries will migrate to a corporate small-scale system (Solomon IV) that provides a stepping stone towards future SAP migration. Although Solomon reports that its system is Y2K compliant, the Company has requested formal certification from Solomon. COSTS TO ADDRESS Y2K ISSUES. An investment program of nearly $100 million commenced in 1996 supports the Company's strategy of replacing legacy systems. An additional $5 million has been allocated for work on corporate legacy systems required for compliance. A further $5 million will be allocated for funding of local system compliance projects. Risks to the Company of Y2K Issues. Y2K noncompliance by the Company would seriously damage its image and credibility within the marketplace, adversely affecting Wang's operating results and growth plans. Specifically, failure to complete the required work in a timely manner may result in the following: Wang Service Delivery Impact: Service delivery at the Company will be forced to move to manual processes, impacting Wang's ability to meet service level agreement obligations. At best, such a move would cause the projected profit margin on key contracts to erode and at worst the contracts would be terminated for failure to perform. Reverting to manual processes would add cost and reduce gross margin. Customer Compliance Failure Impact: The Company relies on its customers to be Y2K compliant and to rectify any internal compliance problems. In the event such customers fail to become compliant they likely would be forced to move to manual processes to work around the issues. Although it is unlikely that Wang would lose such contracts, it is likely that the Company's service delivery costs would increase and the resultant gross margin would erode. Supplier Compliance Failure Impact: Wang relies on key information technology suppliers (Microsoft, Dell, Hewlett-Packard, SAP, Siemens Nixdorf, EMC, Northern Telecomm and Cisco) to implement the Company's Y2K strategy. While Wang is performing some independent testing, the Company expects our suppliers to extensively test all affected products. If products produced by these suppliers prove not to be compliant, then Wang's service delivery and internal operations would be impacted as described herein. Wang Internal Systems Impact: If the Company's internal systems do not comply with Y2K standards, Wang will be forced to move to manual reporting and processing which would increase SG&A costs by as much as 50% for those systems negatively impacted until the problems are resolved. COMPANY'S CONTINGENCY PLAN. In the event that Wang is unable to implement its Y2K plan fully, manual processes will be used until the failed systems can be fixed. For example, automated service call tracking and dispatch would be handled manually until the automated systems become available. Given the Company's reliance on replacement programs, continual close monitoring of their progression is essential. Any replacement program slippage will require increased investment in Y2K remediation of legacy systems. For those systems which are beyond repair, alternative legacy systems would have to be substituted. The Company is committed to assisting its customers in managing the compliance of their IT systems purchased from or serviced by the Company in order to meet the Year 2000 challenge. The compliance of products and services supplied by the Company has been given the highest priority. The Company is committed to providing its customers with products that are supportable beyond the Year 2000 and has engaged in a development effort to bring its principal products into Year 2000 compliance. The Company has developed a suite of products designed to provide VS users the information, products, and tools required to update their VS systems as well as to assist users in identifying and resolving issues with their own or third party VS applications. 24 25 The Company has engaged in a communications campaign to notify its customers of the compliance status of its products. This communications campaign has consisted of written notices sent directly to customers, meetings with customers, open forums for customers, and numerous postings on the Company's web site. Although the Company cannot ensure that every customer has received all of the necessary information, the Company believes that its communications effort has been successful in informing its customers about the compliance status of the Company's products and solutions. The Company believes that its development effort and communications campaign has minimized its potential exposure to Year 2000 claims and liability. Moreover, the Company believes that the standard terms and conditions of its customer contracts provide substantial protection against potential claims by customers. The Company recognizes, however, that there continue to be risks associated with the sale and use of Wang products that may not be Year 2000 compliant. The Company is unable to assess the extent of the risk at this time. No claim has been filed against the Company relating to Year 2000 issues and no customer has asserted losses associated with any products of the Company. THIRD PARTY PRODUCTS. It is the Company's goal to supply only products made by other companies that are Year 2000 compliant. Where products originate from third parties, the Company will seek to verify that the supplier has certified the product as Year 2000 compliant. If an upgrade or future release of a product is required, the Company will work with its customers to establish a plan for obtaining the required upgrade or release. The Company has implemented a certification program in which it has requested certifications from its principal strategic suppliers. The Company is committed to providing its customers with all of the relevant information available regarding Year 2000 status of products and provides information about standard PCs and links to a number of our strategic partners and suppliers. The Company recognizes, however, that there continue to be risks associated with the sale of third-party hardware and software products that may not be Year 2000 compliant. The Company is unable to assess the extent of the risk at this time. No claim has been filed against the Company relating to Year 2000 issues of third party products and no customer has asserted losses caused by any sales of third party products by the Company. MULTI-VENDOR MAINTENANCE SERVICES. The Company provides maintenance services for customers around the world who are using hundreds of different hardware and software products made by dozens of companies. Although the Company will assist its maintenance customers in addressing their Year 2000 related problems, the Company does not intend to provide hardware maintenance or software support for products that will not be ear 2000 complaint or will not be supported by the manufacturer beyond that the Year 2000. Through its field service engineering work force and its professional services teams, Wang will help customers analyze the impact of the Year 2000 on its systems. Such services will be available on a project basis at current commercial rates and terms. Because the Company's standard maintenance contracts do not cover problems associated with the Year 2000, the Company does not believe that it has material exposure for providing maintenance services. The Company recognizes, however, that there continue to be risks associated with the maintenance of hardware and software products that may not be Year 2000 compliant. The Company is unable to assess the extent of the risk at this time. No claim has been filed against the Company relating to Year 2000 maintenance issues and no customer has asserted losses due to any actions of the Company. RISKS AND UNCERTAINTIES Certain statements in this Form 10-K may be deemed "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). The Company desires to take advantage of the safe harbor provisions of the Act and is including this statement for the express purpose of availing itself of the protection of the safe harbor with respect to all forward-looking statements that involve risks and uncertainties. The Company or its representatives may also make forward looking statements in other written reports filed with the Securities and Exchange Commission ("SEC"), in materials delivered to stockholders, in press releases and in oral statements to security analysts, investors and others. Such forward-looking statements may relate to various matters, including, without limitation, the Company's business, revenue, expenses, profitability, acquisitions, dispositions, products, services, intellectual property, expenses, labor matters, effective tax rate, the impact of Year 2000 issues and operating and capital requirements. Forward looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. In accordance with the Act, set forth below are cautionary statements that accompany those forward-looking statements. Readers should carefully review these cautionary statements as they identify certain important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. The following cautionary statements are not exclusive and are in addition to other factors discussed elsewhere in the Company's filings with the SEC and in materials incorporated therein by reference. 25 26 IMPLEMENTATION OF BUSINESS STRATEGY. The Company's business strategy is to increase the revenues and margins it realizes from providing networked technology services and solutions to customers and clients and to build upon that growth through acquisitions and alliances with other companies. The Company's ability to implement successfully this strategy over the long term, and the ultimate success of this strategy and the achievement of sustained profitable growth, is uncertain and subject to a broad range of variables and contingencies, many of which are beyond the Company's control. The Company may not be able to achieve the revenue growth it is seeking as a result of an inability to obtain new customer contracts, recruit, train and retain required skilled personnel or the inability to deliver the required services or solutions in a timely and satisfactory manner to customers. In addition, there can be no assurance that the Company will be able to implement strategic relationships or acquisitions, or, if entered into, that such strategic relationships or acquisitions will in fact further the implementation of the Company's business strategy. The Company's existing strategic relationships with Dell Computer products Corporation, Microsoft Corporation, and Cisco Systems, Inc. are subject to a variety of uncertainties, including possible evolutions in technology, business relationships or strategic plans of the parties which may, in the future, result in the termination of, or a change in the nature of or in the expectations with respect to, such strategic relationships. The Company's relationships with Dell, Microsoft and Cisco also include certain contractual obligations, which, if not satisfied, could allow Dell, Microsoft and Cisco, respectively, to terminate all or a portion of their relationships. Currently, a significant portion of the Company's revenues and gross margins are attributable to the servicing, upgrading and enhancement of its installed base of VS and other traditional systems and the resale of certain hardware products, including banking peripherals. The Company expects revenues from traditional sources, including the acquired Bull traditional product and service revenue streams, to decline at a rate approximating 30% per year on a constant currency basis, but that rate may accelerate as the Company's customers make systems decisions regarding Year 2000 compliance. Additionally, from one period to the next, the decline rate could be highly variable. As the Company's traditional revenues decline, the loss of individual customers will have an increasingly significant effect on the rate of decline for any particular measurement period. The Company's continued growth is predicated on the business strategy described above (including the acquisition of new customer service and network integration businesses) more than offsetting the decline in revenues and gross margins from traditional sources. There can be no assurance that delays or difficulties in the implementation of the Company's strategy, or a higher than anticipated decline in revenues and gross margins from traditional sources will not adversely impact the Company's results of operations or the market value of its securities. RISKS OF NEWLY ACQUIRED BUSINESSES. In March and April 1998, the Company completed its acquisition of the wholly-owned IT solutions and services business of Olivetti Solutions ("Olsy") from the Olivetti Corporation. The transaction more than doubled the annualized revenue and number of employees of the Company. The Company will confront a number of risks as it operates the Olsy business and integrates it with the Company's existing business. As with any significant acquisition or merger, the Company confronts challenges in retaining employees, customer relationships, synchronizing service delivery systems and business processes, and integrating logistics, marketing, and product offerings to achieve greater efficiencies as well as unforeseen liabilities. Moreover, the Company may be unable to implement all anticipated cost savings in the Olsy business. Finally, there can be no assurance that the acquisition of Olsy or any of the Company's other acquisitions or strategic alliances will result in long-term benefits to the Company, or that the Company and its management will be able to effectively assimilate and manage the business of such acquired companies. The Company continues to evaluate such opportunities regularly, and one or more other transactions could occur at any time. The transfer of Company shares to Olivetti as part of the purchase price for Olsy increases the risk that the Company's use of its net operating loss may be limited in the future. Federal tax rules impose an annual limitation on the use of a net operating loss when the change of ownership of shares in a corporation exceeds a certain limit. The transfer of Company shares to Olivetti brings the aggregate change of ownership closer to, but not in excess of, that stated limit. Other unforeseen changes of ownership may push the aggregate change of ownership over the stated limit. The Company believes that even if the annual limitation on the use of its net operating loss were imposed, such limitation would be of no consequence as the projected annual limitation on the use of a net operating loss exceeds the projected federal taxable income of the Company. DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent on key management personnel and technical employees. The Company's growth and future success will depend in large part on its ability to attract, motivate and retain highly qualified personnel, particularly, trained and experienced technical professionals capable of providing sophisticated network and desktop outsourcing and integration services. In particular, the Company's new relationships with Microsoft and Dell contemplates that the Company will train a significant number of qualified Microsoft- and CISCO-certified personnel. Competition for such personnel is intense and there can be no assurances that the Company will be successful in hiring, training, motivating or retaining such qualified personnel. The loss of key personnel or the inability to hire, train or retain qualified personnel could have a material adverse effect on the Company's business, financial condition or results of operations. 