<PAGE> 1
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 March 30, 1996
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 March 30, 1996: 153,743,699.
1
<PAGE> 2
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<CAPTION>
Three-Month Period Ended
------------------------
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
REVENUES
Product sales .................................... $2,055,710 $1,961,450
Service and other revenues ....................... 1,565,316 1,506,014
---------- ----------
TOTAL OPERATING REVENUES ......................... 3,621,026 3,467,464
---------- ----------
COSTS AND EXPENSES
Cost of product sales ............................ 1,294,032 1,399,155
Service expense and cost of other revenues ....... 1,074,650 953,317
Research and engineering expenses ................ 275,703 251,167
Selling, general and administrative expenses ..... 831,792 777,664
---------- ----------
Operating income ................................. 144,849 86,161
Interest income .................................. 18,846 16,479
Interest expense ................................. 25,985 23,756
---------- ----------
INCOME BEFORE INCOME TAXES ....................... 137,710 78,884
Provision for income taxes ....................... 13,637 5,144
---------- ----------
NET INCOME ....................................... 124,073 73,740
Dividend on preferred stock ...................... 8,875 8,875
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK ............ $ 115,198 $ 64,865
========== ==========
NET INCOME APPLICABLE PER COMMON SHARE (1) ....... $ 0.74 $ 0.44
========== ==========
<FN>
(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: 156,593,530 for the three months ended March 30, 1996 and 147,961,418
for the three months ended April 1, 1995. See page 8 of this report.
Cash dividends on common stock have never been paid by the Corporation.
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
Nine-Month Period Ended
------------------------
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
REVENUES
Product sales .................................... $ 6,221,248 $ 5,484,094
Service and other revenues ....................... 4,622,275 4,579,101
----------- -----------
TOTAL OPERATING REVENUES ......................... 10,843,523 10,063,195
----------- -----------
COSTS AND EXPENSES
Cost of product sales ............................ 4,133,992 3,930,101
Service expense and cost of other revenues ....... 3,115,310 2,927,025
Research and engineering expenses ................ 795,483 787,051
Selling, general and administrative expenses ..... 2,415,681 2,483,188
----------- -----------
Operating income/(loss) .......................... 383,057 (64,170)
Interest income .................................. 56,870 37,972
Interest expense ................................. 75,145 63,050
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ........................................ 364,782 (89,248)
Provision for income taxes ....................... 43,756 13,203
----------- -----------
INCOME/(LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ................... 321,026 (102,451)
BENEFIT DUE TO CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ................... -- (64,503)
----------- -----------
NET INCOME/(LOSS) ................................ 321,026 (37,948)
Dividends on preferred stock ..................... 26,625 26,625
----------- -----------
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ..... $ 294,401 $ (64,573)
=========== ===========
PER COMMON SHARE:(1)
INCOME/(LOSS) APPLICABLE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......... $ 1.91 $ (0.90)
BENEFIT DUE TO CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ................... -- 0.45
----------- -----------
NET INCOME/(LOSS) APPLICABLE PER
COMMON SHARE ..................................... $ 1.91 $ (0.45)
=========== ===========
<FN>
(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: 154,208,829 for the nine months ended March 30, 1996. Net loss
applicable per common share is based only on the weighted average number of
common shares outstanding during the period: 143,983,819 shares for the nine
months ended April 1, 1995. See page 9 of this report.
Cash dividends on common stock have never been paid by the Corporation.
