-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LS6N8oXZEGSp11WRVYImX0Ps50TqS4i+z4AQK6v7+fLUU9tQqdZWkvooy0Fihbzn Kh/3dLawwUO9mvrChYEXfQ== 0000950135-97-002243.txt : 19970514 0000950135-97-002243.hdr.sgml : 19970514 ACCESSION NUMBER: 0000950135-97-002243 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970509 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: 97599195 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 DIGITAL EQUIPTMENT CORPORATION FORM 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 29, 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) (508) 493-5111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, par value $1, outstanding as of March 29, 1997:152,816,894. 2 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Three-Month Period Ended -------------------------------------- March 29, March 30, 1997 1996 ----------- ----------- REVENUES Product sales ................................................................ $ 1,836,516 $ 2,055,710 Service revenues ............................................................. 1,477,794 1,565,316 ----------- ----------- TOTAL OPERATING REVENUES ..................................................... 3,314,310 3,621,026 ----------- ----------- COSTS AND EXPENSES Cost of product sales ........................................................ 1,188,578 1,294,032 Service expense .............................................................. 1,019,290 1,074,650 Research and engineering expenses ............................................ 256,476 275,703 Selling, general and administrative expenses ................................. 798,714 858,203 ----------- ----------- Operating income ............................................................. 51,252 118,438 Other (income)/expense, net .................................................. (10,848) (19,272) ----------- ----------- INCOME BEFORE INCOME TAXES ................................................... 62,100 137,710 Provision for income taxes ................................................... 11,134 13,637 ----------- ----------- NET INCOME ................................................................... 50,966 124,073 Dividend on preferred stock .................................................. 8,875 8,875 ----------- ----------- NET INCOME APPLICABLE TO COMMON STOCK ........................................ $ 42,091 $ 115,198 =========== =========== NET INCOME APPLICABLE PER COMMON SHARE (1) ................................... $ 0.27 $ 0.74 =========== ===========
(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: 155,665,576 for the three months ended March 29, 1997 and 156,593,530 for the three months ended March 30, 1996. 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 3 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Nine-Month Period Ended --------------------------------------- March 29, March 30, 1997 1996 ------------ ------------ REVENUES Product sales ................................................................ $ 5,202,959 $ 6,221,248 Service revenues ............................................................. 4,380,739 4,622,275 ------------ ------------ TOTAL OPERATING REVENUES ..................................................... 9,583,698 10,843,523 ------------ ------------ COSTS AND EXPENSES Cost of product sales ........................................................ 3,445,203 4,133,992 Service expense .............................................................. 3,016,261 3,115,310 Research and engineering expenses ............................................ 763,961 795,483 Selling, general and administrative expenses ................................. 2,348,297 2,464,372 ------------ ------------ Operating income ............................................................. 9,976 334,366 Other (income)/expense, net .................................................. (27,465) (30,416) ------------ ------------ INCOME BEFORE INCOME TAXES ................................................... 37,441 364,782 Provision for income taxes ................................................... 20,475 43,756 ------------ ------------ NET INCOME ................................................................... 16,966 321,026 Dividends on preferred stock ................................................. 26,625 26,625 ------------ ------------ NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ................................. $ (9,659) $ 294,401 ============ ============ NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (1) ............................ $ (0.06) $ 1.91 ============ ============
(1) Net loss applicable per common share is based only on the weighted average number of common shares outstanding during the period: 154,965,047 for the nine months ended March 29, 1997. Net income applicable per common share is based on the weighted average number of common shares and common share equivalents outstanding during the period: 154,208,829 for the nine months ended March 30, 1996. 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. 3 4 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 29, June 29, 1997 1996 ----------- ----------- ASSETS CURRENT ASSETS Cash, cash equivalents and short-term investments .............................. $ 2,481,708 $ 2,039,158 Accounts receivable, net of allowances of $217,361 and $182,033 ....................................................... 2,886,164 3,223,293 Inventories Raw materials .................................................................. 399,336 536,911 Work-in-process ................................................................ 357,146 439,318 Finished goods ................................................................. 