<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 September 27, 1997
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)
(978) 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 September 27, 1997: 147,797,657.
<PAGE> 2
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three-Month Period Ended
-----------------------------------------
September 27, September 28,
1997 1996
--------------- -----------------
<S> <C> <C>
REVENUES
Product sales .................................. $ 1,582,232 $ 1,522,163
Service revenues ............................... 1,378,083 1,389,478
----------- -----------
TOTAL OPERATING REVENUES ....................... 2,960,315 2,911,641
----------- -----------
COSTS AND EXPENSES
Cost of product sales .......................... 1,019,118 1,048,390
Service expense ................................ 949,997 951,183
Research and engineering expenses .............. 265,331 257,644
Selling, general and administrative expenses ... 707,213 732,175
----------- -----------
Operating income/(loss)......................... 18,656 (77,751)
Other (income)/expense, net .................... (12,796) (16,172)
----------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES .............. 31,452 (61,579)
Provision for income taxes ..................... 6,343 4,302
----------- -----------
NET INCOME/(LOSS) .............................. 25,109 (65,881)
Dividend on preferred stock .................... 8,875 8,875
----------- -----------
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ... $ 16,234 $ (74,756)
=========== ===========
NET INCOME/(LOSS) APPLICABLE PER COMMON
SHARE (1)..................................... $ 0.11 $ (0.48)
=========== ===========
</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: 150,550,230 shares for the three months ended September 27, 1997. Net
loss applicable per common share is based only on the weighted average number of
common shares outstanding during the period: 154,335,259 shares for the three
months ended September 28, 1996. See page 7 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> 3
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
September 27, June 28,
1997 1997
--------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $1,803,052 $1,358,750
Short-term investments ........................... 550,318 1,160,265
Accounts receivable, net of allowances
of $227,494 and $263,763......................... 2,629,634 2,930,014
Inventories:
Raw materials .................................... 441,441 421,984
Work-in-process .................................. 314,147 350,421
Finished goods ................................... 742,234 730,740
---------- ----------
Total inventories................................. 1,497,822 1,503,145
Prepaid expenses, deferred income taxes
and other current assets ......................... 377,334 324,122
---------- ----------
TOTAL CURRENT ASSETS ............................. 6,858,160 7,276,296
---------- ----------
Property, plant and equipment, at cost ........... 4,866,710 4,868,548
Less accumulated depreciation .................... 2,784,327 2,764,901
---------- ----------
Net property, plant and equipment ................ 2,082,383 2,103,647
Other assets ..................................... 289,703 312,951
---------- ----------
TOTAL ASSETS ..................................... $9,230,246 $9,692,894
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 27, June 28,
1997 1997
---------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank loans and current portion
of long-term debt .............................. $ 285,942 $ 262,835
Accounts payable ............................... 692,695 871,760
Income taxes payable ........................... 124,383 101,286
Salaries, wages and related items .............. 598,601 637,587
Deferred revenues and customer advances ........ 1,035,756 1,079,003
Accrued restructuring costs .................... 332,651 382,559
Other current liabilities ...................... 828,987 905,900
----------- -----------
TOTAL CURRENT LIABILITIES ...................... 3,899,015 4,240,930
----------- -----------
Long-term debt ................................. 743,489 743,440
Postretirement and other postemployment
benefits ....................................... 1,173,186 1,163,568
----------- -----------
TOTAL LIABILITIES .............................. 5,815,690 6,147,938
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value (liquidation
preference of $100.00 per share); 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; 157,219,309 and
157,232,104 shares issued ...................... 157,219 157,232
Additional paid-in capital ..................... 3,838,310 3,835,697
Retained deficit ............................... (224,721) (234,841)
Treasury stock at cost; 9,421,652 shares
and 6,132,201 shares ........................... (360,252) (217,132)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ..................... 3,414,556 3,544,956
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 9,230,246 $ 9,692,894
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three-Month Period Ended
---------------------------------------
September 27, September 28,
1997 1996
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income/(loss) ................................. $ 25,109 $ (65,881)
Adjustments to reconcile net income/(loss) to
net cash from operating activities:
Depreciation ...................................... 93,868 97,386
