-----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, gKlazO76/5nU2T8ynuYQoP+RCd39nKnS2QcuV3iZSe5XHhbNmiH6ZVQuV9/8nCGV gYKo8k7sT7t3grgNnNVmfg== 0000927016-95-000072.txt : 19950609 0000927016-95-000072.hdr.sgml : 19950609 ACCESSION NUMBER: 0000927016-95-000072 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950401 FILED AS OF DATE: 19950516 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-05296 FILM NUMBER: 95540107 BUSINESS ADDRESS: STREET 1: 146 MAIN ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 6178975111 MAIL ADDRESS: STREET 2: 111 POWDER MILL ROAD MS02-3/F13 CITY: MAYNARD STATE: MA ZIP: 01754 10-Q 1 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended April 1, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5296 Digital Equipment Corporation (Exact name of registrant as specified in its charter) Massachusetts 04-2226590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 111 Powdermill Road, Maynard, Massachusetts 01754 (Address of principal executive offices) (Zip Code) (508) 493-5111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, par value $1, outstanding as of April 1, 1995: 146,839,030. DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Three-Month Period Ended ---------------------------- April 1, April 2, 1995 1994 ---------- ---------- REVENUES Product sales.................................. $1,961,450 $1,749,621 Service and other revenues..................... 1,506,014 1,509,168 ---------- ---------- TOTAL OPERATING REVENUES....................... 3,467,464 3,258,789 ---------- ---------- COSTS AND EXPENSES Cost of product sales.......................... 1,399,155 1,210,478 Service expense and cost of other revenues..... 953,317 946,800 Research and engineering expenses.............. 251,167 316,767 Selling, general and administrative expenses... 777,664 954,903 ---------- ---------- Operating income/(loss)........................ 86,161 (170,159) Interest income................................ 16,479 8,697 Interest expense............................... 23,756 16,543 ---------- ---------- INCOME/(LOSS) BEFORE INCOME TAXES.............. 78,884 (178,005) Provision for income taxes..................... 5,144 5,301 ---------- ---------- NET INCOME/(LOSS).............................. 73,740 (183,306) Dividend on preferred stock.................... 8,875 1,775 ---------- ---------- NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ................................... $ 64,865 $ (185,081) ========== ========== NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (1)...................... $ 0.44 $ (1.34) ========== ==========
(1) Net income applicable per common share is based on the weighted average number of common shares and common share equivalents outstanding during the period: 147,961,418 for the three months ended April 1, 1995. Net loss applicable per common share is based only on the weighted average number of common shares outstanding during the period: 137,897,533 shares for the three months ended April 2, 1994. See page 8 of this report. Cash dividends on common stock have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. 2 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Nine-Month Period Ended ----------------------------- April 1, April 2, 1995 1994 ----------- ----------- REVENUES Product sales.................................. $ 5,484,094 $ 4,966,549 Service and other revenues..................... 4,579,101 4,561,267 ----------- ----------- TOTAL OPERATING REVENUES....................... 10,063,195 9,527,816 ----------- ----------- COSTS AND EXPENSES Cost of product sales.......................... 3,930,101 3,304,185 Service expense and cost of other revenues..... 2,927,025 2,859,150 Research and engineering expenses.............. 787,051 962,432 Selling, general and administrative expenses... 2,483,188 2,735,798 ----------- ----------- Operating loss................................. (64,170) (333,749) Interest income................................ 37,972 37,981 Interest expense............................... 63,050 51,577 ----------- ----------- LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES... (89,248) (347,345) Provision for income taxes..................... 13,203 11,332 ----------- ----------- LOSS BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............ (102,451) (358,677) (BENEFIT)/CHARGE DUE TO CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES............ (64,503) 51,026 ----------- ----------- NET LOSS....................................... (37,948) (409,703) Dividends on preferred stock................... 26,625 1,775 ----------- ----------- NET LOSS APPLICABLE TO COMMON STOCK............ $ (64,573) $ (411,478) =========== =========== PER COMMON SHARE (1): LOSS APPLICABLE BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES......... $ (0.90) $ (2.64) CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES.................................. 0.45 (0.38) ----------- ----------- NET LOSS APPLICABLE PER COMMON SHARE .......... $ (0.45) $ (3.02) =========== ===========