714,908 844,582 ----------- ----------- Total inventories .............................................................. 1,471,390 1,820,811 Prepaid expenses, deferred income taxes and other current assets ....................................................... 324,510 336,836 ----------- ----------- TOTAL CURRENT ASSETS ........................................................... 7,163,772 7,420,098 ----------- ----------- Property, plant and equipment, at cost ......................................... 4,934,742 5,120,110 Less accumulated depreciation .................................................. 2,820,668 2,897,190 ----------- ----------- Net property, plant and equipment .............................................. 2,114,074 2,222,920 Other assets ................................................................... 334,667 432,363 ----------- ----------- TOTAL ASSETS ................................................................... $ 9,612,513 $10,075,381 =========== ===========
The accompanying notes are an integral part of these financial statements. 4 5 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands)
March 29, June 29, 1997 1996 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank loans and current portion of long-term debt .......................................... $ 264,043 $ 17,896 Accounts payable ........................................... 810,056 903,618 Income taxes payable ....................................... 79,998 79,528 Salaries, wages and related items .......................... 682,199 632,413 Deferred revenues and customer advances .................... 1,056,946 1,099,328 Accrued restructuring costs ................................ 443,230 619,416 Other current liabilities .................................. 850,941 879,434 ------------ ------------ TOTAL CURRENT LIABILITIES .................................. 4,187,413 4,231,633 ------------ ------------ Long-term debt ............................................. 749,320 999,131 Postretirement and other postemployment benefits ................................................... 1,179,420 1,238,411 ------------ ------------ TOTAL LIABILITIES .......................................... 6,116,153 6,469,175 ------------ ------------ 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; 157,251,550 issued and 155,504,284 shares issued and outstanding .................. 157,252 155,504 Additional paid-in capital ................................. 3,830,584 3,764,224 Retained deficit ........................................... (340,523) (317,522) Treasury stock at cost; 4,434,656 shares and 0 shares ............................................... (154,953) - ------------ ------------ TOTAL STOCKHOLDERS' EQUITY ................................. 3,496,360 3,606,206 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................. $ 9,612,513 $ 10,075,381 ============ ============
The accompanying notes are an integral part of these financial statements. 5 6 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine-Month Period Ended -------------------------------------- March 29, March 30, 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................................... $ 16,966 $ 321,026 Adjustments to reconcile net income to net cash from operating activities: Depreciation ................................................................. 303,327 302,474 Amortization ................................................................. 41,252 52,208 (Gain)/loss on disposition and write-offs of other assets ................................................................. 34,248 (48,691) Other adjustments to net income .............................................. 53,051 27,197 (Increase)/decrease in accounts receivable ................................... 337,129 (197,276) (Increase)/decrease in inventories ........................................... 347,421 (140,054) Decrease in prepaid expenses and other current assets ............................................................... 7,672 17,277 Increase/(decrease) in accounts payable ...................................... (93,562) 3,023 Increase in taxes ............................................................ 9,822 47,657 Increase/(decrease) in salaries, wages, benefits and related items ............................................................ (9,205) 160,297 Decrease in deferred revenues and customer advances ............................................................ (42,382) (106,048) Decrease in accrued restructuring costs ...................................... (176,186) (277,450) Increase/(decrease) in other current liabilities ............................. (25,283) 103,602 ----------- ----------- Total adjustments ............................................................ 787,304 (55,784) ----------- ----------- Net cash flows from operating activities ..................................... 804,270 265,242 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property, plant and equipment .................................. (275,056) (300,200) Proceeds from the disposition of property, plant and equipment ................................................ 67,600 61,666 Purchases of short-term investments .......................................... (2,806,784) (105,026) Maturities of short-term investments ......................................... 1,745,054 146,114 Additions to other assets .................................................... (4,518) (101,002) Proceeds from the disposition of other assets ................................ 14,067 120,135 ----------- ----------- Net cash flows from investing activities ..................................... (1,259,637) (178,313) ----------- ----------- Net cash flows from operating and investing activities ......................................................... (455,367) 86,929 ----------- -----------