Amortization ...................................... 11,513 15,155
Gain on disposition and write-down of
other assets ...................................... (3,982) (12,330)
Other adjustments to net income/(loss) ............ (16,076) 28,741
Decrease in accounts receivable ................... 306,780 290,443
Decrease in inventories ........................... 4,654 139,714
Increase in prepaid expenses and other
current assets .................................... (56,090) (33,269)
Decrease in accounts payable ...................... (179,065) (187,385)
Increase/(decrease) in taxes ...................... 27,282 (1,133)
Increase/(decrease) in salaries, wages, benefits
and related items ................................. (29,368) 33,091
Decrease in deferred revenues and
customer advances ................................. (43,247) (46,710)
Decrease in accrued restructuring costs ........... (49,908) (78,208)
Decrease in other current liabilities ............. (83,667) (41,398)
--------- ---------
Total adjustments ................................. (17,306) 204,097
--------- ---------
Net cash flows from operating activities .......... 7,803 138,216
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment ....... (81,028) (86,338)
Proceeds from the disposition of
property, plant and equipment ..................... 2,917 2,671
Purchases of short-term investments ............... (202,308) (658,212)
Maturities of short-term investments .............. 812,255 159,511
Investments in other assets ....................... (2,395) (4,201)
Proceeds from the disposition of other assets ..... 42,571 8,262
--------- ---------
Net cash flows from investing activities .......... 572,012 (578,307)
--------- ---------
Net cash flows from operating and
investing activities .............................. 579,815 (440,091)
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DIGITAL EQUIPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three-Month Period Ended
-----------------------------
September 27, September 28,
1997 1996
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Proceeds from the issuance of debt ...................... 24,082 3,035
Payments to retire debt ................................. (1,210) (1,223)
Purchase of treasury shares ............................. (160,078) (57,279)
Issuance of common and treasury shares .................. 10,568 7,199
Dividend on preferred stock ............................. (8,875) (8,875)
----------- -----------
Net cash flows from financing activities ................ (135,513) (57,143)
----------- -----------
Net increase/(decrease) in cash and cash equivalents .... 444,302 (497,234)
Cash and cash equivalents at the
beginning of the year ................................... 1,358,750 1,791,754
----------- -----------
Cash and cash equivalents at end of period .............. $ 1,803,052 $ 1,294,520
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE> 7
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
---------------------------------
September 27, September 28,
1997 1996
-------------- ---------------
<S> <C> <C>
Net income/(loss) applicable to common and
common equivalent shares ............................. $ 16,234 $ (74,756)
============= =============
Weighted average number of common shares
outstanding during the period ........................ 148,907,085 154,335,259
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options ........................ 1,643,145 --
------------- -------------
Total weighted average number of common
and common equivalent shares outstanding
during the period .................................... 150,550,230 154,335,259
============= =============
Net income/(loss) applicable per common and
common equivalent share .............................. $ 0.11 $ (0.48)
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
11/07/97
DIGITAL EQUIPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Accounting Policies
Principles of consolidation: The accompanying unaudited financial statements as
of and for the three-month periods ended September 27, 1997 and September 28,
1996 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 management, the financial statements reflect
all adjustments necessary for a fair presentation of the results for those
periods and the financial condition at those dates. Certain prior year's amounts
have been reclassified to conform with the current year presentation.
Other (income)/expense, net:
<TABLE>
<CAPTION>
(in thousands) September 27, 1997 September 28, 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ (30,807) $ (25,050)
Interest expense 21,961 21,165
Net gain on divestments (3,950) (12,287)
- ----------------------------------------------------------------------------------
Other (income)/expense, net $ (12,796) $ (16,172)
- ----------------------------------------------------------------------------------
</TABLE>
Note B - Restructuring Actions
During the first three months of fiscal 1998, the Corporation incurred costs of
$31 million for approximately 230 employee separations and for separation
actions taken at the end of fiscal 1997, but not paid out until the first
quarter of fiscal 1998. In addition, the Corporation incurred costs of $19
million for facilities closures and related actions. Cash expenditures for
restructuring activities were $47 million for the first three months of fiscal
1998.