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
March 30, July 1,
1996 1995
--------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..................... $ 1,737,981 $1,602,148
Accounts receivable, net of allowances
of $172,124 and $150,655 ...................... 3,416,358 3,219,082
Inventories
Raw materials ................................. 571,010 595,829
Work-in-process ............................... 530,470 434,408
Finished goods ................................ 1,039,310 1,023,383
----------- ----------
Total inventories ............................. 2,140,790 2,053,620
Prepaid expenses, deferred income taxes
and other current assets ...................... 366,459 397,047
----------- ----------
TOTAL CURRENT ASSETS .......................... 7,661,588 7,271,897
----------- ----------
Property, plant and equipment, at cost ........ 5,238,246 5,475,727
Less accumulated depreciation ................. 3,032,661 3,207,005
----------- ----------
Net property, plant and equipment ............. 2,205,585 2,268,722
Other assets .................................. 440,198 406,533
----------- ----------
TOTAL ASSETS .................................. $10,307,371 $9,947,152
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
<CAPTION>
March 30, July 1,
1996 1995
--------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and current portion
of long-term debt ............................. $ 10,413 $ 14,371
Accounts payable .............................. 1,116,183 1,113,160
Income taxes payable .......................... 107,208 76,757
Salaries, wages and related items ............. 638,226 562,442
Deferred revenues and customer advances ....... 1,116,308 1,232,050
Accrued restructuring costs ................... 216,071 492,046
Other current liabilities ..................... 875,432 755,466
----------- ----------
TOTAL CURRENT LIABILITIES ..................... 4,079,841 4,246,292
----------- ----------
Deferred income taxes ......................... 5,320 16
Long-term debt ................................ 1,010,817 1,012,885
Postretirement and other postemployment
benefits ...................................... 1,244,192 1,159,679
----------- ----------
TOTAL LIABILITIES ............................. 6,340,170 6,418,872
----------- ----------
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 (liquidation preference of $100.00
per share) issued and outstanding ............. 4,000 4,000
Common stock, $1.00 par value; authorized
450,000,000 shares; 153,743,699 and
149,777,573 shares issued and outstanding ..... 153,744 149,778
Additional paid-in capital .................... 3,685,266 3,544,712
Retained earnings/(deficit) ................... 124,191 (170,210)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY .................... 3,967,201 3,528,280
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $10,307,371 $9,947,152
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Nine-Month Period Ended
------------------------
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ................................ $ 321,026 $ (37,948)
Adjustments to reconcile net income/(loss) to
net cash from operating activities:
Depreciation ................................... 302,474 387,248
Amortization ................................... 52,208 51,318
Gains on disposition of other assets ........... (48,691) (33,505)
Other adjustments to net income/(loss) ......... 27,197 (80,793)
(Increase)/decrease in accounts receivable ..... (197,276) 180,136
Increase in inventories ........................ (140,054) (291,917)
Decrease in prepaid expenses ................... 17,277 5,373
Increase/(decrease) in accounts payable ........ 3,023 (80,626)
Increase/(decrease) in taxes ................... 47,657 (2,364)
Increase in salaries, wages, benefits
and related items .............................. 160,297 85,860
Decrease in deferred revenues and
customer advances .............................. (106,048) (13,157)
Decrease in accrued restructuring costs ........ (277,450) (657,168)
Increase in other current liabilities .......... 103,602 173,702
--------- ---------
Total adjustments ................................ (55,784) (275,893)
--------- ---------
Net cash flows from operating activities ......... 265,242 (313,841)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment ...... (300,200) (265,000)
Proceeds from the disposition of net
property, plant and equipment .................... 61,666 138,212
Additions to other assets ........................ (101,002) (30,872)
Proceeds from the disposition of other assets .... 120,135 727,008
--------- ---------
Net cash flows from investing activities ......... (219,401) 569,348
--------- ---------
Net cash flows from operating and
investing activities ............................. 45,841 255,507
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
<CAPTION>
Nine-Month Period Ended
-----------------------
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt ............... -- 9,107
Payments to retire debt .......................... (6,778) (26,450)
Issuance of common shares ........................ 123,395 72,531
Dividends on preferred stock ..................... (26,625) (26,625)
---------- ----------
Net cash flows from financing activities ......... 89,992 28,563
---------- ----------
Net increase in cash and cash equivalents ........ 135,833 284,070
Cash and cash equivalents at
beginning of year ................................ 1,602,148 1,180,863
---------- ----------
Cash and cash equivalents at end of period ....... $1,737,981 $1,464,933
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DIGITAL EQUIPMENT CORPORATION
<TABLE>
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
<CAPTION>
Three-Month Period Ended
--------------------------
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
