<PAGE>
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 December 31, 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)
111 Powdermill Road, 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 December 31,
1994: 146,673,801.
<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three-Month Period Ended
----------------------------
December 31, January 1,
1994 1994
------------- ------------
<S> <C> <C>
REVENUES
Product sales................................. $ 1,869,993 $ 1,659,924
Service and other revenues.................... 1,603,266 1,594,155
------------- ------------
TOTAL OPERATING REVENUES...................... 3,473,259 3,254,079
------------- ------------
COSTS AND EXPENSES
Cost of product sales......................... 1,300,280 1,112,292
Service expense and cost of other revenues.... 1,025,036 968,473
Research and engineering expenses............. 248,096 330,948
Selling, general and administrative expenses.. 869,157 908,688
------------- ------------
Operating income/(loss)....................... 30,690 ( 66,322)
Interest income............................... 14,467 12,071
Interest expense.............................. 22,568 15,398
------------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES............. 22,589 ( 69,649)
Provision for income taxes.................... 3,707 2,495
------------- ------------
NET INCOME/(LOSS)............................. 18,882 ( 72,144)
Dividend on preferred stock................... 8,875 ---
------------- ------------
NET INCOME/(LOSS) APPLICABLE TO COMMON
STOCK (1)................................... $ 10,007 $ ( 72,144)
============= ============
NET INCOME/(LOSS) APPLICABLE
PER COMMON SHARE (1)........................ $ .07 $ ( .53)
============= ============
</TABLE>
(1) Net income applicable per common share is based on the weighted
average number of common shares and common share equivalents outstanding
during each period: 144,998,947 for the three months ended December 31,
1994. Net loss applicable per common share is based only on the weighted
average number of common shares outstanding during each period: 136,028,383
shares for the three months ended January 1, 1994. 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.
2
<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Six-Month Period Ended
----------------------------
December 31, January 1,
1994 1994
------------- -------------
<S> <C> <C>
REVENUES
Product sales................................. $ 3,522,644 $ 3,216,928
Service and other revenues.................... 3,073,087 3,052,099
------------- -------------
TOTAL OPERATING REVENUES...................... 6,595,731 6,269,027
------------- -------------
COSTS AND EXPENSES
Cost of product sales......................... 2,530,946 2,093,707
Service expense and cost of other revenues.... 1,973,708 1,912,350
Research and engineering expenses............. 535,884 645,665
Selling, general and administrative expenses.. 1,705,524 1,780,895
------------- -------------
Operating loss................................ (150,331) (163,590)
Interest income............................... 21,493 29,284
Interest expense.............................. 39,294 35,034
------------- -------------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.... (168,132) (169,340)
Provision for income taxes.................... 8,059 6,031
------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............. (176,191) (175,371)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................... (64,503) 51,026
------------- -------------
NET LOSS...................................... (111,688) (226,397)
Dividends on preferred stock.................. 17,750 ---
------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK........... $ (129,438) $ (226,397)
============= =============
PER COMMON SHARE:
LOSS APPLICABLE BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE........... $ (1.36) $ (1.29)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................... 0.45 (0.38)
------------- -------------
NET LOSS APPLICABLE PER COMMON SHARE (1)...... $ (0.91) $ (1.67)
============= =============
</TABLE>
3
<PAGE>
(1) Net loss applicable per common share is based on the weighted
average number of common shares outstanding during each period: 142,692,716
shares for the six months ended December 31, 1994 and 135,5l9,380 shares
for the six months ended January 1, 1994. See page 9 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.
