<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 April 1, 1995
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 April 1,
1995: 146,839,030.
<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three-Month Period Ended
----------------------------
April 1, April 2,
1995 1994
---------- ----------
<S> <C> <C>
REVENUES
Product sales.................................. $1,961,450 $1,749,621
Service and other revenues..................... 1,506,014 1,509,168
---------- ----------
TOTAL OPERATING REVENUES....................... 3,467,464 3,258,789
---------- ----------
COSTS AND EXPENSES
Cost of product sales.......................... 1,399,155 1,210,478
Service expense and cost of other revenues..... 953,317 946,800
Research and engineering expenses.............. 251,167 316,767
Selling, general and administrative expenses... 777,664 954,903
---------- ----------
Operating income/(loss)........................ 86,161 (170,159)
Interest income................................ 16,479 8,697
Interest expense............................... 23,756 16,543
---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES.............. 78,884 (178,005)
Provision for income taxes..................... 5,144 5,301
---------- ----------
NET INCOME/(LOSS).............................. 73,740 (183,306)
Dividend on preferred stock.................... 8,875 1,775
---------- ----------
NET INCOME/(LOSS) APPLICABLE TO COMMON
STOCK ................................... $ 64,865 $ (185,081)
========== ==========
NET INCOME/(LOSS) APPLICABLE
PER COMMON SHARE (1)...................... $ 0.44 $ (1.34)
========== ==========
</TABLE>
(1) Net income applicable per common share is based on the weighted
average number of common shares and common share equivalents outstanding
during the period: 147,961,418 for the three months ended April 1, 1995.
Net loss applicable per common share is based only on the weighted
average number of common shares outstanding during the period: 137,897,533
shares for the three months ended April 2, 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>
Nine-Month Period Ended
-----------------------------
April 1, April 2,
1995 1994
----------- -----------
<S> <C> <C>
REVENUES
Product sales.................................. $ 5,484,094 $ 4,966,549
Service and other revenues..................... 4,579,101 4,561,267
----------- -----------
TOTAL OPERATING REVENUES....................... 10,063,195 9,527,816
----------- -----------
COSTS AND EXPENSES
Cost of product sales.......................... 3,930,101 3,304,185
Service expense and cost of other revenues..... 2,927,025 2,859,150
Research and engineering expenses.............. 787,051 962,432
Selling, general and administrative expenses... 2,483,188 2,735,798
----------- -----------
Operating loss................................. (64,170) (333,749)
Interest income................................ 37,972 37,981
Interest expense............................... 63,050 51,577
----------- -----------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES... (89,248) (347,345)
Provision for income taxes..................... 13,203 11,332
----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............ (102,451) (358,677)
(BENEFIT)/CHARGE DUE TO CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES............ (64,503) 51,026
----------- -----------
NET LOSS....................................... (37,948) (409,703)
Dividends on preferred stock................... 26,625 1,775
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK............ $ (64,573) $ (411,478)
=========== ===========
PER COMMON SHARE (1):
LOSS APPLICABLE BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES......... $ (0.90) $ (2.64)
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES.................................. 0.45 (0.38)
----------- -----------
NET LOSS APPLICABLE PER COMMON SHARE .......... $ (0.45) $ (3.02)
=========== ===========
</TABLE>
3
<PAGE>
(1) Net loss applicable per common share is based on the weighted
average number of common shares outstanding during the period: 143,983,819
shares for the nine months ended April 1, 1995 and 136,312,098 shares
for the nine months ended April 2, 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>
April 1, July 2,
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $ 1,464,933 $ 1,180,863
Accounts receivable, net of allowances
of $118,002 and $111,925...................... 3,083,853 3,318,854
Inventories
Raw materials................................. 552,438 476,172
Work-in-process............................... 510,204 605,503
Finished goods................................ 1,031,063 982,303
----------- -----------
Total inventories................................ 2,093,705 2,063,978
Prepaid expenses and deferred income taxes....... 316,050 324,676
----------- -----------
TOTAL CURRENT ASSETS............................. 6,958,541 6,888,371
----------- -----------
Property, plant and equipment, at cost........... 6,025,309 7,020,889
Less accumulated depreciation.................... 3,485,886 3,891,400
----------- -----------
Net property, plant and equipment................ 2,539,423 3,129,489
Other assets..................................... 462,086 561,911
----------- -----------
TOTAL ASSETS..................................... $ 9,960,050 $10,579,771
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
April 1, July 2,
1995 1994
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and current portion
of long-term debt............................. $ 13,304 $ 32,614
Accounts payable................................ 1,083,394 1,197,350
Income taxes payable............................ 19,142 20,753
Salaries, wages and related items............... 578,121 619,756
Deferred revenues and customer advances......... 1,218,480 1,239,792
Accrued restructuring costs..................... 693,907 1,351,075
Other current liabilities....................... 835,300 594,925
---------- -----------
TOTAL CURRENT LIABILITIES....................... 4,441,648 5,056,265
---------- -----------