3 (1) Net loss applicable per common share is based on the weighted average number of common shares outstanding during the period: 143,983,819 shares for the nine months ended April 1, 1995 and 136,312,098 shares for the nine months ended April 2, 1994. See page 9 of this report. Cash dividends on common stock have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
April 1, July 2, 1995 1994 ----------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents........................ $ 1,464,933 $ 1,180,863 Accounts receivable, net of allowances of $118,002 and $111,925...................... 3,083,853 3,318,854 Inventories Raw materials................................. 552,438 476,172 Work-in-process............................... 510,204 605,503 Finished goods................................ 1,031,063 982,303 ----------- ----------- Total inventories................................ 2,093,705 2,063,978 Prepaid expenses and deferred income taxes....... 316,050 324,676 ----------- ----------- TOTAL CURRENT ASSETS............................. 6,958,541 6,888,371 ----------- ----------- Property, plant and equipment, at cost........... 6,025,309 7,020,889 Less accumulated depreciation.................... 3,485,886 3,891,400 ----------- ----------- Net property, plant and equipment................ 2,539,423 3,129,489 Other assets..................................... 462,086 561,911 ----------- ----------- TOTAL ASSETS..................................... $ 9,960,050 $10,579,771 =========== ===========
The accompanying notes are an integral part of these financial statements. 4 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands)
April 1, July 2, 1995 1994 ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank loans and current portion of long-term debt............................. $ 13,304 $ 32,614 Accounts payable................................ 1,083,394 1,197,350 Income taxes payable............................ 19,142 20,753 Salaries, wages and related items............... 578,121 619,756 Deferred revenues and customer advances......... 1,218,480 1,239,792 Accrued restructuring costs..................... 693,907 1,351,075 Other current liabilities....................... 835,300 594,925 ---------- ----------- TOTAL CURRENT LIABILITIES....................... 4,441,648 5,056,265 ---------- ----------- Deferred income taxes........................... 4,758 4,758 Long-term debt.................................. 1,012,750 1,010,680 Postretirement and other postemployment benefits...................................... 1,199,666 1,228,269 ---------- ----------- TOTAL LIABILITIES............................... 6,658,822 7,299,972 ---------- ----------- STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value; authorized 25,000,000 shares; 4,000,000 shares of Series A 8-7/8% Cumulative Preferred Stock issued and outstanding................................... 4,000 4,000 Common stock, $1.00 par value; authorized 450,000,000 shares, 146,839,030 and 142,287,078 shares issued and outstanding..... 146,839 142,287 Additional paid-in capital...................... 3,471,490 3,390,040 Retained deficit................................ (321,101) (256,528) ---------- ----------- TOTAL STOCKHOLDERS' EQUITY...................... 3,301,228 3,279,799 ---------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $9,960,050 $10,579,771 ========== ===========
The accompanying notes are an integral part of these financial statements. 5 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine-Month Period Ended -------------------------- April 1, April 2, 1995 1994 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.......................................... $ (37,948) $ (409,703) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation.................................... 387,248 439,989 Amortization.................................... 51,318 82,952 Net gain on disposition of investments and other assets................... (33,505) - Other adjustments to net loss................... (80,793) 104,577 Decrease in accounts receivable................. 180,136 95,064 Increase in inventories......................... (291,917) (409,693) Decrease in prepaid expenses.................... 5,373 85,759 Increase/(decrease) in accounts payable......... (80,626) 54,624 Decrease in taxes............................... (2,364) (67,654) Increase in salaries, wages, benefits and related items.............................. 85,860 223,836 Increase/(decrease) in deferred revenues and customer advances.............................. (13,157) 18,629 Decrease in accrued restructuring costs......... (657,168) (507,948) Increase/(decrease) in other current liabilities............................ 