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, July 2,
1994 1994
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................... $ 1,132,178 $ 1,180,863
Accounts receivables, net of allowances
of $131,298 and $111,925................... 2,918,332 3,318,854
Inventories
Raw materials.............................. 621,381 476,172
Work-in-process............................ 511,405 605,503
Finished goods............................. 993,931 982,303
------------ -------------
Total inventories............................ 2,126,717 2,063,978
Prepaid expenses and deferred income taxes... 335,330 324,676
------------ -------------
TOTAL CURRENT ASSETS......................... 6,512,557 6,888,371
------------ -------------
Property, plant and equipment, at cost....... 6,228,891 7,020,889
Less accumulated depreciation................ 3,580,588 3,891,400
------------ -------------
Net property, plant and equipment............ 2,648,303 3,129,489
Other assets................................. 459,871 561,911
------------ -------------
TOTAL ASSETS................................. $ 9,620,731 $ 10,579,771
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
December 31, July 2,
1994 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and current portion
of long-term debt.......................... $ 7,993 $ 32,614
Accounts payable............................. 915,986 1,197,350
Income taxes payable......................... 17,658 20,753
Salaries, wages and related items............ 543,759 619,756
Deferred revenues and customer advances...... 1,055,248 1,239,792
Accrued restructuring costs.................. 888,610 1,351,075
Other current liabilities.................... 773,227 594,925
------------ ------------
TOTAL CURRENT LIABILITIES.................... 4,202,481 5,056,265
Deferred income taxes........................ 4,758 4,758
Long-term debt............................... 1,010,811 1,010,680
Postretirement and other postemployment
benefits................................... 1,171,852 1,228,269
------------ ------------
TOTAL LIABILITIES............................ 6,389,902 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, $1.00 par value; authorized
450,000,000 shares, 146,673,801 and
142,287,078 shares issued and outstanding.. 146,674 142,287
Additional paid-in capital................... 3,466,121 3,390,040
Retained deficit............................. (385,966) (256,528)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................... 3,230,829 3,279,799
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY..................................... $ 9,620,731 $10,579,771
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six-Month Period Ended
---------------------------
December 31, January 1,
1994 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $ ( 111,688) $ (155,329)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation............................. 263,101 301,722
Amortization............................. 36,032 60,996
Net gain on disposition of
investments and other assets........... (27,398) ---
Other adjustments to net loss............ (83,413) 84,002
Decrease in accounts receivable.......... 345,657 224,283
Increase in inventories.................. (277,406) (195,216)
(Increase)/decrease in prepaid expenses.. (13,889) 82,145
Decrease in accounts payable............. (248,034) (55,379)
Decrease in taxes........................ (3,848) (66,782)
Increase in salaries, wages, benefits
and related items...................... 14,684 63,627
Decrease in deferred revenues and
customer advances...................... (176,389) (l77,830)
Decrease in accrued restructuring costs.. (462,465) (34l,584)
Increase/(decrease) in other
current liabilities.................... 108,656 (65,303)
------------ ------------
Total adjustments............................ (524,712) (85,3l9)
------------ ------------
Net cash flows from operating activities..... (636,400) (240,648)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment.. (182,335) (348,070)
Proceeds from the disposition of net
property, plant and equipment.............. 110,304 53,620
Investment in other assets................... (13,151) (39,993)
Proceeds from the disposition of other
assets..................................... 644,634 3,238
------------ ------------
Net cash flows from investing activities..... 559,452 (33l,205)
------------ ------------
Net cash flows from operating and
investing activities....................... (76,948) (57l,853)
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt........... --- 12,950
Payments to retire debt...................... (24,355) (23,573)
Issuance of common and treasury
shares, including tax effects.............. 70,368 86,538
Dividends on preferred stock................. (17,750) ---
------------ ------------
Net cash flows from financing activities..... 28,263 75,9l5
------------ ------------
Net decrease in cash and cash equivalents.... (48,685) (495,938)
Cash and cash equivalents at the
beginning of the year...................... 1,180,863 1,643,l95
------------ ------------
Cash and cash equivalents at end of period... $ 1,132,178 $ 1,147,257
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
DIGITAL EQUIPMENT CORPORATION
COMPUTATION OF NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three-Month Period Ended
------------------------------
December 31, January 1,
1994 1994
-------------- -------------
<S> <C> <C>
Net income/(loss) applicable to common
and common equivalent shares................ $ 10,007 $ (72,144)
============== =============
Weighted-average number of common shares
outstanding during the period............... 143,530,877 136,028,383
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options............... 1,468,070 0
-------------- -------------
Total weighted-average number of common
and common equivalent shares outstanding
during the period........................... 144,998,947 136,028,383
============== =============
Net income/(loss) applicable per common
and common equivalent share................. $ 0.07 $ (0.53)
============== =============
</TABLE>
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)
<TABLE>
<CAPTION>
Six-Month Period Ended
------------------------------
December 31, January 1,
1994 1994
-------------- -------------
<S> <C> <C>
Net loss applicable to common and
common equivalent shares.................... $ (129,438) $ (226,397)
============== =============
Weighted-average number of common shares
outstanding during the period............... 142,692,716 135,5l9,380
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options............... 0 0
-------------- -------------
Total weighted-average number of common
and common equivalent shares outstanding
during the period........................... 142,692,716 135,5l9,380
============== =============
Net loss applicable per common
and common equivalent share................. $ ( 0.91) $ ( 1.67)
============== =============
</TABLE>
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 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
In the first six months of fiscal 1995, restructuring actions resulted in
approximately 5,500 employee separations, not including employees
transferred in connection with divestments. During the first half of
fiscal 1995, the Corporation incurred costs of approximately $303 million,
net of postretirement benefits curtailment gains, for employee separations
and $159 million for facilities and other costs. Cash expenditures during
the first six months were approximately $352 million for employee
separations and $66 million for facilities and other costs. During the
first six months of the fiscal year, the Corporation sold, or entered into
agreements to sell, approximately 3 million square feet of space, including
the Corporation's former headquarters facilities in Maynard, Massachusetts,
generating approximately $106 million of cash proceeds.
