-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, C3LhuuU4Mu5NGV1io5opBuDEvPXN8i2SyrM0tXcVVdvVuMjDHwIavmRGOxO9mo4j 8JTdXwQ+K012E0uiWuG9hw== 0000028887-94-000009.txt : 19940207 0000028887-94-000009.hdr.sgml : 19940207 ACCESSION NUMBER: 0000028887-94-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940101 FILED AS OF DATE: 19940204 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL EQUIPMENT CORP CENTRAL INDEX KEY: 0000028887 STANDARD INDUSTRIAL CLASSIFICATION: 3570 IRS NUMBER: 042226590 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 34 SEC FILE NUMBER: 001-05296 FILM NUMBER: 94504545 BUSINESS ADDRESS: STREET 1: 146 MAIN ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 6178975111 10-Q 1 BODY 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 January 1, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5296 Digital Equipment Corporation (Exact name of registrant as specified in its charter) Massachusetts 04-2226590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 146 Main Street, Maynard, Massachusetts 01754 (Address of principal executive offices) (Zip Code) (508) 493-5111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, par value $1, outstanding as of January 1, 1994: 137,889,665. DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data) Three-Month Period Ended --------------------------- January 1, December 26, 1994 1992 ----------- ------------- REVENUES Product sales................................. $ 1,659,924 $ 1,967,234 Service and other revenues.................... 1,594,155 1,722,209 ------------ ------------- TOTAL OPERATING REVENUES...................... 3,254,079 3,689,443 ------------ ------------- COSTS AND EXPENSES Cost of product sales......................... 1,112,292 1,116,538 Service expense and cost of other revenues.... 968,473 1,058,270 Research and engineering expenses............. 330,948 404,843 Selling, general and administrative expenses.. 908,688 1,177,306 ------------ ------------- Operating loss................................ ( 66,322) (67,514) Interest income............................... 12,071 14,209 Interest expense.............................. 15,398 12,554 ------------ ------------- LOSS BEFORE INCOME TAXES ..................... ( 69,649) (65,859) PROVISION FOR INCOME TAXES.................... 2,495 8,000 ------------ ------------- NET LOSS...................................... $ ( 72,144) ( 73,859) ============ ============= NET LOSS PER COMMON SHARE (1)................. $ ( .53) $ (.57) ============ ============= (1) Net loss per share is based on the weighted average number of common shares outstanding during each period: 136,028,383 shares for the three months ended January 1, 1994 and 129,154,484 for the three months ended December 26, 1992. See page 8 of this report. Cash dividends have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. 2 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data) Six-Month Period Ended ---------------------------- January 1, December 26, 1994 1992 ------------ ------------- REVENUES Product sales................................. $ 3,216,928 $ 3,735,055 Service and other revenues.................... 3,052,099 3,268,687 ------------- ------------- TOTAL OPERATING REVENUES...................... 6,269,027 7,003,742 ------------- ------------- COSTS AND EXPENSES Cost of product sales......................... 2,093,707 2,136,495 Service expense and cost of other revenues.... 1,912,350 2,075,920 Research and engineering expenses............. 645,665 810,320 Selling, general and administrative expenses.. 1,780,895 2,308,493 ------------- ------------- Operating loss................................ ( 163,590) ( 327,486) Interest income............................... 29,284 27,425 Interest expense.............................. 35,034 16,344 ------------- ------------- LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.... ( 169,340) ( 316,405) PROVISION FOR INCOME TAXES.................... 6,031 18,000 ------------- ------------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.............. ( 175,371) ( 334,405) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE................................... 20,042 0 ------------- ------------- NET LOSS...................................... $ ( 155,329) $ ( 334,405) ============= ============= LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE PER COMMON SHARE....... $ (1.29) $ (2.60) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE PER COMMON SHARE.................. .14 - ------------- ------------- NET LOSS PER COMMON SHARE (1)................. $ (1.15) $ (2.60) ============= ============= 3 (1) Net loss per share is based on the weighted average number of common shares outstanding during each period: 135,5l9,380 shares for the six months ended January 1, 1994 and 128,578,210 for the six months ended December 26, 1992. See page 9 of this report. Cash dividends 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) January 1, July 3, 1994 1993 ------------- ------------- ASSETS CURRENT ASSETS Cash and cash equivalents.................... $ 1,147,257 $ 1,643,195 Accounts receivables, net of allowances of $100,548 and $110,764................... 