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
8
<PAGE> 9
entirety. 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.
The Corporation and Intel Corporation ("Intel") have been involved in litigation
commenced in the fourth quarter of fiscal 1997 in the U.S. District Courts for
the Districts of Massachusetts and Northern California, and in September 1997 in
the U.S. District Court for the District of Oregon claiming, respectively,
willful infringement by Intel of certain of the Corporation's patents through
the manufacture, sale and use of Intel's families of Pentium microprocessors,
breach of contract and various other unfair or unlawful business practices by
the Corporation, and willful infringement by the Corporation of certain of
Intel's patents through the manufacture, sale and use of various computer
products. On October 27, 1997, the Corporation and Intel announced that they had
reached agreement to settle the pending litigation between the parties and to
request a stay of all pending litigation, subject to receipt of government
approval necessary to finalize the transactions contemplated by the parties'
agreement (see Note F).
Note D - Treasury Stock
During the first quarter of fiscal 1998, the Corporation purchased in the open
market 3.7 million shares of its common stock for an aggregate purchase price of
$160.1 million, or an average of $42.79 per common share. Approximately 451,000
shares were issued under employee stock plans and the remaining shares are held
in treasury. The Corporation continues to repurchase shares of its common stock,
as conditions warrant, under a previously announced program.
Note E - Statement of Financial Accounting Standard No. 128 - Earnings
per Share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128-Earnings per Share. SFAS No. 128
establishes standards for computing and presenting earnings per share (EPS) and
requires a dual presentation of basic and dilutive EPS. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997 and earlier adoption is not permitted. If the Corporation had presented EPS
based on SFAS No. 128, the reconciliation of EPS would approximate the pro forma
amounts indicated below:
9
<PAGE> 10
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
For the Three-Month Period Ended
September 27, 1997 September 28, 1996
------------------ ------------------
<S> <C> <C>
Net income/(loss) $ 25,109 $ (65,881)
Less: Dividend on preferred stock 8,875 8,875
------------- -------------
Net income/(loss) applicable
to common shares $ 16,234 $ (74,756)
============= =============
Net income/(loss) applicable to common
and common equivalent shares $ 16,234 $ (74,756)
============= =============
Weighted average number of
common shares outstanding 148,751,388 154,524,234
Effect of common equivalent shares 1,643,145 --
------------- -------------
Total weighted average common and
common equivalent shares 150,394,533 154,524,234
============= =============
Net income/(loss) applicable
per common share $ 0.11 $ (0.48)
============= =============
Net income/(loss) applicable per common
and common equivalent share $ 0.11 $ (0.48)
============= =============
</TABLE>
Net income applicable per common share is based on the weighted average number
of common shares and common equivalent shares outstanding during the period. Net
loss applicable per common share is based only on the weighted average number of
common shares outstanding during the period.
Note F - Subsequent Event
On October 27, 1997, the Corporation and Intel announced that they had reached
an agreement to establish a broad-based business relationship, including the
sale of the Corporation's semiconductor manufacturing operations to Intel for a
purchase price equal to the net book value of the transferred assets (currently
estimated to be approximately $700 million), cross-licensing of patents, supply
of both Intel and Alpha microprocessors and development of future systems based
on Intel's 64-bit microprocessors. The agreement provides that Intel will make
offers of employment to employees of the Corporation's semiconductor
manufacturing operations, except for those employees associated with the Alpha
and Alpha-related semiconductor design teams. The Corporation and Intel agreed
to request a stay of all pending litigation until U.S. government approval is
granted, which is required to finalize the parties' agreement (see Note C).
