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 April 2, 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 April 2,
1994: 137,882,661.<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Three-Month Period Ended
---------------------------
April 2, March 27,
1994 1993
------------ -------------
REVENUES
Product sales................................. $ 1,749,621 $ 1,767,372
Service and other revenues.................... 1,509,168 1,686,304
------------- -------------
TOTAL OPERATING REVENUES...................... 3,258,789 3,453,676
------------- -------------
COSTS AND EXPENSES
Cost of product sales......................... 1,210,478 1,049,969
Service expense and cost of other revenues.... 946,800 1,030,728
Research and engineering expenses............. 316,767 350,423
Selling, general and administrative expenses.. 954,903 1,050,600
------------- -------------
Operating loss................................ ( 170,159) ( 28,044)
Interest income............................... 8,697 16,325
Interest expense.............................. 16,543 16,402
------------- -------------
LOSS BEFORE INCOME TAXES ..................... ( 178,005) ( 28,121)
PROVISION FOR INCOME TAXES.................... 5,301 2,000
------------- -------------
NET LOSS ..................................... ( 183,306) ( 30,121)
Dividends on preferred stock ................. 1,775 -
------------- -------------
Net loss applicable to common stock .......... $ ( 185,081) $ ( 30,121)
============= =============
NET LOSS PER COMMON SHARE (1)................. $ ( 1.34) $ ( .23)
============= =============
(1) Net loss per share is based on the weighted average number of
common shares outstanding during each period: 137,897,533 shares for the
three months ended April 2, 1994 and 131,553,881 for the three months ended
March 27, 1993. See page 8 of this report.
The accompanying notes are an integral part of these financial statements.
2<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Nine-Month Period Ended
----------------------------
April 2, March 27,
1994 1993
------------- -------------
REVENUES
Product sales................................. $ 4,966,549 $ 5,502,427
Service and other revenues.................... 4,561,267 4,954,991
------------- -------------
TOTAL OPERATING REVENUES...................... 9,527,816 10,457,4l8
------------- -------------
COSTS AND EXPENSES
Cost of product sales......................... 3,304,185 3,186,464
Service expense and cost of other revenues.... 2,859,150 3,106,648
Research and engineering expenses............. 962,432 1,160,743
Selling, general and administrative expenses.. 2,735,798 3,359,093
------------- -------------
Operating loss................................ ( 333,749) ( 355,530)
Interest income............................... 37,981 43,750
Interest expense.............................. 51,577 32,746
------------- -------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.... ( 347,345) ( 344,526)
PROVISION FOR INCOME TAXES.................... 11,332 20,000
------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............. ( 358,677) ( 364,526)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................... 20,042 -
------------- -------------
NET LOSS...................................... ( 338,635) ( 364,526)
Dividends on preferred stock.................. 1,775 -
------------- -------------
Net loss applicable to common stock........... $( 340,410) $( 364,526)
============= =============
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER COMMON SHARE....... $( 2.64) $( 2.81)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE PER COMMON SHARE.................. .14 -
------------- -------------
NET LOSS PER COMMON SHARE (1)................. $( 2.50) $( 2.81)
============= =============
3<PAGE>
(1) Net loss per share is based on the weighted average number of
common shares outstanding during each period: 136,312,098 shares for the
nine months ended April 2, 1994 and 129,570,101 for the nine months ended
March 27, 1993. See page 9 of this report.
The accompanying notes are an integral part of these financial statements.