2,795,969 3,020,252 Inventories Raw materials.............................. 403,800 331,506 Work-in-process............................ 606,630 502,200 Finished goods............................. 939,926 921,434 ------------- ------------- Total inventories............................ 1,950,356 1,755,140 Prepaid expenses and deferred income taxes... 405,669 463,928 ------------- ------------- TOTAL CURRENT ASSETS......................... 6,299,25l 6,882,515 ------------- ------------- Property, plant and equipment, at cost....... 7,l45,929 7,193,430 Less accumulated depreciation................ 4,000,269 4,015,139 ------------- ------------- Net property, plant and equipment............ 3,l45,660 3,178,291 Other assets................................. 923,846 889,537 ------------- ------------- TOTAL ASSETS................................. $ 10,368,757 $ 10,950,343 ============= ============= The accompanying notes are an integral part of these financial statements. 4 January 1, July 3, 1994 1993 ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank loans and current portion of long-term debt.......................... $ 11,574 $ 21,335 Accounts payable............................. 767,055 822,434 Income taxes payable......................... 11,026 57,614 Salaries, wages and related items............ 552,626 556,151 Deferred revenue and customer advances....... 960,493 1,138,323 Restructuring reserve........................ 442,705 738,989 Other current liabilities.................... 553,793 583,868 ------------ ------------ TOTAL CURRENT LIABILITIES.................... 3,299,272 3,918,714 Noncurrent deferred income taxes............. 26,369 - Long-term debt............................... 1,017,360 1,017,577 Postretirement benefits...................... 1,195,805 1,128,653 ------------ ------------ TOTAL LIABILITIES............................ 5,538,806 6,064,944 ------------ ------------ STOCKHOLDERS' EQUITY Common stock, $1.00 par value; authorized 450,000,000 shares; issued 137,889,665 and 135,489,805 shares.................... 137,890 135,490 Additional paid-in capital................... 2,937,205 2,851,960 Retained earnings............................ 1,754,856 1,937,627 Treasury stock at cost, 0 and 497,551 shares....................... - (39,678) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY................... 4,829,95l 4,885,399 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................... $10,368,757 $10,950,343 ============ ============ The accompanying notes are an integral part of these financial statements. 5 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Six-Month Period Ended --------------------------- January 1, December 26, 1994 1992 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss..................................... $ ( 155,329) $ (334,405) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation............................. 30l,722 346,923 Amortization............................. 60,996 67,240 Other adjustments to net loss............ 84,002 l4l,000 Decrease in accounts receivable.......... 224,283 462,248 Increase in inventories.................. (l95,2l6) (2l8,l96) (Increase)/decrease in prepaid expenses.. 82,l45 (33,375) Decrease in accounts payable............. (55,379) (2l2,856) Increase/(decrease) in taxes............. (66,782) 89,666 Increase in salaries, wages, benefits & related items........................ 63,627 75,238 Decrease in deferred revenues and customer advances....................... (l77,830) (230,l52) Decrease in restructuring reserves....... (34l,584) (45l,2l5) Decrease in other current liabilities.... (65,303) (6l,333) ------------ ------------ Total adjustments............................ (85,3l9) (24,8l2) ------------ ------------ Net cash flows from operating activities..... (240,648) (359,2l7) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property, plant and equipment.. (348,070) (256,463) Proceeds from the disposition of net property, plant, and equipment....................... 53,620 25,279 Investment in other assets................... (39,993) (2l8,633) Proceeds from disposition of other assets.... 3,238 - ------------ ------------ Net cash flows from investing activities..... (33l,205) (449,8l7) ------------ ------------ Net cash flows from operating and investing activities....................... (57l,853) (809,034) ------------ ------------ The accompanying notes are an integral part of these financial statements. 6 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt........... 12,950 74l,320 Payments to retire debt...................... (23,573) (8,05l) Issuance of common and treasury shares....... 