-----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, giL/TtPb8oXyCQvL6CSBqxCLnA/1j51zbbOSjrFzxaBlovpVo43bi02ch/jbKaHu SPzNRia41cDKkD0DVyCNMg== 0000028887-94-000022.txt : 19940919 0000028887-94-000022.hdr.sgml : 19940919 ACCESSION NUMBER: 0000028887-94-000022 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19940702 FILED AS OF DATE: 19940916 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05296 FILM NUMBER: 94549402 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-K 1 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 2, 1994 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . Commission file number 1-5296 Digital Equipment Corporation (Exact name of registrant as specified in its charter) Massachusetts 04-2226590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 146 Main Street, Maynard, Massachusetts 01754-2571 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 493-5111 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered (a) Common Stock, par value $1 New York Stock Exchange per share Pacific Stock Exchange Chicago Stock Exchange Depositary shares each representing New York Stock Exchange one-fourth of a share of 8 7/8% Series A Cumulative Preferred Stock, par value $1 per share (a) In addition, shares of Common Stock of the registrant are listed on the Montreal Exchange and certain stock exchanges in Switzerland and Germany. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (a) 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 (b) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [] As of September 12, 1994, 142,777,178 shares of the registrant's Common Stock, par value $1, were issued and outstanding. The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of September 12, 1994 was approximately $3.4 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1994 Annual Report to Stockholders are incorporated by reference in Part II hereof. Portions of the registrant's Proxy Statement for its 1994 Annual Meeting of Stockholders, scheduled to be held on November 10, 1994, are incorporated by reference in Part III hereof. PART I Item 1. Business. General Digital Equipment Corporation, a Massachusetts corporation founded in 1957, is one of the world's largest suppliers of networked computer systems and components, software and services and a world leader in the development and implementation, directly and through partners, of client/server solutions for open computing environments. The Corporation offers a full range of desktop, client/server and production systems and related components, peripheral equipment, software and services used in a wide variety of applications, industries and computing environments. The Corporation does business in more than 100 countries, deriving more than 60% of its revenue from outside of the United States and developing and manufacturing products in the Americas, Europe and the Pacific Rim. The term "Corporation" when used herein refers to Digital Equipment Corporation or Digital Equipment Corporation and its subsidiaries, as required by the context. For the last five fiscal years, the percentage of total operating revenues contributed by the Corporation's principal classes of products was as follows: 1994 1993 1992 1991 1990 Product sales 53.5% 52.8% 55.2% 59.7% 62.9% Service and other revenues 46.5% 47.2% 44.8% 40.3% 37.1% 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ====== ====== Service and other revenues are derived principally from Digital and multivendor hardware and software product services and systems integration services. Products Systems and Products: Most of the Corporation's systems are general purpose digital computers, designed to perform, interpret and record computations on collected data or act as servers providing computing resources across a network. The Corporation offers a broad range of computer systems and servers based on Digital's Alpha AXP(TM) and VAX(R) architectures, and the Intel(R) X86 architecture. The Corporation's offerings include a line of VAX systems and servers, from VAXstation(TM) workstations to high performance servers. The Corporation also offers a full range of Intel-based and industry compatible personal computers and network hardware and desktop integration products. In addition, the Corporation is a major manufacturer and supplier of video terminals, printers and network components, such as hubs, routers and switches. Alpha AXP: The Corporation's 64-bit, reduced instruction set computing ("RISC") architecture known as "Alpha AXP(TM)" is designed to support multiple operating systems and to be the foundation for a leading high performance computer system family. The Corporation offers a complete line of Alpha AXP-based products, ranging from chips and boards to personal computers and high performance workstations to larger general purpose computer systems. Alpha AXP supports three major operating systems: the Open Software Foundation's 64-bit unified UNIX(R) operating system (DEC OSF/1)(R), the Corporation's OpenVMS(TM) operating system and Microsoft Corporation's Windows NT(R) operating system. In April 1994, the Corporation introduced a new line of competitively priced, high performance Alpha AXP-based servers, the Digital 2100 series, which support symmetrical multiprocessing. Storage Business: Shortly after the close of the fiscal year, the Corporation announced it had reached agreement with Quantum Corporation for the sale of portions of its storage business, including its magnetic disk drive, tape drive, solid state disk and thin-film heads businesses. The Corporation expects to continue to offer peripheral and data storage products for use with its computer systems after the transaction is complete. Software: The Corporation designs, develops or acquires from third parties and distributes under license various software products for use on its computer systems and computer systems from other vendors. These products consist of operating systems, communication and networking software, run-time services (such as data/information handling and graphical user interfaces), language compilers, productivity tools, production systems (including databases and transaction processing monitors), office and workgroup software frameworks, and other application software. The Corporation's software offerings are intended to promote open client/server computing and, to this end, are designed to industry-standard interfaces that enable applications to work across different platforms and operating systems. During the fiscal year, the Corporation announced the development of several software products that support this strategy, including its LinkWorks(TM) offerings. In addition, in November 1993 the Corporation announced a joint effort with Microsoft Corporation to develop the Common Object Model, a set of software standards that are designed to enable software objects in different operating systems, data formats and geographical locations to work together across a network. Services The Corporation provides a comprehensive portfolio of technical consulting, systems integration and support services to help customers plan, implement and manage their information technology solutions through a global network of employees and partners. The Corporation's services offerings include maintenance and support services for the Corporation's products, as well as for products manufactured by other companies; information systems consulting; technical and application design services; education and customer training services; systems integration and project management services; network design and support services; and outsourcing and resource management services. Sales and Distribution The Corporation directly sells, markets and supports its products and services through approximately 725 locations throughout the world. Arrangements with third parties, including software developers, value added resellers (VARs) and authorized distributors, are an increasingly important part of the Corporation's focus on providing complete solutions to its customers and expanding distribution of its products and services through indirect channels. For the fiscal year ended July 2, 1994, approximately 3.3% of the Corporation's total operating revenues were derived directly from sales to various agencies of the U.S. Government, and no other customer of the Corporation accounted for more than 2% of total revenues. The Corporation believes that the dollar amount of backlog is not a meaningful indication of future revenues and historically has not published such data. It has been and continues to be the Corporation's objective to minimize the time from the receipt of a purchase order to delivery of the product. International Operations Sales by the Corporation to customers outside the United States amounted to 62%, 64% and 63% of total operating revenues for the fiscal years ended July 2, 1994, July 3, 1993 and June 27, 1992, respectively. International sales and marketing operations are conducted through subsidiaries, by direct sales from the parent company, by resellers and through various representative and distributorship arrangements. The Corporation's international business is subject to risks customarily encountered in foreign operations, including fluctuations in monetary exchange rates, import and export controls and the economic, political and regulatory policies of foreign governments. In view of the diversification of the Corporation's international activities, the Corporation does not believe that there are any special risks beyond the normal business risks attendant to conducting business abroad. See Notes A, B and I of Notes to Consolidated Financial Statements, incorporated by reference herein, for further information on the Corporation's international operations, including financial information concerning the Corporation's operations by major geographical area. Competition The information technology industry is highly competitive, international in scope and comprised of many companies. The methods of competition include marketing, product performance, price, service, technology and compliance with various industry standards, among others. Present and potential competition in the various markets served by the Corporation comes from firms of various sizes and types, some of which are larger and have greater resources than the Corporation. Firms not now in direct competition with the Corporation may introduce competing products in the future. It is possible for companies to be at various times competitors, customers and collaborators in different markets. Materials The Corporation obtains a wide variety of components, assemblies and raw materials from a substantial number of suppliers. The Corporation has established