Deferred income taxes........................... 4,758 4,758
Long-term debt.................................. 1,012,750 1,010,680
Postretirement and other postemployment
benefits...................................... 1,199,666 1,228,269
---------- -----------
TOTAL LIABILITIES............................... 6,658,822 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, 146,839,030 and
142,287,078 shares issued and outstanding..... 146,839 142,287
Additional paid-in capital...................... 3,471,490 3,390,040
Retained deficit................................ (321,101) (256,528)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY...................... 3,301,228 3,279,799
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY......................................... $9,960,050 $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>
Nine-Month Period Ended
--------------------------
April 1, April 2,
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (37,948) $ (409,703)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation.................................... 387,248 439,989
Amortization.................................... 51,318 82,952
Net gain on disposition of
investments and other assets................... (33,505) -
Other adjustments to net loss................... (80,793) 104,577
Decrease in accounts receivable................. 180,136 95,064
Increase in inventories......................... (291,917) (409,693)
Decrease in prepaid expenses.................... 5,373 85,759
Increase/(decrease) in accounts payable......... (80,626) 54,624
Decrease in taxes............................... (2,364) (67,654)
Increase in salaries, wages, benefits
and related items.............................. 85,860 223,836
Increase/(decrease) in deferred revenues and
customer advances.............................. (13,157) 18,629
Decrease in accrued restructuring costs......... (657,168) (507,948)
Increase/(decrease) in other
current liabilities............................ 173,702 (76,486)
---------- ----------
Total adjustments................................. (275,893) 43,649
---------- ----------
Net cash flows from operating activities.......... (313,841) (366,054)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment....... (265,000) (514,382)
Proceeds from the disposition of net
property, plant and equipment................... 138,212 76,250
Investment in other assets........................ (30,872) (61,144)
Proceeds from the disposition of other
assets.......................................... 727,008 23,516
---------- ----------
Net cash flows from investing activities.......... 569,348 (475,760)
---------- ----------
Net cash flows from operating and
investing activities............................ 255,507 (841,814)
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt.............. 9,107 11,017
Payments to retire debt......................... (26,450) (22,749)
Issuance of preferred and common
shares, including tax effects................. 72,531 473,902
Dividends on preferred stock.................... (26,625) -
---------- ----------
Net cash flows from financing activities........ 28,563 462,170
---------- ----------
Net increase/(decrease) in cash
and cash equivalents.......................... 284,070 (379,644)
Cash and cash equivalents at the
beginning of the year......................... 1,180,863 1,643,195
---------- ----------
Cash and cash equivalents at end of period...... $1,464,933 $1,263,551
========== ==========
</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
------------------------------
April 1, April 2,
1995 1994
------------ ------------
<S> <C> <C>
Net income/(loss) applicable to common and
common equivalent shares....................... $ 64,865 $ (185,081)
============ ============
Weighted average number of common shares
outstanding during the period.................. 146,290,810 137,897,533
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options.................. 1,670,608 -
------------ ------------
Total weighted average number of common
and common equivalent shares outstanding
during the period.............................. 147,961,418 137,897,533
============ ============
Net income/(loss) applicable per common
and common equivalent share.................... $ 0.44 $ (1.34)
============ ============
</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>
Nine-Month Period Ended
----------------------------
April 1, April 2,
1995 1994
---------- ----------
<S> <C> <C>
Net loss applicable to common and
common equivalent shares....................... $ (64,573) $ (411,478)
============ ============
Weighted average number of common shares
outstanding during the period.................. 143,983,819 136,312,098
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options.................. - -
------------ ------------
Total weighted average number of common
and common equivalent shares outstanding
during the period.............................. 143,983,819 136,312,098
============ ============
Net loss applicable per common
and common equivalent share.................... $ (0.45) $ (3.02)
============ ============
</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
During the first nine months of fiscal 1995, restructuring actions resulted in
approximately 6,600 employee separations, not including employees transferred in
connection with divestments. While some restructuring actions remain to be
implemented in the fourth quarter of fiscal 1995 and the first half of fiscal
1996, the number of involuntary separations is expected to be lower than
originally planned. However, associated cost savings have been offset by an
increase in estimated separation costs for certain non-U.S. employees. In
total, the estimated cost for employee separations remains unchanged. During
the first nine months of fiscal 1995, the Corporation incurred costs of
approximately $430 million for employee separations, net of postretirement
benefits curtailment gains. Cash expenditures for employee separations were
approximately $482 million for the first nine months of fiscal 1995.