173,702 (76,486) ---------- ---------- Total adjustments................................. (275,893) 43,649 ---------- ---------- Net cash flows from operating activities.......... (313,841) (366,054) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property, plant and equipment....... (265,000) (514,382) Proceeds from the disposition of net property, plant and equipment................... 138,212 76,250 Investment in other assets........................ (30,872) (61,144) Proceeds from the disposition of other assets.......................................... 727,008 23,516 ---------- ---------- Net cash flows from investing activities.......... 569,348 (475,760) ---------- ---------- Net cash flows from operating and investing activities............................ 255,507 (841,814) ---------- ----------
The accompanying notes are an integral part of these financial statements. 6 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt.............. 9,107 11,017 Payments to retire debt......................... (26,450) (22,749) Issuance of preferred and common shares, including tax effects................. 72,531 473,902 Dividends on preferred stock.................... (26,625) - ---------- ---------- Net cash flows from financing activities........ 28,563 462,170 ---------- ---------- Net increase/(decrease) in cash and cash equivalents.......................... 284,070 (379,644) Cash and cash equivalents at the beginning of the year......................... 1,180,863 1,643,195 ---------- ---------- Cash and cash equivalents at end of period...... $1,464,933 $1,263,551 ========== ==========
The accompanying notes are an integral part of these financial statements. 7 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data)
Three-Month Period Ended ------------------------------ April 1, April 2, 1995 1994 ------------ ------------ Net income/(loss) applicable to common and common equivalent shares....................... $ 64,865 $ (185,081) ============ ============ Weighted average number of common shares outstanding during the period.................. 146,290,810 137,897,533 Common stock equivalents from application of "treasury stock" method to unexercised and outstanding stock options.................. 1,670,608 - ------------ ------------ Total weighted average number of common and common equivalent shares outstanding during the period.............................. 147,961,418 137,897,533 ============ ============ Net income/(loss) applicable per common and common equivalent share.................... $ 0.44 $ (1.34) ============ ============
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)
Nine-Month Period Ended ---------------------------- April 1, April 2, 1995 1994 ---------- ---------- Net loss applicable to common and common equivalent shares....................... $ (64,573) $ (411,478) ============ ============ Weighted average number of common shares outstanding during the period.................. 143,983,819 136,312,098 Common stock equivalents from application of "treasury stock" method to unexercised and outstanding stock options.................. - - ------------ ------------ Total weighted average number of common and common equivalent shares outstanding during the period.............................. 143,983,819 136,312,098 ============ ============ Net loss applicable per common and common equivalent share.................... $ (0.45) $ (3.02) ============ ============
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 restated to conform with current year presentation. In the first quarter of fiscal 1994, the Corporation recorded a one-time benefit of $20 million related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes. The Corporation also recorded a one-time charge to income of $71 million related to the adoption of SFAS No. 112 - Employers' Accounting for Postemployment Benefits. Note B - Restructuring Actions During the first nine months of fiscal 1995, restructuring actions resulted in approximately 6,600 employee separations, not including employees transferred in connection with divestments. While some restructuring actions remain to be implemented in the fourth quarter of fiscal 1995 and the first half of fiscal 1996, the number of involuntary separations is expected to be lower than originally planned. However, associated cost savings have been offset by an increase in estimated separation costs for certain non-U.S. employees. In total, the estimated cost for employee separations remains unchanged. During the first nine months of fiscal 1995, the Corporation incurred costs of approximately $430 million for employee separations, net of postretirement benefits curtailment gains. Cash expenditures for employee separations were