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 first quarter, the Corporation sold all of its shares of Ing.
Olivetti & C. S.p.A. common stock for approximately $149 million.
10
<PAGE>
Note D - Litigation
Several purported class action lawsuits were 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. Plaintiff's counsel have agreed to dismiss claims against all but
two of the defendants who served as directors or officers of the
Corporation during the third quarter of fiscal 1994.
Note E - Divestments
During the 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 an aggregate purchase price of $360
million, generating net proceeds of $348 million. 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 employees were transferred to Quantum upon
sale of the Business.
Also during the quarter, the Corporation sold its relational database
business and related assets (the "Assets") to Oracle Corporation for net
proceeds of $107 million. Approximately 250 employees were transferred to
Oracle Corporation upon sale of the Assets.
At the end of December 1994, the Corporation entered into an agreement to
sell its South Queensferry, Scotland semiconductor facility and related
assets to a subsidiary of Motorola, Inc. The transaction is expected to
close around the end of fiscal 1995.
11
<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 six-month period ended December 31, 1994 and the corresponding
quarter and six-month period ended January 1, 1994 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.
<TABLE>
<CAPTION>
Income and Expense Items
as a Percentage of
Total Operating Revenues (a)
-------------------------------------------------
Three-Month Period Ended Six-Month Period Ended
------------------------ ----------------------
Income and Dec. 31, Jan. 1, Dec. 31, Jan. 1,
Expense Items 1994 1994 1994 1994
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Product sales 53.8% 51.0% 53.4% 5l.3%
Service and other revenues 46.2% 49.0% 46.6% 48.7%
---------- ----------- ----------- --------
Total operating revenues 100.0% l00.0% 100.0% 100.0%
Cost of product sales 69.5% 67.0% 71.8% 65.l%
Service expense and cost
of other revenues 63.9% 60.8% 64.2% 62.7%
Total cost of operating
revenues 66.9% 63.9% 68.3% 63.9%
Research and engineering
expenses 7.1% 10.2% 8.1% 10.3%
Selling, general and
administrative expenses 25.0% 27.9% 25.9% 28.4%
----------- ----------- ----------- --------
Operating income/(loss) .9% (2.0%) (2.3%) (2.6%)
Interest income .4% .4% .3% .5%
Interest expense .6% .5% .6% .6%
----------- ----------- ----------- --------
Income/(loss) before income
taxes and cumulative
effect of change in
accounting principle .7% (2.1%) (2.5%) (2.7%)
Provision for income taxes .1% .1% .l% .1%
----------- ----------- ----------- --------
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Income/(loss) before
cumulative effect of
change in accounting
principle .5% (2.2%) (2.7%) (2.8%)
Cumulative effect of
change in accounting
principle --- --- (1.0%) .8%
----------- ----------- ------------ --------
Net income/(loss) .5% (2.2%) (1.7%) (3.6%)
Dividends on preferred
stock .2% --- ( .3%) ---
----------- ----------- ------------ --------
Net income/(loss)
applicable to
common stock .3% (2.2%) (2.0%) (3.6%)
=========== =========== ============ ========
</TABLE>
Note (a) Percentage of operating revenues may not be additive due to
rounding.
13
<PAGE>
<TABLE>
<CAPTION>
Percentage Increases/
(Decreases)
---------------------------------
Three-Month Six-Month
Period Ended Period Ended
Dec. 31, 1994 Dec. 31, 1994
vs. vs.