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 2, July 3,
1994 1993
------------ -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 1,263,551 $ 1,643,195
Accounts receivables, net of allowances
of $101,509 and $110,764................... 2,925,188 3,020,252
Inventories
Raw materials.............................. 497,340 331,506
Work-in-process............................ 640,798 502,200
Finished goods............................. 1,026,695 921,434
------------- -------------
Total inventories............................ 2,164,833 1,755,140
Prepaid expenses and deferred income taxes... 402,218 463,928
------------- -------------
TOTAL CURRENT ASSETS......................... 6,755,790 6,882,515
------------- -------------
Property, plant and equipment, at cost....... 7,116,943 7,193,430
Less accumulated depreciation................ 3,980,454 4,015,139
------------- -------------
Net property, plant and equipment............ 3,136,489 3,178,291
Other assets................................. 902,822 889,537
------------- -------------
TOTAL ASSETS................................. $ 10,795,101 $ 10,950,343
============= =============
The accompanying notes are an integral part of these financial statements.
4<PAGE>
April 2, July 3,
1994 1993
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and current portion
of long-term debt.......................... $ 10,620 $ 21,335
Accounts payable............................. 877,058 822,434
Income taxes payable......................... 10,154 57,614
Salaries, wages and related items............ 597,999 556,151
Deferred revenues and customer advances...... 1,156,952 1,138,323
Restructuring reserve........................ 276,341 738,989
Current deferred income taxes................ 35,228 -
Other current liabilities.................... 509,157 583,868
------------ ------------
TOTAL CURRENT LIABILITIES.................... 3,473,509 3,918,714
Noncurrent deferred income taxes............. 26,369 -
Long-term debt............................... 1,017,427 1,017,577
Postretirement benefits...................... 1,239,573 1,128,653
------------ ------------
TOTAL LIABILITIES............................ 5,756,878 6,064,944
------------ ------------
Contingencies (Note D)
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 -
Common stock, $1.00 par value; authorized
450,000,000 shares; 137,882,661 and
135,489,805 shares issued.................. 137,883 135,490
Additional paid-in capital................... 3,326,565 2,851,960
Retained earnings............................ 1,569,775 1,937,627
Treasury stock at cost, 0
and 497,551 shares....................... - (39,678)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................... 5,038,223 4,885,399
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $10,795,101 $10,950,343
============ ============
The accompanying notes are an integral part of these financial statements.
5<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine-Month Period Ended
---------------------------
April 2, March 27,
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ ( 338,635) $ (364,526)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation............................. 439,989 528,407
Amortization............................. 82,952 100,826
Other adjustments to net loss............ 104,577 157,037
Decrease in accounts receivable.......... 95,064 584,954
Increase in inventories.................. (409,693) (200,842)
(Increase)/decrease in prepaid expenses.. 85,759 (15,944)
Increase/(decrease) in accounts payable.. 54,624 (244,428)
Increase/(decrease) in taxes............. (67,654) 93,165
Increase in salaries, wages, benefits
& related items........................ 152,768 106,399
Increase/(decrease) in deferred revenues
& customer advances.................... 18,629 (67,859)
Decrease in restructuring reserves....... (507,948) (672,853)
Decrease in other current liabilities.... (76,486) (55,673)
------------ ------------
Total adjustments............................ ( 27,419) 313,189
------------ ------------
Net cash flows from operating activities..... (366,054) ( 51,337)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment.. (514,382) (358,419)
Proceeds from the disposition of property,
plant and equipment........................ 76,250 36,079
Investment in other assets................... (61,144) (244,432)
Proceeds from disposition of other assets.... 23,516 -
------------ ------------
Net cash flows from investing activities..... (475,760) (566,772)
------------ ------------
Net cash flows from operating and
investing activities....................... (841,814) (618,109)
------------ ------------
The accompanying notes are an integral part of these financial statements.
6 <PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt........... 11,017 741,673
Payments to retire debt...................... (22,749) (14,880)
Proceeds from the sale of preferred stock.... 387,258 -
Issuance of common and treasury shares,
including tax benefits..................... 86,644 106,231
------------ ------------
Net cash flows from financing activities..... 462,170 833,024
------------ ------------
Net increase/(decrease) in cash and cash
equivalents................................ (379,644) 214,915
Cash and cash equivalents at the
beginning of the year...................... 1,643,195 1,337,172
------------ ------------
Cash and cash equivalents at end of period... $ 1,263,551 $ 1,552,087
============ ============
The accompanying notes are an integral part of these financial statements.
