-----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, PkWe4gO9KXguZoo09yNBgQmohFD/DC8tN9cYUtcNTmmKpRLlhck8KtV4hUBEH3EU IkQzntUUS/OvQsHEUGIDLg== 0000950135-97-004390.txt : 19971111 0000950135-97-004390.hdr.sgml : 19971111 ACCESSION NUMBER: 0000950135-97-004390 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971110 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL EQUIPMENT CORP CENTRAL INDEX KEY: 0000028887 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 042226590 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05296 FILM NUMBER: 97711645 BUSINESS ADDRESS: STREET 1: 146 MAIN ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 6178975111 MAIL ADDRESS: STREET 1: 111 POWDER MILL ROAD MS02-3/F13 STREET 2: 111 POWDER MILL ROAD MS02-3/F13 CITY: MAYNARD STATE: MA ZIP: 01754 10-Q 1 DIGITAL EQUIPMENT CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 27, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5296 DIGITAL EQUIPMENT CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2226590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 111 Powdermill Road, Maynard, Massachusetts 01754 (Address of principal executive offices) (Zip Code) (978) 493-5111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, par value $1, outstanding as of September 27, 1997: 147,797,657. 2 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Three-Month Period Ended ----------------------------------------- September 27, September 28, 1997 1996 --------------- ----------------- REVENUES Product sales .................................. $ 1,582,232 $ 1,522,163 Service revenues ............................... 1,378,083 1,389,478 ----------- ----------- TOTAL OPERATING REVENUES ....................... 2,960,315 2,911,641 ----------- ----------- COSTS AND EXPENSES Cost of product sales .......................... 1,019,118 1,048,390 Service expense ................................ 949,997 951,183 Research and engineering expenses .............. 265,331 257,644 Selling, general and administrative expenses ... 707,213 732,175 ----------- ----------- Operating income/(loss)......................... 18,656 (77,751) Other (income)/expense, net .................... (12,796) (16,172) ----------- ----------- INCOME/(LOSS) BEFORE INCOME TAXES .............. 31,452 (61,579) Provision for income taxes ..................... 6,343 4,302 ----------- ----------- NET INCOME/(LOSS) .............................. 25,109 (65,881) Dividend on preferred stock .................... 8,875 8,875 ----------- ----------- NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ... $ 16,234 $ (74,756) =========== =========== NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (1)..................................... $ 0.11 $ (0.48) =========== ===========
(1) Net income applicable per common share is based on the weighted average number of common shares and common share equivalents outstanding during the period: 150,550,230 shares for the three months ended September 27, 1997. Net loss applicable per common share is based only on the weighted average number of common shares outstanding during the period: 154,335,259 shares for the three months ended September 28, 1996. See page 7 of this report. Cash dividends on common stock have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. 2 3 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
September 27, June 28, 1997 1997 --------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents......................... $1,803,052 $1,358,750 Short-term investments ........................... 550,318 1,160,265 Accounts receivable, net of allowances of $227,494 and $263,763......................... 2,629,634 2,930,014 Inventories: Raw materials .................................... 441,441 421,984 Work-in-process .................................. 314,147 350,421 Finished goods ................................... 742,234 730,740 ---------- ---------- Total inventories................................. 1,497,822 1,503,145 Prepaid expenses, deferred income taxes and other current assets ......................... 377,334 324,122 ---------- ---------- TOTAL CURRENT ASSETS ............................. 6,858,160 7,276,296 ---------- ---------- Property, plant and equipment, at cost ........... 4,866,710 4,868,548 Less accumulated depreciation .................... 2,784,327 2,764,901 ---------- ---------- Net property, plant and equipment ................ 2,082,383 2,103,647 Other assets ..................................... 289,703 312,951 ---------- ---------- TOTAL ASSETS ..................................... $9,230,246 $9,692,894 ========== ==========
The accompanying notes are an integral part of these financial statements. 3 4 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands)
September 27, June 28, 1997 1997 ---------------- ---------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Bank loans and current portion of long-term debt .............................. $ 285,942 $ 262,835 Accounts payable ............................... 692,695 871,760 Income taxes payable ........................... 124,383 101,286 Salaries, wages and related items .............. 598,601 637,587 Deferred revenues and customer advances ........ 1,035,756 1,079,003 Accrued restructuring costs .................... 332,651 382,559 Other current liabilities ...................... 828,987 905,900 ----------- ----------- TOTAL CURRENT LIABILITIES ...................... 3,899,015 4,240,930 ----------- ----------- Long-term debt ................................. 743,489 743,440 Postretirement and other postemployment benefits ....................................... 1,173,186 1,163,568 ----------- ----------- TOTAL LIABILITIES .............................. 5,815,690 6,147,938 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, $1.00 par value (liquidation preference of $100.00 per share); authorized 25,000,000 shares; 4,000,000 shares of Series A 8-7/8% Cumulative Preferred Stock issued and outstanding .................................... 4,000 4,000 Common stock, $1.00 par value; authorized 450,000,000 shares; 157,219,309 and 157,232,104 shares issued ...................... 157,219 157,232 Additional paid-in capital ..................... 3,838,310 3,835,697 Retained deficit ............................... (224,721) (234,841) Treasury stock at cost; 9,421,652 shares and 6,132,201 shares ........................... (360,252) (217,132) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY ..................... 3,414,556 3,544,956 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..... $ 9,230,246 $ 9,692,894 =========== ===========