Net income applicable to common and
common equivalent shares ..................... $ 115,198 $ 64,865
============ ============
Weighted average number of common shares
outstanding during the period ................ 153,070,098 146,290,810
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options ................ 3,523,432 1,670,608
------------ ------------
Total weighted average number of common
and common equivalent shares outstanding
during the period ............................ 156,593,530 147,961,418
============ ============
Net income applicable per common
and common equivalent share .................. $ 0.74 $ 0.44
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
DIGITAL EQUIPMENT CORPORATION
<TABLE>
COMPUTATION OF NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
<CAPTION>
Nine-Month Period Ended
------------------------
March 30, April 1,
1996 1995
--------- --------
<S> <C> <C>
Net income/(loss) applicable to common and
common equivalent shares ..................... $ 294,401 $ (64,573)
============ ============
Weighted average number of common shares
outstanding during the period ................ 151,391,597 143,983,819
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options ................ 2,817,232 --
------------ ------------
Total weighted average number of common
and common equivalent shares outstanding
during the period ............................ 154,208,829 143,983,819
============ ============
Net income/(loss) applicable per common
and common equivalent share .................. $ 1.91 $ (0.45)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 10
DIGITAL EQUIPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Accounting Policies
The accompanying unaudited financial statements as of and for the three-month
and nine-month periods ended March 30, 1996 and April 1, 1995 have been prepared
on substantially the same basis as the annual consolidated financial statements,
reflecting all adjustments of a normal recurring nature. In the opinion of the
Corporation, the financial statements reflect all adjustments necessary for a
fair presentation of the results for those periods and the financial condition
at those dates.
Note B - Restructuring Actions
During the first nine months of fiscal 1996, restructuring actions resulted in
approximately 1,245 employee separations. The Corporation incurred costs of
approximately $120 million, net of postretirement benefits curtailment gains,
for the first nine months. Cash expenditures for employee separations were
approximately $128 million in the first nine months of fiscal 1996.
During the first nine months of fiscal 1996, the Corporation incurred costs of
approximately $156 million for facility closures and related actions. Cash
expenditures for facility closures and related actions for the first nine
months of fiscal 1996 were $25 million, net of proceeds of $45 million from the
sale of property, plant and equipment.
Note C - Litigation
Several purported class action lawsuits were filed against the Corporation
during 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. During fiscal 1995, the lawsuits were consolidated
into three cases, which were pending before the United States District Court for
the District of Massachusetts. On August 8, 1995, the Massachusetts federal
court granted the defendants' motion to dismiss all three cases in their
entirety. On September 6, 1995, notices of appeal were filed in two of the
cases. On May 7, 1996, the United States Court of Appeals for the First Circuit
affirmed in part and reversed in part the dismissal of the two cases, and
remanded for further proceedings.
Note D - Interest Rate Swaps
In October 1995, $500 million face amount of interest rate swap agreements were
terminated, resulting in a final payment of $17 million under the agreements.
Since such swap agreements were entered into in fiscal 1994 to manage the
Corporation's exposure to interest rate movements through fiscal 2003, the final
payment will be amortized over the remaining seven years. During the initial
years, the Corporation received net proceeds on these swap agreements.
10
<PAGE> 11
Note E - Accounts Receivable Securitization Program
In October 1995, the Corporation's French subsidiary entered into a one-year
agreement with a major financial institution allowing it to sell an undivided
ownership interest in a designated pool of trade accounts receivable (the
"Receivables") to a group of investors for proceeds of up to 450 million French
francs (approximately $89 million at March 30, 1996). Commitment fees under the
agreement are immaterial. As of May 13, 1996 no interests in the Receivables had
been sold.
Note F - Divestments
At the end of the second quarter of fiscal 1996, the Corporation transferred its
learning services business to Welsh, Carson, Anderson & Stowe for proceeds of
approximately $80 million. Approximately 600 employees transferred with this
business.
Gains and losses on divestments are included in selling, general and
administrative expenses on the consolidated statements of operations, except
for unrealized gains which are reported separately in fiscal 1995 due to
adoption of a change in accounting principle. Total net gains are reported as
gains on disposition of other assets on the consolidated statements of cash
flows.
Note G - Pension Plan
In December 1995, the Board of Directors approved an amendment to the
Corporation's U.S. pension plan effective March 1, 1996. Pursuant to the
amendment to the plan, the defined pension benefit will be based on an account
balance comprised of a percentage of pay for each year of service and interest
credited on the cumulative balance. Prior to March 1, 1996, the defined benefit
plan was calculated based on a percentage of the employee's earnings during
service to the Corporation.