7<PAGE>
DIGITAL EQUIPMENT CORPORATION
COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
Three-Month Period Ended
------------------------------
April 2, March 27,
1994 1993
-------------- -------------
Net loss applicable to common and
common equivalent shares.................... $ (185,081) $ ( 30,121)
============== =============
Weighted-average number of common shares
outstanding during the period............... 137,897,533 131,553,881
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........................... 137,897,533 131,553,881
============== =============
Net loss per common and common
equivalent share............................ $ ( 1.34) $ ( .23)
============== =============
The accompanying notes are an integral part of these financial statements.
8<PAGE>
DIGITAL EQUIPMENT CORPORATION
COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
Nine-Month Period Ended
------------------------------
April 2, March 27,
1994 1993
-------------- -------------
Net loss applicable to common and
common equivalent shares.....................$ ( 340,410) $ (364,526)
============== =============
Weighted-average number of common shares
outstanding during period.................... 136,312,098 129,570,101
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............................ 136,312,098 129,570,101
============== =============
Net loss per common and common
equivalent shares............................$ ( 2.50) $ ( 2.81)
============== =============
The accompanying notes are an integral part of these financial statements.
9<PAGE>
DIGITAL EQUIPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Accounting Policies
Certain prior years' amounts have been reclassified to conform with current
year presentation.
Note B - Income Taxes
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 109 - Accounting for Income Taxes, effective July 4, 1993.
The Corporation had previously accounted for income taxes under
Accounting Principles Board Opinion No. 11.
In the first quarter, the Corporation recorded a one-time benefit of $20
million, or $0.14 per share, for the recognition of previously unrecognized
tax benefits. There is no cash flow impact from the adoption of SFAS No.
109. The standard was adopted on a prospective basis and amounts presented
for prior years were not restated.
At July 4, 1993, the significant components of deferred tax assets and
liabilities upon the adoption of SFAS No. 109, were:
(dollars in millions)
---------------------------------
Deferred Tax Deferred Tax
Assets Liabilities
------------ ------------
Inventory-related
transactions 138 7
Depreciation 66 4l
Postretirement benefits 358 -
Restructuring 235 -
Tax loss carryforwards (a) 1,025 -
Tax credit carryforwards 149 -
Other 283 234
----- ---
Gross deferred tax balances 2,254 282
Valuation allowance 1,805 -
----- ---
Net deferred tax balances 449 282
===== ===
__________
(a) The deferred tax assets of $1.0 billion represent $2.8 billion of
net operating loss carryforwards on a tax return basis.
10<PAGE>
Tax loss carryforwards will generally expire as follows: $150 million in
1998, $1.2 billion in 2007, $800 million in 2008, and the remainder
thereafter. Tax credit carryforwards will generally expire as follows:
$40 million in 2001, $50 million in 2002, $40 million in 2003, and the
remainder thereafter.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law. This act, among other things, raises the U.S. corporate
statutory tax rate from 34% to 35%. Due to the net operating loss
carryforwards, the Corporation does not expect the change in the statutory
tax rate to have a material impact on the Corporation's consolidated
financial position or results of operations for the foreseeable future.
Note C - Preferred Stock
On January 21, 1994, the Corporation filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 under the Securities
Act of 1933, as amended, covering the registration of securities, including
senior and subordinated debt securities, preferred stock, depositary
shares, and warrants to purchase equity and debt securities, in an
aggregate amount of $1 billion. In March 1994 the Corporation issued and
sold 16,000,000 Depositary Shares under the shelf registration, each
representing a one-fourth interest in a share of Series A 8-7/8% Cumulative
Preferred Stock (the "Series A Preferred Stock"), par value $1.00 per
share, of the Corporation. Dividends on the Series A Preferred Stock
accrue at the annual rate of 8-7/8% ($36 million in the aggregate).