26 27 COMPETITION. The information technology ("IT") services and solutions industry, including the network and desktop services markets, is intensely competitive and undergoing continual change. Worldwide competition is vigorous in all of the markets in which the Company does business. The Company's competitors are numerous and vary widely in market position, size and resources. Competitors differ significantly depending upon the market, customer and geographic area involved. In many of the Company's markets, traditional computer hardware manufacturing, communications and consulting companies provide the most significant competition. The Company must also compete with smaller IT services businesses and solution providers, that have been able to develop strong local or regional customer bases. Many of the Company's competitors have substantially greater resources, including larger research and engineering staffs and larger marketing organizations, than those of the Company. The Company may have difficulty implementing the leading edge technology required to service its customers. There can be no assurance that the Company will be able to compete successfully against other companies that provide similar IT services and solutions. YEAR 2000 LIABILITY. The Company supplies computer systems to large organizations in the commercial and government markets, which include federal, state and local customers. Any failure of the Company's products to perform, including system malfunctions due to the onset of the calendar year 2000 (caused by a data structure problem that will prevent software from properly recognizing dates after the year 1999), could result in claims against the Company. Although the Company maintains computer software and services errors and omissions insurance, a claim brought against the Company could have a material adverse effect on the Company's business, financial condition or results of operations. Moreover, an increasing number of the Company's installed base of VS and other traditional proprietary systems could choose to convert to other calendar year 2000 compliant systems in order to avoid such malfunctions. An increasing rate of conversion would accelerate the decline of revenue associated with such proprietary systems, and could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, the Company operates internal legacy systems and applications that contain year 2000 limitations. Initiatives are underway to replace existing systems and address existing year 2000 limitations. There can be no assurance that the conversion will be completed in a timely manner. In the course of providing complex, integrated solutions to customers, the Company frequently forms alliances with third parties that supply both hardware and software products and services. Future results of the Company will in part depend upon the performance and capabilities of these parties, including their ability to deal effectively with the year 2000 issue. The Company is evaluating the impact of the year 2000 compliance on its suppliers and is working with its suppliers and customers on resolving year 2000 compliance issues. Because the Company relies on the cooperation and assistance of its suppliers in addressing year 2000 matters, there remains a possibility that year 2000 problems experienced by its suppliers could have a material adverse impact on the Company's business and operating results. See "Year 2000" above. POSSIBLE VOLATILITY OF PRICE OF COMMON STOCK. The market price of the Company's Common Stock has fluctuated significantly in the past and may continue to fluctuate in the future. Factors such as announcements of acquisitions, technological innovations or other developments concerning the Company, its competitors or other third parties, quarterly variations in the Company's results of operations, non-recurring transactions and changes in overall industry and economic conditions may all affect the market prices of the Common Stock and cause it to fluctuate significantly. Moreover, the Company's expense levels are based in part on expectations of future revenue levels, and a shortfall in expected revenue could therefore have a disproportionate adverse effect on the Company's net income. Furthermore, the market prices of the stocks of many high technology companies have experienced wide fluctuations that have not necessarily been related to the operating performance of the individual companies. DEPENDENCE ON GOVERNMENT REVENUE. The years ended June 30, 1998 and 1997, the Company derived approximately 20% and 30%, respectively of its revenues from branches or agencies of the United States government, and derived significant additional revenues from agencies of various foreign governments. The Company expects that a significant portion of the revenue from the newly-acquired Olsy operations will be attributable to the sale of products and services to governments of other countries and their instrumentalities and agencies. A significant portion of the Company's U.S. and non-U.S. government revenues comes from orders under government contract or subcontract awards, which involves the risk that the failure to obtain or renew an award due to the change in ownership or other factors, or a delay on the part of the government agency in making the award or of ordering or paying for products or services under an awarded contract, could have a material adverse effect on the financial performance of the Company for the period in question. Other risks involved in government sales are the larger discounts (and thus lower margins) often involved in government sales, the unpredictability of funding for various government programs, and the ability of government agencies to unilaterally terminate the contract. Revenues from government of the United States and other foreign governments and their instrumentalities and agencies, are received under a number of different contracts and from a number of different contracting authorities. 27 28 INTERNATIONAL OPERATIONS. International revenues in recent years have accounted for a substantial portion of the Company's total revenues. As a result of the acquisition of Olsy, the Company expects to derive more than fifty percent of its revenue from affiliates operating outside of the United States. The Company's international entities are subject to all of the risks normally associated with international operations, including changes in regulatory compliance requirements, compliance costs associated with International Standards Organization (ISO) 9000 quality control standards, special standards requirements, exposure to currency fluctuations, exchange controls, tariffs and other barriers, difficulties in staffing and managing international subsidiary operations, potentially adverse tax consequences and country-specific product requirements. The introduction of the Euro may result in changes to business practices throughout Europe affecting pricing, systems and competition. While the Company attempts to reduce its currency exposure, there can be no assurance that it will not experience losses due to international currency fluctuations. The Company's results of operations could also be affected by economic conditions and changes in foreign countries and by macro-economic changes, including recession and inflation. For example, weakness in some Asian economies may have an adverse impact on the Company's business. In addition, effective intellectual property protection may not be available in every foreign country in which the Company distributes its own and other products and the loss of such protection could have a material adverse effect on the business of the Company. NATURE OF CONTRACTS. Some of the Company's contracts are for a fixed price and are long-term in duration, which subjects the Company to substantial risks relating to unexpected cost increases and other factors outside the control of the Company. Revenues and profits on such contracts are recognized using estimates and actual results, when known, may differ materially from such estimates. Additionally, some of the customer relationships in the international arena, particularly those acquired through the Olsy acquisition, are supported by periodic purchase orders in lieu of contracts of a predetermined duration. Revenues supported by purchase orders are often less predictable and may be jeopardized by the change of ownership of Olsy. Finally, IT outsourcing contracts in particular, often contain provisions that allow for termination for convenience, service level agreement compliance, liquidated damages and penalties and are awarded based on a competitive procurement process. Such contracts often require high pre-award expenditures and long lead times with no assurance of success. SUPERIOR RIGHTS OF PREFERRED STOCK. The Board of Directors of the Company is authorized under the Company's Certificate of Incorporation, without stockholder approval, to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred Stock"), in one or more series. Of the 5,000,000 authorized shares of Preferred Stock, 90,000 shares have been designated as 4 1/2% Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), all of which shares have been issued, and 143,750 shares have been designated as 6 1/2% Series B Cumulative Convertible Preferred Stock ("Series B Preferred Stock"), all of which shares have been issued. The rights of holders of Common Stock are subject to, and may be adversely affected by, the rights of holders of the Series A Preferred Stock and the Series B Preferred Stock and any other series of Preferred Stock that the Company may designate and issue in the future. In particular, before any payment or distribution is made to holders of Common Stock upon the liquidation, dissolution or winding-up of the Company, holders of both the Series A Preferred Stock and the Series B Preferred Stock are entitled to receive a liquidation preference of $1,000.00 per share, plus accrued and unpaid dividends. The holders of the Series A Preferred Stock and the Series B Preferred Stock also have various rights, preferences and privileges with respect to dividends, redemption, voting, conversion and registration under the Securities Act. MARKET RISK. The Company's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. The Company manages its exposures to changes in foreign currency exchange rates on certain intercompany and third party transactions denominated in foreign currency by entering into forward exchange contracts. The Company's risk management objective is to reduce its exposure to the effects of changes in future cash flows. To a certain extent, foreign currency exchange rate movements also affect the Company's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. The Company's foreign currency risk policies entail entering into foreign currency derivative instruments only to manage transaction risk, and not for speculative investments. Based on exposures on certain intercompany and third party transactions denominated in foreign currency which are anticipated in the September 1998 quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected cash flows. This analysis is dependent on actual transactions denominated in foreign currency exposures not being materially different from anticipated exposures. The effect of the hypothetical change in exchange rates does not take into account the affect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or other currencies. In reality, some currencies may weaken while others may strengthen. The Company also is exposed to changes in interest rates primarily from its revolving credit borrowings. The Company currently does not enter into interest rate derivative instruments to manage exposure to interest rate changes; however, management is considering hedging options in the future to mitigate exposure to interest rate changes. 28 29 AVAILABILITY OF FINANCING. The Company may need to raise additional funds through public or private debt or equity offerings in order to make other acquisitions and otherwise implement its strategy. The Company has recently entered into a $500 million secured credit facility in conjunction with the completion of the transaction with Olivetti. While the Company believes that the facility provides sufficient capital availability for the foreseeable future there can be no assurance that sufficient capital will be available on terms acceptable to the Company. 29 30 ANTI-TAKEOVER PROVISIONS. The Company's Certificate of Incorporation and By-laws and the Delaware General Corporation Law contain certain provisions which could have the effect of delaying or preventing transactions that might result in a change in control of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over the then-current market price, and may limit the ability of stockholders to approve transactions that they deem to be in their best interests. In addition, the Company has recently adopted a shareholder rights plan which is intended to deter coercive or unfair takeover tactics and to prevent a potential acquirer from gaining control of the Company without offering a fair price to all of the Company's shareholders which could have the same effect as the provisions referred to above. 30 31 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK MARKET RISK. The Company's earnings and cash flow are subject to fluctuations due to changes in foreign currency exchange rates. The Company manages its exposures to changes in foreign currency exchange rates on certain intercompany and third party transactions denominated in foreign currency by entering into forward exchange contracts. The Company's risk management objective is to reduce its exposure to the effects of changes in future cash flows. To a certain extent, foreign currency exchange rate movements also affect the Company's competitive position, as exchange rate changes may affect business practices and/or pricing strategies of non-U.S. based competitors. The Company's foreign currency risk policies entail entering into foreign currency derivative instruments only to manage transaction risk, and not for speculative investments. Based on exposures on certain intercompany and third party transactions denominated in foreign currency which are anticipated in the September 1998 quarter, a hypothetical 10% weakening of the U.S. dollar relative to all other currencies would not materially adversely affect expected cash flows. This analysis is dependent on actual transactions denominated in foreign currency exposures not being materially different from anticipated exposures. The effect of the hypothetical change in exchange rates does not take into account the affect this movement may have on other variables including competitive risk. If it were possible to quantify this competitive impact, the results could well be different than the sensitivity effects shown above. In addition, it is unlikely that all currencies would uniformly strengthen or weaken relative to the U.S. dollar or other currencies. In reality, some currencies may weaken while others may strengthen. The Company also is exposed to changes in interest rates primarily from its revolving credit borrowings. The Company currently does not enter into interest rate derivative instruments to manage exposure to interest rate changes; however, management is considering hedging options in the future to mitigate exposure to interest rate changes. 32 EXHIBIT C REPORT OF INDEPENDENT AUDITORS Board of Directors Wang Laboratories, Inc. We have audited the accompanying consolidated balance sheets of Wang Laboratories, Inc. and subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended June 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wang Laboratories, Inc. and subsidiaries at June 30, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As more fully discussed in Note A, under the caption Restatement the accompanying financial statements have been restated. Ernst & Young LLP Boston, Massachusetts August 12, 1998, except for Note A as to which the date is March 22, 1999 31 33 WANG LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