Income and Expense Items Jan. 1, 1994 Jan. 1, 1994
- - --------------------------------- ------------- -------------
<S> <C> <C>
Product sales 13 % 10 %
Service and other revenues 1 % 1 %
Total operating revenues 7 % 5 %
Cost of product sales 17 % 21 %
Service expense and cost of other
revenues 6 % 3 %
Total cost of operating
revenues 12 % 12 %
Research and engineering
expenses ( 25 %) ( 17 %)
Selling, general and administrative
expenses ( 4 %) ( 4 %)
Operating income/(loss) 100+% ( 8 %)
Interest income 20 % ( 27 %)
Interest expense 47 % 12 %
Income/(loss) before income taxes and
cumulative effect of change in
accounting principle 100+% ( 1 %)
Provision for income taxes 49 % 34 %
Income/(loss) before cumulative effect
of change in accounting principle 100+% -
Cumulative effect of change in
accounting principle - 100+%
Net income/(loss) 100+% ( 51 %)
Dividends on preferred stock NM NM
Net income/(loss) applicable
to common stock 100+% ( 43 %)
</TABLE>
NM=Not meaningful
14
<PAGE>
REVENUES
Total operating revenues for the first six months of fiscal 1995 were $6.6
billion, up 5% from the comparable period a year ago. Total operating
revenues included product sales of $3.5 billion and service and other
revenues of $3.1 billion. Operating revenues from customers outside the
United States were $4.2 billion or 64% of total operating revenues,
compared with $3.9 billion or 61% of total operating revenues for the first
six months 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 first six months were up slightly compared with
the same period last year.
Total operating revenues for the second quarter of fiscal 1995 were $3.5
billion, up 7% from the comparable period a year ago. Total operating
revenues included product sales of $1.9 billion and service and other
revenues of $1.6 billion. Operating revenues from customers outside the
United States were $2.3 billion or 65% of total operating revenues,
compared with $2.0 billion or 63% of total operating revenues for the
second quarter of fiscal 1994.
Product sales for the first six months and the second quarter were up 10%
and 13%, respectively, from the comparable periods a year ago, due
principally to increased demand for Alpha-based systems, Intel-based
personal computers, and certain network and storage component products.
While VAX system revenues declined from 21% to 11% of product sales from
the second quarter of fiscal 1994 to the second quarter of fiscal 1995,
Alpha-based systems revenue increased to 21% of product sales, up from 10%
for the comparable period last year, and revenues from the sale of
Intel-based personal computers represented approximately 25% of product
sales, up from 16% for the second quarter a year ago. Increased demand for
the Corporation's UNIX-based offerings contributed to the growth in
Alpha-based systems revenue for the quarter.
Service and other revenues for the first six months and the second quarter
were essentially flat compared with the same periods of fiscal 1994.
Increased revenue associated with the maintenance and support of
Alpha-based systems and service and support of other vendors' products
offset lower levels of revenue from the Corporation's VAX systems
maintenance business. Revenues from systems integration and consulting
services for the first six months and the second quarter were essentially
flat compared with the same periods last year.
During the second quarter, the Corporation sold portions of its storage
business, its relational database business and a software distribution
subsidiary. In fiscal 1994, these businesses represented approximately 4%
of total consolidated operating revenues and had an immaterial effect on
the consolidated results of operations. In addition, as part of the
15
<PAGE>
Corporation's ongoing restructuring actions, the Corporation transferred
part of its business in Germany to a new independent, employee-owned
company, effective as of October 1, 1994. In fiscal 1994, this business
represented less than 1% of total consolidated operating revenues and had
an immaterial effect on the consolidated results of operations.
EXPENSES AND PROFIT MARGINS
Product gross margin was 28% and 30% of product sales for the first six
months and the second quarter, respectively, compared with 35% and 33% for
the same periods 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, industry-standard systems which typically
carry lower margins, as well as greater use of indirect channels of
distribution. Product gross margin was 30%, up from 26% for the first
quarter of fiscal 1995. The improvement in product gross margin from the
first quarter was due principally to greater pricing discipline and a
favorable change in the mix of products sold, reflecting in part the effect
of divestment activity.
Service gross margin was 36% of service and other revenues for the first
six months, down from 37% for the comparable period last year. Service
gross margin was 36% for the quarter, down from 39% in the comparable
quarter last year. The decline in service gross margin was due principally
to a shift toward multivendor and other service offerings which generally
carry lower gross margins than the Corporation's traditional hardware
maintenance business.
Research and engineering (R&E) expenses totaled $536 million and $248
million for the first six months and the second quarter, respectively,
representing a decrease of 17% and 25%, respectively, from the comparable
periods a year ago, due principally to the elimination of redundant
engineering efforts and streamlined product offerings. The decrease in R&E
expense for the first six months and the quarter was partially attributable
to the sale of a portion of the Corporation's storage business.