approximately $482 million for the first nine months of fiscal 1995. The Corporation's experience in property dispositions in the first nine months of fiscal 1995 has been favorable to plan on a cost per square-foot basis. However, the square footage to be disposed of is expected to somewhat exceed the original plan. In total, the estimated cost of facilities and related actions is unchanged. During the first nine months of fiscal 1995, the Corporation incurred expenses of $227 million for facilities and other costs. During the first nine months of fiscal 1995, the Corporation sold, or entered into agreements to sell, approximately 4.6 million square feet of space, including the Corporation's former headquarters facilities in Maynard, Massachusetts, generating approximately $134 million of cash proceeds. After cash expenditures of $90 million for facilities and related costs, the Corporation generated net cash proceeds of $44 million from the disposition of facilities. Note C - Investing Activities The Corporation adopted SFAS No. 115 - Accounting for Certain Investments in Debt and Equity Securities, effective July 3, 1994. SFAS No. 115 expands the use of fair value accounting for certain debt and equity securities. The Corporation recorded a one-time benefit of $65 million, or $0.46 per common share, in the first quarter from unrealized gains on long-term investments. During the first quarter the Corporation sold all of its shares of Ing. Olivetti & C. S.p.A. common stock for approximately $149 million. 10 Note D - Litigation Several purported class action lawsuits were filed in the fourth quarter of fiscal 1994 against the Corporation and certain directors and officers alleging violations of the federal securities laws arising from alleged misrepresentations and omissions in connection with the Corporation's issuance and sale of Series A 8-7/8% Cumulative Preferred Stock and the Corporation's financial results for the quarter ended April 2, 1994. Plaintiffs' counsel have agreed to dismiss claims against all but two of the defendants who served as directors or officers of the Corporation during the third quarter of fiscal 1994. Note E - Divestments At the end of the third quarter, the Corporation sold its contract manufacturing business to SCI Systems, Inc. for net proceeds of approximately $75 million. Assets sold included approximately $47 million of inventory and $20 million of net property, plant and equipment, including a manufacturing plant in Augusta, Maine. Approximately 700 employees were transferred to SCI Systems, Inc. at the time of the sale. During the second quarter, the Corporation sold its magnetic disk drive, tape drive, solid state disk and thin-film heads businesses (the "Business") to Quantum Corporation ("Quantum") for an aggregate purchase price of $360 million, generating net proceeds of $348 million. Assets sold included approximately $180 million of inventory and $154 million of net property, plant and equipment, including facilities in Shrewsbury, Massachusetts and Penang, Malaysia, as well as the Corporation's interest in Rocky Mountain Magnetics, Inc. Quantum is leasing facilities owned by the Corporation in Colorado Springs, Colorado and leased by the Corporation in Batam, Indonesia. Approximately 3,100 employees were transferred to Quantum upon sale of the Business. Also during the second quarter, the Corporation sold its relational database business and related assets (the "Assets") to Oracle Corporation for net proceeds of $107 million. Approximately 250 employees were transferred to Oracle Corporation upon sale of the Assets. In December 1994, the Corporation entered into an agreement to sell its South Queensferry, Scotland semiconductor facility and related assets to a subsidiary of Motorola, Inc. The transaction is expected to close around the end of fiscal 1995. Note F - Debt As previously disclosed, the Corporation has in place a multi-year agreement with a major financial institution which allows the Corporation to sell an undivided ownership interest in its domestic trade accounts receivable. During the quarter, the Corporation elected to amend the purchase limit under the agreement from $600 million to $500 million. No interests in the receivables have been sold. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION As an aid to understanding the Corporation's operating results, the following tables indicate the percentage relationships of income and expense items included in the statements of operations for the most recent quarter and nine-month period ended April 1, 1995 and the corresponding quarter and nine-month period ended April 2, 1994 of the preceding fiscal year and the percentage changes in those items for such periods. Components of total costs of operating revenues are shown as percentages of their related revenues.