YEAR ENDED JUNE 30, -------------------------------- 1998 1997 1996 -------- -------- -------- (restated) Revenues Services $1,269.5 $ 963.9 $ 699.0 Products 617.5 304.5 314.9 -------- -------- -------- 1,887.0 1,268.4 1,013.9 -------- -------- -------- Costs and expenses Cost of services 998.0 734.4 480.7 Cost of products 496.5 226.6 216.5 Research and development 8.7 3.7 5.0 Selling, general and administrative 356.3 243.2 192.0 Amortization of intangibles - acquisition and fresh-start 208.7 47.0 34.5 Acquisition-related charges 52.6 35.0 -- Chapter 11-related charges (credits) -- 1.3 (3.3) Other restructuring charges 9.4 -- 2.2 -------- -------- -------- Total costs and expenses 2,130.2 1,291.2 927.6 -------- -------- -------- Operating income (loss) (243.2) (22.8) 86.3 -------- -------- -------- Other (income) expense Interest (income) expense, net 2.4 3.9 (3.9) Other income, net (8.1) (4.4) (4.7) -------- -------- -------- Total other income (5.7) (0.5) (8.6) -------- -------- -------- Income (loss) from continuing operations before income taxes and minority interests (237.5) (22.3) 94.9 Provision (benefit) for income taxes 13.4 (15.6) 31.4 -------- -------- -------- Income (loss) from continuing operations before minority interests (250.9) (6.7) 63.5 Minority interests in earnings of subsidiaries (0.7) -- -- -------- -------- -------- Income (loss) from continuing operations (251.6) (6.7) 63.5 Income (loss) from discontinued operations, net of taxes -- 76.6 (69.0) -------- -------- -------- Net income (loss) (251.6) 69.9 (5.5) Dividends and accretion on preferred stock (14.1) (14.1) (22.6) -------- -------- -------- Net income (loss) applicable to common stockholders $ (265.7) $ 55.8 $ (28.1) ======== ======== ======== Per share amounts Basic Continuing operations $ (6.54) $ (0.56) $ 1.13 Discontinued operations -- 2.06 (1.91) -------- -------- -------- Net income (loss) $ (6.54) $ 1.50 $ (0.78) ======== ======== ======== Diluted Continuing operations $ (6.54) $ (0.56) $ 1.07 Discontinued operations -- 2.06 (1.81) -------- -------- -------- Net income (loss) $ (6.54) $ 1.50 $ (0.74) ======== ======== ======== Shares used to compute per share amounts Basic 40.6 37.2 36.0 Diluted 40.6 37.2 38.0
See notes to the consolidated financial statements. 32 34 WANG LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, --------------------- (Dollars in millions) 1998 1997 -------- -------- (restated) Assets Current assets Cash and equivalents $ 225.0 $ 242.2 Accounts receivable, net 838.7 244.3 Inventories 168.3 14.5 Other current assets 202.7 53.6 -------- -------- Total current assets 1,434.7 554.6 Depreciable assets, net 214.1 123.0 Intangible assets, net 508.9 311.6 Other assets 91.7 45.6 -------- -------- Total assets $2,249.4 $1,034.8 ======== ======== Liabilities and stockholders' equity Current liabilities Borrowings due within one year $ 26.3 $ 63.3 Accounts payable 451.5 64.4 Accrued expenses and other current liabilities 742.2 231.3 Deferred service revenue 164.6 69.5 -------- -------- Total current liabilities 1,384.6 428.5 -------- -------- Long-term liabilities Debt 116.9 -- Other long-term liabilities 272.6 98.0 -------- -------- Total long-term liabilities 389.5 98.0 -------- -------- Commitments and contingencies Minority interest 6.6 -- -------- -------- Series A preferred stock 86.2 85.5 -------- -------- Stockholders' equity Series B preferred stock, $0.01 par value, 143,750 shares authorized and outstanding, liquidation preference of $143.8 million 138.3 138.3 Common stock, $0.01 par value, 100,000,000 shares authorized; 46,150,302 and 38,008,004 shares outstanding, respectively 0.5 0.4 Capital in excess of par value 525.1 291.4 Cumulative translation adjustment (19.1) (3.7) Accumulated deficit (262.3) (3.6) -------- -------- Total stockholders' equity 382.5 422.8 -------- -------- Total liabilities and stockholders' equity $2,249.4 $1,034.8 ======== ========
See notes to the consolidated financial statements. 33 35 WANG LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
YEAR ENDED JUNE 30, -------------------------------- 1998 1997 1996 -------- -------- -------- (restated) OPERATING ACTIVITIES Income (loss) from continuing operations $(251.6) $ (6.7) $ 63.5 Depreciation 74.0 67.6 45.9 Amortization 215.4 49.8 44.7 Gain on asset sales (8.7) (2.9) (2.3) Non-cash provision (benefit) for income taxes 9.7 (22.8) 30.7 Non-cash compensation expense -- 5.6 -- Acquisition-related charges 52.6 35.0 -- Chapter 11-related charges (credits) -- 1.3 (3.3) Other restructuring charges (credits) 9.4 -- 2.2 Payments for acquisition-related and other restructuring charges (59.6) (30.1) (44.5) ------- ------- ------- 41.2 96.8 136.9 ------- ------- ------- Changes in other accounts affecting operations Accounts receivable (19.1) 6.4 10.8 Inventories 21.5 6.6 7.1 Other current assets 22.4 3.7 3.6 Accounts payable and other current liabilities (63.5) (43.1) (48.1) Other (3.2) 4.1 3.0 ------- ------- ------- Net changes in other accounts affecting operations (41.9) (22.3) (23.6) ------- ------- ------- (0.7) 74.5 113.3 Proceeds from sale of discontinued operation, net -- 249.2 -- Cash used in discontinued operations (9.4) (35.8) (76.8) ------- ------- ------- Cash provided by (used in) operations (10.1) 287.9 36.5 ------- ------- ------- INVESTING ACTIVITIES Investment in depreciable assets (91.1) (55.0) (43.4) Investment in capitalized software -- -- (0.4) Proceeds from asset sales 25.6 10.4 5.0 Business acquisitions, net of cash acquired 8.4 (170.1) (49.8) Other (7.9) (0.2) (9.9) ------- ------- ------- Cash used in investing activities (65.0) (214.9) (98.5) ------- ------- ------- FINANCING ACTIVITIES Net borrowings under line-of-credit agreement 110.6 -- -- Net increase (decrease) in long-term borrowings 0.8 (0.1) (3.7) Net increase (decrease) in short-term borrowings (48.6) (0.3) (2.5) Proceeds from sale of preferred stock -- -- 138.3 Retirement of preferred stock -- -- (72.9) Proceeds from sale of common stock 11.9 9.7 5.2 Dividends paid on preferred stock (13.4) (13.4) (8.3) Other (1.8) 0.1 (0.8) ------- ------- ------- Cash provided by (used in) financing activities 59.5 (4.0) 55.3 ------- ------- ------- Effect of changes in foreign exchange rates on cash (1.6) (2.1) (0.4) ------- ------- ------- INCREASE (DECREASE) IN CASH AND EQUIVALENTS (17.2) 66.9 (7.1) CASH AND EQUIVALENTS AT BEGINNING OF YEAR 242.2 175.3 182.4 ------- ------- ------- CASH AND EQUIVALENTS AT END OF YEAR $ 225.0 $ 242.2 $ 175.3 ======= ======= =======
See notes to the consolidated financial statements. 34 36 WANG LABORATORIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
RETAINED CONVERTIBLE CAPITAL IN CUMULATIVE EARNINGS PREFERRED COMMON EXCESS OF TRANSLATION (ACCUMULATED (Dollars in millions) STOCK STOCK PAR VALUE ADJUSTMENT DEFICIT) TOTAL ----------- ------ --------- ----------- ------------ ------- Balance June 30, 1995 $ -- $0.3 $291.2 $ (0.5) $ (70.2) $220.8 Net loss (5.5) (5.5) Stock to be issued in business acquisition 5.0 5.0 Stock plans (604,007 shares) 0.1 5.1 5.2 Dividends and accretion on preferred stock (22.6) (22.6) Issuance of cumulative convertible preferred stock, net of issuance costs 138.3 138.3 Currency translation (0.3) (0.3) Other, net 2.2 2.2 ------ ---- ------ ------ ------- ------ Balance June 30, 1996 $138.3 0.4 278.7 (0.8) (73.5) 343.1 Net income 69.9 69.9 Warrant issued in relation to divestiture 5.0 5.0 Stock plans (1,322,638 shares) 21.8 21.8 Dividends and accretion on preferred stock (14.1) (14.1) Currency translation (2.9) (2.9) ------ ---- ------ ------ ------- ------ Balance June 30, 1997 138.3 0.4 291.4 (3.7) (3.6) 422.8 Net loss (restated) (251.6) (251.6) Stock and stock equivalents issued in business acquisition (restated) 0.1 229.6 229.7 Stock plans (892,298 shares) 11.1 11.1 Dividends and accretion on preferred stock (7.0) (7.1) (14.1) Currency translation (15.4) (15.4) ------ ---- ------ ------ ------- ------ Balance June 30, 1998 (restated) $138.3 $0.5 $525.1 $(19.1) $(262.3) $382.5 ====== ==== ====== ====== ======= ======
See notes to the consolidated financial statements. 35 37 WANG LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Investments in affiliated companies, owned more than 20% but not in excess of 50%, are recorded on the equity method. The Company completed the purchase of Olivetti Solutions ("Olsy"), the wholly-owned information technology ("IT") solutions and service subsidiary of Olivetti S.p.A. ("Olivetti") on March 17, 1998, except for Olivetti Corporation of Japan ("OCJ"), Olsy's subsidiary in Japan, which was completed April 7, 1998. Accordingly, the Company's Consolidated Statements of Operations and of Cash Flows include the results of Olsy and OCJ for the periods subsequent to their respective dates of acquisition. Certain amounts in previously issued financial statements have been reclassified to conform to current presentations. REVENUE RECOGNITION: The Company provides services under level-of-effort and fixed-price contracts. Under level-of-effort types of contracts, revenue is earned and billed as services are provided. For fixed-price contracts, revenue is recognized on the percentage-of-completion method. Anticipated contract losses are recognized in the period they are determined. Deferred revenue is recorded to the extent that billings exceed revenue recognized under service contracts and contracts accounted for under the percentage-of-completion method. Revenues from royalty agreements are recognized as earned over the contract term. Hardware and software revenues are recognized at time of shipment or delivery, provided collection is probable and there are no significant post-contract support obligations. If significant post-contract support obligations exist, then revenue is recognized over the period of such support arrangements. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include revenues and costs under long-term contracts, collectibility of accounts receivable, recoverability of depreciable assets, intangibles and deferred tax assets and the adequacy of acquisition-related, Chapter 11-related and restructuring reserves. Although the Company regularly assesses these estimates, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known. CASH AND EQUIVALENTS: Cash and equivalents include time deposits, certificates of deposit and repurchase agreements with original maturities of three months or less. Also included is restricted cash, totaling $9.2 million and $12.7 million at June 30, 1998 and 1997, respectively. These restricted cash balances generally relate to normal trade practices and arrangements and in the prior year also related to statutory reserves for the Company's insurance subsidiaries. CURRENCY TRANSLATION: For non-U.S. subsidiaries, which operate in a local currency environment, assets and liabilities are translated at period-end exchange rates, and income statement items are translated at the average exchange rates for the period. Translation adjustments are reported in a separate component of stockholders' equity, which also includes exchange gains and losses on certain intercompany balances of a long-term investment nature. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of temporary cash investments and trade receivables. The Company restricts investment of temporary cash investments to financial institutions with investment grade credit ratings. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company's worldwide customer base. Trade receivables include $100.4 million and $77.7 million at June 30, 1998 and 1997, respectively, due from the United States government and its agencies. Trade receivables from the Italian government and its agencies, which resulted from the acquisition of Olsy, were $169.0 million at June 30, 1998. FORWARD EXCHANGE CONTRACTS: The Company enters into forward exchange contracts as a hedge against certain intercompany transactions denominated in foreign currency. These financial instruments are designed to minimize exposure and reduce risk from exchange rate fluctuations in the regular course of business. Market value gains and losses are included in income as incurred and offset gains and losses on foreign currency assets or liabilities that are hedged. INVENTORIES: Inventories are stated at the lower of first-in, first-out cost or market. 36 38 INTANGIBLE ASSETS: Intangible assets, including those identified as a result of purchase accounting, and the related depreciable lives are as follows: Trademarks 1 year Patents 15 years Computer software 3-7 years Installed base - service 5-8 years License agreements 3-5 years Assembled workforce 7-10 years Goodwill 15-25 years The Company periodically evaluates the carrying value of intangible assets to determine if impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the assets. The impairment, if any, is measured by the difference between carrying value and estimated discounted future cash flows and is charged to expense in the period identified. Trademarks include rights to use the Olsy or Olivetti name obtained by the Company in connection with the Olsy acquisition in certain countries. Patents include legal costs related to successfully defending certain patents, and expenditures to maintain licenses and register new patents. The capitalized costs of patent defense are charged to expense in the period in which the patent defense is determined to be unsuccessful or the capitalized amount has no future value. Amortization is computed principally by use of the straight line method with the exception of computer software, which is amortized over the greater of (a) the ratio of current gross revenues for a product to total current and anticipated future gross revenues for that product or (b) the straight-line method. DEPRECIABLE ASSETS: Property, plant and equipment, and spare parts and rental equipment are stated at cost less accumulated depreciation. Depreciation is computed principally by use of the straight-line method. Depreciable lives are summarized as follows: Buildings and improvements 5 - 40 years Machinery and equipment 3 - 10 years Spare parts and rental equipment 3 - 5 years INCOME TAXES: The Company does not provide for U.S. federal income taxes on the undistributed earnings of its foreign subsidiaries since it intends to permanently reinvest these earnings in the growth of the business outside of the United States. EARNINGS PER SHARE: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share", which was required to be adopted for financial statements issued for periods ending after December 15, 1997. In accordance with this Statement, the Company has changed the method previously used to compute earnings per share and has restated prior periods. Basic earnings per share is calculated based on the weighted average number of common shares outstanding, including approximately 2.6 million shares which the Disbursing Agent under the Company's Reorganization Plan has been instructed to distribute. In addition, diluted earnings per share includes the effect of stock options and warrants, when dilutive. Income (loss) from continuing operations, for purposes of calculating basic and diluted earnings per share, has been adjusted by cumulative dividends and accretion related to the Company's preferred stock. RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial Accounting Standards Board (the "FASB") issued Statement No. 130, "Reporting Comprehensive Income", ("FAS 130") and Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information", ("FAS 131"). These recent accounting pronouncements have not been adopted by the Company, as permitted by the pronouncements. FAS 130 establishes standards for reporting and displaying comprehensive income and its components. FAS 131 establishes standards for the way public companies report information about operating segments in financial statements, and supersedes FAS 14, "Financial Reporting for Segments of a Business Enterprise", but retains the requirements to report information about major customers. FAS 130 and FAS 131 are effective for the Company in its next fiscal year. The Company does not believe the adoption of these Statements will have a material effect on the Company's financial statements. In June 1998, FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. The Company expects to adopt the new Statement effective January 1, 2000 and has not yet determined its impact. 