The Series A Preferred Stock was offered to the public at $100 per share
($25 per Depositary Share) for a total of $400 million, leaving a balance
of $600 million of securities available for future issuance under the shelf
registration. The net proceeds of $387 million from the Series A Preferred
Stock offering will be used for working capital and other general corporate
purposes. The Series A Preferred Stock is not convertible into, or
exchangeable for, shares of any other class or classes of stock of the
Corporation. The Series A Preferred Stock is not redeemable prior to April
1, 1999. On or after April 1, 1999, the Corporation, at its option, may
redeem shares of the Series A Preferred Stock, as a whole or in part, for
cash at the redemption price per share of $100 ($25 per Depositary Share),
plus accrued and unpaid dividends to the redemption date. Upon
dissolution, liquidation or the winding up of the affairs of the
Corporation, the holders of the Series A Preferred Stock will be entitled
to receive $100 per share ($25 per Depositary Share), plus accrued and
unpaid dividends, before any distribution to holders of the Corporation's
common stock.
11 <PAGE>
Note D - Subsequent Event
Subsequent to the end of the third quarter, the Corporation was named as a
defendant in several purported class action lawsuits filed in the U.S.
District Court for the Southern District of New York and the U.S. District
Court for the District of Massachusetts 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 (the "Series A Preferred Stock") and the
Corporation's financial results for the quarter ended April 2, 1994. The
Corporation's directors, certain of its officers and the managing
underwriters of the Corporation's Series A Preferred Stock offering were
also named as defendants in certain of the actions. Plaintiffs
alternatively seek unspecified monetary damages or rescission of their
purchase of the Series A Preferred Stock. The Corporation believes that
the claims asserted are without merit and intends to vigorously defend
itself against the claims.
12<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 tables indicate the percentage relationships of income and
expense items included in the statements of operations for the most recent
quarter and nine-month period ended April 2, 1994 and the corresponding
quarter and nine-month period ended March 27, 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
as a Percentage of
Total Operating Revenues (a)
------------------------ -----------------------
Three-Month Period Ended Nine-Month Period Ended
------------------------ ----------------------
Income and April 2, March 27, April 2, March 27,
Expense Items 1994 1993 1994 1993
----------- ----------- ----------- ---------
Product sales 53.7% 51.2% 52.1% 52.6%
Service and other revenues 46.3% 48.8% 47.9% 47.4%
----------- ----------- ----------- ---------
Total operating revenues 100.0% l00.0% 100.0% 100.0%
Cost of product sales 69.2% 59.4% 66.5% 57.9%
Service expense and cost
of other revenues 62.7% 61.1% 62.7% 62.7%
Total cost of operating
revenues 66.2% 60.2% 64.7% 60.2%
Research and engineering
expenses 9.7% 10.1% 10.1% 11.1%
Selling, general and
administrative expenses 29.3% 30.4% 28.7% 32.1%
----------- ----------- ----------- ---------
Operating loss (5.2%) ( .8%) ( 3.5%) ( 3.4%)
Interest income .3% .4% .4% .4%
Interest expense .5% .4% .5% .3%
----------- ----------- ----------- ---------
Loss before income taxes
and cumulative effect of
change in accounting
principle (5.5%) ( .8%) ( 3.6%) ( 3.3%)
Provision for income taxes .2% .1% .1% .2%
----------- ----------- ----------- ---------
13 <PAGE>
Loss before cumulative
effect of change in
accounting principle (5.6%) ( .9%) ( 3.8%) (3.5%)
Cumulative effect of
change in accounting
principle - - .2% -
Net loss (5.6%) ( .9%) ( 3.6%) (3.5%)
Dividends on preferred
stock 0.0% - 0.0% -
----------- ----------- ----------- ---------
Net loss applicable to
common stock (5.6%) ( .9%) ( 3.6%) (3.5%)
=========== =========== =========== =========
Note (a) Percentage or operating revenues may not be additive due to
rounding.
