FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended October 1, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5296
Digital Equipment Corporation
(Exact name of registrant as specified in its charter)
Massachusetts 04-2226590
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
146 Main Street, Maynard, Massachusetts 01754
(Address of principal executive offices) (Zip Code)
(508) 493-5111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Number of
shares of Common Stock, par value $1, outstanding as of October 1,
1994: 142,746,524.
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DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Three-Month Period Ended
----------------------------
October 1, October 2,
1994 1993
------------ -------------
REVENUES
Product sales................................. $ 1,652,651 $ 1,557,004
Service and other revenues.................... 1,469,821 1,457,944
------------ -------------
TOTAL OPERATING REVENUES...................... 3,122,472 3,014,948
------------ -------------
COSTS AND EXPENSES
Cost of product sales......................... 1,230,666 981,415
Service expense and cost of other revenues.... 948,672 943,877
Research and engineering expenses............. 287,788 314,717
Selling, general and administrative expenses.. 836,367 872,207
------------ -------------
Operating loss................................ (181,021) (97,268)
Interest income............................... 7,026 17,213
Interest expense.............................. 16,726 19,636
------------ -------------
LOSS BEFORE INCOME TAXES ..................... (190,721) (99,691)
PROVISION FOR INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE...... 4,352 3,536
------------ -------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE...................... (195,073) (103,227)
Cumulative effect of change in accounting
principle.................................... (64,503) 51,026
------------ -------------
NET LOSS...................................... $ (130,570) $ (154,253)
Dividends on preferred stock.................. 8,875 -
------------ -------------
NET LOSS APPLICABLE TO COMMON STOCK (1)....... $ (139,445) $ (154,253)
============ =============
PER COMMON SHARE
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE........................ $ ( 1.44) $ ( 0.76)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................... .46 ( 0.38)
------------ -------------
NET LOSS APPLICABLE PER COMMON SHARE.......... $ ( 0.98) $ ( 1.14)
============ =============
2
(1) Net loss per share is based on the weighted average number of
common shares outstanding during each period: 141,609,402 shares for the
three months ended October 1, 1994 and 135,010,377 shares for the three
months ended October 2, 1993. See page 8 of this report.
Cash dividends on common stock have never been paid by the
Corporation.
The accompanying notes are an integral part of these financial statements.
3
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DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
October 1, July 2,
1994 1994
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 881,160 $ 1,180,863
Accounts receivables, net of allowances
of $126,326 and $111,925................... 2,883,129 3,318,854
Inventories
Raw materials.............................. 669,374 476,172
Work-in-process............................ 572,109 605,503
Finished goods............................ 1,056,683 982,303
------------ -------------
Total inventories............................ 2,298,166 2,063,978
Prepaid expenses and deferred income taxes... 353,666 324,676
------------ -------------
TOTAL CURRENT ASSETS......................... 6,416,121 6,888,371
------------ -------------
Property, plant and equipment, at cost....... 6,964,174 7,020,889
Less accumulated depreciation................ 3,885,235 3,891,400
------------ -------------
Net property, plant and equipment............ 3,078,939 3,129,489
Other assets................................. 471,287 561,911
------------ -------------
TOTAL ASSETS................................. $ 9,966,347 $ 10,579,771
============ =============
The accompanying notes are an integral part of these financial statements.
4
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October 1, July 2,
1994 1994
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and current portion
of long-term debt.......................... $ 9,011 $ 32,614
Accounts payable............................. 976,594 1,197,350
Income taxes payable......................... 15,247 20,753
Salaries, wages and related items............ 628,704 619,756
Deferred revenue and customer advances....... 1,141,053 1,239,792
Accrued restructuring costs.................. 1,125,915 1,351,075
Other current liabilities.................... 661,124 594,925
------------ ------------
TOTAL CURRENT LIABILITIES.................... 4,557,648 5,056,265
Noncurrent deferred income taxes............. 4,758 4,758
Long-term debt............................... 1,010,729 1,010,680
Postretirement & postemployment
benefits.................................... 1,246,898 1,228,269
------------ ------------
TOTAL LIABILITIES............................ 6,820,033 7,299,972
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value;
authorized 25,000,000 shares;
4,000,000 shares of Series A 8-7/8%
Cumulative Preferred Stock issued and
outstanding................................. 4,000 4,000
Common stock, $1 par value; authorized
450,000,000 shares, 142,746,524 and
142,287,078 shares issued and outstanding... 142,747 142,287
Additional paid-in capital................... 3,395,540 3,390,040
Retained deficit............................. (395,973) (256,528)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................... 3,146,314 3,279,799
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $ 9,966,347 $10,579,771
============ ============
The accompanying notes are an integral part of these financial statements.