The accompanying notes are an integral part of these financial statements. 4 5 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three-Month Period Ended --------------------------------------- September 27, September 28, 1997 1996 -------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income/(loss) ................................. $ 25,109 $ (65,881) Adjustments to reconcile net income/(loss) to net cash from operating activities: Depreciation ...................................... 93,868 97,386 Amortization ...................................... 11,513 15,155 Gain on disposition and write-down of other assets ...................................... (3,982) (12,330) Other adjustments to net income/(loss) ............ (16,076) 28,741 Decrease in accounts receivable ................... 306,780 290,443 Decrease in inventories ........................... 4,654 139,714 Increase in prepaid expenses and other current assets .................................... (56,090) (33,269) Decrease in accounts payable ...................... (179,065) (187,385) Increase/(decrease) in taxes ...................... 27,282 (1,133) Increase/(decrease) in salaries, wages, benefits and related items ................................. (29,368) 33,091 Decrease in deferred revenues and customer advances ................................. (43,247) (46,710) Decrease in accrued restructuring costs ........... (49,908) (78,208) Decrease in other current liabilities ............. (83,667) (41,398) --------- --------- Total adjustments ................................. (17,306) 204,097 --------- --------- Net cash flows from operating activities .......... 7,803 138,216 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property, plant and equipment ....... (81,028) (86,338) Proceeds from the disposition of property, plant and equipment ..................... 2,917 2,671 Purchases of short-term investments ............... (202,308) (658,212) Maturities of short-term investments .............. 812,255 159,511 Investments in other assets ....................... (2,395) (4,201) Proceeds from the disposition of other assets ..... 42,571 8,262 --------- --------- Net cash flows from investing activities .......... 572,012 (578,307) --------- --------- Net cash flows from operating and investing activities .............................. 579,815 (440,091) --------- ---------
The accompanying notes are an integral part of these financial statements. 5 6 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands)
Three-Month Period Ended ----------------------------- September 27, September 28, 1997 1996 -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt ...................... 24,082 3,035 Payments to retire debt ................................. (1,210) (1,223) Purchase of treasury shares ............................. (160,078) (57,279) Issuance of common and treasury shares .................. 10,568 7,199 Dividend on preferred stock ............................. (8,875) (8,875) ----------- ----------- Net cash flows from financing activities ................ (135,513) (57,143) ----------- ----------- Net increase/(decrease) in cash and cash equivalents .... 444,302 (497,234) Cash and cash equivalents at the beginning of the year ................................... 1,358,750 1,791,754 ----------- ----------- Cash and cash equivalents at end of period .............. $ 1,803,052 $ 1,294,520 =========== ===========
The accompanying notes are an integral part of these financial statements 6 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 --------------------------------- September 27, September 28, 1997 1996 -------------- --------------- Net income/(loss) applicable to common and common equivalent shares ............................. $ 16,234 $ (74,756) ============= ============= Weighted average number of common shares outstanding during the period ........................ 148,907,085 154,335,259 Common stock equivalents from application of "treasury stock" method to unexercised and outstanding stock options ........................ 1,643,145 -- ------------- ------------- Total weighted average number of common and common equivalent shares outstanding during the period .................................... 150,550,230 154,335,259 ============= ============= Net income/(loss) applicable per common and common equivalent share .............................. $ 0.11 $ (0.48) ============= =============
The accompanying notes are an integral part of these financial statements. 7 8 11/07/97 DIGITAL EQUIPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Significant Accounting Policies Principles of consolidation: The accompanying unaudited financial statements as of and for the three-month periods ended September 27, 1997 and September 28, 1996 have been prepared on substantially the same basis as the annual consolidated financial statements, reflecting all adjustments of a normal recurring nature. In the opinion of management, the financial statements reflect all adjustments necessary for a fair presentation of the results for those periods and the financial condition at those dates. Certain prior year's amounts have been reclassified to conform with the current year presentation. Other (income)/expense, net:
(in thousands) September 27, 1997 September 28, 1996 - ---------------------------------------------------------------------------------- Interest income $ (30,807) $ (25,050) Interest expense 21,961 21,165 Net gain on divestments (3,950) (12,287) - ---------------------------------------------------------------------------------- Other (income)/expense, net $ (12,796) $ (16,172) - ----------------------------------------------------------------------------------
Note B - Restructuring Actions During the first three months of fiscal 1998, the Corporation incurred costs of $31 million for approximately 230 employee separations and for separation actions taken at the end of fiscal 1997, but not paid out until the first quarter of fiscal 1998. In addition, the Corporation incurred costs of $19 million for facilities closures and related actions. Cash expenditures for restructuring activities were $47 million for the first three months of fiscal 1998. Note C - Litigation Several purported class action lawsuits were filed against the Corporation during the fourth quarter of fiscal 1994 alleging violations of the Federal securities laws arising from alleged misrepresentations and omissions in connection with the Corporation's issuance and sale of Series A 8-7/8% Cumulative Preferred Stock and the Corporation's financial results for the quarter ended April 2, 1994. During fiscal 1995, the lawsuits were consolidated into three cases, which were pending before the United States District Court for the District of Massachusetts. On August 8, 1995, the Massachusetts federal court granted the defendants' motion to dismiss all three cases in their 8 9 entirety. On May 7, 1996, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part the dismissal of the two cases, and remanded for further proceedings. The Corporation and Intel Corporation ("Intel") have been involved in litigation commenced in the fourth quarter of fiscal 1997 in the U.S. District Courts for the Districts of Massachusetts and Northern California, and in September 1997 in the U.S. District Court for the District of Oregon claiming, respectively, willful infringement by Intel of certain of the Corporation's patents through the manufacture, sale and use of Intel's families of Pentium microprocessors, breach of contract and various other unfair or unlawful business practices by the Corporation, and willful infringement by the Corporation of certain of Intel's patents through the manufacture, sale and use of various computer products. On October 27, 1997, the Corporation and Intel announced that they had reached agreement to settle the pending litigation between the parties and to request a stay of all pending litigation, subject to receipt of government approval necessary to finalize the transactions contemplated by the parties' agreement (see Note F). Note D - Treasury Stock During the first quarter of fiscal 1998, the Corporation purchased in the open market 3.7 million shares of its common stock for an aggregate purchase price of $160.1 million, or an average of $42.79 per common share. Approximately 451,000 shares were issued under employee stock plans and the remaining shares are held in treasury. The Corporation continues to repurchase shares of its common stock, as conditions warrant, under a previously announced program. Note E - Statement of Financial Accounting Standard No. 128 - Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128-Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and requires a dual presentation of basic and dilutive EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and earlier adoption is not permitted. If the Corporation had presented EPS based on SFAS No. 128, the reconciliation of EPS would approximate the pro forma amounts indicated below: 9 10 (Dollars in thousands except per share amounts)
For the Three-Month Period Ended September 27, 1997 September 28, 1996 ------------------ ------------------ Net income/(loss) $ 25,109 $ (65,881) Less: Dividend on preferred stock 8,875 8,875 ------------- ------------- Net income/(loss) applicable to common shares $ 16,234 $ (74,756) ============= ============= Net income/(loss) applicable to common and common equivalent shares $ 16,234 $ (74,756) ============= ============= Weighted average number of common shares outstanding 148,751,388 154,524,234 Effect of common equivalent shares 1,643,145 -- ------------- ------------- Total weighted average common and common equivalent shares 150,394,533 154,524,234 ============= ============= Net income/(loss) applicable per common share $ 0.11 $ (0.48) ============= ============= Net income/(loss) applicable per common and common equivalent share $ 0.11 $ (0.48) ============= =============
Net income applicable per common share is based on the weighted average number of common shares and common equivalent shares outstanding during the period. Net loss applicable per common share is based only on the weighted average number of common shares outstanding during the period. Note F - Subsequent Event On October 27, 1997, the Corporation and Intel announced that they had reached an agreement to establish a broad-based business relationship, including the sale of the Corporation's semiconductor manufacturing operations to Intel for a purchase price equal to the net book value of the transferred assets (currently estimated to be approximately $700 million), cross-licensing of patents, supply of both Intel and Alpha microprocessors and development of future systems based on Intel's 64-bit microprocessors. The agreement provides that Intel will make offers of employment to employees of the Corporation's semiconductor manufacturing operations, except for those employees associated with the Alpha and Alpha-related semiconductor design teams. The Corporation and Intel agreed to request a stay of all pending litigation until U.S. government approval is granted, which is required to finalize the parties' agreement (see Note C). 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUES Total operating revenues for the first quarter of fiscal 1998 were $3.0 billion, up 2% from the comparable quarter last year. Total operating revenues include product sales of $1.6 billion and service revenues of $1.4 billion.