On the effective date of the amendment, the vested and accumulated benefit
obligations of the pension plan more closely approximated the projected benefit
obligation. The implementation of the amended plan did not have a material
effect on the consolidated statement of operations or the consolidated balance
sheet. There was no cash flow impact from the implementation of the amendment to
the plan.
11
<PAGE> 12
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 March 30, 1996 and the corresponding quarter and
nine-month period ended April 1, 1995 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
------------------------ -----------------------
March 30, April 1, March 30, April 1,
Income and expense items 1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Product sales 56.8% 56.6% 57.4% 54.5%
Service and other revenues 43.2% 43.4% 42.6% 45.5%
----- ----- ----- -----
Total operating revenues 100.0% 100.0% 100.0% 100.0%
Cost of product sales 62.9% 71.3% 66.4% 71.7%
Service expense and cost
of other revenues 68.7% 63.3% 67.4% 63.9%
Total cost of operating
revenues 65.4% 67.8% 66.9% 68.1%
Research and engineering
expenses 7.6% 7.2% 7.3% 7.8%
Selling, general and
administrative expenses 23.0% 22.4% 22.3% 24.7%
----- ----- ----- -----
Operating income/(loss) 4.0% 2.5% 3.5% (0.6%)
Interest income 0.5% 0.5% 0.5% 0.4%
Interest expense 0.7% 0.7% 0.7% 0.6%
Income/(loss) before income
taxes and cumulative
effect of change in
accounting principle 3.8% 2.3% 3.4% (0.9%)
Provision for income taxes 0.4% 0.1% 0.4% 0.1%
----- ----- ----- -----
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Income and Expense Items
as a Percentage of
Total Operating Revenues (a) (continued)
-------------------------------------------------
Three-Month Period Ended Nine-Month Period Ended
------------------------ -----------------------
March 30, April 1, March 30, April 1,
Income and expense items 1996 1995 1996 1995
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Income/(loss) before
cumulative effect of
change in accounting
principle 3.4% 2.1% 3.0% (1.0%)
Benefit due to cumulative
effect of change in
accounting principle -- -- -- (0.6%)
--- --- --- ----
Net income/(loss) 3.4% 2.1% 3.0% (0.4%)
Dividends on preferred
stock 0.2% 0.3% 0.2% 0.3%
--- --- --- ----
Net income/(loss)
applicable to
common stock 3.2% 1.9% 2.7% (0.6%)
=== === === ====
<FN>
Note (a): Percentage of operating revenues may not be additive due to rounding.
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Percentage Increases/
(Decreases)
-------------------------------
Three-Month Nine-Month
Period Ended Period Ended
March 30, 1996 March 30, 1996
vs. vs.
Income and Expense Items April 1, 1995 April 1, 1995
- - ------------------------ -------------- --------------
<S> <C> <C>
Product sales 4.8% 13.4%
Service and other revenues 3.9% 0.9%
Total operating revenues 4.4% 7.8%
Cost of product sales (7.5%) 5.2%
Service expense and cost of other
revenues 12.7% 6.4%
Total cost of operating revenues 0.7% 5.7%
Research and engineering expenses 9.8% 1.1%
Selling, general and administrative
expenses 7.0% (2.7%)
Operating income/(loss) 68.1% 100+%
Interest income 14.4% 49.8%
Interest expense 9.4% 19.2%
Income/(loss) before income taxes and
cumulative effect of change in
accounting principle 74.6% 100+%
Provision for income taxes 100+% 100+%
Income/(loss) before cumulative effect
of change in accounting principle 68.3% 100+%
Cumulative effect of change in
accounting principle N/M N/M
Net income/(loss) 68.3% 100+%
Dividends on preferred stock 0.0% 0.0%
Net income/(loss) applicable
to common stock 77.6% 100+%
<FN>
N/M = Not meaningful
</TABLE>
14
<PAGE> 15
REVENUES
Total operating revenues for the first nine months of fiscal 1996 were $10.8
billion, up 8% from the comparable period last year. Total operating revenues
included product sales of $6.2 billion and service and other revenues of $4.6
billion. For the first nine months of fiscal 1996 and 1995, respectively,
operating revenues from customers outside of the United States were $7.1 billion
and $6.5 billion, representing 65% and 64% of total operating revenues for the
respective periods.