Income and Expense Items as a Percentage of Total Operating Revenues (a) -------------------------------------------------------- Three-Month Period Ended Nine-Month Period Ended ------------------------- -------------------------- Income and April 1, April 2, April 1, April 2, Expense Items 1995 1994 1995 1994 - - ---------------------------------- ----------- ----------- ----------- ----------- Product sales 56.6% 53.7% 54.5% 52.1% Service and other revenues 43.4% 46.3% 45.5% 47.9% ----------- ---------- ---------- ----------- Total operating revenues 100.0% 100.0% 100.0% 100.0% ----------- ---------- ---------- ----------- Cost of product sales 71.3% 69.2% 71.7% 66.5% Service expense and cost of other revenues 63.3% 62.7% 63.9% 62.7% Total cost of operating revenues 67.8% 66.2% 68.1% 64.7% Research and engineering expenses 7.2% 9.7% 7.8% 10.1% Selling, general and administrative expenses 22.4% 29.3% 24.7% 28.7% ----------- ---------- ---------- ----------- Operating income/(loss) 2.5% (5.2%) (0.6%) (3.5%) Interest income 0.5% 0.3% 0.4% 0.4% Interest expense 0.7% 0.5% 0.6% 0.5% ----------- ---------- ---------- ----------- Income/(loss) before income taxes and cumulative effect of changes in accounting principles 2.3% (5.5%) (0.9%) (3.6%) Provision for income taxes 0.1% 0.2% 0.1% 0.1% ----------- ---------- ---------- ----------- Income/(loss) before cumulative effect of changes in accounting principles 2.1% (5.6%) (1.0%) (3.8%) (Benefit)/charge due to cumulative effect of changes in accounting principles - - (0.6%) 0.5% ----------- ---------- ---------- ----------- Net income/(loss) 2.1% (5.6%) (0.4%) (4.3%) Dividends on preferred stock 0.3% 0.0% 0.3% 0.0% ----------- ---------- ---------- ----------- Net income/(loss) applicable to common stock 1.9% (5.6%) (0.6%) (4.3%) =========== ========== ========== ===========
Note (a) Percentage of operating revenues may not be additive due to rounding. 12
Percentage Increases/ (Decreases) ------------------------------- Three-Month Nine-Month Period Ended Period Ended April 1, 1995 April 1, 1995 vs. vs. Income and Expense Items April 2, 1994 April 2, 1994 - - --------------------------------------- ------------- ------------- Product sales 12% 10% Service and other revenues 0% 0% Total operating revenues 6% 6% Cost of product sales 16% 19% Service expense and cost of other revenues 1% 2% Total cost of operating revenues 9% 11% Research and engineering expenses (21%) (18%) Selling, general and administrative expenses (19%) (9%) Operating income/(loss) 100+% (81%) Interest income 89% 0% Interest expense 44% 22% Income/(loss) before income taxes and cumulative effect of changes in accounting principles 100+% (74%) Provision for income taxes (3%) 17% Income/(loss) before cumulative effect of changes in accounting principles 100+% (71%) (Benefit)/charge due to cumulative effect of changes in accounting principles - NM Net income/(loss) 100+% (91%) Dividends on preferred stock 100+% 100+% Net income/(loss) applicable to common stock 100+% (84%)
NM = Not meaningful 13 REVENUES Total operating revenues for the first nine months of fiscal 1995 were $10.1 billion, up 6% from the comparable period a year ago. Total operating revenues included product sales of $5.5 billion and service and other revenues of $4.6 billion. Operating revenues from customers outside the United States were $6.5 billion or 64% of total operating revenues, compared with $5.9 billion or 62% of total operating revenues for the first nine months of fiscal 1994. The increase in non-U.S. revenues was due principally to increased operating revenues from the Asia Pacific region. Total operating revenues for the third quarter of fiscal 1995 were $3.5 billion, up 6% from the comparable period a year ago. Total operating revenues included product sales of $2.0 billion and service and other revenues of $1.5 billion. Operating revenues from customers outside the United States were $2.3 billion or 66% of total operating revenues, compared with $2.0 billion or 63% of total operating revenues for the third quarter of fiscal 1994. Product sales for the first nine months and the third quarter were up 10% and 12%, respectively, from the comparable periods a year ago, due principally to increased demand for Alpha-based systems and Intel-based personal computers. During the third quarter of fiscal 1995, Alpha-based systems revenue increased to 22% of product sales, up from 15% for the comparable quarter last year, and revenues from the sale of Intel-based personal computers represented approximately 30% of product sales, up from 22% for the third quarter a year ago. VAX systems revenues declined from 17% to 10% of product sales from the third quarter of fiscal 1994 to the third quarter of fiscal 1995. Continued increased demand for the Corporation's UNIX-based offerings contributed to the growth in Alpha-based systems revenue for the quarter. New products and expanded distribution channels contributed to increased demand for the Corporation's personal computer products. Historically, the Corporation has experienced some seasonality in revenues, with a higher level of product sales in the fiscal fourth quarter. The expanded use of indirect channels of distribution