14 <PAGE>
Percentage Increases
(Decreases)
------------------------------------
Three-Month Nine-Month
Period Ended Period Ended
Apr. 2, 1994 Apr. 2, 1994
vs. vs.
Income and Expense Items Mar. 27, 1993 Mar. 27, 1993
- - --------------------------------- ------------- -------------
Product sales ( 1 %) (10 %)
Service and other revenues ( 11 %) ( 8 %)
Total operating revenues ( 6 %) ( 9 %)
Cost of product sales 15 % 4 %
Service expense and cost of other
revenues ( 8 %) ( 8 %)
Total cost of operating
revenues 4 % ( 2 %)
Research and engineering
expenses ( 10 %) (17 %)
Selling, general and administrative
expenses ( 9 %) (19 %)
Operating loss 507 % ( 6 %)
Interest income ( 47 %) (13 %)
Interest expense 1 % 58 %
Loss before income taxes and
cumulative effect of change in
accounting principle 533 % 1 %
Provision for income taxes 165 % (43 %)
Loss before cumulative effect of
change in accounting principle 509 % ( 2 %)
Cumulative effect of change in
accounting principle - NM
Net loss 509 % ( 7 %)
Dividends on preferred stock NM NM
Net loss applicable to common stock 514 % ( 7 %)
NM=Not Meaningful
15 <PAGE>
REVENUES
Total operating revenues for the first nine months of fiscal year 1994
were $9.53 billion, down 9% from the comparable period a year ago. Total
operating revenues included product sales of $4.97 billion, down 10% from a
year ago and service and other revenues of $4.56 billion, down 8%.
Operating revenues from customers outside the United States were $5.90
billion or 62% of total operating revenues for the first nine months,
compared with $6.71 billion or 64% of total operating revenues for the
comparable nine-month period last year. The Corporation continued to
experience a significant decrease in European revenues, as well as a
decline in U.S. revenues, partially offset by revenue growth in the Asia
Pacific region and Latin America.
For the quarter ended April 2, 1994, total operating revenues were
$3.26 billion, down 6% from the comparable period a year ago. Product
sales were $1.75 billion, down 1% and service and other revenues were $1.51
billion, down 11%. Operating revenues from customers outside the United
States were $2.04 billion or 63% of total operating revenues; this
compared with $2.24 billion or 65% of total operating revenues for the
third quarter of fiscal year 1993.
For the third quarter, revenues from the sale of Alpha AXP systems grew
more than 50% from the second quarter of fiscal year 1994, and represented
approximately 15% and 11% of product sales for the quarter and first nine
months, respectively. The growth in revenues from the sale of Alpha AXP
systems has been predominantly at the low-end. An increasing share of the
Corporation's product sales are represented by low-end systems which are
lower priced than the Corporation's traditional proprietary mid-range
systems. The Corporation continues to experience a significant decline in
demand for its VAX systems.
Product sales for the quarter and first nine months were positively
affected by a growth in demand for Alpha AXP workstations, storage devices
and networking products, as well as personal computers. However, the
Corporation was unable to satisfy fully the better than expected customer
demand for certain of these products. The Corporation expects these shifts
in product demand to continue, and in response is adapting its logistical
systems to better satisfy demand.
The decline in service revenues over the comparable periods of fiscal
year 1993 was due principally to lower levels of revenue from the
Corporation's VAX/VMS systems maintenance business and customers' movement
away from maintenance contracts to maintenance on a "per call" or "as
needed" basis. In addition, the greater reliability of, and lower
maintenance revenue associated with, newer, lower-priced products
contributed to the decline in service revenues over the quarter. Increased
16<PAGE>
competition in the maintenance business also has resulted in pricing
pressures. Additionally, over the last year, the Corporation has been more
selective in pursuing consulting and systems integration opportunities,
increasing its focus on the profitability of projects. The decline in
service revenues, including both the Corporation's traditional maintenance
business and its newer consulting and systems integration services, was
most pronounced in Europe and was exacerbated by currency fluctuations as
described below.