5
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DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three-Month Period Ended
---------------------------
October 1, October 2,
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ (130,570) $ (154,253)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation................................. 132,432 144,386
Amortization................................. 18,024 30,174
Net gain on disposition of
investments and other assets............... (16,900) -
Other adjustments to net loss................ 16,271 29,365
Decrease in accounts receivable.............. 435,725 161,420
Increase in inventories...................... (234,188) (165,683)
(Increase)/decrease in prepaid expenses...... (31,551) 22,012
Decrease in accounts payable................. (220,756) (90,025)
Decrease in taxes........................ (5,506) (36,898)
Increase in salaries, wages, benefits
& related items............................ 27,577 148,398
Decrease in deferred revenues &
customer advances.......................... (98,739) (86,060)
Decrease in accrued restructuring costs...... (225,160) (180,299)
Increase/(decrease) in other current
liabilities................................ 27,885 (69,571)
------------ ------------
Total adjustments............................ (174,886) (92,781)
------------ ------------
Net cash flows from operating activities..... (305,456) (247,034)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment.. (117,671) (167,001)
Proceeds from the disposition of property,
plant, and equipment....................... 10,800 47,964
Investment in other assets................... (8,556) (14,130)
Proceeds from the disposition of other
assets..................................... 153,379 -
------------ ------------
Net cash flows from investing activities..... 37,952 (133,167)
------------ ------------
Net cash flows from operating and
investing activities....................... (267,504) (380,201)
------------ ------------
The accompanying notes are an integral part of these financial statements.
6
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt........... - 12,950
Payments to retire debt...................... (23,784) (14,154)
Issuance of preferred, common and treasury
shares, including tax effects.............. 460 12,040
Dividends paid............................... (8,875) -
------------ ----------
Net cash flows from financing activities..... (32,199) 10,836
------------ ----------
Net increase/(decrease) in cash and cash
equivalents................................ (299,703) (369,365)
Cash and cash equivalents at the
beginning of the year...................... 1,180,863 1,643,195
---------- -------------
Cash and cash equivalents at end of period... $ 881,160 $ 1,273,830
============ =============
The accompanying notes are an integral part of these financial statements.
7
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DIGITAL EQUIPMENT CORPORATION
COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
Three-Month Period Ended
------------------------------
October 1, October 2,
1994 1993
-------------- -------------
Net loss applicable to common and
common equivalent shares.................... $ (139,445) $ (154,253)
============== =============
Weighted-average number of common shares
outstanding during the period............... 141,609,402 135,010,377
Common stock equivalents from application
of "treasury stock" method to exercised and
outstanding stock options................... 0 0
-------------- -------------
Total weighted-average number of common
and common equivalent shares outstanding
during the period........................... 141,609,402 135,010,377
============== =============
Net loss per common and common
equivalent share.............................$ (0.98) $ (1.14)
============== =============
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
DIGITAL EQUIPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Accounting Policies
Certain prior years' amounts have been restated to conform with current
year presentation. In the first quarter of fiscal 1994, the Corporation
recorded a one-time benefit of $20 million related to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for
Income Taxes. The Corporation also recorded a one-time charge to income of
$71 million related to the adoption of SFAS No. 112 - Employers' Accounting
for Postemployment Benefits.
Note B - Restructuring Actions
During the first quarter, the Corporation incurred costs of approximately
$180 million for employee separations and $45 million for facilities and
other costs. Cash expenditures during the quarter were approximately $202
million for employee separations and $33 million for facilities and other
costs. As a result of restructuring actions, approximately 2,500 employees
were separated from the Corporation during the first quarter of fiscal
1995.