The Corporation's experience in property dispositions in the first nine months
of fiscal 1995 has been favorable to plan on a cost per square-foot basis.
However, the square footage to be disposed of is expected to somewhat exceed the
original plan. In total, the estimated cost of facilities and related actions
is unchanged. During the first nine months of fiscal 1995, the Corporation
incurred expenses of $227 million for facilities and other costs. During the
first nine months of fiscal 1995, the Corporation sold, or entered into
agreements to sell, approximately 4.6 million square feet of space, including
the Corporation's former headquarters facilities in Maynard, Massachusetts,
generating approximately $134 million of cash proceeds. After cash expenditures
of $90 million for facilities and related costs, the Corporation generated net
cash proceeds of $44 million from the disposition of facilities.
Note C - Investing Activities
The Corporation adopted 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 against the Corporation and certain directors and officers 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. Plaintiffs' 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
At the end of the third quarter, the Corporation sold its contract manufacturing
business to SCI Systems, Inc. for net proceeds of approximately $75 million.
Assets sold included approximately $47 million of inventory and $20 million of
net property, plant and equipment, including a manufacturing plant in Augusta,
Maine. Approximately 700 employees were transferred to SCI Systems, Inc. at the
time of the sale.
During 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 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 second 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.
In 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.
Note F - Debt
As previously disclosed, the Corporation has in place a multi-year agreement
with a major financial institution which allows the Corporation to sell an
undivided ownership interest in its domestic trade accounts receivable. During
the quarter, the Corporation elected to amend the purchase limit under the
agreement from $600 million to $500 million. No interests in the receivables
have been sold.
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 nine-month period ended April 1, 1995 and the corresponding
quarter and nine-month period ended April 2, 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 Nine-Month Period Ended
------------------------- --------------------------
Income and April 1, April 2, April 1, April 2,
Expense Items 1995 1994 1995 1994
- - ---------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales 56.6% 53.7% 54.5% 52.1%
Service and other revenues 43.4% 46.3% 45.5% 47.9%
----------- ---------- ---------- -----------
Total operating revenues 100.0% 100.0% 100.0% 100.0%
----------- ---------- ---------- -----------
Cost of product sales 71.3% 69.2% 71.7% 66.5%
Service expense and cost
of other revenues 63.3% 62.7% 63.9% 62.7%
Total cost of operating
revenues 67.8% 66.2% 68.1% 64.7%
Research and engineering
expenses 7.2% 9.7% 7.8% 10.1%
Selling, general and
administrative expenses 22.4% 29.3% 24.7% 28.7%
----------- ---------- ---------- -----------
Operating income/(loss) 2.5% (5.2%) (0.6%) (3.5%)
Interest income 0.5% 0.3% 0.4% 0.4%
Interest expense 0.7% 0.5% 0.6% 0.5%
----------- ---------- ---------- -----------
Income/(loss) before income
taxes and cumulative
effect of changes in
accounting principles 2.3% (5.5%) (0.9%) (3.6%)
Provision for income taxes 0.1% 0.2% 0.1% 0.1%
----------- ---------- ---------- -----------
Income/(loss) before
cumulative effect of
changes in accounting
principles 2.1% (5.6%) (1.0%) (3.8%)
(Benefit)/charge due to
cumulative effect of changes
in accounting principles - - (0.6%) 0.5%
----------- ---------- ---------- -----------
Net income/(loss) 2.1% (5.6%) (0.4%) (4.3%)
Dividends on preferred
stock 0.3% 0.0% 0.3% 0.0%
----------- ---------- ---------- -----------
Net income/(loss)
applicable to
common stock 1.9% (5.6%) (0.6%) (4.3%)
=========== ========== ========== ===========
</TABLE>
Note (a) Percentage of operating revenues may not be additive due to rounding.
12
<PAGE>
<TABLE>
<CAPTION>
Percentage Increases/
(Decreases)
-------------------------------
Three-Month Nine-Month
Period Ended Period Ended
April 1, 1995 April 1, 1995
vs. vs.