Movements in currency exchange rates are one of many competitive,
industry and economic factors which affect the Corporation's operating
results. The Corporation operates in approximately 100 countries in major
and emerging markets. Revenues and costs in non-U.S. operations, including
certain product costs, are denominated in applicable local currencies.
While the effects of foreign currency translation for a fiscal period are
included in applicable revenue and expense categories, they are difficult
to quantify precisely because the Corporation responds to movements in
currency exchange rates through pricing, expense, sourcing or other
management actions, as market conditions permit. The Corporation enters
into foreign exchange contracts, which generally have maturities which do
not exceed six months, covering most of its net monetary assets,
liabilities and firm commitments, to increase the predictability of the
rate at which non-U.S. revenues will be translated into U.S. dollars.
During the third quarter and first nine months of fiscal year 1994, the net
effect of foreign currency translation and gains and losses on foreign
exchange contracts was negative compared with the comparable periods a year
ago.
EXPENSES AND PROFIT MARGINS
The Corporation recorded an operating loss of $170 million for the
third quarter of fiscal year 1994, compared with an operating loss of $28
million in the third quarter a year ago. For the first nine months, the
Corporation recorded an operating loss of $334 million, compared with an
operating loss of $356 million for the comparable period a year ago.
Gross profit on product sales for the quarter and the first nine months
declined from the comparable periods of a year ago. Product gross margin
(gross profit as a percentage of product sales) represented 31% and 34% of
product sales, respectively, down 10 and 9 percentage points, respectively,
from the comparable periods last year. The decline in product gross profit
resulted from the Corporation taking aggressive pricing actions and a
continued shift in the mix of product sales towards lower-priced,
lower-margin systems (including Alpha AXP-based systems, which have lower
margins than comparable VAX systems), partially offset by manufacturing
cost efficiencies.
17<PAGE>
Gross profit on service revenues for the quarter and first nine months
declined from the comparable periods a year ago. Service gross margin
(gross profit as a percentage of service revenues) represented 37% of
services revenues for both the quarter and the first nine months, down from
39% for the same quarter one year ago, but essentially unchanged compared
with the first nine months of fiscal year 1993. The decline in service
gross profit resulted principally from lower service revenues, pricing
pressures, changes in customer maintenance purchasing patterns away from
long-term service contracts, the effects of extended product warranties,
and the increasing reliability of hardware and software products, partially
offset by increased efficiency in service delivery and an increased focus
on the profitability of consulting projects.
Spending on research and engineering (R&E) in the quarter totaled $317
million, a decrease of 10% from the $350 million of the comparable quarter
a year ago. For the first nine months, R&E spending totaled $962 million,
down 17% from the $1.16 billion of the comparable period a year ago.
Selling, general and administrative (SG&A) expense in the quarter
totaled $955 million, down 9% from the $1.05 billion of the comparable
quarter a year ago. For the first nine months, SG&A spending totaled $2.74
billion, down 19% from the $3.36 billion of the comparable period in fiscal
year 1993. While spending for SG&A has declined from the comparable
periods last year, the Corporation believes its costs and expense levels
are not competitive for the products and services it offers and expects to
implement further cost reductions.
The Corporation is accelerating its ongoing restructuring efforts and
is currently evaluating and expects to undertake a wide range of additional
restructuring and cost-cutting actions during fiscal years 1995 and 1996,
including the reduction of its employee population by at least 20,000
persons, further spending reductions, the disposition of seven to ten
million square feet of owned and leased facilities, and the disposition or
divestiture of other assets and operations. As the Corporation continues
its examination of its business and cost structure, it may undertake
restructuring actions and cost-cutting activities in addition to those
currently being contemplated.