or has available alternate sources of supply for many of these materials. The Corporation believes that the materials required for its manufacturing operations are presently available in quantities sufficient to meet demand; however, a portion of the Corporation's manufacturing operations is dependent on the timely delivery of certain sub-assemblies and components from significant suppliers. The failure of such suppliers to deliver such items on a timely basis could adversely affect the Corporation's operating results until alternative sources of supply could be arranged. Environmental Affairs The Corporation's facilities are subject to numerous laws and regulations designed to protect human health and safety and the environment, particularly those relating to manufacturing and engineering, chemical usage, waste and emissions. Pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA"), as amended, the Corporation has been notified that it is a potentially responsible party ("PRP") for and is sharing the costs of investigating and cleaning up certain sites listed on the federal National Priorities List of Superfund Sites. Under similar state laws, the Corporation also is incurring costs in connection with the investigation and remediation of certain properties owned and/or operated by the Corporation. In the opinion of the Corporation, compliance with these laws and regulations has not had and should not have a material effect on the capital expenditures, earnings or competitive position of the Corporation. Patents The Corporation owns or is licensed under a number of patents and patent applications relating to its products. While the Corporation's portfolio of patents and patent applications is of significant value to the Corporation, the Corporation does not believe that any particular patent or group of patents is of material importance to the Corporation's business as a whole. Research and Engineering The Corporation is in an industry which is characterized by rapid technological change. In the fiscal years ended July 2, 1994, July 3, 1993 and June 27, 1992, the Corporation spent $1.30 billion, $1.53 billion and $1.75 billion, respectively, for research and engineering (R&E). Although the Corporation expects to continue its ongoing R&E efficiency initiatives, it also expects to continue to invest heavily in R&E to maintain and strengthen its competitive position. Employees The Corporation had approximately 77,800 regular employees, and an additional 5,000 temporary and contract workers worldwide at July 2, 1994. Executive Officers of the Corporation The following table sets forth the names and ages of the 11 executive officers of the Corporation and certain information relating to their positions held with the Corporation. YEAR FIRST NAME AGE PRESENT TITLE BECAME OFFICER Robert B. Palmer 54 Director; President and Chief 1985 Executive Officer R. E. Caldwell 57 Vice President, Digital 1994 Semiconductor Charles F. Christ 55 Vice President and General 1993 Manager, Components Division Richard M. Farrahar 50 Vice President, Human 1993 Resources Ilene B. Jacobs 47 Vice President and Treasurer 1985 Vincent J. Mullarkey 46 Vice President, Finance and 1992 Chief Financial Officer Enrico Pesatori 53 Vice President and General 1993 Manager, Computer Systems Division E.C. Mick Prokopis 52 Vice President and Corporate 1994 Controller John J. Rando 42 Vice President, Multivendor 1993 Customer Services Thomas C. Siekman 52 Vice President and General 1993 Counsel William D. Strecker 50 Vice President, Advanced 1985 Technology Group and Chief Technical Officer - ------------------- Executive officers of the Corporation are elected annually and hold office until the first meeting of the Board of Directors following the annual meeting of stockholders and until their successors have been chosen and qualified. All of the executive officers named have been officers or held managerial positions in the Corporation for at least the last five years, except Messrs. Christ, Pesatori and Prokopis. Prior to joining the Corporation, these officers held the following positions: Mr. Christ, who joined the Corporation as Vice President, Mass Storage Group, in 1990, served as a partner in Coopers & Lybrand's Management Consulting Services group from 1989 to July 1990; from 1986 to 1989 he served as President and Chief Executive Officer of Digital Sound Corporation. Mr. Pesatori had been President and Chief Executive Officer of Zenith Data Systems from January 1991 to January 1993; from October 1986 to 1989 he served as President and Chief Executive Officer of North American operations for Ing. Olivetti & C. S.p.A. ("Olivetti") and from 1989 to December 1990 he was Senior Vice President, Corporate Marketing of Olivetti. Mr. Prokopis was self employed from November 1993 to July 1994; from July 1992 to November 1993 he served as Executive Vice President of Ziff Communications Corp.; from March 1992 to July 1992 he was Executive Vice President and Chief Financial Officer of MAST Industries; from 1989 to 1992 he was the Corporation's Finance Manager, Manufacturing, Engineering and Marketing and from 1987 to 1989 he served as the Corporation's Manufacturing Controller. Item 2. Properties At the end of fiscal 1994, the Corporation owned or leased approximately 39.1 million square feet of space worldwide. The Corporation occupied approximately 32.3 million square feet, leased or sub-leased to others approximately 1.3 million square feet, and due to restructuring actions, had vacant space of approximately 5.5 million square feet, most of which is available for sale or sub-lease. The total space owned or leased decreased by approximately 3.0 million square feet from the prior year. Approximately 54% of the occupied space is located in the United States; approximately 59% of the occupied space is owned. The Corporation's occupied facilities are substantially utilized, well maintained and suitable for the products and services offered by the Corporation. Approximately 500,000 square feet of space for new manufacturing facilities is under construction and scheduled for completion during fiscal 1995. The Corporation anticipates it will occupy fewer square feet of space worldwide at the end of fiscal 1995 than at the end of fiscal 1994. Item 3. Legal Proceedings The Corporation has been named as a defendant in several purported class action lawsuits filed in the U.S. District Court for the Southern District of New York and the U.S. District Court for the District of Massachusetts alleging violations of the Federal securities laws 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 fiscal quarter ended April 2, 1994. (See Note H of Notes to Consolidated Financial Statements.) Item 4. Submission of Matters to a Vote of Security Holders. During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. See the section entitled "Stock Information," which is incorporated herein by reference, appearing on page 54 of the Corporation's 1994 Annual Report to Stockholders. Item 6. Selected Financial Data. See the section entitled "Eleven-Year Financial Summary," which is incorporated herein by reference, appearing on pages 26 and 27 of the Corporation's 1994 Annual Report to Stockholders. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. See the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition," which is incorporated herein by reference, appearing on pages 28 through 33 of the Corporation's 1994 Annual Report to Stockholders. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data, which are incorporated herein by reference from the Corporation's 1994 Annual Report to Stockholders, are indexed under Item 14(a)(1). See also the financial statement schedules appearing herein, as indexed under Item 14(a)(2). Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. See the section entitled "Election of Directors," which is incorporated herein by reference from the Corporation's Proxy Statement for its 1994 Annual Meeting of Stockholders. See also the section entitled "Executive Officers of the Corporation" appearing in Part I hereof. Item 11. Executive Compensation. See the section entitled "Executive Compensation," which is incorporated herein by reference from the Corporation's Proxy Statement for its 1994 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. See the section entitled "Security Ownership of Directors and Executive Officers" which is incorporated herein by reference from the Corporation's Proxy Statement for its 1994 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions. See the section entitled "Certain Relationships and Related Transactions," which is incorporated herein by reference from the Corporation's Proxy Statement for its 1994 Annual Meeting of Stockholders. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) Financial statements which are incorporated herein by reference from the Corporation's 1994 Annual Report to Stockholders: Report of Independent Accountants (page 35). Consolidated Statements of Operations for fiscal years 1994, 1993 and 1992 (page 36). Consolidated Balance Sheets as at July 2, 1994 and July 3, 1993 (page 37). Consolidated Statements of Cash Flows for fiscal years 1994, 1993 and 1992 (page 38). Consolidated Statements of Stockholders' Equity for fiscal years 1994, 1993, and 1992 (page 39). Notes to Consolidated Financial Statements (pages 40 through 53). Eleven-Year Financial Summary (pages 26 and 27). Quarterly Financial Data (page 54). The Corporation's 1994 Annual Report to Stockholders is not to be deemed filed as part of this report except for those parts thereof specifically incorporated herein by reference. (2) Financial statement schedules: Page S-1 Report of Independent Accountants S-2 V - Property, Plant and Equipment S-5 VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment S-8 VIII - Valuation and Qualifying Accounts and Reserves S-9 X - Supplemental Income Statement Information All other schedules have been omitted since they are not required, not applicable or the information has been included in the financial statements or the notes thereto. Individual financial statements of the Corporation have been omitted because it is primarily an operating company and the consolidated subsidiaries are not indebted, in a material amount, to any person other than to the parent or to other consolidated subsidiaries. (3) Exhibits: 3(a) - Restated Articles of Organization of the Corporation dated March 11, 1991 (filed under cover of Form SE as Exhibit 3(a) to the Corporation's Annual Report on Form 10-K for the fiscal year ended June 29, 1991 and incorporated herein by reference). (b) Articles of Amendment filed with the Secretary of State of the Commonwealth of Massachusetts on November 4, 1993 (filed as Exhibit 4.3 to the Corporation's Registration Statement on Form S-3, No. 33-51987 and incorporated herein by reference). (c) Certificate of Designation filed with the Secretary of State of the Commonwealth of Massachusetts on March 21, 1994 (filed as Exhibit 4.1 to the Corporation's Report on Form 8-K filed on March 23, 1994 and incorporated herein by reference). (d) - By-laws of the Corporation, as amended (filed as Exhibit 3(c) to the Corporation's Annual Report on Form 10-K for the fiscal year ended June 30, 1990 and incorporated herein by reference). 