Revenues (dollars in millions) - --------------------------------------------------------------------------------------- First quarter of fiscal year 1998 1997 - --------------------------------------------------------------------------------------- Product sales $ 1,582 $ 1,522 % of total revenues 53% 52% - --------------------------------------------------------------------------------------- Service revenues $ 1,378 $ 1,390 % of total revenues 47% 48% - --------------------------------------------------------------------------------------- Total revenues $ 2,960 $ 2,912 - ---------------------------------------------------------------------------------------
Product sales for the first three months of fiscal 1998 were up 4% from the comparable quarter last year. The increase in product sales reflects increased revenues from the sale of servers (Intel and Alpha-based), storage and network products, and a decrease in revenues from the sales of certain client products, principally Alpha-based UNIX workstations. For the first three months of fiscal 1998, revenues from the sale of servers represented 35% of product sales, up from 29% for the same quarter last year. Client sales represented 27% and 31% of product sales for the first quarter of fiscal 1998 and 1997, respectively. Revenues from the Corporation's components and other products represented 38% and 40% of product sales for the first three months of fiscal 1998 and 1997, respectively. Service revenues for the first quarter of fiscal 1998 were $1.4 billion, essentially unchanged from the first three months of fiscal 1997. Service revenues reflect growth in multivendor services and client/server outsourcing services, offset by an anticipated decrease in revenues from Digital products maintenance services. Operating revenues from customers outside of the United States were $1.9 billion for the first quarter of fiscal 1998 and 1997, representing 64% and 65% of total revenues, respectively. The Corporation's operating results for the first three months of fiscal 1998 were adversely impacted by the continued strengthening of the U.S. dollar. Removing the effects of foreign currency exchange rate movements, the increase in total operating revenues for the first quarter of fiscal 1998 would have been 8%, compared with 2% as reported. 11 12 EXPENSES AND PROFIT MARGINS
Gross margin (dollars in millions) - ------------------------------------------------------------------------------ First quarter of fiscal year 1998 1997 - ------------------------------------------------------------------------------ Product sales gross margin $ 563 $ 474 % of related revenues 36% 31% - ------------------------------------------------------------------------------ Service revenues gross margin $ 428 $ 438 % of related revenues 31% 32% - ------------------------------------------------------------------------------
Product gross margin was 36% of product sales for the first quarter of fiscal 1998, compared with 31% for the same period a year ago. The continued improvement in product gross margin was due principally to manufacturing cost efficiencies and an increased proportion of higher-margin server revenues. Service gross margin was 31% of service revenues for the first three months of fiscal 1998, down slightly from the first quarter of fiscal 1997. Service gross margin reflects the continued focus on more profitable systems integration contracts and the continued shift in the mix of service revenues toward lower-margin service offerings.