37 39 NOTE A--RESTATEMENT Subsequent to the filing of its Annual Report on Form 10-K for the fiscal year ended June 30, 1998, the management of the Company and the Securities and Exchange Commission ("SEC") have had discussions with regard to the determination and allocation of the purchase price in connection with the Company's acquisition of Olsy. As a result of the discussions, which concluded March 1999, the Company has modified the valuation of the acquisition related consideration and the allocation of the related intangible assets. Additionally, the Company has modified the impairment losses recorded in fiscal 1998 on certain other long-lived assets to conform to the methodology recommended by the SEC. The accompanying financial statements and related amounts in the notes thereto have been restated to reflect these modifications. A summary of the modifications and the effects on the financial position on June 30, 1998 and results of operations for the fiscal year then ended follow. Restatement Related to Valuation of Olsy Consideration - Common Stock and Stock Appreciation Rights: The Company revised the values of the 8.75 million shares of common stock (of which 1.5 million are to be delivered upon shareholder approval) and the 5.0 million Stock Appreciation Rights ("SARs") issued to Olivetti as part of the consideration for Olsy (see Note B). The value of the shares previously recorded was based on the market value of the Company's common stock, discounted by 35% to reflect the restrictions contained in the Stock Purchase Agreement between the Company and Olivetti. The Company has adjusted the value to reflect a discount of 20% to a revised calculation of market value. The value of the common stock used to calculate the value of the SARs has been revised consistent with the new value per share of the common stock described above. Accordingly, the value of the consideration and additional paid-in capital was increased with a corresponding increase to intangible assets. Restatement Related to Acquired In-Process Research and Development: The Company has modified the methods used to value acquired in-process research and development ("IPR&D") and other intangible assets in connection with the Company's acquisition of Olsy. Initial calculation of value of the acquired IPR&D was based on the cost required to complete each project, the cash flows attributable to each project, and the selection of an appropriate rate of return to reflect the risk associated with the stage of completion of each project. Revised calculations are based on adjusted after-tax cash flows that give explicit consideration to the Staff's views on IPR&D as set forth in its September 15, 1998, letter to the American Institute of Certified Public Accountants including consideration of the stage of completion of the IPR&D as of the acquisition date and the view that IPR&D be valued on a fair market value basis versus a fair value basis in arriving at the valuation amount. As a result of these modifications the Company has decreased the amount of the purchase price allocated to acquired in-process research and development from $74.1 million to $18.1 million and increased goodwill by $56.0 million for the year ended June 30, 1998. Restatement Related to Impairment Losses on Long-Lived Assets: The Company revised the cashflow analysis made to determine impairment losses under Statement of Financial Accounting Standards No. 121, "Accounting for Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed of" ("FAS 121") to conform the assumptions to those used in allocating the Olsy purchase price. The impairment charges associated with the I-Net commercial outsourcing business were increased from $114.8 million to $130.7 million, and the impairment charges associated with the Bull installed contracts and assembled workforce were increased from $20.0 million to $26.3 million for the year ended June 30, 1998. 38 40 Restructuring Charges: As of June 30, 1998, the Company recorded $10.8 million of severance costs associated with workforce reduction in an acquired Olsy subsidiary as part of its purchase price allocation. Pursuant to discussions with the SEC, these costs have been excluded from the purchase price, and will be recognized as expense when they are incurred. A summary of the acquisition related adjustments follows (in millions):
RESTATED PREVIOUSLY REPORTED Cash, including transaction costs $ 90.2 $ 90.2 Common stock and stock equivalents 197.2 146.9 Stock appreciation rights 32.5 41.8 ------- ------- Total Consideration 319.9 278.9 Estimated fair value of net (assets) liabilities assumed 84.2 95.0 ------- ------- Excess of purchase price over net tangible assets acquired $ 404.1 $ 373.9 ======= =======
The excess of purchase price over the fair values of the net liabilities assumed has been restated as follows (in million):
RESTATED PREVIOUSLY REPORTED In-process research and development $ 18.1 $ 74.1 Capitalized Software 43.2 56.4 Trademarks 57.0 39.0 Goodwill 285.8 204.4 ------- ------- $ 404.1 $ 373.9 ======= =======
Summary of Effects of Restatements: The effects of the restatement related to acquired in-process research and development, impairment losses and restructuring charges resulted in the following impact on the Company's financial position at June 30, 1998 and the results of operations for the year then ended (in millions): 39 41 WANG LABORATORIES, INC. AND SUBSIDIARIES RESTATEMENT OF FINANCIAL STATEMENTS
Year Ended June 30, 1998 ---------- RESULTS FROM OPERATIONS: Loss from continuing operations before income taxes and minority interest as previously reported $(267.5) Adjustment related to acquired in-process research and development 56.0 Adjustment related to impairment losses (22.2) Adjustment related to restructuring charges -- Adjustment to amortization of intangible assets (3.8) ------- Restated $(237.5) ======= Net loss applicable to common stockholders as previously reported $(295.7) Adjustment related to acquired in-process research and development 56.0 Adjustments related to impairment losses (22.2) Adjustment related to restructuring charges -- Adjustment to amortization of intangible assets (3.8) ------- Restated net loss applicable to common stock $(265.7) ======= LOSS PER SHARE: As previously reported $ (7.29) Adjustment related to acquired in-process research and development 1.38 Adjustment related to impairment losses (0.55) Adjustment related to restructuring charges -- Adjustment to amortization of intangible assets (0.08) ------- Restated $ (6.54) =======
June 30, 1998 ---------- FINANCIAL POSITION: Intangible assets, net, as previously reported $ 448.7 Adjustment related to acquired in-process research and development 56.0 Adjustment related to impairment losses (22.2) Adjustment related to restructuring charges (10.8) Adjustment to amortization of intangible assets (3.8) Adjustment related to valuation of consideration for Olsy 41.0 ------- Restated $ 508.9 ======= Accrued expenses and other current liabilities, as reported $ 753.0 Adjustment related to restructuring charges (10.8) ------- Restated $ 742.2 ======= Capital in excess of par value, as previously reported $ 484.1 Adjustment related to valuation of consideration for Olsy 41.0 ------- Restated $ 525.1 ======= Accumulated deficit, as previously reported $(292.3) Adjustment related to acquired in-process technology 56.0 Adjustment related to impairment losses (22.2) Adjustment to amortization of intangible assets (3.8) ------- Restated $(262.3) =======
40 42 NOTE B -- BUSINESS ACQUISITIONS AND ACQUISITION-RELATED CHARGES BUSINESS ACQUISITIONS: Olsy On March 17, 1998, the Company completed the purchase of Olsy, the wholly-owned information technology solutions and service subsidiary of Olivetti, except for OCJ, which was completed April 7, 1998. Olsy's revenues for the calendar year ended December 31, 1997 were approximately $2.4 billion. In consideration for Olsy, the Company paid Olivetti $68.6 million in cash; 8.75 million shares of common stock (of which 1.5 million shares are to be delivered upon shareholder approval) with a value of $197.2 million at the time of issuance; 5.0 million stock appreciation rights ("SARs") which give Olivetti value for the increase in the market price of the Company's common stock above $30.00 per share at any time from March 2001 to March 2005 and are redeemable in cash or common stock at the Company's election and valued at $32.5 million; and the potential for an additional amount (an "earnout") of up to $56.0 million payable in the year 2000, subject to meeting mutually-agreed performance targets for the 24 months ended December 31, 1999. The value of the shares was recorded at a discount of 20% of the market value of the Company's common stock based on restrictions contained in the Stock Purchase Agreement between the Company and Olivetti. The value of the SARs was recorded based on the historical and implied volatility of the common stock, considering both the minimum guaranteed price and the restrictions on exercise inherent in the SARs. These values were supported by independent valuations. Neither the shares nor the SARs are registered, and are subject to a three-year restriction period. Until shareholder approval is obtained on the 1.5 million shares, the Company will pay Olivetti an incremental $2.6 million per year in quarterly installments. Settlement of the 1.5 million shares will be in cash if the shareholders do not approve the issuance. The earnout will be recorded at the time it becomes probable that a payment will be required and the amount can be reasonably estimated. Additionally, Olivetti has indemnified the Company against certain contingencies acquired by the Company as part of the transaction. The acquisition was accounted for using the purchase method of accounting in accordance with Accounting Principles Board No. 16, "Business Combinations" ("APB 16"). Under APB 16, purchase price allocations are made to the assets acquired and the liabilities assumed based on their respective fair values. A summary of the acquisition, follows (in millions): Cash, including transaction costs $ 90.2 Common stock and stock equivalents 197.2 Stock appreciation rights 32.5 ------ Total consideration 319.9 Estimated fair value of net (assets) liabilities assumed 84.2 ------ Excess of purchase price over net tangible assets acquired $404.1 ====== The excess of the purchase price over the fair value of the net liabilities assumed was $404.1 million and has been recorded based on a preliminary purchase price allocation including an accrued restructuring liability of $199.0 million. Finalization of the allocation of the purchase price to assets acquired and liabilities assumed is subject to appraisals, valuations, evaluations, settlements with labor representatives, and other analyses of the fair values of assets acquired and liabilities assumed. The purchase price allocation is based on the report of an independent appraiser and includes $18.1 million for acquired in-process research and development ("IPR&D") for projects that had not yet reached technological feasibility and had no future alternative uses. This allocation represents the estimated fair value based on the present value cash flows related to the IPR&D projects. Accordingly, these costs were charged to expense in the June 1998 quarter upon completion of the appraisal. Olsy's IPR&D value is comprised of one primary R&D program focused on operating on a Microsoft Distributed interNet Architecture for Financial Services ("Microsoft DNA FS"). This program is supported by several individual projects which include the introduction of certain new technologies. At the acquisition date, Olsy's IPR&D projects ranged in completion from 10% to 95%, and total continuing R&D commitments to complete the projects were expected to be approximately $11 million. Remaining development efforts for the Olsy programs are complex and include the development and advancement of advance software solutions. The value assigned to purchased IPR&D was determined by estimating the costs to develop the purchase in-process technologies into 41 43 commercially viable products, estimating the resulting cash flows from the projects and discounting the net cash flows to their present value. The revenue projections used to value the IPR&D projects are based on estimates of relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by the Company and its competitors. The rates utilized to discount the net cash flows to their present value were 25% based on consideration of the weighted average cost of capital adjusted for certain risks associated with the in-process technology. The excess of purchase price over the fair value of the net liabilities assumed of $404.1 million was allocated to specific intangible asset categories as follows (in millions): In-process research and development $ 18.1 Capitalized software 43.2 Trademarks 57.0 Goodwill 285.8 ------ $404.1 ====== Amortization of these intangibles for the period subsequent to the acquisition was $22.8 million. The Company has recorded a total of $199.0 million of restructuring and integration liabilities in connection with the purchase accounting in the Olsy acquisition, of which $138.6 million is workforce-related, $26.2 million is for facilities, and $34.2 million is for other. Under certain conditions, costs related to the acquired Olsy business will be accounted for as an additional cost of the acquisition at the time the formal plan of restructuring is completed. Integration-related costs attributable to Wang will be accounted for as charges to operations in the periods they are determined. In connection with the acquisition, on March 13, 1998, the Company entered into a multi-currency, revolving credit facility with Bankers Trust Company ("BTC") and certain other financial institutions. The five-year facility provides borrowings up to $500.0 million, including $200.0 million for letters of credit. For a more detailed description of this facility, please see Note G, Financing Arrangements. The following pro forma results of operations have been prepared as though the Olsy acquisition had occurred as of the beginning of the periods presented (in millions except per share data):
Year Ended ----------------------- June 30, 1998 1997 --------- --------- Revenues $3,527.7 $3,921.7 Loss from continuing operations $ (348.1) $ (228.0) Loss attributable to common stockholders $ (362.2) $ (242.1) Net loss per share applicable to common stockholders $ (7.69) $ (5.26)
I-NET On August 29, 1996, the Company acquired all of the outstanding shares of I-NET, pursuant to the Stock Purchase Agreement between the Company and the other stockholders of I-NET dated as of July 24, 1996, as amended on August 29, 1996. I-NET is a vendor-independent provider of outsourced network and desktop management services. These services include enterprise network integration and operations, network management, client/server technologies, local area network and wide area network communications and IT outsourcing. In consideration for the shares of I-NET, the Company paid the stockholders of I-NET $100.2 million in cash and issued one-year, interest-free notes in the total amount of $64.5 million. The Company discounted the notes at a rate of 8.0%, to $59.7 million for accounting purposes, and increased the principal balance through charges to interest expense through the settlement date. Through September 1997, the Company paid $36.3 million to the holders of the notes, including $2.2 million of interest. In 42 44 accordance with the terms of a final settlement of the notes reached November 13, 1997, the Company paid an additional $14.9 million, including $1.6 million of accrued interest, to the selling shareholders. The balance of $13.3 million was reversed in the three months ended December 31, 1997, of which $1.2 million was recorded as a reduction of interest expense and $12.1 million was recorded as an adjustment of the original purchase price. The acquisition was accounted for using the purchase method of accounting in accordance with APB 16. The excess of the purchase price over the net liabilities assumed was $219.5 million and will be amortized using the straight line method over a period of twenty-five years. A summary of the acquisition follows (in millions): Cash $100.2 Note to selling stockholders 47.4 Original investment in I-NET 12.4 Transaction costs 7.9 Stock options 4.9 ------ Total consideration 172.8 Estimated fair value of net (assets) liabilities assumed 46.7 ------ Excess of purchase price over net liabilities assumed $219.5 ======
The following pro forma results of operations have been prepared as though the I-NET acquisition had occurred as of the beginning of the periods presented. The pro forma information does not purport to be indicative of the results of operations that would have been attained had the combination been in effect on the dates indicated, nor of future results of operations of the Company (in millions, except per share data).