4(a) - Rights Agreement dated as of December 11, 1989 between the Corporation and First Chicago Trust Company of New York, as Rights Agent (filed under cover of Form SE as Exhibit 4.1 to the Corporation's Current Report on Form 8-K dated December 12, 1989 and incorporated herein by reference). (b) - Indenture dated as of September 15, 1992 between Citibank, N.A. as Trustee, and the Corporation ("Indenture") (filed as Exhibit 4 to the Corporation's Registration Statement on Form S-3, No. 33-51378 and incorporated herein by reference). (c) - Form of 7 1/8% Note Due 2002, issued under the Indenture (filed as Exhibit 4.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended December 26, 1992 and incorporated herein by reference). (d) - Form of 8 5/8% Debenture due November 1, 2012, issued under the Indenture (filed as Exhibit 4.3 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended December 26, 1992 and incorporated herein by reference). (e) - Form of 7% Note Due 1997, issued under the Indenture (filed as Exhibit 4.4 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended December 26, 1992 and incorporated herein by reference). (f) - Form of 7 3/4% Debenture due April 1, 2023, issued under the Indenture (filed as Exhibit 4.2 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended March 27, 1993 and incorporated herein by reference). 10(a) - 1968 Employee Stock Purchase Plan (filed as Exhibit 99 to the Corporation's Registration Statement on Form S-8, No. 33-50963 and incorporated herein by reference).* (b) - 1976 Restricted Stock Option Plan, as amended (filed as Exhibit 10(b) to the Corporation's Annual Report on Form 10-K for the fiscal year ended June 27, 1992 and incorporated herein by reference).* (c) - 1981 International Employee Stock Purchase Plan (filed as Exhibit 99 to the Corporation's Registration Statement on Form S-8, No. 33-50945 and incorporated herein by reference).* (d) - 1985 Restricted Stock Option Plan, as amended (filed under cover of Form SE as Exhibit 10(d) to the Corporation's Annual Report on From 10-K for the fiscal year ended July 1, 1989 and incorporated herein by reference).* (e) - 1990 Equity Plan (contained in the prospectus included in the Corporation's Registration Statement on Form S-8, No. 33-37631 and incorporated herein by reference).* (f) - 1990 Stock Option Plan for Nonemployee Directors (contained in the prospectus included in the Corporation's Registration Statement on Form S-8, No. 33-37628 and incorporated herein by reference).* (g) - Deferred Compensation Plan for Non-Employee Directors as Amended and Restated Effective 18 May 1987 and as further amended on 22 April 1991 (filed under cover of Form SE as Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the fiscal year ended June 29, 1991 and incorporated herein by reference).* (h) - Retirement Arrangement for Non-Employee Directors (filed as Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the fiscal year ended June 27, 1987 and incorporated herein by reference).* (i) - Form of Indemnification Agreement in effect between the Corporation and each of its officers and directors (filed as Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for the fiscal year ended July 2, 1988 and incorporated herein by reference).* (j) - Digital Equipment Corporation Restoration Pension Plan effective as of May 1, 1992 (filed as Exhibit 10(j) to the Corporation's Annual Report on Form 10-K for the fiscal year ended June 27, 1992 and incorporated herein by reference).* (k) - Digital Equipment Corporation fiscal year 1995 Cash Incentive Plan.* (l) - Letter Agreement from the Corporation to Enrico Pesatori dated as of February 2, 1993; Agreement between the Corporation and Edward E. Lucente, dated as of April 29, 1994; and Agreement between the Corporation and Gresham T. Brebach, Jr., dated as of August 8, 1994.* 11 - Computation of net income/(loss) per share. 13 - The Corporation's 1994 Annual Report to Stockholders, certain portions of which have been incorporated herein by reference. 22 - List of Subsidiaries. 24 - Consent of independent accountants. *Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: The Corporation filed with the Securities and Exchange Commission a Report on Form 8-K on April 21, 1994. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) Date: September 16, 1994 By /s/Robert B. Palmer Robert B. Palmer President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date President and Chief Executive Officer /s/ Robert B. Palmer (Principal Executive Robert B. Palmer Officer) and Director September 16, 1994 Vice President, Finance and Chief Financial Officer /s/ Vincent J. Mullarkey (Principal Financial Vincent J. Mullarkey Officer) September 16, 1994 Vice President and Corporate Controller /s/ E.C. Prokopis (Principal Accounting E.C. Prokopis Officer) September 16, 1994 /s/ Vernon R. Alden Director September 16, 1994 Vernon R. Alden /s/ Philip Caldwell Director September 16, 1994 Philip Caldwell /s/ Colby H. Chandler Director September 16, 1994 Colby H. Chandler /s/ Arnaud de Vitry Director September 16, 1994 Arnaud de Vitry /s/ Robert R. Everett Director September 16, 1994 Robert R. Everet /s/ Kathleen F. Feldstein Director September 16, 1994 Kathleen F. Feldstein /s/ Thomas P. Gerrity Director September 16, 1994 Thomas P. Gerrity /s/ Thomas L. Phillips Director September 16, 1994 Thomas L. Phillips /s/ Delbert C. Staley Director September 16, 1994 Delbert C. Staley Report of Independent Accountants Our report on the consolidated financial statements of Digital Equipment Corporation has been incorporated by reference in this Form 10-K from page 35 of the 1994 Annual Report to Stockholders of Digital Equipment Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 9 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/Coopers & Lybrand Coopers & Lybrand Boston, Massachusetts July 26, 1994 SCHEDULE V DIGITAL EQUIPMENT CORPORATION Property, Plant and Equipment (In Thousands) Year Ended July 2, 1994
_________________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F _________________________________________________________________________________________________ Balance at Other Changes Beginning Additions Retirement add (deduct) Balance at Classification of Period at Cost and Sales Transfer End of Period _________________________________________________________________________________________________ Land.................... $ 363,264 $ 2,203 $ (9,280) $ 399 $ 356,586 Buildings............... 1,887,211 135,244 (56,264) 1,624 1,967,815 Leasehold improvements.......... 532,369 34,305 (101,413) (50,639)(a) 414,622 Machinery and equipment............. 4,410,586 510,348 (687,684) 48,616 (a) 4,281,866 ___________ _________ __________ ____________ ___________ $ 7,193,430 $ 682,100 $(854,641) $ 0 $7,020,889 ___________ __________ __________ ____________ ___________ ___________ __________ __________ ____________ ___________ (a) Reclassification between accounts.
SCHEDULE V, cont'd. DIGITAL EQUIPMENT CORPORATION Property, Plant and Equipment (In Thousands) Year Ended July 3, 1993
_______________________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F _______________________________________________________________________________________________________ Balance at Other Changes Beginning Additions Retirements add (deduct) Balance at Classification of Period at Cost and Sales Transfers End of Period _______________________________________________________________________________________________________ Land.................... $ 372,989 $ 464 $ (10,159) $ (30) $ 363,264 Buildings............... 1,871,710 146,065 (129,390) (1,174) 1,887,211 Leasehold improvements.......... 592,971 53,188 (116,300) 2,510 532,369 Machinery and equipment............. 4,835,454 328,974 (752,536) (1,306) 4,410,586 ___________ ____________ ____________ ______________ __________ $ 7,673,124 $ 528,691 $(1,008,385) $ 0 $7,193,430 __________ ___________ ____________ ______________ ___________ __________ ___________ ____________ ______________ ___________
SCHEDULE V, cont'd. DIGITAL EQUIPMENT CORPORATION Property, Plant and Equipment (In Thousands) Year Ended June 27, 1992
________________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F ________________________________________________________________________________________________ Balance at Other Changes Beginning Additions Retirements add (deduct) Balance at Classification of Period at Cost and Sales Transfers End of Period _________________________________________________________________________________________________________________ Land.................... $ 376,071 $ 701 $ (3,325) $ (458) $ 372,989 Buildings............... 1,836,323 83,617 (48,809) 579 1,871,710 Leasehold improvements.......... 573,378 77,746 (57,603) (550) 592,971 Machinery and equipment............. 4,642,820 548,372 (356,167) 429 4,835,454 __________ __________ __________ ____________ ____________ $7,428,592 $ 710,436 $(465,904) $ 0 $ 7,673,124 __________ __________ __________ ____________ ____________ __________ __________ __________ ____________ ____________
SCHEDULE VI DIGITAL EQUIPMENT CORPORATION Accumulated Depreciation and Amortization of Property, Plant and Equipment (In Thousands) Year Ended July 2, 1994
_______________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F _______________________________________________________________________________________________ Additions Balance at Charged to Other Changes Beginning Costs and Retirements add (deduct) Balance at Classification of Period Expenses and Sales Transfers End of Period ________________________________________________________________________________________________ Buildings.......... $ 420,676 $ 64,347 $ (22,270) $ 1,919 $ 464,672 Leasehold improvements..... 327,950 41,905 (70,113) (69,911)(a) 229,831 Machinery and equipment........ 3,266,513 467,718 (605,326) 67,992 (a) 3,196,897 ___________ ___________ _________ ____________ ___________ $4,015,139 $ 573,970 $(697,709) $ 0 $ 3,891,400 __________ ___________ __________ ____________ ___________ __________ ___________ __________ ____________ ___________ (a) Reclassification between accounts.