Selling, general and administrative (SG&A) expenses decreased 4% to $1.7
billion for the first six months from $1.8 billion for the comparable
period last year. For the quarter, SG&A expenses totaled $869 million,
down 4% from $909 million for the second quarter of fiscal 1994. The
decrease in SG&A expenses was due principally to restructuring actions,
partially offset by increased spending for a corporate advertising campaign
and variable compensation and marketing expenses associated with higher
levels of revenue and demand generation.
The Corporation continues to implement the restructuring actions announced
at the end of fiscal 1994. Although a significant portion of the actions
called for in the plan have already been carried out (see Note B), the
Corporation believes employee separations will extend
16
<PAGE>
into the first half of fiscal 1996. The estimated total cost of
restructuring actions remains unchanged.
Interest income for the first six months and the quarter was $21 million
and $14 million, respectively. Interest expense for the first six months
and the quarter was $39 million and $23 million, respectively. Interest
expense for the second quarter of fiscal 1995 was increased by the
differential accrued on interest rate swap agreements relating to $750
million of long-term debt, while interest expense for all other periods
presented was reduced by the differential received on the same interest
rate swap agreements.
Income tax expense for the first six months and the second quarter of
fiscal 1995 was $8 million and $4 million, respectively. 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.
This program is designed 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 first six
months and the quarter, the net effect of currency exchange rate movements
on consolidated results of operations was slightly positive compared with
the same periods 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 $1.1 billion at the end of the quarter,
down from $1.2 billion at the end of fiscal 1994.
Net cash used for operating activities was $636 million for the first six
months, due principally to restructuring activities (see Note B) and
increased inventory. Cash used was partially offset by a decrease in
accounts receivable.
Net cash flow generated from investing activities was $559 million for the
first six months. During the first half of fiscal 1995, the Corporation
17
<PAGE>
sold all its shares of Ing. Olivetti & C. S.p.A. common stock, portions
of its storage business, its relational database business, a software
distribution subsidiary and other assets generating approximately $645
million of cash proceeds. The sale of property, plant and equipment
generated an additional $110 million in cash proceeds. Capital spending
was $182 million, compared with $348 million for the same period last year,
due principally to continued efforts to focus and control all spending in
the Corporation.
Net cash flow from financing activities in the first six months was $28
million, due principally to the issuance of stock under the Corporation's
employee stock purchase plans, offset by the reduction of debt and the
payment of dividends on preferred stock issued in the third quarter of
fiscal 1994.
Cash expenditures for restructuring activities were $312 million, net of
cash proceeds of $106 million, for the first half of fiscal 1995. Cash
expenditures for the first six months were less than originally projected
due to lower than anticipated facilities-related costs, deferral of cash
payments for employee separation actions taken in the first half of fiscal
1995 and higher than originally estimated cash proceeds from the sale of
property, plant and equipment associated with restructuring actions. Due
to higher than anticipated proceeds from the sale of facilities, the
Corporation has reduced its estimate of total cash required to complete the
restructuring plan from $1.2 billion to $1.1 billion. Net cash required
for restructuring actions in the second half of fiscal 1995 is expected to
be somewhat lower than the original projection of $420 million, with the
remainder of required cash to be expended principally in fiscal 1996.
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.
* * * *
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 December 31, 1994 and
the consolidated results of operations and the consolidated statements of
cash flows for the interim periods ended December 31, 1994 and January 1,
1994.
18
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Corporation during the
period covered by this report.
19
<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)
February 13, 1995
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of the Corporation for the six months ended
December 31, 1994 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-1995
<PERIOD-START> JUL-03-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,132,178
<SECURITIES> 0
<RECEIVABLES> 3,049,630
<ALLOWANCES> 131,298
<INVENTORY> 2,126,717
<CURRENT-ASSETS> 6,512,557
<PP&E> 6,228,891
<DEPRECIATION> 3,580,588
<TOTAL-ASSETS> 9,620,731
<CURRENT-LIABILITIES> 4,202,481
<BONDS> 1,010,811
<COMMON> 146,674
0
4,000
<OTHER-SE> 3,080,155
<TOTAL-LIABILITY-AND-EQUITY> 9,620,731
<SALES> 3,522,644
<TOTAL-REVENUES> 6,595,731
<CGS> 2,530,946
<TOTAL-COSTS> 4,504,654
<OTHER-EXPENSES> 2,241,408
<LOSS-PROVISION> 19,123
<INTEREST-EXPENSE> 39,294
<INCOME-PRETAX> (168,132)
<INCOME-TAX> 8,059
<INCOME-CONTINUING> (176,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (64,503)
<NET-INCOME> (111,688)
<EPS-PRIMARY> (.91)
<EPS-DILUTED> (.91)
</TABLE>