YEAR ENDED JUNE 30, -------------------- 1997 1996 --------- --------- Revenues $1,325.8 $1,356.7 Income (loss) from continuing operations $ (14.1) $ 9.7 Net income (loss) attributable to common stockholders $ 48.4 $ (81.9) Net income (loss) per share applicable to common stockholders $ 1.32 $ (2.28)
ACQUISITION-RELATED AND RESTRUCTURING CHARGES: During fiscal year 1998, the Company recorded integration and restructuring charges totaling $62.0 million, of which $38.8 million was recorded in the fourth quarter, and $23.2 million was recorded in the third quarter. Of the total charge, $52.6 million is recorded in Acquisition-related charges (including the $18.1 million charge for purchased in-process research and development discussed above) and $9.4 million is recorded in Other restructuring charges in the Consolidated Statements of Operations. Excluding the charge for purchased in-process research and development, the balance of the acquisition-related and restructuring charges reflect the costs associated with combining the operations of Wang and Olsy, in addition to the costs of other business realignment activities. These charges were recorded after certain actions had been identified, quantified and approved. The acquisition-related and other restructuring charges recorded in fiscal 1998 consist of the following (in millions): Workforce-related $14.4 Facilities 18.9 Depreciable assets 5.5 Other 5.1 ----- 43.9 In-process research and development 18.1 ----- Total $62.0 =====
Workforce-related charges, consisting principally of severance costs, were recorded based on specific identification of employees to be terminated, along with their job classifications or functions and their locations. The facilities-related charges for the Company's excess facilities were recorded to recognize the lower of the amount of the remaining lease obligations, net of any sublease rentals, or the expected lease settlement costs. These costs have been estimated from the time when the space is expected to be vacated when there are no plans to utilize the facility in the future. Costs incurred prior to vacating the facilities will be charged to operations. Depreciable asset-related charges were provided to recognize, at net realizable value, the write-down to disposal value of existing assets. The charge for in-process research and development consists of that portion of the purchase price allocated to acquired research and development which had not reached technological feasibility and has no alternative future use but which the Company expects to achieve technological feasibility. 43 45 Cash outlays to complete these and earlier initiatives, are estimated to approximate $185 million during the next 12 months and $18 million thereafter. As of June 30, 1998, approximately 1,600 employees had been released in the current fiscal year relative to these and previously recorded initiatives. Periodically, the accruals related to the acquisition-related charges are reviewed and compared to their respective cash requirements. As a result of those reviews, the accruals are adjusted for changes in cost and timing assumptions of previously approved and recorded initiatives. During fiscal 1998, review of these accruals identified $1.1 million of excess reserves, which were reversed in June 1998. During fiscal 1997, review of these accruals identified $1.0 million of excess reserves, which were reversed in June 1997. During the fiscal 1996 review of the acquisition-related accruals, the Company identified excess reserves of $2.8 million, primarily related to facilities and depreciable assets, as well as $2.8 million of additional severance requirements relative to the workflow and imaging R&D workforce in Paris acquired from Bull. The activity related to these charges during fiscal years 1998, 1997 and 1996 is summarized in the following table (in millions):
FISCAL 1996 ACTIVITY ------------------------------------------------------------------------------------------ CHARGES/ (REVERSALS) CHANGES IN BALANCE ESTIMATES BALANCE JUNE 30, AND NEW PURCHASE CURRENCY JUNE 30, 1995 INITIATIVES ACCOUNTING UTILIZATION OTHER TRANSLATION 1996 -------- ----------- ---------- ----------- ----- ----------- --------- Facilities $ 5.2 $ (0.9) $ -- $ (3.2) $ -- $(0.1) $ 1.0 Depreciable assets 8.8 22.0 -- (30.0) -- -- 0.8 Workforce-related 37.4 3.7 2.4 (26.6) -- (0.5) 16.4 Other 3.8 6.0 -- (4.5) 0.4 0.1 5.8 ----- ------ ------ ------ ----- ----- ------ 55.2 30.8(A) 2.4 (64.3) 0.4 (0.5) 24.0 Less amounts included in discontinued operations (2.0) (30.8) -- 30.8 -- -- (2.0) ----- ------ ------ ------ ----- ----- ------ Acquisition-related charges-continuing operations $53.2 $ -- $ 2.4 $(33.5) $ 0.4 $(0.5) $ 22.0 ===== ====== ====== ====== ===== ===== ======
FISCAL 1997 ACTIVITY ----------------------------------------------------------------------------- CHARGES/ (REVERSALS) CHANGES IN ESTIMATES BALANCE AND NEW PURCHASE CURRENCY JUNE 30, INITIATIVES ACCOUNTING UTILIZATION OTHER TRANSLATION 1997 ----------- ---------- ----------- ----- ----------- --------- Facilities $ 7.1 $ -- $ (1.4) $(0.1) $ -- $ 6.6 Depreciable assets 3.2 4.6 (4.4) (0.1) -- 4.1 Workforce-related 20.0 4.8 (18.1) 0.1 (0.6) 22.6 Other 6.4 1.0 (8.9) 0.3 -- 4.6 ------ ------ ------ ----- ----- ------ 36.7(A) 10.4 (32.8) 0.2 (0.6) 37.9 Less amounts included in discontinued operations (1.7) -- 3.7 -- -- -- ------ ------ ------ ----- ----- ------ Acquisition-related charges-continuing operations $ 35.0 $10.4 $(29.1) $ 0.2 $(0.6) $ 37.9 ====== ====== ====== ===== ===== ======
FISCAL 1998 ACTIVITY ------------------------------------------------------------------------------------------ CHARGES/(REVERSALS) CHANGES IN ESTIMATES AND NEW INITIATIVES ------------------------------ INTEGRATION- RESTRUCTURING AND NEW PURCHASE CURRENCY JUNE 30, CHARGES INITIATIVES ACCOUNTING UTILIZATION OTHER TRANSLATION 1998 -------- ------------ ---------- ----------- ----- ----------- --------- Facilities $ 0.3 $ 18.6 $ 26.2 $(15.3) $ 0.7 $(0.1) $ 37.0 Depreciable assets 0.1 5.4 13.8 (1.6) -- (0.1) 21.7 Workforce-related 8.0 6.4 138.6 (35.9) (6.0) (0.7) 133.0 Other 1.0 22.2 20.4 (24.6) 5.6 0.1 29.3 ----- ------ ------ ------ ----- ----- ------ Acquisition-related and restructuring charges $ 9.4(A) $ 52.6(A) $199.0 $(77.4) $ 0.3 $(0.8) $221.0 ===== ====== ====== ====== ===== ===== ======
44 46
1998 1997 1996 ------------------------------ ------- ------- INTEGRATION RESTRUCTURING RELATED (A) Comprised of: CHARGES CHARGES ------------- ----------- Increase in initial purchase price adjusted pursuant to SFAS 38 $ -- $ -- $ -- $ -- Decrease in initial purchase price adjusted pursuant to SFAS 38 -- -- -- -- Initial charges 9.4 53.7 37.7 30.8 Increases and overages of estimated integration accruals recognized in income -- -- -- 2.8 Reversals of estimated integration accruals recognized in income -- (1.1) (1.0) (2.8) ----- ------ ----- ------ $ 9.4 $ 52.6 $36.7 $ 30.8 ===== ====== ===== ======
45 47 The June 30, 1998 and 1997 balances of acquisition-related reserves are classified as follows (in millions):
JUNE 30, ---------------- 1998 1997 ------ ----- Depreciable assets $ 21.7 $ 4.1 Accounts payable, accrued expenses and other 181.2 26.0 Non-current liabilities 18.1 7.8 ------ ----- $221.0 $37.9 ====== =====
NOTE C -- DISCONTINUED OPERATIONS On March 17, 1997, the Company completed the sale of its software business unit to Kodak for $260.0 million in cash. The business sold to Kodak included Wang's software business unit management, employees, products, technology, customers and partners, as well as its sales, marketing and research and development organizations worldwide. As a result of the sale, the operations of the software business unit for all periods presented have been reclassified and reported as discontinued operations in the Consolidated Statements of Operations and of Cash Flows. Revenues, related income (loss) and income tax benefits associated with the software business unit for the years ended June 30, 1997 and 1996 were as follows (in millions):
YEAR ENDED JUNE 30, ------------------- 1997 1996 ------- ------- Revenues $ 47.0 $ 75.9 ====== ====== Operating loss, net of applicable tax benefits of $9.3 million and $20.4 million in 1997 and 1996, respectively $(36.2) $(69.0) Gain on sale, net of income tax expense of $75.2 million 112.8 -- ------ ------ Income (loss) from discontinued operations $ 76.6 $(69.0) ====== ======
NOTE D -- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in millions except per share data):
YEAR ENDED JUNE 30, ---------------------------- 1998 1997 1996 -------- ------- ------ Numerator: Income (loss) from continuing operations $(251.6) $ (6.7) $63.5 Dividends and accretion on 11% Exchangeable Preferred Stock (14.6) Dividends and accretion on Series A Preferred Stock (4.8) (4.8) (4.8) Dividends on Series B Preferred Stock (9.3) (9.3) (3.2) ------- ------ ----- Numerator for basic and diluted earnings per share - Income (loss) from continuing operations available to Common Shareholders $(265.7) $(20.8) $40.9 ======= ====== ===== Denominator: Denominator for basic earnings per share - weighted average shares 40.6 37.2 36.0 Effect of dilutive securities: Stock options -- -- 1.8 Stock warrants -- -- 0.2 ------- ------ ----- Dilutive potential common shares -- -- 2.0 ------- ------ ----- Denominator for diluted earnings per share- adjusted weighted-average shares and assumed conversions 40.6 37.2 38.0 ======= ====== ===== Basic earnings per share - continuing operations $ (6.54) $(0.56) $1.13 ------- ------ ----- Diluted earnings per share - continuing operations $ (6.54) $(0.56) $1.07 ======= ====== =====
Options to purchase approximately 6.6 million shares of common stock and warrants to purchase approximately 7.5 million shares of common stock were excluded from the computation of diluted earnings per share as their effect would be antidilutive. 46 48 In connection with the acquisition of Olsy, the Company issued to Olivetti 5,000,000 Stock Appreciation Rights ("SARs"). Each Right entitles Olivetti to receive from the Company an amount equal to the higher of (a) $4.00 or (b) the difference between the fair market value per share of Common Stock on the date of exercise and $30.00 (the "Strike Price"). The Company may pay such amount in either cash or shares of Common Stock. The SARs can be exercised any time from March 2001 to March 2005. The SARs were excluded from the computation of diluted earnings per share as their effect would be antidilutive. For additional disclosures regarding the Series A Preferred stock, the Series B Preferred stock, the stock options and the warrants, see Notes G and I, respectively. NOTE E -- OTHER BALANCE SHEET INFORMATION Components of other selected captions in the Consolidated Balance Sheet follow (in millions):
JUNE 30, ------------------ 1998 1997 ------ ------ Accounts receivable Billed $816.3 $226.2 Unbilled 43.3 36.0 ------ ------ 859.6 262.2 Less allowances 20.9 17.9 ------ ------ $838.7 $244.3 ====== ====== Inventories Finished products $ 63.3 $ 5.6 Raw materials and work-in-process 55.6 7.8 Service parts and supplies 49.4 1.1 ------ ------ $168.3 $ 14.5 ====== ====== Depreciable assets Land $ 7.0 $ 4.5 Buildings and improvements 103.0 25.0 Machinery and equipment 122.0 84.9 Spare parts 137.8 140.3 ------ ------ 369.8 254.7 Less accumulated depreciation 155.7 131.7 ------ ------ $214.1 $123.0 ====== ====== Intangible assets Trademarks $ 57.0 $ -- Patents 4.6 4.1 Computer software 43.5 0.3 Installed base - service 14.3 61.6 License agreements 6.4 6.3 Assembled workforce 2.2 13.9 Goodwill 428.2 266.1 ------ ------ 556.2 352.3 Less accumulated amortization 47.3 40.7 ------ ------ $508.9 $311.6 ====== ====== Accrued expenses and other current liabilities Accrued expenses $250.0 $126.5 Compensation and benefits 56.1 57.9 Restructuring, reorganization and acquisition-related 181.3 28.7 Warranty accruals 39.0 1.5 Income and other taxes 77.6 15.5 Other 138.2 1.2 ------ ------ $742.2 $231.3 ====== ====== Other long-term liabilities Postretirement $ 16.1 $ 16.8 Pension 94.3 7.1 Facilities 6.5 9.2 Restructuring, reorganization and acquisition-related 18.1 7.8 Insurance 7.7 5.6 Deferred compensation and benefits 99.0 -- Deferred taxes 21.2 22.1 Other 9.7 29.4 ------ ------ $272.6 $ 98.0 ====== ======
47 49 NOTE F - IMPAIRMENT LOSSES ON LONG-LIVED ASSETS In the first quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows, net of taxes, estimated to be generated by those assets are less than the carrying amount of the assets. In accordance with FAS 121, the Company periodically evaluates the carrying value of long-lived assets in relation to the operating performance and future undiscounted cash flows, net of taxes, of the underlying business. During the fourth quarter of fiscal 1998, the Company identified an impairment of the goodwill associated with the commercial outsourcing portion of I-NET, based upon estimated undiscounted cash flows, net of taxes, over the remaining useful life of the asset. The impairment was the result of significantly lower than expected revenue and margin growth in the post acquisition period which are currently projected to grow at a rate insufficient to recover the carrying value of the related goodwill. The cash flows associated with the I-NET commercial outsourcing business were discounted at the Company's weighted average cost of capital over the remaining useful life of the asset and resulted in a charge of $130.7 million to amortization expense. The remaining net asset of $2.3 million associated with the commercial outsourcing business, and $69.2 million associated with the Federal Business, which is not impaired, will be amortized over its remaining useful life based on current projections and the Company's plans for this business. Also during the fourth quarter of fiscal 1998, the Company identified an impairment of the installed customer service base and assembled workforce acquired in the Bull HN Information Systems acquisition based upon estimated undiscounted cash flows over the remaining useful life of the assets. The impairment was the result of an accelerated decline rate for the proprietary GCOS revenue and gross margin stream acquired from Bull due to Year 2000 issues and market changes as customers migrate from main frame systems to networked technology. The cash flows, net of taxes, associated with the installed customer service base and assembled workforce acquired in the Bull purchase were discounted at the Company's weighted average cost of capital over the remaining useful life of