SCHEDULE VI, cont'd. DIGITAL EQUIPMENT CORPORATION Accumulated Depreciation and Amortization of Property, Plant and Equipment (In Thousands) Year Ended July 3, 1993
______________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F ______________________________________________________________________________________________ Additions Balance at Charged to Other Changes Beginning Costs and Retirements add (deduct) Balance at Classification of Period Expenses and Sales Transfers End of Period ________________________________________________________________________________________________ Buildings.......... $ 398,012 $ 66,113 $ (44,535) $ 1,086 $ 420,676 Leasehold improvements..... 342,116 56,789 (70,963) 8 327,950 Machinery and equipment........ 3,363,294 575,729 (671,416) (1,094) 3,266,513 ___________ __________ ___________ ____________ ___________ $ 4,103,422 $ 698,631 $(786,914) $ 0 $ 4,015,139 ___________ __________ ___________ ____________ ___________ ___________ __________ ___________ ____________ ___________
SCHEDULE VI, cont'd. DIGITAL EQUIPMENT CORPORATION Accumulated Depreciation and Amortization of Property, Plant and Equipment (In Thousands) Year Ended June 27, 1992
___________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F ___________________________________________________________________________________________ Additions Balance at Charged to Other Changes Beginning Costs and Retirement add (deduct) Balance at Classification of Period Expenses and Sales Transfers End of Period ____________________________________________________________________________________________ Buildings.......... $ 344,422 $ 67,622 $ (13,844) $ (188) $ 398,012 Leasehold improvements..... 315,765 64,667 (39,843) 1,527 342,116 Machinery and equipment........ 2,990,575 600,247 (226,189) (1,339) 3,363,294 __________ ___________ __________ ____________ ___________ $3,650,762 $ 732,536 $(279,876) $ 0 $4,103,422 __________ __________ __________ ____________ ___________ __________ __________ __________ ____________ ___________
SCHEDULE VIII DIGITAL EQUIPMENT CORPORATION Valuation and Qualifying Accounts and Reserves (In Thousands)
___________________________________________________________________________________________________ Column A Column B Column C Column D Column E Column F ___________________________________________________________________________________________________ Balance at Charged to Charged Deductions Balance Beginning Operations to Other from at End of Description of Period Accounts Reserves(a) Period ____________________________________________________________________________________________________ Allowance for Possible Losses on Accounts Receivable Year ended: July 02, 1994 $ 110,764 $ 50,247 (c) $ 1,286 $ 50,372 (c) $ 111,925 July 03, 1993 $ 129,686 $ 22,596 (b) $ 10,801 (d) $ 52,319 (e) $ 110,764 June 27, 1992 $ 84,999 $ 29,535 $ 31,735 (f) $ 16,583 (e) $ 129,686 (a) Uncollectible accounts and adjustments. (b) Includes recovery of accounts previously written off. (c) Increased customer credits. (d) Reclassification of reserve from other current liabilities related to fiscal year 1991 acquisition. (e) Includes write-offs in the current year of amounts reserved at time of acquisition of businesses in prior periods. (f) Acquired in business purchase.
SCHEDULE X DIGITAL EQUIPMENT CORPORATION Supplemental Income Statement Information (In Thousands) Charged to costs and expenses Year Ended
___________________________________________________________________________________________ July 02, 1994 July 03, 1993 June 27, 1992 ___________________________________________________________________________________________ Maintenance and repairs....... $ 247,494 (a) $ 326,441 $ 383,081 Advertising, amortization of intangible assets, royalties and taxes other than payroll and income taxes are not set forth inasmuch as each such item does not exceed one percent of total operating revenues as shown in the related Consolidated Statements of Operations. (a) Decrease principally due to facility closures and reduced number of fleet vehicles.
EX-10 2 EXHIBIT 10(K) Digital Restricted Distribution FY95DESC.DOC 30 August 1994 Digital Equipment Corporation Description of the FY95 Cash Incentive Plan Intent The FY95 Cash Incentive Plan (CIP or the "Plan") was approved by the Board of Directors in June 1994. It provides the funding of all management cash incentive programs<1> throughout the Corporation based on overall corporate and organizational performance and establishes the framework within which organizational programs will award these funds to individuals. The intent of this document is to give an overview of CIP and its design features. Concept The purpose of the Cash Incentive Plan is to motivate and reward superior performance in a given year. In addition, the CIP should play a key role in helping to establish and emphasize a performance-oriented culture, which is based on both team effort and clear organizational accountabilities. Awards made under the Plan will be based primarily on the achievement of performance goals and business objectives, and yet allow the Board of Directors, the Chief Executive Officer, and management the use of judgment in assessing performance and determining payouts. The Plan has been undergoing, and will continue to undergo a transition from one based primarily on corporate results, with adjustments for unit performance, to one that clearly reflects the independent performance of individual organizations. In FY95, the decision to fund the plan by both Company and organizational performance reflects the current phase of our Company transformation, and a continued need to emphasize teamwork and the Corporation's overall performance. Eligibility/Participation Eligibility for the Plan is limited to selected regular employees (active or on short term disability), working 20 hours or greater per week, and in SRI 40 and above in the U.S. exempt salary structure or an international equivalent. For FY95 many eligible participants will be identified and communicated with early in the year. However, based on performance and contribution, other eligible employees not previously communicated with early in the year may be selected to participate at year end. In future years the plan provides that all eligible employees will be identified and receive notification at the beginning of the year. Selection of participants will be conducted on a business by business basis to ensure that participation reflects business objectives and competitive practice. Incentive Targets Incentive award targets, expressed in either currency or as a percentage of base salary, will be established for each identified participant in the Plan at the time of their selection. Targets that are expressed as a percentage will be based on the salary rate in effect at the beginning of the fiscal year; targets that are expressed in currency will be fixed for the entire year. The target incentive levels are established to be competitive with those offered by companies with which Digital competes for employees and for the sale of products and services. A range of incentive opportunity, above and below the target level, may be communicated to each identified participant. Cash Incentive Plan Funding For FY95, 50% of the total CIP award fund will be based on overall Digital performance in relation to the agreed-upon business plan for the year. Digital performance will be based on Operating Profit dollars actually achieved. A funding schedule has been developed based on the following principles to provide a range of total funding that is above and below the target performance for the Corporation: Outstanding Results: A level of performance that, considering current business circumstances, would reflect unusual success. Target Performance: Reflects the attainment of the agreed-upon business plan. Threshold Performance: A level of performance that, while less than plan, merits some incentive payout. Performance targets for the Cash Incentive Plan are expected to increase over time whether Digital's business performance improves or not. It would not be appropriate to pay significant bonuses over the medium-to-long term without there having been competitive returns to shareholders. The other 50% of the total CIP Award Fund will be distributed to organizations based on their achievement of goals established at the beginning of the year and independent of overall Company performance. Evaluation of Organizational Performance The allocation of the 50% organizational fund will recognize business or organizational performance. This performance will be evaluated on both objective and subjective criteria established at the beginning of the year. In FY95 each major organization may have up to three goals identified for these purposes. The types of factors that might be included are profit, cash flow from operations, and return on assets. Other measures such as revenue, market share, successful new product introductions, and customer satisfaction could also be adopted. Staff areas could be evaluated on cost control, the attainment of specific objectives, and how responsive they are to the needs of their internal customers/clients. The overriding objective is that the Chief Executive Officer engages in a candid dialogue with each of his direct reports, and they in turn with their management teams regarding performance expectations and accountabilities. Allocation of Awards, and Payments A. Allocations of the Total Funds Available: Organizations are allocated funds from the total available fund after the fiscal year ends. Fifty percent of the total available funds will be allocated to organizations based on the Corporation's performance. The other fifty percent will be allocated based on organizational performance. B. Awards to Individuals: Organizations will make awards to individuals from their allocations, according to the specific program of the organization. These individual awards will follow the commitments made to individuals identified at the beginning of the year, and follow guidelines for award amounts to other individuals selected for participation at year end. All awards to individuals must be made based on their demonstrated performance. Actual payouts to identified participants will vary significantly around the target award -- from no award to twice the target award -- based on the Corporation, the business, and individual performance. C. Award Payments: Awards are payable after the end of the fiscal year and following the release of audited financial results of the Corporation. To receive an incentive award, participants must be: 1) employed by the Corporation at the time awards are paid, and; 2) an active employee for a minimum of three months during the year, and; 3) assessed as having at least a satisfactory performance rating. Administration The Plan will be administered by the Compensation and Stock Option Committee of the Board of Directors. The Committee will have the authority to make all decisions regarding the operation of the Plan. Unusual Events The purpose of the Plan is to motivate and reward superior performance. Therefore, in extraordinary situations, adjustments may be made to retain the motivational impact of the Plan. The Compensation and Stock Option Committee retains the discretion to make the changes necessary to ensure the Plan's motivational impact and provide a fair return to shareholders. _______________________________ [FN] <1> With the exception of three programs which were approved prior to June 1993. EX-10 3 EXHIBIT 10(L) February 2, 1993 Mr. Enrico Pesatori 219 East Lake Shore Drive Apartment 6D Chicago, IL 60611 Re: Offer of Employment Dear Enrico: As the letter dated December 21, 1992, contemplated, the following provisions shall constitute the terms and conditions upon which you shall be employed with Digital Equipment Corporation ("Digital" or the "Company")). 