Total operating revenues for the third quarter of fiscal 1996 were $3.6 billion,
up 4% from the comparable quarter last year. Total operating revenues included
product sales of $2.0 billion and service and other revenues of $1.6 billion.
For the third quarter of fiscal 1996 and 1995, respectively, operating revenues
from customers outside of the United States were $2.4 billion and $2.3 billion,
representing 68% and 66% of total operating revenues for the respective periods.
Product sales for the first nine months of fiscal 1996 were up 13% compared with
the same period last year, due principally to increased demand for Alpha-based
systems and Intel-based personal computers. Although product sales for the third
quarter of fiscal 1996 were up 5% from the comparable period last year, revenues
from personal computers declined approximately 10% for the third quarter
compared with the same period last year, due principally to a slowdown in the
Corporation's sales to commercial customers, competitive pricing pressures and
higher levels of inventory in distribution channels. Adjusted for divestments,
product sales for the first nine months and the third quarter increased 21% and
9%, respectively, compared with the same periods last year. Continued increased
demand for the Corporation's UNIX-based offerings and increased acceptance of
the Corporation's Windows NT-based products contributed to the growth in
Alpha-based systems revenues in the first nine months and the third quarter of
fiscal 1996. Demand for the Corporation's networks and storage subsystem
products during the first nine months and the third quarter also continued to
strengthen compared with the same periods of fiscal 1995.
For the first nine months and the third quarter of fiscal 1996, Alpha-based
systems revenues represented 28% and 33%, respectively, of product sales, up
from 21% and 22%, respectively, for the same periods last year. Revenues from
Intel-based personal computers represented 27% and 25% of product sales for the
first nine months and the third quarter, respectively, compared with 26% and 30%
for the same periods last year. For the first nine months and the third quarter,
VAX systems revenues represented 5% of product sales, compared with 11% and 10%
for the same periods last year, as the Corporation nears the end of a major
product transition. Revenues from the Corporation's other product businesses,
including storage subsystems, networks and software, represented 40% and 37% of
product sales for the first nine months and the third quarter, respectively,
compared with 42% and 38% for the comparable periods last year.
Service and other revenues for the first nine months were essentially unchanged
compared with the same period of fiscal 1995. For the third quarter of fiscal
1996, service and other revenues were up 4% compared with the same periods of
fiscal 1995. Revenues from multivendor maintenance services and integration
services increased, offsetting a decline in revenue from Digital products
maintenance business.
15
<PAGE> 16
EXPENSES AND PROFIT MARGINS
Product gross margin for the first nine months and the third quarter of fiscal
1996 was 34% and 37%, respectively, up from 28% and 29%, respectively, in the
comparable periods last year. The increase in product gross margin was due
principally to a favorable product mix driven by increased Alpha-based systems
revenues, manufacturing cost efficiencies and the effect of divesting
lower-margin businesses.
Service gross margin for the first nine months and the third quarter of fiscal
1996 was 33% and 31%, respectively, compared with 36% and 37% for the same
periods last year. The decline in service gross margin was due principally to a
continuing shift in the mix of service revenues toward lower-margin multivendor
service offerings.
Research and engineering (R&E) expenses totaled $795 million for the first nine
months of fiscal 1996, up slightly from $787 million for the same period last
year. R&E expenses for the third quarter of fiscal 1996 were $276 million, up
10% from $251 million for the third quarter of fiscal 1995. The Corporation
believes that its level of R&E spending as a percentage of total operating
revenues is appropriate to support current operations and to maintain a strong,
consistently market-driven product set.
Selling, general and administrative (SG&A) expenses totaled $2.4 billion for the
first nine months of fiscal 1996, down slightly from $2.5 billion for the same
period last year. For the third quarter of fiscal 1996, SG&A expenses totaled
$832 million, up 7% from $778 million for the third quarter of fiscal 1995. The
increase in SG&A expenses for the quarter was due principally to increased
variable costs associated with higher revenue levels and infrastructure
investments, partially offset by the favorable effects of restructuring actions
taken in the first half of fiscal 1995 and the effects of divestments (see Note
F).