Note C - Investing Activities
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 115 - Accounting for Certain Investments in Debt and Equity Securities,
effective July 3, 1994. SFAS No. 115 expands the use of fair value
accounting for certain debt and equity securities. The Corporation
recorded a one-time benefit of $65 million, or $0.46 per common share, in
the first quarter from unrealized gains on long-term investments.
During the quarter, the Corporation sold all of its shares of Ing. Olivetti
& C. S.p.A. common stock for approximately $149 million.
Note D - Litigation
There have been no significant developments in the several purported class
action lawsuits filed in the fourth quarter of fiscal 1994 alleging
violations of the Federal securities laws arising from alleged
misrepresentations and omissions in connection with the Corporation's
issuance and sale of Series A 8 7/8% Cumulative Preferred Stock and the
Corporation's financial results for the quarter ended April 2, 1994.
9
<PAGE>
Note E - Subsequent Event
At the beginning of the second quarter, the Corporation sold its magnetic
disk drive, tape drive, solid state disk and thin-film heads businesses
(the "Business") to Quantum Corporation ("Quantum") for $360 million, of
which $70 million was paid in the form of a six-month interest-bearing
note. Assets sold included approximately $180 million of inventory and
$154 million of net property, plant and equipment, including facilities in
Shrewsbury, Massachusetts and Penang, Malaysia, as well as the
Corporation's interest in Rocky Mountain Magnetics, Inc. Quantum is
leasing facilities owned by the Corporation in Colorado Springs, Colorado
and leased by the Corporation in Batam, Indonesia. Approximately 3,100
regular and 1,600 other employees were transferred to Quantum upon sale of
the Business.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
As an aid to understanding the Corporation's operating results, the
following table indicates the percentage relationships of income and
expense items included in the statements of operations for the most recent
quarter ended October 1, 1994 and the corresponding quarter ended October
2, 1993 of the preceding fiscal year and the percentage changes in those
items for such periods. Components of total costs of operating revenues
are shown as percentages of their related revenues.
Income and Expense Items Percentage
as a Percentage of Total Increases/
Operating Revenues (a) (Decreases)
------------------------ ------------------------
Three-Month Period Ended Three-Month Period Ended
------------------------ ------------------------
Income and Oct. 1, Oct. 2, October 1, 1994 vs
Expense Items 1994 1993 October 2, 1993
----------- ----------- ------------------------
Product sales 52.9 % 51.6 % 6.1 %
Service and other revenues 47.1 % 48.4 % .8 %
----------- -----------
Total operating revenues 100.0 % 100.0 % 3.6 %
Cost of product sales 74.5 % 63.0 % 25.4 %
Service expense and cost
of other revenues 64.5 % 64.7 % .5 %
Total cost of operating
revenues 69.8 % 63.9 % 13.2 %
Research and engineering
expenses 9.2 % 10.4 % (8.6)%
Selling, general and
administrative expenses 26.8 % 28.9 % (4.1)%
----------- -----------
Operating loss (5.8)% (3.2)% 86.1 %
Interest income .2 % .5 % (59.2)%
Interest expense .5 % .6 % (14.8)%
----------- -----------
Loss before income taxes
and cumulative effect of
change in accounting
principle (6.1)% (3.3)% 91.3 %
Provision for income taxes .1 % .1 % 23.1 %
----------- -----------
Loss before cumulative
effect of change in
accounting principle (6.2)% (3.4)% 89.0 %
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Cumulative effect of
change in accounting
principle (2.1)% 1.7 % (100.0+)%
----------- -----------
Net loss (4.2)% (5.1)% (15.4)%
Dividends on preferred
stock .3 % - NM
------------ ------------
Net loss applicable to
common stock (4.5)% (5.1)% ( 9.6) %
============ ===========
Note (a) Percentage of operating revenues may not be additive due to
rounding.
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<PAGE>
REVENUES
Total operating revenues for the first quarter of fiscal 1995 were $3.12
billion, up 4% from the comparable period a year ago. Total operating
revenues included product sales of $1.65 billion and service and other
revenues of $1.47 billion. Operating revenues from customers outside the
United States were $1.93 billion or 62% of total operating revenues,
compared with $1.81 billion or 60% of total operating revenues for the
first quarter of fiscal 1994. The increase in non-U.S. revenues was due
principally to increased operating revenues from the Asia Pacific region.