The accompanying notes are an integral part of these financial statements. 6 7 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands)
Nine-Month Period Ended ------------------------------------ March 29, March 30, 1997 1996 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt ....................................... 6,240 - Payments to retire debt .................................................. (10,713) (6,778) Purchase of treasury shares .............................................. (214,546) - Issuance of common and treasury shares, including tax effects .............................................................. 81,831 123,395 Dividends on preferred stock ............................................. (26,625) (26,625) ----------- ----------- Net cash flows from financing activities ................................. (163,813) 89,992 ----------- ----------- Net increase/(decrease) in cash and cash equivalents ..................... (619,180) 176,921 Cash and cash equivalents at the beginning of the year .................................................... 1,791,754 1,531,849 ----------- ----------- Cash and cash equivalents at end of period ............................... $ 1,172,574 $ 1,708,770 =========== ===========
The accompanying notes are an integral part of these financial statements. 7 8 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data)
Three-Month Period Ended --------------------------------------- March 29, March 30, 1997 1996 ------------ ------------ Net income applicable to common and common equivalent shares ..................................... $ 42,091 $ 115,198 ============ ============ Weighted average number of common shares outstanding during the period ................................ 154,648,476 153,070,098 Common stock equivalents from application of "treasury stock" method to unexercised and outstanding stock options ................................ 1,017,100 3,523,432 ------------ ------------ Total weighted average number of common and common equivalent shares outstanding during the period ............................................ 155,665,576 156,593,530 ============ ============ Net income applicable per common and common equivalent share ............................................. $ 0.27 $ 0.74 ============ ============
The accompanying notes are an integral part of these financial statements. 8 9 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data)
Nine-Month Period Ended ------------------------------------------ March 29, March 30, 1997 1996 ------------- ------------- Net income/(loss) applicable to common and common equivalent shares ..................................... $ (9,659) $ 294,401 ============= ============= Weighted average number of common shares outstanding during the period ................................ 154,965,047 151,391,597 Common stock equivalents from application of "treasury stock" method to unexercised and outstanding stock options ................................ -- 2,817,232 ------------- ------------- Total weighted average number of common and common equivalent shares outstanding during the period ............................................ 154,965,047 154,208,829 ============= ============= Net income/(loss) applicable per common and common equivalent share .................................. $ (0.06) $ 1.91 ============= =============
The accompanying notes are an integral part of these financial statements. 9 10 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 and nine-month periods ended March 29, 1997 and March 30, 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. Short-term investments: Investments with maturities greater than three months at date of acquisition but within one year of the balance sheet date are classified as short-term investments. Short-term investments are valued at cost plus accrued interest, which approximates market. Cash, cash equivalents and short-term investments:
March 29, June 29, (in thousands) 1997 1996 - - ------------------------------------------------------------------- Cash and cash equivalents $1,172,574 $1,791,754 Short-term investments 1,309,134 247,404 - - ------------------------------------------------------------------- Cash and cash equivalents and short-term investments $2,481,708 $2,039,158 - - -------------------------------------------------------------------
Other (income)/expense, net:
Nine-Month Period Ended Three-Month Period Ended - - --------------------------------------------------------------------------------------------- March 29, March 30, March 29, March 30, (in thousands) 1997 1996 1997 1996 - - --------------------------------------------------------------------------------------------- Interest income $(82,706) $(56,870) $(30,207) $(18,846) Interest expense 64,311 75,145 21,542 25,985 Net gain on divestments (9,070) (48,691) (2,183) (26,411) - - --------------------------------------------------------------------------------------------- Other (income)/expense, net $(27,465) $(30,416) $(10,848) $(19,272) - - ---------------------------------------------------------------------------------------------