Interest income for the quarter and the first nine months was $9
million and $38 million, respectively. Interest income was down from the
comparable periods a year ago due to lower cash balances. Interest expense
for the quarter and the first nine months was $17 million and $52 million,
respectively. Interest expense for the first nine months was up from the
comparable period a year ago due to the issuance of $1 billion aggregate
principal amount of long-term debt in the second and third quarters of
fiscal year 1993. Interest expense for the quarter and the first nine
18<PAGE>
months includes the differential received on interest rate swap agreements
entered into in the first quarter of fiscal year 1994 relating to $750
million of long-term debt.
Tax expense for the quarter and first nine months was $5 million
and $11 million, respectively. The tax expense reflects taxes provided for
profitable non-U.S. operations and an inability to recognize U.S. and
certain non-U.S. tax benefits from operating losses.
NEW ACCOUNTING STANDARDS
The Corporation adopted Statement of Financial Accounting Standards
(SFAS) No. 109 - Accounting for Income Taxes, effective July 4, 1993. The
Corporation had previously accounted for income taxes under Accounting
Principles Board Opinion No. 11. In the first quarter of fiscal year 1994,
the Corporation recorded a one-time benefit of $20 million, or $0.l4 per
share, for the recognition of previously unrecognized tax benefits. There
is no cash flow impact from the adoption of SFAS No. 109. The standard was
adopted on a prospective basis and amounts presented for prior years were
not restated. (See Note B.)
In November 1992, the Financial Accounting Standards Board issued
SFAS No. 112 - Employers' Accounting for Postemployment Benefits. SFAS No.
112 requires employers to recognize an obligation for benefits provided to
former or inactive employees after employment but before retirement. These
benefits include, but are not limited to, salary continuation, supplemental
unemployment benefits, severance benefits, disability-related benefits, job
training and counseling, and continuation of benefits such as health care
benefits and life insurance coverage. SFAS No. 112 requires employers to
recognize the cost of such benefits as an expense over the employee's
working career, in those instances where the employee's rights to such
benefits vest or vary based on an employee's years of service, or as an
expense at the date of the event giving rise to the payment of the benefit.
The Corporation must adopt SFAS No. 112 effective at the beginning of
fiscal year 1995. Upon adoption, SFAS No. 112 requires the recognition of
a one-time charge to income for the costs of providing such postemployment
benefits (the "transition obligation") as of the beginning of the fiscal
year in which SFAS No. 112 is adopted.
The Corporation expects to adopt SFAS No. 112 in the fourth quarter
of fiscal year 1994. Based on current estimates, the Corporation's
transition obligation will be $50 to $65 million. This transition
obligation represents principally the cost of providing medical, dental and
life insurance benefits coverage to individuals currently on long-term
disability during the estimated remaining period during which they will
receive disability benefits. The additional expense under the new standard,
19<PAGE>
exclusive of the transition obligation, compared to the expense determined
under the Corporation's existing practice is expected to be insignificant.
There will be no cash flow impact from the adoption of SFAS No. 112.
In November 1992, the Financial Accounting Standards Board issued
SFAS No. 115 - Accounting for Certain Investments in Debt and Equity
Securities. SFAS No. 115 expands the use of fair value accounting for
certain debt and equity securities. The Corporation must adopt SFAS no.
115 by the first quarter of fiscal year 1995. The Corporation has not yet
determined when it will adopt SFAS No. 115. However, at the end of the
third quarter, the Corporation had unrecognized gains on long-term
investments of approximately $80 million that would be subject to SFAS No.
115 treatment.
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS
Cash and cash equivalents totaled $1.26 billion at the end of the
quarter, down from $1.64 billion at the end of fiscal year 1993 and up from
$1.15 billion in the prior quarter. The net increase of $116 million in
the quarter was due principally to the receipt of $387 million of net
proceeds from the sale of preferred stock, as discussed below.
Net cash used by operating activities was $125 million for the
quarter and $366 million for the first nine months. Cash used for the
quarter and for the first nine months was due principally to operating
losses, restructuring activities and growth in inventory levels from year
end. Inventory levels increased principally as a result of the Corporation
acquiring materials to satisfy increased demand for Alpha AXP workstations
and personal computer products.