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REVENUES
Total operating revenues for the first quarter of fiscal 1998 were $3.0 billion,
up 2% from the comparable quarter last year. Total operating revenues include
product sales of $1.6 billion and service revenues of $1.4 billion.
<TABLE>
<CAPTION>
Revenues (dollars in millions)
- ---------------------------------------------------------------------------------------
First quarter of fiscal year 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Product sales $ 1,582 $ 1,522
% of total revenues 53% 52%
- ---------------------------------------------------------------------------------------
Service revenues $ 1,378 $ 1,390
% of total revenues 47% 48%
- ---------------------------------------------------------------------------------------
Total revenues $ 2,960 $ 2,912
- ---------------------------------------------------------------------------------------
</TABLE>
Product sales for the first three months of fiscal 1998 were up 4% from the
comparable quarter last year. The increase in product sales reflects increased
revenues from the sale of servers (Intel and Alpha-based), storage and network
products, and a decrease in revenues from the sales of certain client products,
principally Alpha-based UNIX workstations.
For the first three months of fiscal 1998, revenues from the sale of servers
represented 35% of product sales, up from 29% for the same quarter last year.
Client sales represented 27% and 31% of product sales for the first quarter of
fiscal 1998 and 1997, respectively. Revenues from the Corporation's components
and other products represented 38% and 40% of product sales for the first three
months of fiscal 1998 and 1997, respectively.
Service revenues for the first quarter of fiscal 1998 were $1.4 billion,
essentially unchanged from the first three months of fiscal 1997.
Service revenues reflect growth in multivendor services and client/server
outsourcing services, offset by an anticipated decrease in revenues from Digital
products maintenance services.
Operating revenues from customers outside of the United States were $1.9 billion
for the first quarter of fiscal 1998 and 1997, representing 64% and 65% of total
revenues, respectively. The Corporation's operating results for the first three
months of fiscal 1998 were adversely impacted by the continued strengthening of
the U.S. dollar. Removing the effects of foreign currency exchange rate
movements, the increase in total operating revenues for the first quarter of
fiscal 1998 would have been 8%, compared with 2% as reported.
11
<PAGE> 12
EXPENSES AND PROFIT MARGINS
<TABLE>
<CAPTION>
Gross margin (dollars in millions)
- ------------------------------------------------------------------------------
First quarter of fiscal year 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Product sales gross margin $ 563 $ 474
% of related revenues 36% 31%
- ------------------------------------------------------------------------------
Service revenues gross margin $ 428 $ 438
% of related revenues 31% 32%
- ------------------------------------------------------------------------------
</TABLE>
Product gross margin was 36% of product sales for the first quarter of fiscal
1998, compared with 31% for the same period a year ago. The continued
improvement in product gross margin was due principally to manufacturing cost
efficiencies and an increased proportion of higher-margin server revenues.
Service gross margin was 31% of service revenues for the first three months of
fiscal 1998, down slightly from the first quarter of fiscal 1997. Service gross
margin reflects the continued focus on more profitable systems integration
contracts and the continued shift in the mix of service revenues toward
lower-margin service offerings.
<TABLE>
<CAPTION>
Operating expenses (dollars in millions)
- -------------------------------------------------------------------------------
First quarter of fiscal year 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Research and engineering $ 265 $ 258
% of total revenues 9% 9%
- -------------------------------------------------------------------------------
Selling, general and administrative $ 707 $ 732
% of total revenues 24% 25%
- -------------------------------------------------------------------------------
</TABLE>
Research and engineering (R&E) spending totaled $265 million for the first three
months of fiscal 1998, up from $258 million for the same quarter last year. The
Corporation believes that this level of R&E investment is appropriate for the
Corporation to continue to provide competitive products and services.