10 11 Note B - Restructuring Actions During the first nine months of fiscal 1997, the Corporation incurred costs of $84 million for approximately 1,700 employee separations and $92 million for facilities closures and related actions. Cash expenditures for restructuring activities were $131 million for the first nine months of fiscal 1997, net of proceeds of $49 million from the sale of properties. Note C - Litigation Several purported class action lawsuits were filed against the Corporation during the fourth quarter of fiscal 1994 alleging violations of the Federal securities laws arising from alleged misrepresentations and omissions in connection with the Corporation's issuance and sale of Series A 8-7/8% Cumulative Preferred Stock and the Corporation's financial results for the quarter ended April 2, 1994. During fiscal 1995, the lawsuits were consolidated into three cases, which were pending before the United States District Court for the District of Massachusetts. On August 8, 1995, the Massachusetts federal court granted the defendants' motion to dismiss all three cases in their entirety. On May 7, 1996, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part the dismissal of the two cases, and remanded for further proceedings. Note D - Treasury Stock During the third quarter of fiscal 1997, the Corporation purchased in the open market 4.5 million shares of its common stock for an aggregate purchase price of $157.4 million, or an average of $34.95 per common share. During the second quarter of fiscal 1997, the Corporation issued under employee stock plans 1.5 million shares of common stock purchased in the first quarter of fiscal 1997 for an aggregate purchase price of $57.3 million or an average of $38.19 per common share. The Corporation continues to repurchase shares of its common stock under a previously announced plan, as conditions warrant. Note E - Non-Recurring Items The net effect of the non-recurring items discussed below was immaterial to the consolidated results of operations of the Corporation for the second quarter of fiscal 1997. During the second quarter of fiscal 1997, the Corporation amended its U.S. postretirement medical plan, changing the period over which benefits are earned and accrued. As a result of the amendment, the Corporation recognized a one-time curtailment gain of $52 million. Events and circumstances arising during the second quarter of fiscal 1997 indicated that the carrying value of certain intangible assets would not be recoverable. Accordingly, unamortized balances of $40 million were written-off as a charge to operations. At the end of the second quarter of fiscal 1997, the Corporation accrued a loss of approximately $17 million associated with a pending divestment. Approximately $12 million of the charges were for inventory write-downs and were included in product cost of sales. Negotiations regarding the divestment ceased during the third quarter and the Corporation initiated an alternative course of action with similar financial consequences. 11 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUES Total operating revenues for the first nine months of fiscal 1997 were $9.6 billion, down 12% from the comparable period last year. Total operating revenues included product sales of $5.2 billion and service revenues of $4.4 billion. Operating revenues from customers outside of the United States were $6.5 billion and $7.1 billion, or 68% and 65% of total operating revenues for the first nine months of fiscal 1997 and 1996, respectively. Total operating revenues for the third quarter of fiscal 1997 were $3.3 billion, down 8% from the same quarter last year. Total operating revenues included product sales of $1.8 billion and service revenues of $1.5 billion. Operating revenues from customers outside of the United States were $2.3 billion and $2.4 billion, or 69% and 68% of total operating revenues for the third quarter of fiscal 1997 and 1996, respectively. The Corporation's results were adversely impacted by the continued strengthening of the U.S. dollar. Removing the effects of foreign currency exchange rate movements, the decline in revenue for the first nine months and the third quarter of fiscal 1997 would have been 9% and 5%, respectively, compared with 12% and 8% as reported.
Revenue (dollars in millions) Nine-Month Period Ended Three-Month Period Ended - - ----------------------------------------------------------------------------------------------------------- March 29, March 30, March 29, March 30, 1997 1996 1997 1996 - - ----------------------------------------------------------------------------------------------------------- Product sales $5,203 $ 6,221 $1,836 $2,056 % of total revenues 54% 57% 55% 57% - - ----------------------------------------------------------------------------------------------------------- Service revenues $4,381 $ 4,623 $1,478 $1,565 % of total revenues 46% 43% 45% 43% - - ----------------------------------------------------------------------------------------------------------- Total revenues $9,584 $10,844 $3,314 $3,621 - - -----------------------------------------------------------------------------------------------------------
Product sales for the first nine months and the third quarter of fiscal 1997 were down 16% and 11%, respectively, from the comparable periods last year. The decline reflects the adverse effects of currency rate movements, the discontinuation of the retail personal computer and certain component products lines, as well as a planned reduction in inventories in distribution channels. For the first nine months and third quarter of fiscal 1997, Alpha-based systems revenues decreased 4% and 13%, respectively, from the comparable periods of fiscal 1996. Alpha-based systems revenues represented 32% of product sales for both the first nine months and third quarter of fiscal 1997, respectively, compared with 27% and 33% of product sales for the comparable periods last year. Revenues from Intel-based personal computers represented 28% of product sales for both the first nine months and the third quarter of fiscal 1997, up from 27% and 25% for the comparable periods last year. Revenues from the Corporation's other product businesses, including VAX systems, storage subsystems, networks, software and other component products were 40% of total product sales for both the first nine months and third quarter of fiscal 1997, compared with 46% and 42% for the same periods of fiscal 1996. 12 13 Service revenues for the first nine months and the third quarter of fiscal 1997 were $4.4 billion and $1.5 billion, respectively, down from $4.6 billion and $1.6 billion for the same periods last year. The decline in service revenues was due principally to the continuing shift of maintenance service revenues from the servicing of proprietary products to multivendor services, as well as focusing on more profitable systems integration contracts. EXPENSES AND PROFIT MARGINS