European revenues for the quarter were up slightly compared with the same
period last year.
Product sales for the quarter were up 6% from the comparable period a year
ago, principally due to increased demand for Alpha-based systems,
Intel-based personal computers and certain network and storage component
products. As the Corporation continues to implement a major product
transition, VAX system revenues declined from 26% of product sales in the
first quarter last year to 12% for the first quarter of fiscal 1995. Alpha
systems revenue represented approximately 19% of product sales for the
quarter, up from 9% for the comparable period last year. Revenues from the
sale of Intel-based personal computers represented approximately 22% of
product sales, up from 13% in the first quarter of fiscal 1994.
Service and other revenues for the quarter were essentially flat compared
with the first quarter of the prior year. For the quarter, anticipated
lower levels of revenue from the Corporation's VAX systems maintenance
business were offset by increased revenue associated with the maintenance
and support of Alpha-based systems and service and support of other
vendors' products. Revenues from systems integration and consulting
services were essentially flat compared with the comparable period a year
ago.
Since the beginning of the fiscal year, the Corporation has entered into
agreements to sell portions of its storage business, its relational
database business and a software distribution subsidiary. The sale of
portions of the storage business was consummated shortly after the close of
the quarter (see Note E.) In fiscal 1994, these businesses represented
approximately 4% of total consolidated operating revenues and had an
immaterial effect on the consolidated results of operations.
EXPENSES AND PROFIT MARGINS
Product gross margin was 26% of product sales for the quarter, compared
with 37% for the same period last year. The decline in product gross
margin was due to several factors, including a continuation of a shift in
the Corporation's product sales toward lower-end, open systems which
typically carry lower margins, as well as greater use of indirect channels
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of distribution. Product gross margin was essentially unchanged from the
fourth quarter of fiscal 1994. In response to product gross margin
performance during fiscal 1994, the Corporation is implementing design
improvements and manufacturing and logistics cost efficiencies, as well as
increased discipline in the area of pricing discounts and allowances.
Service gross margin was essentially flat compared with the comparable
quarter of fiscal 1994. The Corporation maintained service gross margin
due principally to increased efficiency in service delivery.
Spending on research and engineering totaled $288 million for the quarter,
a decrease of 9% from the $315 million of the first quarter a year ago.
Selling, general and administrative expenses (SG&A) decreased 4% to $836
million from the $872 million for the comparable period last year. For the
quarter, SG&A included approximately $49 million of losses associated with
several small divestments.
The Corporation continues to implement the restructuring actions announced
at the end of fiscal 1994. Regular employee population decreased by 4,000
to 73,800 during the first quarter, and by 15,000 (from 88,800) at the end
of the first quarter of fiscal 1994. As part of the Corporation's
restructuring and cost reduction initiatives, the Corporation entered into
agreements during the first quarter to sell approximately 2.6 million
square feet of space, including the Corporation's headquarters facilities
in Maynard, Massachusetts. Cash expenditures associated with restructuring
actions are expected to be approximately $765 million for the remainder of
fiscal 1995 (see Note B).
Interest income was $7 million for the quarter, down $10 million from the
$17 million of the comparable quarter a year ago, reflecting lower cash
balances in the quarter. Interest expense was $17 million, down from $20
million for the comparable quarter last year. Interest expense for the
first quarter of fiscal 1995 and 1994 includes the differential received on
interest rate swap agreements relating to $750 million of long-term debt.
Income tax expense was $4 million in the first quarter of fiscal 1995,
essentially flat compared with the same quarter a year ago. Income tax
expense reflects several factors, including income taxes provided for
profitable non-U.S. operations and an inability to recognize currently U.S.
and certain non-U.S. tax benefits from operating losses.
The Corporation enters into foreign exchange option and forward contracts
on a continuing basis for periods consistent with its committed exposures
to limit potential losses from adverse exchange rate movements on
operations and to delay the short-term impact of foreign currency movements
on asset and liability positions of non-U.S. subsidiaries. The foreign
exchange option and forward contracts generally have maturities which do
not exceed three months. During the quarter, the net effect of currency
14
<PAGE>
exchange rate movements on consolidated results of operations was slightly
positive compared with the comparable quarter a year ago.