Operating expenses (dollars in millions) - ------------------------------------------------------------------------------- First quarter of fiscal year 1998 1997 - ------------------------------------------------------------------------------- Research and engineering $ 265 $ 258 % of total revenues 9% 9% - ------------------------------------------------------------------------------- Selling, general and administrative $ 707 $ 732 % of total revenues 24% 25% - -------------------------------------------------------------------------------
Research and engineering (R&E) spending totaled $265 million for the first three months of fiscal 1998, up from $258 million for the same quarter last year. The Corporation believes that this level of R&E investment is appropriate for the Corporation to continue to provide competitive products and services. Selling, general and administrative (SG&A) expenses were $707 million for the first quarter of fiscal 1998, down from $732 million for the first three months of fiscal 1997. The decline in SG&A expenses reflects the positive effects of currency rate movements and the Corporation's continued focus on achieving a competitive cost structure through reductions in population and facilities expenditures, partially offset by increases in salaries and wages and investment in demand generation activities. At the end of fiscal 1996, the Corporation approved a restructuring plan intended to increase sales productivity, further consolidate manufacturing plants and distribution sites, improve service delivery and further reduce 12 13 overhead in support areas. The planned employee separations are expected to be substantially complete in fiscal 1998. The number of involuntary separations is expected to be lower than originally planned due principally to a higher than anticipated level of voluntary separations. However, associated restructuring-related cost savings are expected to be offset by an increase in estimated separation costs for certain non-U.S. employees. The total estimated cost of restructuring actions is unchanged (see Note B). Total employee population decreased by 500 during the first quarter of fiscal 1998 to approximately 54,400, and by 2,600 from the end of the first quarter of fiscal 1997. Net other income was $13 million and $16 million for the first quarter of fiscal 1998 and 1997, respectively. Net gains on divestments were $4 million for the first three months of fiscal 1998, compared with $12 million for the same quarter a year ago. The decrease in gains from divestments in the first quarter of fiscal 1998 was offset by increased interest income on higher cash and short-term investment balances. Income tax expense for the first three months of fiscal 1998 was $6 million, compared with $4 million for the same quarter last year. Income tax expense reflects several factors, including income taxes for profitable operations, benefits taken from net operating loss carryforwards and an inability to recognize currently certain tax benefits from operating losses. AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR OPERATIONS Cash, cash equivalents and short-term investments totaled $2.4 billion at the end of the first quarter of fiscal 1998, down from $2.5 billion at the end of fiscal 1997. Net cash generated from operating activities was $8 million for the first quarter of fiscal 1998, due principally to a decrease in accounts receivable from the end of fiscal 1997, offset by a decrease in accounts payable and various other liabilities. Cash expenditures for restructuring activities were $47 million for the first three months of fiscal 1998. Future cash expenditures for currently planned restructuring activities are estimated to be $300 million for fiscal 1998 and beyond, the majority of which will be used in fiscal 1998 (see Note B). Net cash from investing activities was $572 million in the first three months of fiscal 1998. The increase in cash from investing activities was due principally to maturities of short-term investments. As investments mature, the proceeds are reinvested as cash, cash equivalents or short-term investments, as conditions warrant. Net cash used for financing activities was $136 million in the first quarter of fiscal 1998. The principal financing activity for the first three months of fiscal 1998 was the open market purchase of 3.7 million shares of the 13 14 Corporation's common stock for $160 million. In July 1997, the Corporation's Board of Directors authorized the repurchase for cash, as conditions warrant, of up to 15 million shares of the Corporation's common stock. On October 27, 1997, the Corporation and Intel announced that they had reached an agreement to establish a broad-based business relationship, including the sale of the Corporation's semiconductor manufacturing operations to Intel for a purchase price equal to the net book value of the transferred assets (currently estimated to be approximately $700 million), cross-licensing of patents, supply of both Intel and Alpha microprocessors and development of future systems based on Intel's 64-bit microprocessors. The agreement provides that Intel will make offers of employment to employees of the Corporation's semiconductor manufacturing operations, except for those employees associated with the Alpha and Alpha-related semiconductor design teams. The Corporation and Intel agreed to request a stay of all pending litigation until U.S. government approval is granted, which is required to finalize the parties' agreement (see Notes C and F). The Corporation's need for, cost of and access to funds are dependent on future operating results, as well as conditions external to the Corporation. The Corporation historically has maintained a conservative capital structure, and believes that its cash position and its sources of and access to capital markets are adequate to support current operations. FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Corporation or statements made by its employees may contain "forward-looking" information, as that term is defined in the Private Securities Litigation Reform Act of 1995. The Corporation cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to the following: - -- The Corporation's future operating results are dependent on its ability to develop, produce and market new and innovative products and services. There are numerous risks inherent in this complex process, including rapid technological change, the Corporation's ability to access components and related technical information from other companies and the requirement that the Corporation bring to market in a timely fashion new products and services which meet customers' changing needs. - -- Historically, the Corporation has generated a disproportionate amount of its operating revenues toward the end of each quarter, making precise prediction of revenues and earnings particularly difficult and resulting in risk of variance of actual results from those forecast at any time. In addition, the Corporation's operating results historically have varied from fiscal period to fiscal period; accordingly, the Corporation's financial results in any particular fiscal period are not necessarily indicative of results for future periods. 