At the end of fiscal 1994, the Corporation approved a restructuring plan
intended to achieve a more competitive cost structure. While certain originally
planned restructuring actions remain to be implemented during the current
fiscal year and beyond, the Corporation expects to meet the objectives of the
plan. The total estimated cost of these actions remains unchanged (see Note B).
As the Corporation implements its strategic plan, it will continue to focus on
productivity improvements and cost controls. The Corporation expects to realign
business activities and take the actions necessary to achieve a competitive cost
structure appropriate for the level and mix of revenues.
Employee population decreased by 800 from the end of fiscal 1995 and by 2,200
from the end of the third quarter of fiscal 1995 to approximately 60,900 at the
end of the third quarter of fiscal 1996.
The net effect of currency exchange rate movements on revenues was slightly
favorable in the first nine months and the third quarter of fiscal 1996 compared
with the first nine months and the third quarter of fiscal 1995. This effect was
offset substantially by the effects of currency exchange rate movements on
non-dollar denominated costs.
Interest income for the first nine months and the third quarter of fiscal 1996
was $57 million and $19 million, respectively, compared with $38 million and $16
million for the comparable periods last year,
16
<PAGE> 17
reflecting higher interest rates and significantly higher cash balances.
Interest expense for the first nine months and the third quarter was $75 million
and $26 million, respectively, compared with $63 million and $24 million for the
comparable periods of fiscal 1995. For the first nine months interest expense
related to interest rate swap agreements was approximately $2 million, compared
with a reduction of interest expense of approximately $2 million for the first
nine months of fiscal 1995 (see Note D).
Income tax expense for the first nine months and the third quarter of fiscal
1996 was $44 million and $14 million, respectively, compared with $13 million
and $5 million for the same periods of fiscal 1995. Income tax expense reflects
several factors, including income taxes provided for profitable operations,
benefits taken from net operating loss carryforwards and an inability to
recognize currently certain non-U.S. tax benefits from operating losses.
As previously reported, in February 1996, the Corporation terminated its
negotiations with Cirrus Logic, Inc. to establish a semiconductor manufacturing
relationship consistent with the terms of a Memorandum of Understanding signed
in December 1995.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 123 - Accounting for Stock-Based
Compensation. SFAS No. 123 encourages companies to recognize compensation costs
for all stock-based compensation arrangements using a fair value method of
accounting. Alternatively, SFAS No. 123 permits a company to continue accounting
for these arrangements under Accounting Principles Board Opinion No. 25 -
Accounting for Stock Issued to Employees, accompanied by footnote disclosure of
the pro forma effects on net income and earnings per share had the new
accounting rules been applied. The Corporation expects to implement the pro
forma disclosures provision in fiscal 1997. The adoption of SFAS No. 123 will
have no cash flow impact on the Corporation.
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR
OPERATIONS
Cash and cash equivalents totaled $1.7 billion at the end of the third quarter
of fiscal 1996, up from $1.6 billion at the end of fiscal 1995.
Net cash generated from operating activities was $265 million for the first nine
months of fiscal 1996, due principally to increased profits. Cash expenditures
for restructuring activities were $153 million, net of proceeds of approximately
$45 million from the sale of property, plant and equipment. The Corporation
currently estimates that cash expenditures for restructuring actions for the
remainder of fiscal 1996 will be $75 million to $100 million (see Note B).
Net cash used for investing activities was $219 million for the first nine
months of fiscal 1996, due principally to capital spending and an advance to a
supplier, offset by proceeds from the disposition of other assets (see Note F)
and the sale of property, plant and equipment.
Net cash generated from financing activities was $90 million for the first nine
months of fiscal 1996, due principally to the issuance of stock under the
Corporation's employee stock plans, offset by the payment of dividends on
preferred stock.