The Corporation adopted Statement of Financial Accounting Standards (SFAS)
No. 115-Accounting for Certain Investments in Debt and Equity Securities,
effective July 3, 1994. There was no cash flow impact from the adoption of
SFAS No. 115 (see Note C.)
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING
FOR OPERATIONS
Cash and cash equivalents totaled $881 million at the end of the quarter,
down from $1.2 billion at the end of fiscal 1994.
Net cash used for operating activities was $305 million for the quarter,
due principally to restructuring activities (see Note B), lower accounts
payable related to lower spending levels compared to the previous quarter
and increased inventory. Inventories were higher to support growing demand
for the Digital 2100 Alpha Server and Intel-based personal computers, as
well as increases in certain storage products which were included in the
sale of portions of the Corporation's storage business (see Note E). Cash
used was partially offset by a decrease in accounts receivable.
Net cash flow from investing activities was $38 million for the quarter.
During the quarter, the Corporation sold 98,533,000 shares of Ing. Olivetti
& C. S.p.A. common stock for approximately $149 million. Also, the sale of
property, plant and equipment and other assets generated approximately $15
million in cash proceeds. Capital spending was $118 million, consisting
principally of investments in semiconductor technology facilities and
equipment.
Cash used for financing activities in the first quarter was $32 million due
to the reduction of debt and the payment of dividends on preferred stock
issued in the third quarter of fiscal 1994.
Subsequent to the end of the quarter, the Corporation completed the sale of
portions of its storage business for $360 million (see Note E). The
Corporation also has entered into agreements to sell other businesses
which, when consummated, are expected to generate proceeds of approximately
$125 million.
The Corporation's need for, cost of and access to funds are dependent on
future operating results, as well as conditions external to the
Corporation. The Corporation historically has maintained a conservative
capital structure, and believes that its current cash position and its
sources of and access to capital are adequate to support planned
restructuring actions and operations.
* * * *
15
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The accompanying consolidated balance sheets, statements of operations
and statements of cash flows reflect all adjustments of a normal recurring
nature which are, in the opinion of management, necessary to a fair
statement of the consolidated financial position at October 1, 1994 and the
consolidated results of operations and the consolidated statements of cash
flows for the interim periods ended October 1, 1994 and October 2, 1993.
16
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On November 10, 1994, the Corporation held its Annual Meeting of
Stockholders. At the meeting the stockholders elected four Class II
Directors for three-year terms. 111,206,565 votes were cast for the
nominees for Class II Directors, 1,786,365 votes were withheld and there
were no broker non-votes. 111,096,136 votes were cast for Vernon R. Alden,
a nominee for Class II Director and 1,903,050 votes were withheld.
111,132,410 votes were cast for Robert R. Everett, a nominee for Class II
Director and 1,866,776 votes were withheld. 111,155,822 votes were cast
for Thomas L. Phillips, a nominee for Class II Director and 1,843,364 votes
were withheld. 111,130,056 votes were cast for Delbert C. Staley, a
nominee for Class II Director and 1,869,130 votes were withheld. At the
meeting the stockholders also approved amendments to the Corporation's 1968
Employee Stock Purchase Plan ("1968 Plan") and 1981 International Employee
Stock Purchase Plan ("1981 Plan") to increase the number of shares subject
to such plans by 5,000,000 and 3,500,000 shares, respectively. 72,289,843
votes were cast for the proposal to amend the 1968 Plan and 8,631,808 were
cast against, with 1,460,594 abstentions and 30,616,941 broker non-votes;
72,201,098 votes were cast for the 1981 Plan and 8,780,882 were cast
against, with 1,421,372 abstentions and 30,595,834 broker non-votes. The
stockholders also ratified the selection of Coopers & Lybrand L.L.P. as the
Corporation's auditors. 111,976,673 votes were cast for the ratification
and 530,422 were cast against, with 492,091 abstentions and no broker
non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Corporation during the
period covered by this report.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
DIGITAL EQUIPMENT CORPORATION
(Registrant)
By /s/ Vincent J. Mullarkey
Vincent J. Mullarkey
Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
November 14, 1994
18