the asset and resulted in charges of $21.4 million and $4.9 million respectively. The remaining balance of $9.4 million relating to the installed customer service base and of $2.2 million relating to the assembled workforce will be amortized over 4.25 years and 6.75 years, respectively, based on current projections of the decline rate. During the third quarter of fiscal 1998, the Company identified an impairment of the value of the assembled workforce at BISS U.K. based upon the faster than expected attrition of the acquired workforce. A charge of $1.8 million was taken in the third quarter, and there is no remaining value associated with the acquired workforce. The writedown of the I-NET, Bull and BISS assets is included with Amortization of intangibles - acquisition and fresh-start in the Consolidated Statements of Operations for the year ended June 30, 1998. In fiscal 1997, the Company evaluated the ongoing value of certain software licenses and the related goodwill that were the result of the Bull acquisition, and determined that assets with a carrying amount of $21.3 million were impaired and wrote them down by $14.4 million to their carrying value of $6.9 million. In order to determine the carrying value of these assets, the Company discounted future cash flows at the Company's weighted average cost of capital. The impairment is due to an accelerated conversion by a major client to other systems which became evident in February 1997. The writedown of these assets is included with Amortization of intangibles - acquisition and fresh-start in the Consolidated Statements of Operations for the year ended June 30, 1997. The Company periodically evaluates the carrying value of long-lived assets in relation to the operating performance and future undiscounted cash flows, net of taxes, of the underlying business. While the Company believes that its long-lived assets are currently stated at appropriate carrying values, significant changes in future operating and business conditions could result in material impairment writedowns in the future. NOTE G -- FINANCING ARRANGEMENTS SERIES A PREFERRED STOCK: On May 30, 1995, the Company issued to Microsoft Corporation 90,000 shares ($90.0 million face amount) of 4 1/2% Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), redeemable on October 1, 2003 or within 180 days of a written request of the holders thereof received by the Company at any time on or after May 30, 2002 at $1,000.00 per share plus accrued and unpaid dividends. Redemption and liquidation preference of the preferred stock is $90.0 million. The excess of the redemption value over the initial carrying value of $84.0 million is being accreted by periodic charges to retained earnings over the life of the issue, or, in the absence of retained earnings, to capital in excess of par value. 48 50 The Series A Preferred Stock is convertible into Common Stock of the Company at $23.00 per share, subject to adjustment in the event of a subdivision or combination of the Common Stock. The stockholders of the Series A Preferred Stock are entitled to one vote per share. Cash dividends of $45.00 per annum per share are payable quarterly in arrears. The Company may redeem the Series A Preferred Stock with cash or with Common Stock. BORROWING ARRANGEMENTS: Borrowings due consisted of (in millions):
JUNE 30, ---------------- 1998 1997 ------ ----- Revolving Credit Facility $110.6 $ -- Capital lease obligations 32.6 -- Notes payable to former shareholders of I-NET, non-interest bearing, paid November 1997 -- 63.3 ------ ----- 143.2 63.3 Less current maturities 26.3 63.3 ------ ----- $116.9 $ -- ====== =====
Interest paid amounted to $8.1 million, $2.9 million and $2.4 million for the years ended June 30, 1998, 1997 and 1996 and is primarily related to notes payable to selling shareholders of acquired businesses and to the revolving credit facility described below. The weighted average interest rate on borrowings outstanding at June 30, 1998 was 7.03%. On March 13, 1998, the Company entered into a revolving credit facility with Bankers Trust Company ("BTC") and certain other financial institutions. The five-year facility provides borrowings up to $500.0 million, including $200.0 million of borrowing capacity to support letters of credit. Interest on the borrowings is based on the LIBOR rate plus 0.75% to 1.50%, depending on the Company's leverage ratio. Fees and expenses associated with the new facility amounted to $7.2 million in fiscal 1998, approximately $3.5 million of which was charged to interest expense in the third quarter, representing that portion of the facility used to replace the existing $225.0 million facility. The BTC agreement contains various financial covenants, including covenants relating to the Company's operating results, working capital, net worth and level of indebtedness. The Company was in compliance with these covenants as of June 30, 1998. In addition to providing financing for the Olsy acquisition, the credit facility will be used for general corporate purposes. As of June 30, 1998, borrowings of $110.6 million and letters of credit aggregating $8.8 million were outstanding under the agreement. The financing is secured by substantially all of the Company's domestic assets and partial pledges of selected international subsidiaries. NOTE H -- INCOME TAXES Pretax income/(loss) from continuing operations is as follows (in millions):
YEAR ENDED JUNE 30, ---------------------------------- 1998 1997 1996 -------- -------- -------- Domestic $(227.7) $ (49.8) $ 56.0 Foreign (9.8) 27.5 38.9 ------- ------- ------- Total $(237.5) $ (22.3) $ 94.9 ======= ======= =======
The provision for income taxes consisted of (in millions):
YEAR ENDED JUNE 30, ---------------------------------- 1998 1997 1996 -------- -------- -------- Continuing operations $ 13.4 $ (15.6) $ 31.4 Discontinued operations -- 65.9 (20.4) ------- ------- ------- Net income tax provision $ 13.4 $ 50.3 $ 11.0 ======= ======= =======
49 51 The income tax provision (benefit) from continuing operations consists of the following:
YEAR ENDED JUNE 30, ---------------------------------- 1998 1997 1996 -------- -------- -------- Current: Federal $ 0.1 $ 3.5 $ -- Non-US 3.6 2.2 0.7 State -- 1.5 -- Deferred: Federal -- (23.3) 20.4 Non-US 9.7 4.6 -- State -- (4.1) -- Change in valuation allowance -- -- (2.5) Tax benefit applied to reduce reorganization value in excess of amounts allocated to identifiable intangible assets and goodwill -- -- 12.8 ------- ------- ------- $ 13.4 $ (15.6) $ 31.4 ======= ======= =======
The provisions (benefit) for income taxes from continuing operations differed from the amount computed by applying the U.S. federal statutory rate as follows (in millions):
YEAR ENDED JUNE 30, ---------------------------------- 1998 1997 1996 -------- -------- -------- Taxes at statutory rate of 35% $ (83.1) $ (7.8) $ 33.2 Amortization of excess reorganization value -- 0.9 2.4 Non-deductible expenses 60.1 1.8 2.0 Foreign tax differential 2.2 (0.6) 0.7 State taxes -- (2.6) -- Loss carryforwards not currently utilizable 36.0 1.7 3.7 Loss carryforwards utilized (4.2) (6.7) (5.3) Change in Valuation allowance -- -- (2.5) Other, net 2.4 (2.3) (2.8) ------- ------- ------- $ 13.4 $ (15.6) $ 31.4 ======= ======= =======
The significant components of deferred tax assets and liabilities are as follows (in millions):
YEAR ENDED JUNE 30, --------------------- 1998 1997 -------- -------- Net operating loss and credit carryforwards $ 667.7 $ 477.2 Accrued restructuring expenses 91.0 43.7 Capitalized research and development expenses 2.1 8.3 Depreciation 34.1 17.8 Provision for doubtful accounts 13.3 -- Other 41.0 52.1 ------- ------- Gross deferred tax assets 849.2 599.1 ------- ------- Goodwill and other acquired intangibles (10.9) (12.7) Other (32.5) (57.8) ------- ------- Gross deferred tax liabilities (43.4) (70.5) ------- ------- Valuation allowance (772.2) (488.5) ------- ------- Net deferred tax asset $ 33.6 $ 40.1 ======= =======
The decrease in the net deferred tax asset balance during fiscal 1998 was due primarily to the utilization of net operating losses in connection with operating income earned in certain foreign locations. Although realization is not assured, management believes that the net deferred tax asset will be realized. The estimate of future taxable income relates to the Company's operations outside the United States which have, in the past, consistently generated a level of taxable income similar to the amounts of future taxable income necessary to realize the net deferred tax asset. In addition, the Company has tax planning strategies to prevent tax net operating loss carryforwards from expiring unused. The amount of deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 50 52 Under fresh start reporting, any tax benefits for cumulative temporary differences and tax basis net operating loss carryforwards existing at September 30, 1993, will not reduce the tax provision for income taxes, but instead, have reduced reorganization value in excess of amounts allocated to identifiable intangible assets to zero, and thereafter will increase capital in excess of par value. Tax benefits which are substantially recognized through a reduction in the valuation allowance will be recorded as follows (in millions):
YEAR ENDED JUNE 30, ------------------------------- 1998 1997 1996 ------- ------- ------- Reorganization value in excess of amounts allocated to identifiable assets $ -- $ -- $ 13.7 Goodwill and other non-current intangible assets 111.9 -- 65.5 Capital in excess of par value 360.7 325.4 298.3 Income tax benefit to be reported in the Statement of Operations 299.6 163.1 145.2 ------- ------- ------- $ 772.2 $ 488.5 $ 522.7 ======= ======= =======
If the Company experiences a change in ownership within the meaning of Section 382 of the Internal Revenue Code, an annual limitation will be placed upon the Company's ability to realize the benefit of its U.S. net operating loss carryforwards. U.S. federal income taxes have not been provided on approximately $184.7 million, $125.0 million and $119.4 million of earnings on non-U.S. subsidiaries at June 30, 1998, 1997 and 1996, respectively, since such amounts are considered to be permanently reinvested. At June 30, 1998, the Company and its subsidiaries have tax basis net operating loss carryforwards of approximately $1.7 billion and tax credit carryforwards of approximately $72.1 million that are available to offset future taxable income. Tax basis loss carryfowards and tax credit carryforwards expire as follows (in millions):
2004 1999 2000 2001 2002 2003 & BEYOND ------ ----- ----- ------ ------ -------- U.S. tax basis loss carryforwards $ -- $ -- $ -- $103.8 $153.6 $457.7 Non-U.S. tax loss carryforwards $104.3 $81.9 $58.8 $ 69.3 $ 98.7 $541.4 Investment tax credits and R&D tax credit carryforwards $ 26.3 $20.7 $13.8 $ 3.4 $ 4.2 $ 3.7
Net taxes paid amounted to $5.7 million for the year ended June 30, 1998, $6.7 million for the year ended June 30, 1997 and $0.9 million for the year ended June 30, 1996. NOTE I -- STOCKHOLDERS' EQUITY SERIES C PREFERRED STOCK: On April 22, 1998, the Company declared a dividend distribution of one Right for each outstanding share of Common Stock to stockholders of record at the close of business on May 1, 1998. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series C Junior Participating Preferred Stock (the "Series C preferred Stock"), par value $0.01 per share, at a purchase price of $120.00, subject to adjustment. Initially, the Rights will be attached to all Common Stock certificates representing shares then outstanding, and no separate Rights Certificates will be distributed. The Rights will separate from the Common Stock and a Distribution Date will occur within a predetermined time after the occurrence of one of several specific Triggering Events. The Rights are not exercisable until the Distribution Date and will expire at the close of business on April 22, 2008, unless earlier redeemed or exchanged by the Company. Until a Right is exercised, the holder thereof will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. SERIES B PREFERRED STOCK: On February 27, 1996, the Company completed a private placement of 2,875,000 Depositary Shares, each representing a 1/20 interest in a share of 6 1/2% Series B Cumulative Convertible Preferred Stock (the "Series B Preferred Stock"), $0.01 par value per share, for $138.3 million, net of issuance costs. Each share of Series B Preferred Stock is convertible at the option of the holder into Common Stock of the Company at a conversion price of $26.5625 per share of Common Stock subject to adjustment for dividends payable in Common Stock, the issuance of rights or warrants to purchase Common Stock, the subdivision, combination or reclassification of Common Stock and the distribution of other assets to all the holders of Common Stock. Upon 51 53 conversion, the Series B Preferred Stock is convertible into a total of 5.4 million shares of Common Stock. The Series B Preferred Stock may not be redeemed before March 1, 1999. Thereafter, the Series B Preferred Stock may be redeemed at the option of the Company, in whole or in part, at specified redemption prices plus accrued and unpaid dividends. Each Depositary Share entitles the holder to 1/20th of one vote. Cash dividends are cumulative at the rate of $65.00 per annum per share ($3.25 per annum per Depositary Share) payable quarterly in arrears. COMMON STOCK: The Company's authorized Common Stock consists of 100 million shares, $0.01 par value per share. Holders of the Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. The common stockholders are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors. No dividends have been paid to date. The rights, preferences and privileges of holders of the Common Stock are subject to, and may be adversely affected by, the rights of holders of shares of the outstanding Series A and Series B Preferred Stock, as well as any other series of preferred stock that the Company may designate and issue in the future. STOCK WARRANTS: In satisfaction of the interests of the Class B and C common stockholders of the Predecessor Company, 7.5 million warrants, less an amount allocated for certain disputed claims, were made available for issuance to stockholders of the Predecessor Company as of September 29, 1993. The Company began issuance of these warrants on March 17, 1995. Each warrant entitles its holder to purchase one share of Common Stock for an exercise price of $21.45 per share, and expires on June 30, 2001. The exercise price was set in such a manner as to allow the creditors who are issued Common Stock in the reorganization to recover an estimated 95 percent of the value of their allowed claims before the exercise price of the warrants equals the trading price of the Common Stock. Holders of the Class B and C Common Stock received one warrant for each 24 shares of stock of the Predecessor Company. STOCK APPRECIATION RIGHTS: In connection with the acquisition of Olsy, the Company issued to Olivetti 5,000,000 Stock Appreciation Rights ("SARs") which give Olivetti value for the increase in the market price of the Company's common stock above $30.00 per share at any time from March 2001 to March 2005. The SARs are redeemable in cash or common stock at the Company's election. At the time of issuance, the SARs were valued at $32.5 million. In connection with the sale of its software business to Kodak, the Company issued to Microsoft a stock appreciation right ("SAR") to purchase 1,000,000 shares of Common Stock at an exercise price of $23.00 per share, exercisable at any time beginning 90 days after the closing and expiring on the redemption date of the Series A Preferred Stock. If and when exercised, the SAR will be closed out on a net share basis. STOCK OPTIONS: The Company has a series of stock incentive option plans for directors and eligible employees on terms and vesting schedules as may be set from time to time by the Organization, Compensation, and Nominating Committee of the Board of Directors. Options granted to date generally vest ratably over three to four years from the date of the grant provided the employee continues to be employed by the Company, and expire seven or ten years after the date of the grant. 