86,538 l03,933 ------------ ------------ Net cash flows from financing activities..... 75,9l5 837,202 ------------ ------------ Net increase (decrease) in cash and cash equivalents................................ (495,938) 28,l68 Cash and cash equivalents at the beginning of the year...................... 1,643,l95 1,337,172 ------------ ------------ Cash and cash equivalents at end of period... $ 1,147,257 $ 1,365,340 ============ ============ The accompanying notes are an integral part of these financial statements. 7 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data) Three-Month Period Ended ------------------------------ January 1, December 26, 1994 1992 -------------- ------------- Net loss applicable to common and common equivalent shares.................... $ (72,144) $ (73,859) ============== ============= Weighted-average number of common shares outstanding during the period............... 136,028,383 129,154,484 Common stock equivalents from application of "treasury stock" method to exercised and outstanding stock options................... 0 0 -------------- ------------- Total weighted-average number of common and common equivalent shares outstanding during the period........................... 136,028,383 129,154,484 ============== ============= Net loss per common and common equivalent share............................ $ (0.53) $ (0.57) ============== ============= The accompanying notes are an integral part of these financial statements. 8 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data) Six-Month Period Ended ------------------------------ January 1, December 26, 1994 1992 -------------- ------------- Net loss applicable to common and common equivalent shares.....................$ (155,329) $ (334,405) ============== ============= Weighted-average number of common shares outstanding during period.................... 135,5l9,380 128,578,210 Common stock equivalents from application of "treasury stock" method to exercised and outstanding stock options.................... 0 0 -------------- ------------- Total weighted-average number of common and common equivalent shares outstanding during the period............................ 135,5l9,380 128,578,210 ============== ============= Net loss per common and common equivalent share.............................$ ( 1.15) $ ( 2.60) ============== ============= The accompanying notes are an integral part of these financial statements. 9 DIGITAL EQUIPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Significant Accounting Policies Certain prior years' amounts have been reclassified to conform with current year presentation. Note B - Income Taxes The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes, effective July 4, 1993. The Corporation had previously accounted for income taxes under Accounting Principles Board Opinion No. 11. In the first quarter, the Corporation recorded a one-time benefit of $20 million, or $0.14 per share, for the recognition of previously unrecognized tax benefits. There is no cash flow impact from the adoption of SFAS No. 109. The standard was adopted on a prospective basis and amounts presented for prior years were not restated. At July 4, 1993, the significant components of deferred tax assets and liabilities upon the adoption of SFAS No. 109, were: (dollars in millions) --------------------------------- Deferred Tax Deferred Tax Assets Liabilities ------------ ------------ Inventory-related transactions $ 138 $ 7 Depreciation 66 4l Postretirement benefits 358 - Restructuring 235 - Tax loss carryforwards (a) 1,025 - Tax credit carryforwards 149 - Other 283 234 ------ ---- Gross deferred tax balances 2,254 282 Valuation allowance 1,805 - ------ ----- Net deferred tax balances $ 449 $ 282 ====== ===== 10 The deferred tax assets (a) of $l.0 billion represent $2.8 billion of net operating loss carryforwards on a tax return basis which will generally expire as follows: $150 million in 1998, $1.2 billion in 2007, $800 million in 2008, and the remainder thereafter. Tax credit carryforwards will generally expire as follows: $40 million in 2001, $50 million in 2002, $40 million in 2003, and the remainder thereafter. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law. This act, among other things, raises the U.S. corporate statutory tax rate from 34% to 35%. Due to the net operating loss carryforwards, the Corporation does not expect the change in the statutory tax rate to have a material impact on the Corporation's consolidated financial position or results of operations for the foreseeable future. Note C - Preferred Stock On November 4, 1993, the stockholders of the Corporation approved an amendment to the Corporation's Restated Articles of Organization to authorize the issuance of up to 25,000,000 shares of preferred stock. Note D - Subsequent Event On January 21, 1994, the Corporation filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, covering the registration of securities, including senior and subordinated debt securities, preferred stock, depositary shares and warrants to purchase equity and debt securities (the "Securities"), in an aggregate amount of $l billion. The Securities may be offered from time to time in amounts, at prices and on terms to be determined at the time of sale. The Corporation believes the shelf registration provides additional financing flexibility to meet potential future funding requirements and to take advantage of potentially attractive capital market conditions. Subsequent to the end of the second quarter of fiscal 1994, the Corporation's annual facility fee on its three-year $750 million committed credit facility was increased from 0.175% to 0.250%. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION As an aid to understanding the Corporation's operating results, the following tables indicate the percentage relationships of income and expense items included in the statements of operations for the most recent quarter and six-month period ended January 1, 1994 and the corresponding quarter and six-month period ended December 26, 1992 of the preceding fiscal year and the percentage changes in those items for such periods. Components of total costs of operating revenues are shown as percentages of their related revenues. Income and Expense Items as a Percentage of Total Operating Revenues (a) ------------------------ ----------------------- Three-Month Period Ended Six-Month Period Ended ------------------------ ---------------------- Income and Jan. 1, Dec. 26, Jan. 1, Dec. 26, Expense Items 1994 1992 1994 1992 ----------- ----------- ----------- --------- Product sales 5l.0% 53.3% 5l.3% 53.3% Service and other revenues 49.0% 46.7% 48.7% 46.7% ----------- ----------- ----------- --------- Total operating revenues 100.0% l00.0% 100.0% 100.0% Cost of product sales 67.0% 56.8% 65.l% 57.2% Service expense and cost of other revenues 60.8% 61.4% 62.7% 63.5% Total cost of operating revenues 63.9% 58.9% 63.9% 60.l% Research and engineering expenses 10.2% ll.0% 10.3% 11.6% Selling, general and administrative expenses 27.9% 3l.9% 28.4% 33.0% ----------- ----------- ----------- --------- Operating loss (2.0%) (1.8%) (2.6%) (4.7%) Interest income .4% .4% .5% .4% Interest expense .5% .3% .6% .2% ----------- ----------- ----------- --------- Loss before income taxes and cumulative effect of change in accounting principle (2.1%) (1.8%) (2.7%) (4.5%) Provision for income taxes .1% .2% .l% .3% ----------- ----------- ----------- --------- Loss before cumulative effect of change in accounting principle (2.2%) (2.0%) (2.8%) (4.8%) Cumulative effect of change in accounting principle 0.0% 0.0% .3% 0.0% ----------- ----------- ----------- --------- Net loss (2.2%) (2.0%) (2.5%) (4.8%) =========== =========== =========== ========= Note (a) Percentage of operating revenues may not be additive due to rounding. 12 Percentage Increases (Decreases) ------------------------------------ Three-Month Six-Month Period Ended Period Ended Jan. 1, 1994 Jan. 1, 1994 vs. vs. Income and Expense Items Dec. 26, 1992 Dec. 26,1992 --------------------------------- ------------- ------------- Product sales ( 16 %) ( 14 %) Service and other revenues ( 7 %) ( 7 %) Total operating revenues ( 12 %) ( 10 %) Cost of product sales ( 0 %) ( 2 %) Service expense and cost of other revenues ( 9 %) ( 8 %) Total cost of operating revenues ( 4 %) ( 5 %) Research and engineering expenses ( 18 %) ( 20 %) Selling, general and administrative expenses ( 23 %) ( 23 %) Operating loss ( 2 %) ( 50 %) Interest income ( 15 %) 7 % Interest expense 23 % 100+% Loss before income taxes and cumulative effect of change in accounting principle 6 % ( 46 %) Provision for income taxes ( 69 %) ( 66 %) Loss before cumulative effect of change in accounting principle ( 2 %) ( 48 %) Cumulative effect of change in accounting principle - NM Net loss ( 2 %) ( 54 %) NM=Not meaningful 13 REVENUES Total operating revenues for the first six months of fiscal 1994 were $6.27 billion, down 10% from the comparable period a year ago. Total operating revenues included product sales of $3.22 billion, down 14% from a year ago and service and other revenues of $3.05 billion, down 7%. Operating revenues from customers outside the United States were $3.86 billion or 61% of total operating revenues, compared with $4.47 billion or 64% of total operating revenues for the comparable six-month period last year. The Corporation continued to experience a significant decrease in European revenues, as well as a decline in U.S. revenues, partially offset by revenue growth in the Asia Pacific region and Latin America. Total operating revenues for the quarter and first six months were negatively affected by foreign currency exchange rate fluctuations. For the quarter ended January 1, 1994, total operating revenues were $3.25 billion, down 12% from the comparable period a year ago. Product sales were $1.66 billion, down 