Income and Expense Items April 2, 1994 April 2, 1994
- - --------------------------------------- ------------- -------------
<S> <C> <C>
Product sales 12% 10%
Service and other revenues 0% 0%
Total operating revenues 6% 6%
Cost of product sales 16% 19%
Service expense and cost of other
revenues 1% 2%
Total cost of operating revenues 9% 11%
Research and engineering expenses (21%) (18%)
Selling, general and administrative
expenses (19%) (9%)
Operating income/(loss) 100+% (81%)
Interest income 89% 0%
Interest expense 44% 22%
Income/(loss) before income taxes and
cumulative effect of changes in
accounting principles 100+% (74%)
Provision for income taxes (3%) 17%
Income/(loss) before cumulative effect
of changes in accounting principles 100+% (71%)
(Benefit)/charge due to cumulative
effect of changes in accounting
principles - NM
Net income/(loss) 100+% (91%)
Dividends on preferred stock 100+% 100+%
Net income/(loss) applicable
to common stock 100+% (84%)
</TABLE>
NM = Not meaningful
13
<PAGE>
REVENUES
Total operating revenues for the first nine months of fiscal 1995 were $10.1
billion, up 6% from the comparable period a year ago. Total operating revenues
included product sales of $5.5 billion and service and other revenues of $4.6
billion. Operating revenues from customers outside the United States were $6.5
billion or 64% of total operating revenues, compared with $5.9 billion or 62% of
total operating revenues for the first nine months of fiscal 1994. The increase
in non-U.S. revenues was due principally to increased operating revenues from
the Asia Pacific region.
Total operating revenues for the third quarter of fiscal 1995 were $3.5 billion,
up 6% from the comparable period a year ago. Total operating revenues included
product sales of $2.0 billion and service and other revenues of $1.5 billion.
Operating revenues from customers outside the United States were $2.3 billion
or 66% of total operating revenues, compared with $2.0 billion or 63% of total
operating revenues for the third quarter of fiscal 1994.
Product sales for the first nine months and the third quarter were up 10% and
12%, respectively, from the comparable periods a year ago, due principally to
increased demand for Alpha-based systems and Intel-based personal computers.
During the third quarter of fiscal 1995, Alpha-based systems revenue increased
to 22% of product sales, up from 15% for the comparable quarter last year, and
revenues from the sale of Intel-based personal computers represented
approximately 30% of product sales, up from 22% for the third quarter a year
ago. VAX systems revenues declined from 17% to 10% of product sales from the
third quarter of fiscal 1994 to the third quarter of fiscal 1995. Continued
increased demand for the Corporation's UNIX-based offerings contributed to the
growth in Alpha-based systems revenue for the quarter. New products and expanded
distribution channels contributed to increased demand for the Corporation's
personal computer products.
Historically, the Corporation has experienced some seasonality in revenues,
with a higher level of product sales in the fiscal fourth quarter. The expanded
use of indirect channels of distribution generally has moderated, and is
expected to continue to moderate, the seasonality of the Corporation's product
sales.
Service and other revenues for the first nine months and the third 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
other vendors' products offset lower levels of revenue from the Corporation's
VAX systems maintenance business.
During the first nine months of fiscal 1995, the Corporation sold portions of
its storage business, its relational database business, a software distribution
subsidiary and a contract manufacturing business (see Note E). In fiscal 1994,
these businesses represented approximately 5% of the total consolidated
operating revenues and had an immaterial effect on the consolidated results of
operations. In addition, as part of the Corporation's ongoing restructuring
14
<PAGE>
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 the total consolidated operating
revenues and had an immaterial effect on the consolidated results of operations.
After adjusting for divestments, during the first nine months and the third
quarter, the Corporation experienced revenue growth in each of its major
geographies, compared with the same periods last year.
EXPENSES AND PROFIT MARGINS
Product gross margin was 28.3% and 28.7% of product sales for the first nine
months and the third quarter, respectively, compared with 33.5% and 30.8% for
the same periods last year and 30.5% in the second quarter of fiscal 1995. The
decline in product gross margin was due to several factors, including a
continuation of the 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 distribution channels.
Service gross margin was 36.1% and 36.7% of services and other revenues for the
first nine months and the third quarter respectively, compared with 37.3% for
both the first nine months and third quarter a year ago. Although a higher
percentage of service revenues was attributable to multivendor and other service
offerings which generally carry lower gross margins than the Corporation's
traditional hardware maintenance business, the Corporation maintained service
gross margin due principally to increased efficiency in service delivery.