1995 EMPLOYEES' STOCK PURCHASE PLAN: On January 25, 1995, the Company's stockholders approved the 1995 Employees' Stock Purchase Plan (the "1995 Plan"). As amended, the 1995 Plan permits purchases on a voluntary basis by eligible employees of up to 809,607 shares of Common Stock of the Company. Employees of the U.S. parent company and designated subsidiaries, but excluding any officers with the rank of vice president or above of the parent company, are eligible to participate in the 1995 Plan. The purchase price is 85% of the market price of the Common Stock on the first business day or the last business day of that payment period, whichever is lower. PRO FORMA ACCOUNTING FOR STOCK-BASED COMPENSATION: In the first quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"). FAS 123 encourages companies to adopt the fair value method of accounting for employee stock options. Under this method, compensation expense for stock-based compensation plans is measured at the grant date based on the fair value of the award and is recognized over the service period. In accordance with FAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized as long as the exercise price equals the market price of the underlying stock on the date of grant. 52 54 Pro forma information regarding net income and earnings per share is required by FAS 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to June 30, 1995 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998: risk-free interest rates ranging from 5.40% to 6.06%; dividend yield of 0%; volatility factor of the expected market price of the Company's common stock of 39%; and weighted average expected life of 3.8 years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
YEAR ENDED JUNE 30, -------------------------------- 1998 1997 1996 -------- ------- ------- Pro forma income (loss) (in millions) Continuing operations $(257.7) $(13.4) $ 60.8 Net income $(257.7) $ 63.3 $ (8.2) Pro forma earnings (loss) per share Basic Continuing operations $ (6.69) $(0.45) $ 1.05 Net income $ (6.69) $ 1.31 $(0.85) Diluted Continuing operations $ (6.69) $(0.32) $ 1.05 Net income $ (6.69) $ 1.30 $(0.85) Weighted average fair value of options granted during the period $ 8.25 $ 8.56 $ 6.36
During the initial phase-in period, the effects of applying FAS 123 for recognizing compensation expense may not be representative of the effects on reported net income or loss for future quarters or years because the options granted by the Company vest over several years and additional awards may be made in future years. Presented below is a summary of the status of the stock option plans and the related transactions:
YEAR ENDED JUNE 30, ------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES PRICE SHARES PRICE SHARES PRICE --------- -------- --------- -------- --------- -------- Options outstanding at beginning of year 5,987,055 $14.68 4,601,997 $12.45 3,453,001 $ 9.73 Granted 2,190,800 $23.07 2,820,143 $17.62 2,175,750 $15.66 Exercised 756,279 $11.93 773,033 $11.28 598,472 $ 8.41 Canceled 461,973 $17.27 662,052 $15.97 428,282 $12.20 --------- ------ --------- --------- Options outstanding at end of year 6,959,603 $17.53 5,987,055 $14.68 4,601,997 $12.45 ========= ====== ========= ========= Options exercisable at end of year 3,101,432 1,958,781 1,039,665 ========= ========= =========
At June 30, 1998, 1997 and 1996, 2,914,047, 373,930 and 1,942,421 shares, respectively, were available for future grants under stock option plans. 53 55 The following table summarizes information about stock options outstanding at June 30, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------- -------------------- WEIGHTED- AVERAGE REMAINING WEIGHTED- WEIGHTED- CONTRACTUAL AVERAGE AVERAGE LIFE EXERCISE EXERCISE RANGE OF EXERCISE PRICES SHARES (YEARS) PRICE SHARES PRICE - ------------------------ --------- ----------- --------- --------- --------- $ 0.07 - $ 0.07 60,293 8.2 $ 0.07 50,858 $ 0.07 $ 0.96 - $ 0.96 1,830 5.3 $ 0.96 457 $ 0.96 $ 7.35 - $10.22 644,280 5.5 $ 7.44 644,280 $ 7.44 $11.15 - $16.63 1,851,472 6.9 $13.59 1,504,723 $13.43 $16.88 - $25.18 3,878,228 7.7 $20.15 901,114 $18.68 $26.31 - $30.94 523,500 6.8 $26.51 -- -- --------------- --------- --- ------ --------- ------ $ 0.07 - $30.94 6,959,603 7.2 $17.52 3,101,432 $13.49 ========= =========
NOTE J - POSTRETIREMENT BENEFITS DEFINED BENEFIT PLANS (U.S.): The Company has two frozen defined benefit plans in the United States. As a result of freezing all future benefits under both U.S. plans, no increase in compensation is assumed for either plan subsequent to the dates that the plans were frozen. The Company also has two non-frozen defined benefit plans in the U.S. related to the Olsy acquisition. Amounts related to the Olsy plans are included in the 1998 amounts. U.S. net pension cost (credits) consisted of (in millions):
YEAR ENDED JUNE 30, ----------------------------- 1998 1997 1996 ------- ------ ------- Service cost $ 0.6 $ -- $ 0.6 Interest cost 8.5 7.7 7.0 Actual return on assets (19.9) (8.7) (10.3) Other, net 9.3 (0.1) 3.0 ------ ----- ------ $ (1.5) (1.1) $ 0.3 ====== ===== ======
The funded status of the U.S. plans was (in millions):
JUNE 30, ------------------- 1998 1997 -------- ------- Fair value of plan assets $ 144.5 $114.4 Projected benefit obligation (159.5) (99.3) ------- ------ Plan assets greater (less) than projected benefit obligation (15.0) 15.1 Unrecognized net (gain) loss 6.5 (13.8) Unrecognized net transition asset (0.4) (0.5) ------- ------ Prepaid (accrued) pension costs $ (8.9) $ 0.8 ======= ====== Accumulated benefits $ 156.2 $ 99.3 ======= ====== Vested benefits $ 155.8 $ 99.3 ======= ======
DEFINED BENEFIT PLANS (FOREIGN): The Company has various defined benefit plans in foreign countries, including several in connection with the Olsy acquisition. The Company's international subsidiaries maintain defined benefit pension plans that provide plan benefits primarily based on the employee's compensation during the last years before retirement and the number of years of service. The Company has plans under which funds are deposited with trustees, annuities are purchased under group contracts, or reserves are provided. In certain countries the funding of pension plans is not a common practice, consequently, the Company has pension plans which are under-funded. Amounts related to the Olsy acquisition are included in the 1998 amounts effective from the date of acquisition. 54 56 Non-U.S. net pension cost (credits) consisted of (in millions):
YEAR ENDED JUNE 30, --------------------------------- 1998 1997 1996 -------- -------- -------- Service cost $ 3.2 $ 0.4 $ 1.9 Interest cost 5.0 1.2 2.4 Actual return on assets (6.4) (3.5) (3.7) Other, net 2.6 2.3 0.4 ------- ------- ------- $ 4.4 $ 0.4 $ 1.0 ======= ======= =======
The funded status of non-U.S plans was (in millions):
ENDED JUNE 30, ----------------------------------- 1998 1997 ------------------------ -------- ASSETS ACCUMULATED EXCEED BENEFITS ACCUMULATED EXCEED BENEFITS ASSETS ----------- ----------- Fair value of plan assets $ 244.1 $ 49.4 $ 16.7 Projected benefit obligation (237.5) (108.9) (16.5) ------- ------- ------- Plan assets in excess (deficiency) over projected benefit obligation 6.6 (59.5) 0.2 Unrecognized net (gain) loss (3.7) 0.6 3.3 ------- ------- ------- Prepaid (accrued) pension costs $ 10.3 $ (60.1) $ (3.1) ======= ======= ======= Accumulated benefits $ 206.0 $ 95.1 $ 15.9 ======= ======= ======= Vested benefits $ 163.9 $ 39.2 $ 12.7 ======= ======= =======
The net accrued pension costs at June 30, 1998 is primarily related to a certain non-U.S. pension plan assumed in connection with the Olsy transaction. In connection with the Stock Purchase Agreement between the Company and Olivetti, Olivetti has agreed to reimburse the Company, at a time stipulated in the agreement, for the net after tax amount of such unfunded liability. During 1997, the Company converted four of its defined benefit pension plans related to its Australian and Canadian subsidiaries to defined contribution plans. The accrued benefits for plan members were transferred to the defined contribution plans. A net gain of $1.1 million was recognized for the curtailment and settlement of the plans. The following assumptions were used to measure the projected benefit obligation for the defined benefit pension plans:
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 ------------------ ------------------ ------------------ U.S. NON-U.S. U.S. NON-U.S. U.S. NON-U.S. PLANS PLANS PLANS PLANS PLANS PLANS ----- ---------- ----- ---------- ----- ---------- Discount rate 7.0% 2.4%-14.0% 8.25% 6.3%-12.0% 8.0% 6.8%-12.0% Average increase in compensation levels 4.0% 1.9%-11.5% 0.0% 3.0%- 9.0% 0.0% 7.5%-12.0% Expected long-term rate of return for plan assets 9.5% 4.0%-16.0% 9.0% 8.0%-12.0% 8.0% 7.5%-12.0%
Plan assets consist principally of equity and fixed income investments. Annual cost is determined using the projected unit credit actuarial method. DEFINED CONTRIBUTION PLANS: The Company has several defined contribution plans which cover substantially all employees in the United States and certain non-U.S. subsidiaries. Contributions are generally based on fixed amounts of eligible compensation ("Basic Contribution"). The Company may make an additional contribution when its operating income exceeds 4% of revenue, which is based on a percentage of the Basic Contribution. No additional contribution was made by the Company in any of the years ended June 30, 1998, 1997 or 1996. The Company's expense for U.S. and non-U.S. plans totaled $9.9 million for the year ended June 30, 1998, $13.8 million for the year ended June 30, 1997 and $9.6 million for the year ended June 30, 1996. Non-U.S. employees are covered by defined contribution and/or defined benefit pension plans in several countries, in accordance with applicable government regulations and local practices. 55 57 ITALIAN TFR: Under Italian law, deferred compensation accrues in favor of employees and agents which they (or in the case of their death, their heirs) are entitled to collect upon termination of employment or under certain other circumstances. The amount payable related to each year's services is calculated on the basis of the renumeration for that year and will be subject to annual revaluations based on increases in the Italian cost-of-living index. Included in other liabilities as of June 30, 1998 is approximately $92 million, which is unfunded. NOTE K - INDUSTRY, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION INDUSTRY SEGMENT INFORMATION: The Company operates primarily in one industry segment, which includes providing customers in approximately 140 countries with information technology services, including electronic commerce, software application integration, network architecture, design and consulting services, network integration, network security management, help desk support, maintenance and installation, warranty and procurement. GEOGRAPHIC INFORMATION: Transfer prices to non-U.S. sales subsidiaries, combined with supplemental commission and expense reimbursement arrangements, are intended to produce profit margins commensurate with the sales and service effort associated with the products sold, and are comparable to prices charged to unaffiliated distributors. SIGNIFICANT CUSTOMER: The Company had revenues from the U.S. government and its agencies of approximately $383 million, $385 million and $228 million for the years ended June 30, 1998, 1997 and 1996, respectively. The majority of these revenues were in the United States geographic area. Certain information on a geographic basis follows (in millions):
YEAR ENDED JUNE 30, ----------------------------------- 1998 1997 1996 ---------- ------------ --------- Revenues from unaffiliated customers: United States, including direct export sales $ 893.9 $ 858.9 $ 537.6 Other Americas 86.8 69.4 63.8 Europe/Africa/Middle East 689.9 216.5 251.1 Asia/Pacific 216.4 123.6 161.4 --------- --------- --------- $ 1,887.0 $ 1,268.4 $ 1,013.9 ========= ========= ========= Interarea transfers: United States $ 10.5 $ 14.8 $ 13.9 Other Americas 0.2 -- -- Europe/Africa/Middle East -- 0.3 0.1 Asia/Pacific 0.7 0.1 -- --------- --------- --------- $ 11.4 $ 15.2 $ 14.0 ========= ========= ========= Income (loss) from continuing operations before income taxes and minority interests: United States $ (228.5) $ (52.2) $ 46.8 Other Americas 8.1 6.1 10.0 Europe/Africa/Middle East (1.4) 17.4 18.3 Asia/Pacific (15.7) 6.4 19.8 --------- --------- --------- $ (237.5) $ (22.3) $ 94.9 ========= ========= =========
The income (loss) from continuing operations before income taxes for the years ended June 30, 1998, 1997 and 1996 included $62.0 million, $36.3 million and $(1.1) million, respectively, of net acquisition-related, Chapter 11-related and restructuring charges (credits).