16% and service and other revenues were $1.59 billion, down 7%. Operating revenues from customers outside the United States were $2.04 billion or 63% of total operating revenues; this compared with $2.41 billion or 65% of total operating revenues for the second quarter of fiscal 1993. Although revenues from the sale of Alpha AXP systems continue to grow, and represented approximately 10% of product sales for both the quarter and first six months, the Corporation continues to experience a significant decline in demand for its VAX systems. Product sales for the quarter and first six months were positively affected by a growth in demand for personal computers and Alpha AXP workstations, as well as storage devices and networking products. The decline in service revenues over the comparable periods of fiscal 1993 was due principally to lower levels of revenue from the Corporation's VAX/VMS systems maintenance business, as well as the greater reliability of, and lower maintenance revenues associated with newer products. This was partially offset by an increase in revenues from maintenance of products manufactured by other companies. In addition, the Corporation is becoming more selective in pursuing consulting and systems integration opportunities, increasing its focus on the profitability of projects; as a result, revenues from consulting and systems integration services were down slightly for the quarter and essentially flat for the first six months compared with the comparable periods a year ago. The Corporation continues to take actions to respond to changes in industry demand, economic conditions and other factors affecting the Corporation's business. In October, the Corporation announced new open client-server products and related software and service products. The Corporation continues to seek alliances with other companies and to focus its resources in order to offer products and services which meet customer needs for open systems. Just after the close of the second quarter, the 14 Corporation announced that it had hired a new general manager to lead its European operations. The Corporation also is focusing on increasing market penetration by improving its direct sales efforts, targeting the growing small and medium enterprise information technology market and expanding its use of resellers and other indirect channels of distribution. EXPENSES AND PROFIT MARGINS The Corporation recorded an operating loss of $66 million for the second quarter of fiscal 1994, compared with an operating loss of $68 million in the second quarter a year ago. For the first six months, the Corporation recorded an operating loss of $164 million, compared with an operating loss of $327 million for the comparable period a year ago. Gross profit on product sales for the quarter and first six months declined from the comparable periods a year ago. Product gross margin (gross profit as a percentage of product sales) represented 33% and 35% of product sales, respectively, down 10 and 8 percentage points, respectively, from the comparable periods last year. The decline in product gross profit resulted from the decrease in product sales, a continued shift in the mix of product sales toward personal computers and Alpha AXP-based systems which typically carry lower margins than the Corporation's VAX systems, competitive pricing pressures and unfavorable currency exchange rate fluctuations, partially offset by manufacturing cost efficiencies. Gross profit on service revenues for the quarter and first six months declined slightly from the comparable periods a year ago. Service gross margin (gross profit as a percentage of service revenues) represented 39% and 37% of service revenues, respectively, slightly higher than the comparable periods of fiscal 1993. The modest decline in service gross profit resulted principally from lower service revenues, partially offset by increased efficiency in service delivery and an increased focus on the profitability of consulting projects. Spending on research and engineering (R&E) in the quarter totaled $331 million, a decrease of 18% from the $405 million of the comparable quarter a year ago. For the first six months, R&E spending totaled $646 million, down 20% from the $810 million of the comparable period last year. The Corporation is focusing its current R&E investments on maintaining a strong, market-driven product set and on attaining and sustaining technology leadership in selected areas. Selling, general and administrative (SG&A) expenses totaled $909 million in the quarter, down 23% from the $1.18 billion of the comparable quarter a year ago. For the first six months, SG&A spending totaled $1.78 billion, down 23% from the $2.31 billion of the comparable period in fiscal 1993. While spending for R&E and SG&A is declining, the Corporation believes its cost and expense levels are still too high for the level and mix of 15 total operating revenues. The Corporation