Selling, general and administrative (SG&A) expenses were $707 million for the
first quarter of fiscal 1998, down from $732 million for the first three months
of fiscal 1997. The decline in SG&A expenses reflects the positive effects of
currency rate movements and the Corporation's continued focus on achieving a
competitive cost structure through reductions in population and facilities
expenditures, partially offset by increases in salaries and wages and investment
in demand generation activities.
At the end of fiscal 1996, the Corporation approved a restructuring plan
intended to increase sales productivity, further consolidate manufacturing
plants and distribution sites, improve service delivery and further reduce
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<PAGE> 13
overhead in support areas. The planned employee separations are expected to be
substantially complete in fiscal 1998. The number of involuntary separations is
expected to be lower than originally planned due principally to a higher than
anticipated level of voluntary separations. However, associated
restructuring-related cost savings are expected to be offset by an increase in
estimated separation costs for certain non-U.S. employees. The total estimated
cost of restructuring actions is unchanged (see Note B).
Total employee population decreased by 500 during the first quarter of fiscal
1998 to approximately 54,400, and by 2,600 from the end of the first quarter of
fiscal 1997.
Net other income was $13 million and $16 million for the first quarter of fiscal
1998 and 1997, respectively. Net gains on divestments were $4 million for the
first three months of fiscal 1998, compared with $12 million for the same
quarter a year ago. The decrease in gains from divestments in the first quarter
of fiscal 1998 was offset by increased interest income on higher cash and
short-term investment balances.
Income tax expense for the first three months of fiscal 1998 was $6 million,
compared with $4 million for the same quarter last year. Income tax expense
reflects several factors, including income taxes for profitable operations,
benefits taken from net operating loss carryforwards and an inability to
recognize currently certain tax benefits from operating losses.
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR
OPERATIONS
Cash, cash equivalents and short-term investments totaled $2.4 billion at the
end of the first quarter of fiscal 1998, down from $2.5 billion at the end of
fiscal 1997.
Net cash generated from operating activities was $8 million for the first
quarter of fiscal 1998, due principally to a decrease in accounts receivable
from the end of fiscal 1997, offset by a decrease in accounts payable and
various other liabilities. Cash expenditures for restructuring activities were
$47 million for the first three months of fiscal 1998. Future cash expenditures
for currently planned restructuring activities are estimated to be $300 million
for fiscal 1998 and beyond, the majority of which will be used in fiscal 1998
(see Note B).
Net cash from investing activities was $572 million in the first three months of
fiscal 1998. The increase in cash from investing activities was due principally
to maturities of short-term investments. As investments mature, the proceeds are
reinvested as cash, cash equivalents or short-term investments, as conditions
warrant.
Net cash used for financing activities was $136 million in the first quarter of
fiscal 1998. The principal financing activity for the first three months of
fiscal 1998 was the open market purchase of 3.7 million shares of the
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<PAGE> 14
Corporation's common stock for $160 million. In July 1997, the Corporation's
Board of Directors authorized the repurchase for cash, as conditions warrant, of
up to 15 million shares of the Corporation's common stock.
On October 27, 1997, the Corporation and Intel announced that they had reached
an agreement to establish a broad-based business relationship, including the
sale of the Corporation's semiconductor manufacturing operations to Intel for a
purchase price equal to the net book value of the transferred assets (currently
estimated to be approximately $700 million), cross-licensing of patents, supply
of both Intel and Alpha microprocessors and development of future systems based
on Intel's 64-bit microprocessors. The agreement provides that Intel will make
offers of employment to employees of the Corporation's semiconductor
manufacturing operations, except for those employees associated with the Alpha
and Alpha-related semiconductor design teams. The Corporation and Intel agreed
to request a stay of all pending litigation until U.S. government approval is
granted, which is required to finalize the parties' agreement (see Notes C and
F).
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 cash position and its sources of and access to capital markets
are adequate to support current 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 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, the Corporation's ability to access components and related technical
information from other companies 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.
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<PAGE> 15
- -- 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 successfully
predict and adjust production capacity to meet demand, 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, or unexpected
increases or decreases in the prices of components, could adversely affect
future operating results.