JUNE 30, --------- -------- 1998 1997 --------- -------- Identifiable assets (excluding intercompany): United States $ 791.4 $ 732.3 Other Americas 59.6 44.1 Europe/Africa/Middle East 1,244.4 204.5 Asia/Pacific 168.9 53.9 Eliminations and other (14.9) -- -------- -------- $2,249.4 $1,034.8 ======== ========
56 58 NOTE L -- COMMITMENTS AND CONTINGENCIES LEASES: Rental expense for the three fiscal years ended June 30, 1998, 1997 and 1996 was $45.1 million, $33.8 million and $28.2 million respectively. Future minimum lease commitments on noncancelable operating leases and sublease income are as follows (in millions):
YEAR ENDED JUNE 30, ------------------------------------------------ 1999 2000 2001 2002 2003 THEREAFTER ----- ----- ----- ----- ----- ---------- Future minimum lease commitments on noncancelable leases $72.5 $54.1 $33.9 $19.8 $13.3 $47.5 Future minimum sublease income $ 9.4 $ 4.4 $ 3.7 $ 2.8 $ 2.1 $ 5.7
These future minimum lease commitments include approximately $56 million, net of sublease income, related to facilities the Company has elected to abandon in connection with the restructuring and acquisition-related initiatives. FOREIGN CURRENCY GAINS (LOSSES): Foreign currency exchange and translation gains or losses were insignificant for the years ended June 30, 1998, 1997 and 1996. FORWARD EXCHANGE CONTRACTS: The Company had no forward exchange contracts at either June 30, 1998 or 1997. Market risk arises from fluctuation of currency rates during the period that contracts are outstanding. LITIGATION: Prior to its filing for Chapter 11 protection in August of 1992, from which it successfully emerged in September of 1993, the Company was a defendant in a number of other lawsuits arising from the conduct of its business. Substantially all such suits were stayed while the Company operated under Chapter 11. Claims in such suits relating to periods prior to the Company's filing under Chapter 11 are being extinguished and, to the extent allowed, have been provided for under the Reorganization Plan. The Company also is subject to other legal proceedings and claims which arise in the ordinary course of its business. Although the Company is not in a position to predict accurately the results of specific matters, the Company does not currently believe that its liability, if any, for all litigation will be material to the Company's consolidated financial position, results of operations, or cash flows. NOTE M -- FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, forward exchange contracts, long- and short-term debt, warrants, stock appreciation rights and preferred stock. The carrying amounts reported in the balance sheets for cash and cash equivalents, forward exchange contracts and long and short-term debt approximate their fair value. The fair value of the Company's publicly traded warrants is determined by the closing price on a nationally recognized exchange. The fair value of the warrants was approximately $63.0 million and $45.1 million at June 30, 1998 and 1997, respectively. The carrying value of the Company's Series A Preferred Stock approximates fair value at June 30, 1998 and 1997. The fair value of the Company's SARs is determined by the Black Scholes pricing (with assumptions consistent to those shown in Note I). The fair value of the SARs was approximately $50 million and $5 million at June 30, 1998 and 1997, respectively. NOTE N -- REORGANIZATION AND RESTRUCTURING EXPENSES Reorganization expenses relate to the reorganization and restructuring of the Company in connection with its emergence from Chapter 11 and the implementation of its Reorganization Plan. In conjunction with its emergence from Chapter 11, an accrual of $17.8 million was recorded, representing the estimated amount of the Predecessor Company's liabilities that would be settled in cash. 57 59 The activity related to the accruals for reorganization and restructuring activities accruals is summarized in the following table (in millions):
FISCAL 1996 ACTIVITY --------------------------------------------------------- CHARGES/ (REVERSALS) CHANGES IN BALANCE ESTIMATES BALANCE JUNE 30, AND NEW CURRENCY JUNE 30, 1995 INITIATIVES UTILIZATION TRANSLATION 1996 -------- ----------- ----------- ----------- -------- Accrued reorganization $ 1.4 $(1.1) $ (0.3) $ -- $ -- Chapter 11 accounts payable 2.4 (2.2) -- -- 0.2 Restructuring Facilities 10.2 3.3 (7.0) -- 6.5 Depreciable Assets 3.7 0.1 (3.0) (0.2) 0.6 Workforce-related 3.6 (0.2) (2.2) (0.1) 1.1 Other 6.4 (1.0) (3.5) -- 1.9 ----- ----- ------ ----- ----- Reorganization and restructure-related accruals $27.7 $(1.1)(A) $(16.0) $(0.3) $10.3 ===== ===== ====== ===== =====
FISCAL 1997 ACTIVITY --------------------------------------------------------- CHARGES/ (REVERSALS) CHANGES IN BALANCE ESTIMATES BALANCE JUNE 30, AND NEW CURRENCY JUNE 30, 1996 INITIATIVES UTILIZATION TRANSLATION 1997 -------- ----------- ----------- ----------- -------- Accrued reorganization $ -- $ 1.3 $ (1.3) $ -- $ -- Chapter 11 accounts payable 0.2 -- -- -- 0.2 Restructuring Facilities 6.5 -- (4.0) -- 2.5 Depreciable Assets 0.6 -- (0.6) -- -- Workforce-related 1.1 -- (1.1) -- -- Other 1.9 -- (1.5) -- 0.4 ----- ----- ------ ----- ----- Reorganization and restructure-related accruals $10.3 $ 1.3(A) $ (8.5) $ -- $ 3.1 ===== ===== ====== ===== =====
FISCAL 1998 ACTIVITY --------------------------------------------------------- CHARGES/ (REVERSALS) CHANGES IN BALANCE ESTIMATES BALANCE JUNE 30, AND NEW CURRENCY JUNE 30, 1996 INITIATIVES UTILIZATION TRANSLATION 1998 -------- ----------- ----------- ----------- -------- Accrued reorganization $ -- $ -- $ -- $ -- $ -- Chapter 11 accounts payable 0.2 -- (0.1) -- 0.1 Restructuring Facilities 2.5 -- (2.5) $ -- -- Depreciable Assets -- -- -- -- -- Workforce-related -- -- -- -- -- Other 0.4 -- -- -- 0.4 ----- ----- ------ ----- ----- Reorganization and restructure-related accruals $ 3.1 $ --(A) $ (2.6) $ -- $ 0.5 ===== ===== ====== ===== =====
58 60 (A) Comprised of:
1996 1997 1998 ----- ---- ---- Initial provisions for reorganization and restructuring actions $ -- $ -- $-- Increases due to changes in reorganization or restructuring plans Decreases due to changes in reorganization or restructuring plans (2.2) Increases and overages of estimated costs of plans 3.4 Incremental costs related to ongoing Chapter 11 administration 1.3 Reversals of estimated costs of plans (2.3) ----- ---- --- $(1.1) $1.3 $-- ===== ==== ===
Periodically, the accruals related to the reorganization and restructure-related charges are reviewed and compared to their respective 59 61 requirements. As a result of those reviews, the accruals are adjusted for changes in cost and timing assumptions of previously approved and recorded initiatives. No adjustments for changes in estimates were required during fiscal 1998. At June 30, 1997, an additional charge of $1.3 million for incurred incremental Chapter 11-related expense was recorded. During fiscal 1996, a review of the Chapter 11-related accruals identified $1.1 million of excess reorganization reserves and $2.2 million of excess Chapter 11 accounts payable accruals which were reversed and reported as Chapter 11-related charges in the statements of operations. The Company determined the amount of excess reorganization reserves to be reversed by reviewing its requirements for reserve utilization, primarily related to litigation and bankruptcy administration, and reversing the balance of the reserve identified as excess as a result of this analysis. The Chapter 11 accounts payable excess reserves related primarily to trade vendor liabilities discharged with lower cash payment requirements than originally anticipated. Additionally, review of the restructure accruals during fiscal 1996 identified net additional facilities change in estimate charge of $3.3 million was required due to the Company's lack of success in subleasing certain properties or otherwise terminating its leases in Europe. This charge is included in the line "Other restructuring charges (credits)" in the Consolidated Statements of Operations. The June 30, 1998 and 1997 balances of the restructuring accruals are classified as follows (in millions):
JUNE 30, -------------- 1998 1997 ---- ---- Depreciable assets $ -- $ -- Accounts payable, accrued expenses and other -- 2.5 Liabilities of businesses held for sale 0.4 0.4 Non-current liabilities -- -- ---- ---- $0.4 $2.9 ==== ====
60 62 (Dollars in millions except per share data)
THREE MONTHS ENDED ------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30* ------------ ----------- -------- --------- YEAR ENDED JUNE 30, 1998 Revenues $ 312.2 $ 338.9 $ 402.6 $ 833.3 Costs 246.0 260.9 318.3 669.3 Expenses 49.8 54.7 93.7 166.8 Amortization of intangibles - acquisition 6.3 6.3 8.5 187.6 Acquisition-related charges (credits) -- -- 14.0 38.6 Restructuring charges (credits) -- -- 9.2 0.2 ------- ------- ------- ------- Operating income (loss) 10.1 17.0 (41.1) (229.2) Interest and other (income) expense - net (7.7) (2.4) 3.8 0.6 Provision (benefit) for income taxes 6.4 7.0 -- -- ------- ------- ------- ------- Net income (loss) 11.4 12.4 (44.9) (230.5) Dividends and accretion - preferred stock (3.5) (3.6) (3.5) (3.5) ------- ------- ------- ------- Net income (loss) applicable to common stockholders $ 7.9 $ 8.8 $ (48.4) $(234.0) ======= ======= ======= ======= Net income (loss) per share: Basic $ 0.21 $ 0.23 $ (1.22) $ (5.08) ======= ======= ======= ======= Diluted $ 0.20 $ 0.22 $ (1.22) $ (5.08) ======= ======= ======= ======= YEAR ENDED JUNE 30, 1997 Revenues $ 272.7 $ 342.4 $ 315.1 $ 338.2 Costs 196.1 261.0 242.9 261.0 Expenses 50.8 52.9 81.2 62.0 Amortization of intangibles - acquisition and fresh-start 9.0 10.5 22.7 4.8 Acquisition-related charges (credits) 27.4 -- 8.6 (1.0) Chapter 11-related charges (credits) -- -- -- 1.3 Other restructuring charges (credits) -- -- -- -- ------- ------- ------- ------- Operating income (loss) (10.6) 18.0 (40.3) 10.1 Interest and other (income) expense - net -- 1.6 2.7 (4.8) Provision (benefit) for income taxes 1.7 1.3 (21.1) 2.5 ------- ------- ------- ------- Income (loss) from continuing operations (12.3) 15.1 (21.9) 12.4 Income (loss) from discontinued operations (14.1) (10.6) 101.3 -- ------- ------- ------- ------- Net income (loss) (26.4) 4.5 79.4 12.4 Dividends and accretion - preferred stock (3.5) (3.5) (3.6) (3.5) ------- ------- ------- ------- Net income (loss) applicable to common stockholders $ (29.9) $ 1.0 $ 75.8 $ 8.9 ======= ======= ======= ======= Net income (loss) per share: Basic Continuing operations $ (0.43) $ 0.32 $ (0.69) $ 0.24 Discontinued operations (0.39) (0.29) 2.74 -- ------- ------- ------- ------- Net Income $ (0.82) $ 0.03 $ 2.05 $ 0.24 ======= ======= ======= ======= Diluted Continuing operations $ (0.43) $ 0.30 $ (0.69) $ 0.23 Discontinued operations (0.39) (0.27) 2.74 -- ------- ------- ------- ------- Net income (loss) $ (0.82) $ 0.03 $ 2.05 $ 0.23 ======= ======= ======= =======
* The operating results for the quarter ended June 30, 1998 have been restated to reflect certain modifications as described in Note A to the accompanying consolidated financial statements. 61 EX-12.1 2 CALCULATIONS OF RATIO OF EARNINGS PER SHARE 1 EXHIBIT 12.1 - CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions except ratios)
Predecessor Company ------------ Year Year Year Year Nine months Three months ended June 30, ended June 30, ended June 30, ended June 30, ended June 30, September 30, 1998 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- ------------ (Restated) FIXED CHARGES Interest expense $ 10.4 $ 10.9 $ 5.1 $ 3.7 $ 3.5 $ 1.2 Portion of rent expense representative of interest 15.0 9.4 9.4 5.9 5.6 2.7 ------- ------ -------- ----- ----- ----- 25.4 20.3 14.5 9.6 9.1 3.9 Preferred dividend requirement 23.5 23.5 37.7 14.5 8.7 -- ------- ------ -------- ----- ----- ----- Combined fixed charges and preferred dividend $ 48.9 $ 43.8 $ 52.2 $24.1 $17.8 $ 3.9 ======= ====== ======== ===== ===== ===== EARNINGS Income (loss) from continuing operations before income taxes, discontinued operations, minority interest, fresh-start reporting adjustment and extraordinary item $(237.5)(1) $(22.3)(2) $ 94.9(3) $ 6.9(4) $18.4 $(8.5) Fixed charges per above 25.4 20.3 14.5 9.6 9.1 3.9 ------- ------ -------- ----- ----- ----- $(212.1) $ (2.0) $ 109.4 $16.5 $27.5 $(4.6) ======= ====== ======== ===== ===== ===== Ratio of earnings to combined fixed charges and preferred dividends -- -- 2.1 -- 1.5 -- ======= ====== ======== ===== ===== ===== Coverage deficiency $(261.0) $(45.8) -- $(7.6) -- $(8.5) ======= ====== ======== ===== ===== =====
(1) Includes $62.0 million of acquisition-related, restructuring and Chapter 11 charges. (2) Includes $36.3 million of acquisition-related, restructuring and Chapter 11-related charges. (3) Includes $1.1 million of acquisition-related, restructuring and Chapter 11-related credits. (4) Includes $62.1 million of acquisition-related, restructuring and Chapter 11-related charges. EX-23.1 3 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-73210), pertaining to the Company's Stock Incentive Plan, 1993 Employees' Stock Grant Plan, Employees' Stock Purchase Plan and Senior Management Stock Distribution Plan, the Registration Statement (Form S-8 No. 33-75350), pertaining to the Company's 1993 Directors' Stock Option Plan, the Registration Statement (Form S-8 No. 33-89910), pertaining to the Company's 1995 Director Stock Option Plan, the Registration Statement (Form S-8 No. 33-89912), pertaining to the Company's Employees' Stock Incentive Plan, the Registration Statement (Form S-8 No. 33-89914), pertaining to the Company's 1995 Employees' Stock Purchase Plan, the Registration Statement (Form S-8 No. 333-01333), pertaining to the Company's Employees' Stock Incentive Plan, the Registration Statement (Form S-8 No. 333-01335), pertaining to the Avail Systems Corporation 1991 Incentive Stock Plan, the Registration Statement (Form S-3 and Form S-3/A No. 333-06611) of Wang Laboratories, Inc. and the related Prospectus, the Registration Statement (Form S-8 No. 333-12963), pertaining to the I-NET, Inc. Key Employee Stock Option Plan, the Registration Statement (Form S-8 No. 333-12943), pertaining to the I-NET, Inc. 1996 Stock Incentive Plan, the Registration Statement (Form S-3 and Form S-3/A No. 333-19789), of Wang Laboratories, Inc. Common Stock, the Registration Statement (Form S-8 No. 333-26661), pertaining to Wang Laboratories, Inc. Common Stock, the Registration Statement (Form S-8 No. 333-26635), pertaining to the I-NET Inc. Key Employee Stock Option Plan, the Registration Statement (Form S-8 No. 333-26637), pertaining to the I-NET Inc. 1996 Stock Incentive Plan, the Registration Statement (Form S-3 and Form S-3/A no. 333-27969), of Wang Laboratories, Inc. pertaining to a warrant for Common Stock, the Registration Statement (Form S-3 and Form S-3/A No. 333-27971), of Wang Laboratories, Inc. Common Stock, the Registration Statement (Form S-8 No. 333-46075) pertaining to the Company's 1995 Employees' Stock Purchase Plan, the Registration Statement (Form S-8 No. 333-46079) pertaining to the Company's Employees' Stock Incentive Plan, the Registration Statement (Form S-8 333-46081) pertaining to the Company's 1995 Director Stock Option Plan, and the Registration Statement (Form S-8 No. 333-46103) pertaining to the Company's Short-Term Incentive Compensation Plan of our report dated August 12, 1998 except for Note A as to which the date is March 22, 1999, included in the Annual Report (Form 10-K) for the year ended June 30, 1998, with respect to the consolidated financial statements and schedule of Wang Laboratories, Inc., as amended, included in this Form 10-K/A. Ernst & Young LLP Boston, Massachusetts April 5, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS, NOTE E-OTHER BALANCE SHEET INFORMATION, MANAGEMENT'S DISCUSSION AND ANALYSIS, NOTE E-OTHER BALANCE SHEET INFORMATION AND SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K/A, AMENDMENT NO. 1 TO FORM 10-K FOR THE YEAR ENDED JUNE 30, 1998. 1,000 U.S. DOLLARS YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 1 225,000 0 859,600 20,900 168,300 1,434,700 369,800 155,700 2,249,400 1,384,600 143,200 86,200 138,300 500 243,700 2,249,400 617,500 1,887,000 496,500 1,494,500 279,400 9,600 10,400 (237,500) 13,400 (251,600) 0 0 0 (251,600) (6.54) (6.54) PP&E COST AND ACCUMULATED DEPRECIATION INCLUDE CAPITALIZED NONCONSUMABLE SPACES INVENTORY. OTHER COSTS AND EXPENSES INCLUDE $62.0 MILLION OF ACQUISITION-RELATED AND RESTRUCTURING CHARGES.
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