1. Status You will be employed as of February 3, 1993, as a regular employee with the title of Vice President and General Manager, Personal Computer Business Unit, on an at-will basis and your employment shall continue for so long as it is mutually agreeable to both parties; provided, however, that your employment will not be terminated during the first six months of employment, and during the second six months, only on six months' prior written notice. In this capacity, you will be a member of the Senior Leadership Team. 2. Compensation Your beginning annual rate of base compensation will be $550,000.00, which is payable weekly (or on such other basis as may be applicable to senior executives generally as Digital shall determine from time to time). Your rate of base pay will be reviewed periodically and adjusted accordingly in light of the compensation practices and policies in effect from time to time. You will participate in Digital's short-term incentive compensation program. Any payment thereunder will be made solely in the discretion of Digital's Board of Directors (the "Board"), subject to the Company's performance, which is the same basis on which the other members of the Senior Leadership Team participate. If payment under this program is made to other members of the Senior Leadership Team, a payment will be made to you as well. It will be recommended that your target participation range will be at least $200,000 for on-plan performance, pro-rated for the number of months of the fiscal year during which you are employed by Digital; provided, however, no less than $100,000 will be paid to you under this program for fiscal year 1993. 3. Stock Awards The Board has approved an award to you effective on your date of hire and contingent on your actually being employed by Digital, which grants you a stock award of 10,000 shares of Digital common stock under the 1990 Equity Plan, which will be evidenced by a separate award letter, to vest in equal amounts over a five-year period from the effective date of the award. All vesting restrictions on such stock shall lapse if your employment is terminated by the Company for reasons other than for "cause" or by you for "good reason" (as each such term is defined in Paragraph 7, below). You will be solely responsible for any income tax consequences (including making a Section 83(b) election) associated with your receipt of such an award. The Board has approved an award to you effective on your date of hire and contingent on your actually being employed by Digital, which grants you an award of a non-qualified stock option with respect to 30,000 shares of Digital common stock at an option price of $35.00 under the 1990 Equity Plan, which will be evidenced by a separate award letter, to become exercisable in equal amounts over a five-year period from the effective date of the award. All vesting restrictions on such stock shall lapse if your employment is terminated by the Company for reasons other than for "cause" or by you for "good reason" (as each such term is defined in Paragraph 7, below). 4. Loan The Board has approved a loan to you, contingent on your actually being employed by Digital, in the principal amount of $150,000.00 for the sole purpose of purchasing a new principal residence in the Boston area, which shall be secured by a second mortgage. You agree to execute a promissory note with terms substantially as set forth in the attached form of promissory note and execute such other documents which the Company determines to be necessary or desirable to effect such security and to establish the tax-free nature of the transaction under Section 7872 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. 5. Confidentiality Agreement You will be required to sign Digital's Employee Invention and Confidential Agreement (the "Confidentiality Agreement") as of your date of hire, a copy of which is attached. 6. Employee Benefits As a regular employee, you will be eligible to participate in Digital's employee benefit plans, such as pension, savings, disability, life insurance, medical coverage, dental coverage, and cafeteria arrangements under the terms as separately provided for under each such plan or arrangement, except as are provided for below. To the extent necessary, Digital will provide medical and dental coverage for your dependents who reside outside of the United States under Company-provided medical and dental plans for employees (and their dependents) who are employed by the Company (or a subsidiary or affiliate, as the case may be) in Italy. Moreover, to the extent it is feasible to do so, Digital will make no contributions on your behalf under the U.S. Social Security system and will make or cause to be made such comparable contributions on your behalf under the pension system in Italy. All other fringe benefit arrangements that are provided to regular employees will be provided to you except that you will be eligible for four weeks of vacation on an annual basis. 7. Severance If, prior to February 3, 1997, (a) you voluntarily terminate your employment hereunder for good reason (as defined below), or (b) Digital terminates your employment hereunder other than for cause (as defined below), then, in either such event (each, a "Severance Event"), Digital will, for a period of two years from the date of such Severance Event, (i) continue to pay you your base compensation as constituted at the time of the Severance Event and (ii) provide you and your dependents with life insurance, medical, dental and pension benefits equivalent to those provided at the time of the Severance Event (collectively, the "Severance Package"); provided, however, that if, at any time during the two-year period following such Severance Event, you accept employment (as defined below) with any entity which competes (as defined below) with or if you publicly criticize Digital, then Digital shall not be obliged to continue to provide the Severance Package after such acceptance or criticism, as the case may be. Notwithstanding anything contained herein to the contrary, neither (a) your acceptance of employment with any entity which does not compete with Digital, nor (b) your failure to attempt to find other employment will entitle Digital to discontinue the Severance Package. If so requested by Digital, at the time of the Severance Event you agree to enter into a separate agreement with Digital containing the terms of this Paragraph 7. For purposes of this Paragraph 7, the following terms shall have the meanings set forth below: (i) Being "employed" or "employment" means having a common law employment relationship with another entity or engaging in any other comparable position such as independent contractor for, owner of, consultant to, or partner with or of another entity. (ii) "Cause" means (a) the commission of a serious willful act against Digital by which you intended to enrich yourself at the expense of Digital (which may be evidenced by your arrest for, or conviction, guilty plea, or plea of nolo contendere of a crime involving moral turpitude); (b) your continued failure to perform your duties hereunder in one or more material respects through continued inattention or neglect (except that which is a result of your illness or disability), which failure does not cease within 15 days after written notice thereof specifying the details of such conduct is given to you by the Board; or (c) your willful misconduct which has caused or has a high likelihood of causing material harm to Digital; or (d) the breach of one or more terms of the Confidentiality Agreement. (iii) "Good reason" means Digital's (a) effecting without your consent a material change in the nature or scope of your authority, powers, functions, duties, or responsibilities of the position for which you are employed; (b) the reduction of your base compensation or benefits provided to you pursuant to Paragraph 6 hereof that are provided to all senior executives generally (other than as a result of actions by Digital that affect all senior executives generally) or benefits specifically provided to you hereunder; (c) requiring you to relocate to an area more than 50 miles from Maynard, Massachusetts; or (d) the breach of any of the provisions of this Agreement. (iv) "Compete" means rendering services directly or indirectly to, becoming associated with or employed in any capacity by, or having any ownership interest in any individual, firm, corporation, or other entity engaged in or actively planning to engage in any activities competitive with those activities of Digital with respect to which you have managed, or with respect to which you possessed or had access to Digital's confidential information, know-how or trade secrets (including but not limited to information, know-how, or trade secrets relating to the research, development, design, manufacture, marketing, sale, or distribution of any Digital product or service with respect to which you possessed or had access to Digital's confidential information, know-how, or trade secrets). For purposes of this definition, "Digital" shall include Digital and any of its subsidiaries and affiliates. 8. Relocation You will be provided with the standard relocation benefits offered transferring employees, including temporary housing for up to 6 months. In addition, Digital will reimburse you up to $20,000 for rent payments that you are required to make with respect to your primary residence in the Chicago area for periods of time after the date your employment with Digital commences, upon request and receipt by Digital of appropriate documentation. 9. Legal Fees and Assistance Digital will reimburse you, upon request and receipt by Digital of appropriate documentation, for legal fees you incur for counsel provided to you in connection with your employment with Digital, such reimbursement not to exceed $5,000. Upon request, Digital also agrees to provide you with assistance from the Law Department with regard to matters involving your termination of employment from your last employer. 