Gross margin (dollars in millions) Nine-Month Period Ended Three-Month Period Ended - - ----------------------------------------------------------------------------------------------------------- March 29, March 30, March 29, March 30, 1997 1996 1997 1996 - - ----------------------------------------------------------------------------------------------------------- Product sales gross margin $1,758 $2,087 $648 $762 % of related revenues 34% 34% 35% 37% - - ----------------------------------------------------------------------------------------------------------- Service revenues gross margin $1,364 $1,507 $459 $491 % of related revenues 31% 33% 31% 31% - - -----------------------------------------------------------------------------------------------------------
Product gross margin was 34% of product sales for the first nine months, unchanged from the comparable period last year, and 35% of product sales for the third quarter of fiscal 1997, compared with 37% for the third quarter of fiscal 1996. The effect of revenue declines as well as price reductions made early in the third quarter of fiscal 1997 were partially offset by the favorable impact of cost and manufacturing efficiencies, and plant consolidation activities. Service gross margin was 31% of service revenues for both the first nine months and the third quarter of fiscal 1997, compared with 33% for the first nine months of fiscal 1996 and unchanged from the third quarter of fiscal 1996. The decline in service gross margin in the first half of fiscal 1997 was due principally to the continued shift in the mix of maintenance service revenues toward lower-margin multivendor service offerings.
Operating expenses (dollars in millions) Nine-Month Period Ended Three-Month Period Ended - - ----------------------------------------------------------------------------------------------------------- March 29, March 30, March 29, March 30, 1997 1996 1997 1996 - - ----------------------------------------------------------------------------------------------------------- Research and engineering $ 764 $ 795 $256 $276 % of total revenues 8% 7% 8% 8% - - ----------------------------------------------------------------------------------------------------------- Selling, general and administrative $2,348 $2,464 $799 $858 % of total revenues 25% 23% 24% 24% - - -----------------------------------------------------------------------------------------------------------
Research and engineering (R&E) expenses totaled $764 million and $256 million for the first nine months and the third quarter of fiscal 1997, respectively, down from $795 million and $276 million for the same periods of fiscal 1996. The decrease in R&E expenses was due principally to the Corporation's withdrawal from certain non-strategic businesses and the elimination of related development costs. The Corporation believes that its level of R&E spending is appropriate to support current operations and to offer competitive, market-driven products. Selling, general and administrative (SG&A) expenses decreased 5% to $2.3 billion for the first nine months of fiscal 1997, compared with $2.5 billion for the comparable period last year. For the third quarter of fiscal 1997, SG&A expenses totaled $799 million, down 7% from $858 million for the third quarter of fiscal 1996. The decline in SG&A expenses reflects reductions in population and facilities expenditures, reduced variable costs and the positive effects of currency rate movements, partially offset by increased salaries and wages. The Corporation's efforts to achieve a competitive cost structure, improve selling and administrative practices and further increase productivity are ongoing. 13 14 During the fourth quarter 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 overhead in support areas. The planned employee separations are expected to be substantially completed in the first half of 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 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). Employee population decreased by 4,000 from the end of fiscal 1996 to approximately 55,100, and by 800 from the end of the second quarter of fiscal 1997. Net other income for the first nine months and third quarter of fiscal 1997 was $27 million and $11 million, respectively, compared with $30 million and $19 million for the same periods last year. Gains on divestments were $9 million and $2 million for the first nine months and the third quarter of fiscal 1997, respectively, compared with $49 million and $26 million for the same periods a year ago (see Note A). The decrease on gains from divestments was partially offset by increased interest income resulting from significantly higher cash and short-term investment balances. Income tax expense for the first nine months and the third quarter of fiscal 1997 was $20 million and $11 million, respectively, compared with $44 million and $14 million for the same periods of fiscal 1996. The reduction in income tax expense in fiscal 1997 is attributable to lower profit levels. Income tax expense reflects several factors, including incomes taxes provided for profitable operations, benefits taken from net operating loss carryforwards and an inability to recognize currently certain tax benefits from operating losses. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (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. Neither basic nor dilutive EPS as calculated in accordance with SFAS No. 128 would be materially different from primary EPS as presented in these financial statements. In October 1996, the FASB issued SFAS No. 123-Accounting for Stock-Based Compensation. SFAS No. 123 encourages, but does not require, companies to recognize compensation costs for all stock-based compensation arrangements using a fair value method of accounting. Alternatively, SFAS No. 123 permits a company to continue accounting for these arrangements under Accounting Principles Board Opinion No. 25-Accounting for Stock Issued to Employees, accompanied by footnote disclosure of the pro forma effects on net income and earnings per share had the new rules been applied. The Corporation adopted the alternative approach under SFAS No. 123 as of the first day of fiscal 1997. AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR OPERATIONS Cash and short-term investments totaled $2.5 billion at the end of the third quarter of fiscal 1997, up from $2.0 billion at the end of fiscal 1996. Net cash generated from operating activities was $804 million for the first nine months of fiscal 1997, due principally to decreases in accounts receivable and inventories, partially offset by decreases in accrued restructuring costs and accounts payable. Cash expenditures for restructuring activities were $131 million for the first nine months of fiscal 1997, net of proceeds of $49 million from the sale of properties. Future cash expenditures for currently planned restructuring activities are estimated to be between $60 million and $110 million for the remainder of fiscal 1997, and between $300 million and $350 million in fiscal 1998 and beyond (see Note B). While expected total cash expenditures for restructuring actions remains unchanged, actual cash outlays have been delayed due to the timing of certain employee separations, principally in Europe. Net cash used for investing activities was $1.3 billion for the first nine months of fiscal 1997, due principally to short-term investment activities (see Note A). 14 15 Net cash used for financing activities was $164 million for the first nine months of fiscal 1997, due principally to the open market purchase of the Corporation's common stock and the payment of dividends on preferred stock, partially offset by the issuance of stock under the Corporation's employee stock plans (see Note D). During the second quarter of fiscal 1997, $250 million of five-year notes due in November 1997 were reclassified from long-term debt to current portion of long-term debt. The Corporation's need for, cost of and access to funds are dependent on future operating results, as well as conditions external to the Corporation. The Corporation historically has maintained a conservative capital structure, and believes that its current cash position and its sources of and access to capital are adequate to support current and future operations. FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Corporation or statements made by its employees may contain "forward-looking" information, as that term is defined in the Private Securities Litigation Reform Act of 1995 (the "Act"). The Corporation cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to the following: - - -- The Corporation's future operating results are dependent on its ability to develop, produce and market new and innovative products and services. There are numerous risks inherent in this complex process, including rapid technological change and the requirement that the Corporation bring to market in a timely fashion new products and services which meet customers' changing needs. - - -- Historically, the Corporation has generated a disproportionate amount of its operating revenues toward the end of each quarter, making precise prediction of revenues and earnings particularly difficult and resulting in risk of variance of actual results from those forecast at any time. In addition, the Corporation's operating results historically have varied from fiscal period to fiscal period; accordingly, the Corporation's financial results in any particular fiscal period are not necessarily indicative of results for future periods. - - -- The Corporation offers a broad variety of products and services to customers around the world. Changes in the mix of products and services comprising revenues could cause actual operating results to vary from those expected. - - -- The Corporation's success is partly dependent on its ability to 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 could adversely affect future operating results. - - -- The Corporation operates in a highly competitive environment and in a highly competitive industry, which include 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 15 16 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. - - -- 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K. None. 16 17 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 9, 1997 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF DIGITAL EQUIPMENT CORPORATION FOR THE NINE MONTHS ENDED MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 29, 1997. 1,000 U.S. DOLLARS 9-MOS JUN-28-1997 JUN-30-1996 MAR-29-1997 1 1,172,574 1,309,134 3,103,525 217,361 1,471,390 7,163,772 4,934,742 2,820,668 9,612,513 4,187,413 749,320 0 4,000 157,252 3,335,108 9,612,513 5,202,959 9,583,698 3,445,203 6,461,464 3,112,258 0 64,311 37,441 20,475 16,966 0 0 0 16,966 (0.06) 0
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