17
<PAGE> 18
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 current and future operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, information provided by the Corporation or statements made by
its employees may contain "forward-looking" information, as that term is defined
in the Private Securities Litigation Reform Act of 1995 (the "Act"). The
Corporation cautions investors that there can be no assurance that actual
results or business conditions will not differ materially from those projected
or suggested in such forward-looking statements as a result of various factors,
including but not limited to the following:
- - -- The Corporation's future operating results are dependent on its ability to
develop, produce and market new and innovative products and services. There are
numerous risks inherent in this complex process, including rapid technological
change and the requirement that the Corporation bring to market in a timely
fashion new products and services which meet customers' changing needs.
- - -- Historically, the Corporation has generated a disproportionate amount of its
operating revenues toward the end of each quarter, making precise prediction of
revenues and earnings particularly difficult and resulting in risk of variance
of actual results from those forecast at any time. In addition, the
Corporation's operating results historically have varied from fiscal period to
fiscal period; accordingly, the Corporation's financial results in any
particular fiscal period are not necessarily indicative of results for future
periods.
- - -- The Corporation offers a broad variety of products and services to customers
around the world. Changes in the mix of products and services comprising
revenues could cause actual operating results to vary from those expected.
- - -- The Corporation's success is partly dependent on its ability to predict
demand and adjust production capacity accordingly, which is partly dependent
upon the ability of external suppliers to deliver components at reasonable
prices and in a timely manner; capacity or supply constraints could adversely
affect future operating results.
- - -- The Corporation operates in a highly competitive environment and in a highly
competitive industry, which include significant pricing pressures and intense
competition for skilled employees. Particular business segments may from time to
time experience unanticipated intense competitive pressure, possibly causing
operating results to vary from those expected.
- - -- The Corporation offers its products and services directly and through
indirect distribution channels. Changes in the financial condition of, or the
Corporation's relationship with, distributors and other indirect channel
partners could cause actual operating results to vary from those expected.
18
<PAGE> 19
- - -- The Corporation does business worldwide in over 100 countries. Global and/or
regional economic factors and potential changes in laws and regulations
affecting the Corporation's business, including without limitation, currency
fluctuations, changes in monetary policy and tariffs, and federal, state and
international laws regulating the environment, could impact the Corporation's
financial condition or future results of operations.
- - -- The market price of the Corporation's securities could be subject to
fluctuations in response to quarter to quarter variations in operating results,
changes in analysts' earnings estimates, market conditions in the information
technology industry, as well as general economic conditions and other factors
external to the Corporation.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS.
As previously reported, several purported class action lawsuits were filed
against the Corporation during 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. During fiscal 1995, the
lawsuits were consolidated into three cases, which were pending before the
United States District Court for the District of Massachusetts. On August 8,
1995, the Massachusetts federal court granted the defendants' motion to dismiss
all three cases in their entirety. On September 6, 1995, notices of appeal were
filed in two of the cases. On May 7, 1996, the United States Court of Appeals
for the First Circuit affirmed in part and reversed in part the dismissal of the
two cases, and remanded for further proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K.
The Corporation filed with the Securities and Exchange Commission a
Report on Form 8-K on February 16, 1996.
20
<PAGE> 21
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 13, 1996
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DIGITAL EQUIPMENT CORPORATION FOR THE NINE
MONTHS ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 30, 1996.
</LEGEND>
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-START> JUL-02-1995
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,737,981
<SECURITIES> 0
<RECEIVABLES> 3,588,482
<ALLOWANCES> 172,124
<INVENTORY> 2,140,790
<CURRENT-ASSETS> 7,661,588
<PP&E> 5,238,246
<DEPRECIATION> 3,032,661
<TOTAL-ASSETS> 10,307,371
<CURRENT-LIABILITIES> 4,079,841
<BONDS> 1,010,817
<COMMON> 153,744
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<OTHER-SE> 3,809,457
<TOTAL-LIABILITY-AND-EQUITY> 10,307,371
<SALES> 6,221,248
<TOTAL-REVENUES> 10,843,523
<CGS> 4,133,992
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<OTHER-EXPENSES> 3,211,164
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<INTEREST-EXPENSE> 75,145
<INCOME-PRETAX> 364,782
<INCOME-TAX> 43,756
<INCOME-CONTINUING> 321,026
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