10. Personnel Policies and Procedures Unless specifically excepted for above, your employment with Digital will be subject to Digital's personnel policies and procedures as amended from time to time. 11. Legal Status Notwithstanding the foregoing, your employment with Digital is contingent on Digital's ability to verify your identity and employment eligibility as required by federal law. 12. Merger This Agreement includes all of the agreements of the parties relative to your employment with Digital, and supersedes any prior agreements or representations between the parties as to the subjects covered. Please indicate your understanding and consent to the foregoing by signing and dating the copy of this letter and returning it to the undersigned. Very truly yours, /s/ Robert B. Palmer Robert B. Palmer President and CEO I have read and agree to the terms as stated above. /s/ Enrico Pesatori /s/ February 2, 1993 Signature Date j:\empl-ep.agt AGREEMENT WHEREAS, DIGITAL EQUIPMENT CORPORATION, on its own behalf and on behalf of its officers, agents, directors, employees, assigns and successors ("Digital") and Edward E. Lucente on his own behalf and on behalf of his heirs, executors, administrators, and assigns ("Mr. Lucente") have reached an amicable settlement regarding the conditions of Mr. Lucente's voluntary resignation from his employment with Digital. NOW, THEREFORE, in consideration of the mutual covenants and undertakings set forth herein, Digital and Mr. Lucente hereby agree as follows: 1 . Mr. Lucente voluntarily resigns his employment with Digital effective as of April 29, 1994 (the "Effective Date"). 2. Digital accepts Mr. Lucente's resignation as an officer and as an employee of Digital as of his Effective Date. Payment provided for under this Agreement shall not be construed in any way to extend Mr. Lucente's employment or employment status with Digital beyond the Effective Date. 3. a. Digital and Mr. Lucente contemplate that he will continue active employment with Digital until his Effective Date. During his period of active employment, Mr. Lucente shall continue to be paid at his current base rate of pay and shall be treated as an active employee in all respects. Should Mr. Lucente obtain and commence employment outside of Digital before his Effective Date, his employment with Digital shall immediately cease as of the date he commences such outside employment, and such date shall be deemed to be the Effective Date. b. Digital and Mr. Lucente agree that Mr. Lucente will be generally available to consult informally with the President and other designated executives of Digital for a period of one year from the Effective Date. It is understood that from and after the Effective Date, Mr. Lucente is otherwise free to engage in any activity that he may desire to pursue, whether or not he receives any remuneration therefor, provided that such activity is not prohibited under any other provision of this Agreement. If Mr. Lucente is asked to undertake specific assignments on behalf of Digital, he may decline to do so without consequence; if he agrees to do so, he shall not receive any additional compensation other than that which is provided for in Paragraph 6. 4. Mr. Lucente agrees that he shall not become employed by a "competitor" of Digital as such term is defined below at any time prior to the date that is 12 months following his Effective Date. 5. A competitor of Digital shall be defined as, and limited to, any of the following companies or any subsidiary of one of the following companies, in which the parent company owns, directly or indirectly, a controlling interest. * International Business Machines (IBM) * Data General Corporation * American Telephone and Telegraph Company (AT&T) * Sun Microsystems * The National Cash Register Company (NCR) * Prime Computer, Inc. * Wang Laboratories, Inc. * Fujitsu * NEC * Unisys, Inc. * Hewlett-Packard Company * Ing. C. Olivetti & C. S.P.A. * Siemans AG * STC PLC (ICL, Inc.) * Apple Computer, Inc. * Dell Computer Corporation * Compaq Computer Corporation Employment with one of said companies or their subsidiaries shall be defined as including employee status and consulting with or direct participation in the business affairs of any of said companies or their subsidiaries which involves computers or matters relating to computers. Employment with one of said companies or their subsidiaries shall not include routine business dealings with one of said companies while an employee of a company not included on the above list. Digital may, in its sole discretion, remove any one or set or all of such companies and their subsidiaries from the list of competitors upon request by Mr. Lucente, but may do so only in a writing delivered to Mr. Lucente and signed by the President or an elected Vice President of Digital. Digital agrees that its consent to removing any one or set of such companies from the list of competitors upon request by Mr. Lucente shall not be unreasonably withheld. 6. Digital, without admitting and while expressly denying the commission of any wrongful act, including but not limited to any violations of any federal, state or local fair employment practice law, or other employment practice law, or other employer duty or other employment-related obligation (all of which are hereinafter referred to as "employment relations laws") or other equity, and Mr. Lucente agree that: a. Digital shall make payment to Mr. Lucente in the form of four installments. The first installment of $282,502.80 shall be paid as soon as practicable after the expiration of the seven-day revocation period, as described in Paragraph 10, below. Subsequent installments of $157,502.80, $157,502.80, and $32,502.80, respectively, shall be paid quarterly beginning August 1, 1994; provided, however, that the third and fourth quarterly payments shall be made only if Mr. Lucente is not employed with another entity at an annualized rate of compensation of at least $300,000 during any period after the Effective Date. Each installment payable under this subparagraph (a) shall be less any amount required of Digital by law to be withheld as income tax withholding or elected to be deducted by Mr. Lucente on a voluntary basis. Actual payment of each installment shall be made as soon as reasonably possible after the respective payment date. For purposes of Paragraphs 6, 9, and 11, being "employed" or "employment" means entering into a relationship with an entity as a common law employee, consultant, independent contractor, partner, or owner or any other comparable relationship. For purposes of Paragraph 7, the term "employer" shall be inclusive of such relationships with another entity which are not common law employment relationships. b. Digital shall also pay to Mr. Lucente as soon as practicable after the Effective Date, a lump sum payment equal to the value of his then accrued and unused vacation time and personal holiday. c. Mr. Lucente shall continue presently elected and paid for health, dental, life insurance, and disability benefits at the then current cost of such benefits to active employees until his Effective Date. Digital agrees to continue his health, dental, basic and personal accident (if applicable) life insurance benefits for a period of twelve months from the Effective Date, or until he becomes eligible for such coverage by virtue of other employment, whichever occurs first, provided that Mr. Lucente continues to make timely payment therefor subject to whatever applicable changes, including cost, that are implemented by Digital to such plans. Group universal life insurance coverage shall be continued under the terms of that policy. Thereafter, Mr. Lucente shall be entitled to continued health and dental coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) at the same cost to Mr. Lucente as for any other employee who terminates on Mr. Lucente's Effective Date for the same coverage, such coverage to be for a period not to exceed the statutory limit. d. Digital shall provide at its expense executive outplacement services to Mr. Lucente. Mr. Lucente may choose a firm from the list of approved vendors and may begin to use such services upon execution of this Agreement. e. Mr. Lucente shall continue to participate in Digital's Pension Plan and to accrue benefit service subject to the terms and conditions of said Plan until his Effective Date. Thereafter, his rights in said Plan shall be determined under the terms of the Plan. 7. Mr. Lucente agrees not to actively recruit any Digital employees on behalf of his future employer or employers and not to utilize his knowledge of Digital and Digital's employees to encourage their recruitment from Digital by his future employer or employers for a period ending one year after his Effective Date. The foregoing sentence does not prohibit Mr. Lucente or his employers from entertaining and accepting requests for employment from Digital employees as long as they were not solicited by him. He further agrees not to make any derogatory comments to persons or third parties regarding his employment with Digital during the period ending two years after his Effective Date. 8. Mr. Lucente agrees not to disclose or use any of Digital's confidential information or confidential information entrusted to Digital by others to any non-Digital person, corporation, or other entity. Digital's confidential information includes matters not generally known outside of Digital, such as experimentation, research and developments relating to existing and future products and services marketed or used by Digital, and also any information which gives Digital a competitive advantage including data relating to the general business operations of Digital (i.e., sales, costs, profits, organizations, customer lists, pricing methods, etc.). 9. Mr. Lucente agrees to notify the President of Digital (or his designee) within one week of accepting new employment with another entity of the name and address thereof and the annualized rate of compensation that he will be paid by such entity, provided that the beginning date of such employment is prior to April 1, 1995. 10. Mr. Lucente accepts the foregoing in full and complete satisfaction of any and all claims of any kind or description that he has or may have had or may have against Digital or its officers, directors or employees to the date of the execution of this Agreement including but not limited to claims arising from any employment relations laws, contract or tort law, public policy, law or equity or claims for expenses or other monetary or equitable relief including any right to or claim arising out of a right, to re-employment. Mr. Lucente also releases Digital and its officers, directors, agents and employees from liability for such claims and waives any other rights relating to his employment with, or his resignation from employment from, Digital. This Agreement shall serve to inform Mr. Lucente that Digital advises him to consult counsel before signing this Agreement in order to assist him in considering his rights and obligations as expressed in this Agreement prior to his determining whether or not to sign it. Mr. Lucente has a period of 21 days from the date he receives this Agreement to accept this Agreement by signing in the space indicated below and returning the signed Agreement to Digital. He is also entitled to rescind this Agreement at any time within the seven-day period after he executes it by written notice to Digital. 