The restructuring reserve for current restructuring activities
decreased $167 million during the quarter. Restructuring actions utilized
cash of approximately $109 million for employee-related activities and $40
million for facilities-related and other actions. The remaining amount
represents non-cash charges. Cash used for restructuring actions was
provided by operating activities and the Corporation's existing cash
balance. The Corporation estimates that approximately two-thirds of the
remaining reserve of $276 million will be used for restructuring activities
which will utilize cash in fiscal year 1994.
Net cash used for investing activities was $145 million for the
quarter and $476 million for the first nine months. Capital spending was
$166 million for the quarter and $5l4 million for the first nine months,
principally consisting of investments in semiconductor and storage
technology facilities and equipment. During the quarter and first nine
months, the Corporation generated $43 million and $100 million,
respectively, in cash proceeds from the disposal of property, plant and
20<PAGE>
equipment and other assets, principally as the result of restructuring
activities and sale of equity investments.
Net cash from financing activities was $386 million for the quarter
and $462 million for the first nine months. Net cash generated from
financing activities for the first nine months was due principally to the
sale of preferred stock in the third quarter, as discussed below,
generating net proceeds of $387 million, and the issuance of Common Stock
under the Corporation's employee stock plans.
On January 21, 1994, the Corporation filed with the Securities and
Exchange Commission a shelf registration statement on Form S-3 under the
Securities Act of 1933, as amended, covering the registration of
securities, including senior and subordinated debt securities, preferred
stock, depositary shares, and warrants to purchase equity and debt
securities, in an aggregate amount of $1 billion. In March 1994, the
Corporation issued and sold 16,000,000 Depositary Shares under the shelf
registration, each representing a one-fourth interest in a share of Series
A 8-7/8%, Cumulative Preferred Stock (the "Series A Preferred Stock"), par
value $1.00 per share, of the Corporation. Dividends on the Series A
Preferred Stock accrue at the annual rate of 8-7/8% ($36 million in the
aggregate). (See Note C.)
The Corporation historically has maintained a conservative capital
structure, and believes that its current cash position and access to
capital are adequate to support current and anticipated restructuring
activities and operations. However, the Corporation's need for, cost of
and access to funds are in part dependent on future operating results.
****
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 April 2, 1994 and the
consolidated results of operations and the consolidated statements of cash
flows for the interim periods ended April 2, 1994 and March 27, 1993.
21 <PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 1. Legal Proceedings
The Corporation has been named as a defendant in several purported class
action lawsuits filed in the U.S. District Court for the Southern District
of New York and the U.S. District Court for the District of Massachusetts
alleging violations of the Federal securities laws 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. (See Note D.)
Item 5. Other Information
Item 5. Other Information
Shortly after the close of the quarter, Edward E. Lucente, Vice President
for worldwide sales and marketing, resigned from the Corporation. The
Corporation announced that Enrico Pesatori, a Vice President of the
Corporation and general manager of its Personal Computer Business Unit, had
assumed the additional responsibilities of managing the Corporation's
Systems Business Unit, including its worldwide sales and marketing
organization.
Item 6. Exhibits and Reports on Form 8-K
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Certificate of Designation filed with the Secretary of State of
the Commonwealth of Massachusetts on March 28, 1994 (filed as
Exhibit 4.1 to the Corporation's Report on Form 8-K filed on
March 23, 1994 and incorporated herein by reference).
(b) Reports on Form 8-K
The Corporation filed with the Securities and Exchange Commission
(the "Commission") a Report on Form 8-K on March 23, 1994. On
April 21, 1994, subsequent to the end of the period covered by
this report, the Corporation filed with the Commission a Report
on Form 8-K.
22<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_______________________________
William M. Steul
Vice President, Finance and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
May 16, 1994
23
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