generally has moderated, and is expected to continue to moderate, the seasonality of the Corporation's product sales. Service and other revenues for the first nine months and the third quarter were essentially flat compared with the same periods of fiscal 1994. Increased revenue associated with the maintenance and support of Alpha-based systems and other vendors' products offset lower levels of revenue from the Corporation's VAX systems maintenance business. During the first nine months of fiscal 1995, the Corporation sold portions of its storage business, its relational database business, a software distribution subsidiary and a contract manufacturing business (see Note E). In fiscal 1994, these businesses represented approximately 5% of the total consolidated operating revenues and had an immaterial effect on the consolidated results of operations. In addition, as part of the Corporation's ongoing restructuring 14 actions, the Corporation transferred part of its business in Germany to a new independent, employee-owned company, effective as of October 1, 1994. In fiscal 1994, this business represented less than 1% of the total consolidated operating revenues and had an immaterial effect on the consolidated results of operations. After adjusting for divestments, during the first nine months and the third quarter, the Corporation experienced revenue growth in each of its major geographies, compared with the same periods last year. EXPENSES AND PROFIT MARGINS Product gross margin was 28.3% and 28.7% of product sales for the first nine months and the third quarter, respectively, compared with 33.5% and 30.8% for the same periods last year and 30.5% in the second quarter of fiscal 1995. The decline in product gross margin was due to several factors, including a continuation of the shift in the Corporation's product sales toward lower-end, industry-standard systems which typically carry lower margins, as well as greater use of indirect distribution channels. Service gross margin was 36.1% and 36.7% of services and other revenues for the first nine months and the third quarter respectively, compared with 37.3% for both the first nine months and third quarter a year ago. Although a higher percentage of service revenues was attributable to multivendor and other service offerings which generally carry lower gross margins than the Corporation's traditional hardware maintenance business, the Corporation maintained service gross margin due principally to increased efficiency in service delivery. Research and engineering (R&E) expenses totaled $787 million and $251 million for the first nine months and the third quarter, respectively, representing a decrease of 18% and 21%, respectively, from the comparable periods a year ago. The decrease in R&E expenses was due principally to the elimination of redundant engineering efforts and streamlined product offerings. The decrease in R&E expenses for the first nine months and the third quarter also was partially attributable to divestments. Selling, general and administrative (SG&A) expenses decreased 9% to $2.5 billion for the first nine months from $2.7 billion for the comparable period last year. For the quarter, SG&A expenses totaled $778 million, down 19% from $955 million for the third quarter of fiscal 1994. The decrease in SG&A expenses for the first nine months and the third quarter was due principally to restructuring actions. At the end of fiscal 1994, the Corporation approved a restructuring plan intended to create a more competitive cost structure. The plan called for reducing employee population to a target level of approximately 60,000 employees. The plan also called for reducing the Corporation's facilities by approximately 10 million square feet. While certain restructuring actions remain to be implemented in the fourth quarter of fiscal 1995 and in fiscal 1996, the Corporation expects to meet or exceed the objectives of the plan and the total cost of the planned restructuring actions remains unchanged (see Note B). 15 Interest income for the first nine months and the quarter was $38 million and $16 million, respectively, reflecting higher cash balances and higher interest rates. Interest expense was $63 million for the first nine months and $24 million for the third quarter. Interest expense for the third quarter of fiscal 1995 was increased by the differential accrued on interest rate swap agreements relating to $750 million of long-term debt, while interest expense for all other periods presented was reduced by the differential received on the same interest rate swap agreements. Income tax expense for the first nine months and the third quarter of fiscal 1995 was $13 million and $5 million, respectively. Income tax expense reflects several factors, including income taxes provided for profitable non-U.S. operations, benefit taken for net operating loss carryforwards in certain non- U.S. operations and an inability to recognize currently U.S. and certain non- U.S. tax benefits from operating losses. The Corporation enters into foreign exchange option and forward contracts on a continuing basis for periods consistent with its committed exposures. This program is designed to limit potential losses from adverse exchange rate movements on operations and to mitigate the effect of foreign currency movements on the U.S. dollar value of asset and liability positions of non-U.S. subsidiaries. The foreign exchange option and forward contracts generally have maturities which do not exceed three months. During the first nine months and the third quarter, the net effect of currency exchange rate movements on consolidated results of operations was slightly positive. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115 - Accounting for Certain Investments in Debt and Equity Securities, effective July 3, 1994. There was no cash flow impact from the adoption of SFAS No. 115 (see Note C). In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that an impairment loss be recognized for long-lived assets and certain identifiable intangibles when circumstances indicate that the carrying amount of an asset may not be recoverable. The Corporation must adopt SFAS No. 121 by fiscal year 1997. The Corporation has not adopted SFAS No. 121, and has not yet determined the impact of such adoption on the Corporation's consolidated financial position or results of operations. Adoption of SFAS No. 121 will have no cash flow impact on the Corporation. 16 AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR OPERATIONS Cash and cash equivalents totaled $1.5 billion at the end of the third quarter, up from $1.2 billion at the end of fiscal 1994. Net cash used for operating activities was $314 million for the first nine months, due principally to restructuring activities (see Note B) and increased inventory. Cash used was offset by a decrease in accounts receivable. Net cash flows generated from investing activities was $569 million for the first nine months of fiscal 1995. During the first nine months, the Corporation sold all of its shares of Ing. Olivetti & C. S.p.A. common stock, portions of its storage business, its relational database business, a software distribution subsidiary, a contract manufacturing business and other assets generating approximately $727 million in cash proceeds. The sale of property, plant and equipment generated an additional $138 million in cash proceeds. Capital spending was $265 million, compared with $514 million for the same period last year, due principally to continued efforts to focus and control all spending in the Corporation. Net cash flows from financing activities in the first nine months were $29 million, due principally to the issuance of stock under the Corporation's employee stock purchase plans, offset by the reduction of debt and the payment of dividends on preferred stock issued in the third quarter of fiscal 1994. For the first nine months of fiscal 1995, cash expenditures for restructuring activities were $438 million, net of proceeds of $134 million from the sale of property, plant and equipment. Cash expenditures for the first nine months were less than originally projected due to lower than anticipated facilities-related costs, deferral of cash payments for employee separation actions and higher than originally estimated cash proceeds from the sale of property, plant and equipment associated with restructuring actions. Due principally to higher than anticipated proceeds from the sale of facilities, the Corporation currently estimates that the total cash expenditures for the restructuring plan will be approximately $900 million to $1 billion. Net cash required for restructuring actions in the fourth quarter of fiscal 1995 is expected to be approximately $100 million, with the remainder of required cash expected to be expended principally in fiscal 1996 (see Note B). The Corporation's need for, cost of and access to funds are dependent on future operating results, as well as conditions external to the Corporation. The Corporation historically has maintained a conservative capital structure, and believes that its current cash position and its sources of and access to capital are adequate to support planned restructuring actions and operations. 17 * * * * The accompanying consolidated balance sheets, statements of operations and statements of cash flows reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary to a fair statement of the consolidated financial position at April 1, 1995 and the consolidated results of operations and the consolidated statements of cash flows for the interim periods ended April 1, 1995 and April 2, 1994. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 27. Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Corporation during the period covered by this report. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL EQUIPMENT CORPORATION (Registrant) By /s/Vincent J. Mullarkey ----------------------- Vincent J. Mullarkey Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) May 15, 1995 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS JUL-01-1995 JUL-03-1994 APR-01-1995 1,464,933 0 3,201,855 118,002 2,093,705 6,958,541 6,025,309 3,485,886 9,960,050 4,441,648 1,012,750 146,839 0 4,000 3,150,389 9,960,050 5,484,094 10,063,195 3,930,101 6,857,126 3,270,239 12,098 63,050 (89,248) 13,203 (102,451) 0 0 (64,503) (37,948) (.45) (.45)
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