11. Neither Mr. Lucente nor Digital shall release, reveal, publish, cause to be published, publicize, discuss or otherwise disclose either the fact or terms of this Agreement except as provided for in Paragraph 12, below, and except as Digital may be obligated to disclose on account of statutory, regulatory, or other legal requirements or in connection with Mr. Lucente's compliance with the obligations described in paragraphs 4, 5, 7 or 8 and except that Mr. Lucente may make such disclosures (i) to family members or attorneys to whom he discloses such information on a confidential basis or (ii) that are consistent with, and only to the extent necessary to meet, his obligations expressed in paragraphs 4, 5, 7 or 8, above, with respect to his employment with prospective employers (as so defined therein). 12. Mr. Lucente agrees to cooperate with Digital and its counsel in the disposition of legal, administrative, or agency proceedings that now exist or may arise. In this regard, Mr. Lucente agrees to make himself available for meetings, proceedings, depositions, etc. as may be reasonably required. 13. The terms of this Agreement including all facts, circumstances, statements or documents relating thereto, shall not be admissible for any purpose in any litigation in any forum other than to secure enforcement of the terms and conditions of the Agreement. It is agreed by Mr. Lucente and Digital that the consideration paid by Digital hereunder is in return for specific performance by Mr. Lucente and that Digital will seek and is entitled to specific performance by Mr. Lucente in the event of a violation of this Agreement by Mr. Lucente. 14. This Agreement has been reached by mutual accord of the parties hereto, and the parties by their signatures indicate their full agreement and understanding of its terms. 15. This Agreement includes all of the agreements of the parties relative to Mr. Lucente's termination, and supersedes any prior agreements or representations between the parties as to the subjects covered. Without limiting the foregoing, the letter dated April 7, 1993, extending an offer of employment to Mr. Lucente is expressly superseded by this Agreement. Mr. Lucente specifically agrees that nothing in this Agreement modifies his obligations and responsibilities under any prior Employee Agreement or Stock Option Agreement previously executed by him, including without limitation, any non-competition, protection of confidential information of Digital or others, and employee obligations clauses. 16. This Agreement shall become effective upon execution of it by Mr. Lucente and the representative of Digital listed below. DIGITAL EQUIPMENT CORPORATION By:_/s/ Richard M. Farrahar Richard M. Farrahar Vice President, Personnel Date: /s/ 5-13-94 /s/ Edward E. Lucente Edward E. Lucente Date:___________________________ AGREEMENT This agreement (the "Agreement") is entered into between Digital Equipment Corporation, on its own behalf and on behalf of its officers, agents, directors, employees, subsidiaries, affiliates, assigns and successors (collectively, "Digital") and Gresham T. Brebach, Jr. (on your own behalf and on behalf of your heirs, executors, administrators, and assigns) regarding the termination of your employment with Digital. In consideration of the mutual covenants and undertakings set forth herein, you and Digital hereby agree as follows: 1 . Your employment with Digital ended as of August 8, 1994 (the "Effective Date"). 2. For a period of 6 months following your Effective Date, you will not render any services directly or indirectly to, or on behalf of, become associated with or employed in any capacity by, have an ownership interest in any individual, firm, corporation, or other entity listed on Exhibit I, hereto, or with respect to any other entity to the extent that such services, association, employment, or ownership interest relate to any activities competitive with or similar to those activities of Digital with respect to which you have managed or with respect to which you have possessed or have had access to Digital's confidential information, know- how, or trade secrets (including but not limited to information, know-how, or trade secrets relating to the research, development, design, manufacture, marketing, sale, or distribution of any Digital product or service). At your request, Digital will discuss any potential employment or other comparable opportunity with you to determine whether the opportunity, if taken, would violate the terms of this Paragraph 2. Digital will promptly respond to your inquiry and in its sole discretion may waive all or part of the provisions of this Paragraph 2 at your request, such waiver not to be unreasonably withheld. 3. You will inform each subsequent employer or person or entity with whom you becomes associated, prior to accepting such employment, of the existence of the obligation set forth in Paragraph 2 and provide a copy of the text of Paragraph 2 to such employer or other person or entity, provided that the beginning date of such employment is within 6 months from the Effective Date. 4. You will notify Digital within one week of accepting new employment of the name and address thereof, provided that the beginning date of such employment is within 6 months from the Effective Date. 5. For a period of 6 months following the Effective Date, you will not directly or indirectly solicit for employment (either with yourself or with your employer at the time or any of such employer's affiliates) or hire (whether as an employee, consultant, or otherwise) any executive orother employee of Digital; provided, however, that in no event shall the provisions of this Paragraph 5 be deemed to impose any obligation on you with respect to any solicitation or hiring where you neither have any control over, nor participate in, such action. Without limiting the generality of the foregoing, if you request or consent (whether in writing or otherwise) that a third party (such as an employee of a recruiting firm) take any action which, if taken by yourself, would be a violation of the foregoing provisions of this Paragraph 5, you shall be deemed to "participate in" such action. It shall not be a violation of this Paragraph 5 if you solicit or hire, as those terms are defined above, any secretary with whom you worked at Digital, or if you hire any employee who has been terminated by Digital under a transition layoff plan or business spin off. 6. You will not disclose or use any of Digital's confidential information or confidential information entrusted to Digital by others to any non-Digital person, corporation, or other entity. Digital's confidential information includes matters not generally known outside of Digital, such as experimentation, research and developments relating to existing and future products and services marketed or used by Digital, and also any information relating to the general business operations of Digital (including, but limited to, business strategies, sales, costs, profits, organizations, customer lists, and pricing methods). 7. You will refrain from seeking or accepting any employment, re-employment or work of any sort (temporary, contract, consultant, regular, part-time or other) with or at Digital. 8. On or before expiration of the seven-day revocation period described in Paragraph 10, you will have settled all expense accounts and advances made by Digital to you and completed all other procedures required of terminating employees, and you will have returned to Digital all property provided by Digital to you including all credit, identification, and entry cards, equipment, (except as provided for in Paragraph 9(f), below), automobiles, and all documents, records, papers, notebooks, and other materials and copies thereof (regardless of the medium on which the copy is made) related to or including any information which is confidential to Digital. 9. Digital, without admitting and while expressly denying the commission of any wrongful act, including but not limited to any violations of any federal, state or local fair employment practice law, or other employment practice law, or other employer duty or other employment-related obligation (all of which are hereinafter referred to as "employment relations laws") or other equity, will provide the following: a. Payment of $58,333.33 on the first day of each calendar month beginning with September 1994 and ending in February 1995 (a total of six such payments.) In no case will actual payment be made prior to the expiration of the seven-day revocation period described in Paragraph 10. Actual payment shall be made as soon as reasonably practicable after each such date. Each payment made under this Paragraph 9 shall be less any amount required of Digital by law to be withheld or elected to be withheld by you on a voluntary basis. For purposes of Paragraphs 4, 5, 6, 8, 9(a), and 9(c) of the Agreement, being "employed" or "employment" means entering into a relationship with an entity such as a common law employee, consultant, independent contractor, partner, or owner or any other comparable relationship. b. On or before September 1, 1994, payment (i) in a single sum equal to the value of your then accrued and unused vacation time and (ii) in a single sum equal to $150,000.00 as the remainder of the short- term incentive compensation payment with respect to fiscal year 1994, payable pursuant to the letter agreement dated April 5, 1993, which outlined the terms of Digital's offer of employment to you. c. Continuation of elected and paid for health, dental, life insurance, and disability benefits at the then current cost of such benefits to active employees until your Effective Date. Digital agrees to continue your health, dental, and basic and personal accident (if applicable) life insurance benefits through February 8, 1995, or until you become eligible for such coverage from another employer, whichever occurs first, provided that you continue to make timely payment therefor, subject to whatever applicable changes are implemented by Digital to such plans. Group universal life insurance coverage in effect at the Effective Date shall be continued under the terms of that policy. Thereafter, you shall be entitled to continued health and dental coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA) at the same cost to you as for any other employee for the same coverage, such coverage to be for a period not to exceed the statutory limit. d. Continuation of your participation in the Digital Equipment Corporation Pension Plan and the Digital Equipment Corporation Savings and Investment Plan (the "Plans") under the terms and conditions of the Plans until your Effective Date. Thereafter, your rights in the Plans, if any, shall be determined under the terms of the Plans. e. Executive outplacement services with a firm of your choice from an approved list of vendors. You may begin to use such services upon execution of the Agreement. f. Retention at no cost to you of the equipment previously provided to you by Digital, currently located in your home and your Digital office which is listed on Exhibit II, hereto. 