Research and engineering (R&E) expenses totaled $787 million and $251 million
for the first nine months and the third quarter, respectively, representing a
decrease of 18% and 21%, respectively, from the comparable periods a year ago.
The decrease in R&E expenses was due principally to the elimination of redundant
engineering efforts and streamlined product offerings. The decrease in R&E
expenses for the first nine months and the third quarter also was partially
attributable to divestments.
Selling, general and administrative (SG&A) expenses decreased 9% to $2.5 billion
for the first nine months from $2.7 billion for the comparable period last year.
For the quarter, SG&A expenses totaled $778 million, down 19% from $955 million
for the third quarter of fiscal 1994. The decrease in SG&A expenses for the
first nine months and the third quarter was due principally to restructuring
actions.
At the end of fiscal 1994, the Corporation approved a restructuring plan
intended to create a more competitive cost structure. The plan called for
reducing employee population to a target level of approximately 60,000
employees. The plan also called for reducing the Corporation's facilities by
approximately 10 million square feet. While certain restructuring actions
remain to be implemented in the fourth quarter of fiscal 1995 and in fiscal
1996, the Corporation expects to meet or exceed the objectives of the plan and
the total cost of the planned restructuring actions remains unchanged (see Note
B).
15
<PAGE>
Interest income for the first nine months and the quarter was $38 million and
$16 million, respectively, reflecting higher cash balances and higher interest
rates. Interest expense was $63 million for the first nine months and $24
million for the third quarter. Interest expense for the third 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 nine months and the third quarter of fiscal
1995 was $13 million and $5 million, respectively. Income tax expense reflects
several factors, including income taxes provided for profitable non-U.S.
operations, benefit taken for net operating loss carryforwards in certain 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 mitigate the effect of foreign currency movements
on the U.S. dollar value of 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 nine months and
the third quarter, the net effect of currency exchange rate movements on
consolidated results of operations was slightly positive.
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).
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 -
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. SFAS No. 121 requires that an impairment loss be recognized for
long-lived assets and certain identifiable intangibles when circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Corporation must adopt SFAS No. 121 by fiscal year 1997. The Corporation has
not adopted SFAS No. 121, and has not yet determined the impact of such adoption
on the Corporation's consolidated financial position or results of operations.
Adoption of SFAS No. 121 will have no cash flow impact on the Corporation.
16
<PAGE>
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR
OPERATIONS
Cash and cash equivalents totaled $1.5 billion at the end of the third quarter,
up from $1.2 billion at the end of fiscal 1994.
Net cash used for operating activities was $314 million for the first nine
months, due principally to restructuring activities (see Note B) and increased
inventory. Cash used was offset by a decrease in accounts receivable.
Net cash flows generated from investing activities was $569 million for the
first nine months of fiscal 1995. During the first nine months, the Corporation
sold all of its shares of Ing. Olivetti & C. S.p.A. common stock, portions of
its storage business, its relational database business, a software distribution
subsidiary, a contract manufacturing business and other assets generating
approximately $727 million in cash proceeds. The sale of property, plant and
equipment generated an additional $138 million in cash proceeds. Capital
spending was $265 million, compared with $514 million for the same period last
year, due principally to continued efforts to focus and control all spending in
the Corporation.
Net cash flows from financing activities in the first nine months were $29
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.
For the first nine months of fiscal 1995, cash expenditures for restructuring
activities were $438 million, net of proceeds of $134 million from the sale of
property, plant and equipment. Cash expenditures for the first nine months were
less than originally projected due to lower than anticipated facilities-related
costs, deferral of cash payments for employee separation actions and higher than
originally estimated cash proceeds from the sale of property, plant and
equipment associated with restructuring actions. Due principally to higher than
anticipated proceeds from the sale of facilities, the Corporation currently
estimates that the total cash expenditures for the restructuring plan will be
approximately $900 million to $1 billion. Net cash required for restructuring
actions in the fourth quarter of fiscal 1995 is expected to be approximately
$100 million, with the remainder of required cash expected to be expended
principally in fiscal 1996 (see Note B).
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.
17
<PAGE>
* * * *
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 1, 1995 and the consolidated results of
operations and the consolidated statements of cash flows for the interim periods
ended April 1, 1995 and April 2, 1994.
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.
18
<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)
May 15, 1995
19
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