- --While the Corporation believes that the materials required for its
manufacturing operations are presently available in quantities sufficient to
meet demand, the failure of a significant supplier to deliver certain components
or technical information on a timely basis or in sufficient quantities could
adversely affect the Corporation's future results of operations.
- -- The Corporation operates in a highly competitive environment which includes
significant competitive 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, as well as fluctuations in end-user sales by indirect sales channel
partners, could cause actual operating results to vary from those expected.
- -- 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.
- --Certain of the Corporation's internal computer systems are not Year 2000 ready
(i.e., such systems use only two digits to represent the year in date data
fields and, consequently, may not accurately distinguish between the 20th and
21st centuries or may not function properly at the turn of the century). The
Corporation has been taking actions intended to either correct such systems or
replace them with Year 2000 ready systems. The Corporation expects to implement
successfully the systems and programming changes necessary to address Year 2000
issues and does not believe that the cost of such actions will have a material
effect on the Corporation's results of operations or financial condition. There
can be no assurance, however, that there will not be a delay in, or increased
costs associated with, the implementation of such changes, and the Corporation's
inability to implement such changes could have an adverse effect on future
results of operations.
15
<PAGE> 16
- -- As the Corporation continues to implement its strategic plan and respond to
external market conditions, there can be no assurance that additional
restructuring actions will not be required. With regard to completion of planned
restructuring actions, there can be no assurance that the estimated cost of such
actions will not change.
- -- 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As discussed in Note C above, the Corporation and Intel Corporation ("Intel")
have been involved in litigation commenced in the fourth quarter of fiscal 1997
in the U.S. District Courts for the Districts of Massachusetts and Northern
California, and in September 1997 in the U.S. District Court for the District of
Oregon claiming, respectively, willful infringement by Intel of certain of the
Corporation's patents through the manufacture, sale and use of Intel's families
of Pentium microprocessors, breach of contract and various other unfair or
unlawful business practices by the Corporation, and willful infringement by the
Corporation of certain of Intel's patents through the manufacture, sale and use
of various computer products. On October 27, 1997, the Corporation and Intel
announced that they had reached agreement to settle the pending litigation
between the parties and to request a stay of all pending litigation, subject to
receipt of government approval necessary to finalize the transactions
contemplated by the parties' agreement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K.
On October 27, 1997, the Corporation filed a Current Report on Form 8-K
which reported that the Corporation and Intel Corporation reached an agreement
to establish a broad-based business relationship and settle pending litigation
as described in Notes C and F to the financial statements contained in this
Quarterly Report on Form 10-Q.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL EQUIPMENT CORPORATION
(Registrant)
By: /s/ Vincent J. Mullarkey
------------------------------------
Vincent J. Mullarkey
Vice President, Finance and Chief
Financial Officer (Duly Authorized
Officer and Principal Financial
Officer)
November 10, 1997
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DIGITAL EQUIPMENT CORPORATION FOR THE THREE
MONTHS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 27, 1997.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUL-29-1997
<PERIOD-END> SEP-27-1997
<CASH> 1,803,052
<SECURITIES> 550,318
<RECEIVABLES> 2,857,128
<ALLOWANCES> 227,494
<INVENTORY> 1,497,822
<CURRENT-ASSETS> 6,858,160
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<DEPRECIATION> 2,784,327
<TOTAL-ASSETS> 9,230,246
<CURRENT-LIABILITIES> 3,899,015
<BONDS> 743,489
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<COMMON> 157,219
<OTHER-SE> 3,253,337
<TOTAL-LIABILITY-AND-EQUITY> 9,230,246
<SALES> 1,582,232
<TOTAL-REVENUES> 2,960,315
<CGS> 1,019,118
<TOTAL-COSTS> 1,969,115
<OTHER-EXPENSES> 972,544
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<INTEREST-EXPENSE> 21,961
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<INCOME-TAX> 6,343
<INCOME-CONTINUING> 25,109
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