14 15 - -- The Corporation offers a broad variety of products and services to customers around the world. Changes in the mix of products and services comprising revenues could cause actual operating results to vary from those expected. - -- The Corporation's success is partly dependent on its ability to successfully predict and adjust production capacity to meet demand, which is partly dependent upon the ability of external suppliers to deliver components at reasonable prices and in a timely manner; capacity or supply constraints, or unexpected increases or decreases in the prices of components, could adversely affect future operating results. - --While the Corporation believes that the materials required for its manufacturing operations are presently available in quantities sufficient to meet demand, the failure of a significant supplier to deliver certain components or technical information on a timely basis or in sufficient quantities could adversely affect the Corporation's future results of operations. - -- The Corporation operates in a highly competitive environment which includes significant competitive pricing pressures and intense competition for skilled employees. Particular business segments may from time to time experience unanticipated intense competitive pressure, possibly causing operating results to vary from those expected. - --The Corporation offers its products and services directly and through indirect distribution channels. Changes in the financial condition of, or the Corporation's relationship with, distributors and other indirect channel partners, as well as fluctuations in end-user sales by indirect sales channel partners, could cause actual operating results to vary from those expected. - -- The Corporation does business worldwide in over 100 countries. Global and/or regional economic factors and potential changes in laws and regulations affecting the Corporation's business, including without limitation, currency fluctuations, changes in monetary policy and tariffs, and federal, state and international laws regulating the environment, could impact the Corporation's financial condition or future results of operations. - --Certain of the Corporation's internal computer systems are not Year 2000 ready (i.e., such systems use only two digits to represent the year in date data fields and, consequently, may not accurately distinguish between the 20th and 21st centuries or may not function properly at the turn of the century). The Corporation has been taking actions intended to either correct such systems or replace them with Year 2000 ready systems. The Corporation expects to implement successfully the systems and programming changes necessary to address Year 2000 issues and does not believe that the cost of such actions will have a material effect on the Corporation's results of operations or financial condition. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and the Corporation's inability to implement such changes could have an adverse effect on future results of operations. 15 16 - -- As the Corporation continues to implement its strategic plan and respond to external market conditions, there can be no assurance that additional restructuring actions will not be required. With regard to completion of planned restructuring actions, there can be no assurance that the estimated cost of such actions will not change. - -- The market price of the Corporation's securities could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the information technology industry, as well as general economic conditions and other factors external to the Corporation. 16 17 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As discussed in Note C above, the Corporation and Intel Corporation ("Intel") have been involved in litigation commenced in the fourth quarter of fiscal 1997 in the U.S. District Courts for the Districts of Massachusetts and Northern California, and in September 1997 in the U.S. District Court for the District of Oregon claiming, respectively, willful infringement by Intel of certain of the Corporation's patents through the manufacture, sale and use of Intel's families of Pentium microprocessors, breach of contract and various other unfair or unlawful business practices by the Corporation, and willful infringement by the Corporation of certain of Intel's patents through the manufacture, sale and use of various computer products. On October 27, 1997, the Corporation and Intel announced that they had reached agreement to settle the pending litigation between the parties and to request a stay of all pending litigation, subject to receipt of government approval necessary to finalize the transactions contemplated by the parties' agreement. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K. On October 27, 1997, the Corporation filed a Current Report on Form 8-K which reported that the Corporation and Intel Corporation reached an agreement to establish a broad-based business relationship and settle pending litigation as described in Notes C and F to the financial statements contained in this Quarterly Report on Form 10-Q. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL EQUIPMENT CORPORATION (Registrant) By: /s/ Vincent J. Mullarkey ------------------------------------ Vincent J. Mullarkey Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) November 10, 1997 18 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 THREE MONTHS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 27, 1997. 1,000 3-MOS JUN-27-1998 JUL-29-1997 SEP-27-1997 1,803,052 550,318 2,857,128 227,494 1,497,822 6,858,160 4,866,710 2,784,327 9,230,246 3,899,015 743,489 0 4,000 157,219 3,253,337 9,230,246 1,582,232 2,960,315 1,019,118 1,969,115 972,544 0 21,961 31,452 6,343 25,109 0 0 0 25,109 0.11 0.00
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