is reducing expenses by streamlining its product offerings and selling and administrative practices, resulting in reductions in employee population, closing and consolidation of facilities and reductions in discretionary spending. The Corporation believes that the remaining restructuring reserve of $443 million is adequate to cover presently planned restructuring actions. The Corporation will continue to take actions necessary to achieve a level of costs appropriate for its revenues and competitive for its business. Interest income for the quarter and first six months was $12 million and $29 million, respectively. Interest expense for the quarter and first six months was $15 million and $35 million, respectively, up from the comparable periods a year ago due to the issuance of $1 billion aggregate principal amount of long-term debt in fiscal 1993. Interest expense for the second quarter includes the differential received on interest rate swap agreements entered into in the first quarter of fiscal 1994 relating to $750 million of long-term debt. Tax expense for the quarter and first six months was $2 million and $6 million, respectively. The tax expense reflects taxes provided for profitable non-U.S. operations and an inability to recognize U.S. tax benefits from operating losses. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes, effective July 4, 1993. The Corporation had previously accounted for income taxes under Accounting Principles Board Opinion No. 11. In the first quarter of fiscal 1994, the Corporation recorded a one-time benefit of $20 million, or $0.14 per share, for the recognition of previously unrecognized tax benefits. There is no cash flow impact from the adoption of SFAS No. 109. The standard was adopted on a prospective basis and amounts presented for prior years were not restated (see Note B). AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS Cash and cash equivalents totaled $1.15 billion at the end of the quarter, down from $1.64 billion at the end of fiscal 1993. The net decrease in cash and cash equivalents for the quarter was $127 million. Operating activities generated $6 million of cash for the quarter, and used $241 million of cash for the first six months of fiscal 1994. Cash used for the first six months was due principally to restructuring activities, higher inventory levels and the operating loss, partially offset by a decrease in accounts receivable. Net cash used for investing activities was $198 million for the quarter and $331 million for the first six months. Capital spending was $181 16 million for the quarter and $348 million for the first six months, consisting principally of investments in semiconductor and storage technology facilities and equipment. During the first six months, the Corporation generated $57 million in cash proceeds from the disposal of property, plant and equipment and other assets, principally as the result of restructuring activities. Net cash from financing activities was $65 million for the quarter, due principally to the issuance of common stock under the Corporation's employee stock plans. On January 21, 1994 the Corporation filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, covering the registration of securities, including senior and subordinated debt securities, preferred stock, depositary shares and warrants to purchase equity and debt securities (the "Securities"), in an aggregate amount of $1 billion. The Securities may be offered from time to time in amounts, at prices and on terms to be determined at the time of sale. The Corporation believes the shelf registration provides additional financing flexibility to meet potential future funding requirements and to take advantage of potentially attractive capital market conditions (see Note D). The Corporation historically has maintained a conservative capital structure, and believes that its current cash position and access to capital markets are adequate to support current and future operations. * * * * The accompanying consolidated balance sheets, statements of operations and statements of cash flows reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the consolidated financial position at January 1, 1994 and the consolidated results of operations and the consolidated statements of cash flows for the interim periods ended January 1, 1994 and December 26, 1992. 17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 4.1 Articles of Amendment filed with the Secretary of State of the Commonwealth of Massachusetts on November 4, 1993 (filed as Exhibit 4.3 to the Corporation's Registration Statement on Form S-3, No. 33-51987 and incorporated herein by reference). (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 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) /s/William M. Steul By_______________________________ Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) February 4, 1994 19 -----END PRIVACY-ENHANCED MESSAGE-----