10. In exchange for the consideration set forth above and for other good and valuable consideration receipt of which is hereby acknowledged: a. You hereby accept the foregoing, in full and complete waiver, release, and satisfaction of any and all claims of any kind or description that you have or may have had or may have through the date you execute the Agreement against Digital or its officers, directors or employees including but not limited to claims arising from any employment relations laws, contract or tort law, public policy, law or equity or claims for expenses or other monetary or equitable relief including any right to or claim arising out of a right, to re-employment. You also hereby release Digital from liability for such claims and waive any other rights relating to your employment, or your termination from employment, with Digital. This release shall include a release from claims under the Age Discrimination in Employment Act of 1967 (ADEA). Digital hereby advises you to consult counsel before signing the Agreement and that you have, and are entitled to, at least 21 days following the receipt of the Agreement to execute it, although you are not required to use all of this period if in your sole and unlimited discretion and judgment you choose not to do so. You are also entitled to rescind the Agreement at any time within the seven-day period after you execute it by written notice to Digital. This waiver of your rights under ADEA shall not apply to any claims arising after your execution of the Agreement; b. You agree to refrain from filing any complaint, civil action, litigation or proceedings of any nature or description against Digital, in an judicial or quasi-judicial forum, based upon claims released in Paragraph 10(a) except for enforcement of the terms of this Agreement; c. You represent that you have not filed any complaints, administrative charges and/or lawsuits or proceedings against Digital based upon claims released in Paragraph 10(a), with any local, state or federal court or agency and further that you have not assigned or transferred to any person any portion of any claim which is released or waived by this Agreement; and d. You agree to not file, participate in as a plaintiff and/or class member, or commence yourself, or encourage, induce, solicit or support the filing of, or institution of any claim, suit, litigation, grievance, arbitration, cause of action, or any other proceeding against Digital by any other person or persons based on claims released in Paragraph 10(a) or similar claims of third parties, whether or not such claims arise from any employment relations laws, including but not limited to claims based on discrimination on the basis of age, sex, handicap, disability, contract or tort law, public policy, law or equity or claims for expenses or other monetary or equitable relief. Notwithstanding the foregoing, you shall not be prohibited from giving testimony in lawsuits or administrative proceedings initiated by third parties if such testimony is compelled by legal and/or administrative subpoena. You shall not volunteer to provide such testimony and/or encourage, induce or solicit others to call you as a witness. 11. It is further agreed by you and Digital that the consideration paid by Digital hereunder is in return for specific performance by you, and that Digital will seek and is entitled to specific performance by you in the event of a violation of the Agreement by you in addition to any other remedies available to Digital. 12. Neither you nor Digital shall release, reveal, publish, cause to be published, publicize, discuss, or otherwise disclose the facts or terms of the Agreement except as provided for herein and in Paragraph 3 of the Agreement and except as Digital may be obligated to disclose on account of any statutory, regulatory, or other legal requirements. The terms of the Agreement including all facts, circumstances, statements or documents relating thereto, shall not be admissible for any purpose in any litigation in any forum other than to secure enforcement of the terms and conditions of the Agreement. Both Digital and you agree not to publicly discuss, nor make any derogatory comments regarding, the facts and circumstances leading to your departure from Digital, but you may confirm that your departure was voluntary. 13. The Agreement has been reached by mutual accord of the parties hereto, and the parties by their signatures indicate their full agreement and understanding of its terms. 14. The Agreement includes all of the agreements of the parties relative to your termination, and supersedes any prior agreements or representations between the parties as to the subjects covered. You specifically agree that nothing in the Agreement modifies your obligations and responsibilities under any prior Employee Agreement or Restricted Stock Option Agreement previously executed by you, including without limitation, any non-competition, protection of confidential information of Digital or others, and employee obligations clauses. This Agreement has no precedential effect, value, or impact whatsoever as to any person not a party to it. 15. Should any provision or part of any provision of this Agreement be found to be legally unenforceable and/or against public policy, such unenforceability shall not prevent enforcement of the remaining provisions or parts of this Agreement. 16. The Agreement shall be interpreted under the laws of the Commonwealth of Massachusetts. DIGITAL EQUIPMENT CORPORATION By:/s/ Richard M. Farrahar Richard M. Farrahar Vice President, Human Resources Date:/s/ Sept. 6, 1994 /s/ Gresham T. Brebach, Jr. Gresham T. Brebach, Jr. Date:/s/ 30-Aug-1994 EXHIBIT I - AT & T - Hewlett Packard - IBM The names above are inclusive of all such entities, subsidiaries and affiliated companies. EX-11 4 EXHIBIT 11 DIGITAL EQUIPMENT CORPORATION Computation of Net Income Per Share/(Loss) Per Share Year Ended
______________________________________________________________________________________________________________________ July 2, 1994 July 3, 1993 June 27, 1992 June 29, 1991 June 30, 1990 ______________________________________________________________________________________________________________________ (In Thousands Except Income Per Share Data) Net income/(loss)........... $(2,156,063)(b) $ (251,330) $(2,795,507)(c) $ (617,427) $ 74,393 ___________ ___________ ____________ ____________ ___________ ___________ ___________ ____________ ____________ ___________ Net income/(loss) applicable to common and common equivalent shares.......... $(2,166,713) $ (251,330) $(2,795,507)(c) $ (617,427) $ 74,393 (a) (b) ____________ ___________ ____________ ____________ ___________ ____________ ___________ ____________ ____________ ___________ Weighted-average number of common shares outstanding during the year........... . 137,090 130,409 124,864 121,558 121,745 ____________ ___________ ____________ ____________ ___________ ____________ ___________ ____________ ____________ ___________ See page S-11 for notes to Exhibit 11. Exhibit 11, cont'd. Year Ended ______________________________________________________________________________________________________________________ July 2, 1994 July 3, 1993 June 27, 1992 June 29, 1991 June 30, 1990 ______________________________________________________________________________________________________________________ (In Thousands Except Income Per Share Data) Common stock equivalents from application of "treasury stock" method to unexercised and out- standing stock options......... 0 0 0 0 3,477 ___________ __________ __________ __________ _________ ___________ __________ __________ __________ _________ Total number of common and common equivalent shares used in the computation of net income per share............... 137,090 130,409 124,864 121,558 125,222 ___________ ___________ __________ ___________ _________ ___________ ___________ __________ ___________ _________ Net income/(loss) per share..... $ (15.80)(b) $ (1.93) $ (22.39)(c) $ (5.08) $ .59 ___________ ___________ ___________ __________ __________ ___________ ___________ ___________ __________ __________ (a) Includes dividends paid and declared on Series A 8 7/8% cumulative preferred stock totaling $10,650,000. (b) Net loss and net loss per share include the cumulative effect of change in accounting principles of $51,026,000 and $0.37, respectively. (c) Net loss and net loss per share include the cumulative effect of change in accounting principle of $485,495,000 and $3.89, respectively.
EX-13 5 ANNUAL REPORT Digital Equipment Corporation Maynard, Massachusetts 01754 Digital Equipment Corporation Annual Report 1994 Corporate Profile Digital Equipment Corporation is a world leader in the development of networked platforms for client/server computing. Digital's products and services for open computing environments help customers simplify business processes and enhance organizational productivity. The Company does business in more than 100 countries and develops and manufactures products in the Americas, Europe, Asia and the Pacific Rim. Building on its core competencies in Software, Systems, Networks, and Services, Digital--working with its business partners--provides a complete range of information processing solutions from personal computers to integrated worldwide networks. Financial Summary Fiscal Year 1994 1993 Total operating revenues $13,450,790,000 $14,371,369,000 Restructuring charges $ 1,206,000,000 - Net loss $(2,156,063,000) $ (251,330,000) Net loss per common share $ (15.80) $ (1.93) Total stockholders' equity $ 3,279,799,000 $ 4,885,399,000 Number of common stockholders 77,722 86,611 Stockholders' equity per common share $ 20.24 $ 36.19 Number of regular employees 77,800 89,900 Annual Meeting The Annual Meeting of Stockholders will be held at 11:00 a.m. Thursday, November 10, 1994, at the World Trade Center, Commonwealth Pier, 164 Northern Avenue, Boston, Massachusetts 02210. Stockholders of record on Monday, September 12, 1994, will be entitled to vote at this meeting. Contents 2 President's Letter 4 Q&A with Robert B. Palmer 6 Open Client/Server Computing 8 Software 12 Systems 16 Networks 20 Services 24 Teamwork 25 Financial Statements Open Client/Server Computing Solves Real Business Problems "We have the ability--directly and through our partners--to implement and support networked platforms and applications in multivendor environments more quickly and cost effectively than anyone else". "This capability is making Digital the leader in open client/server computing--the combination of technologies that enables PCs, laptops, workstations and other devices to tap into computers so that these systems and the people who use them can share data and work together." - --Robert B. Palmer, President and Chief Executive Officer Digital Equipment Corporation [Photograph of Robert B. Palmer] President's Letter To Our Stockholders, Employees, Customers and Partners Fiscal year 1994 was a year of both progress and frustration for stockholders, for employees, for our customers and for our partners. For the year, Digital reported a net loss of $2.16 billion, which includes a restructuring charge of $1.2 billion and noncash asset write-offs and accounting changes of $431 million. I am obviously disappointed with these results. However, with the actions we took last year, including reducing regular employee population by 12,000 and total occupied space by 5.2 million square feet, and our announced restructuring plans for the future--for example, the elimination of Digital's inefficient matrix management system--I am confident that we have established a solid foundation for a return to profitability. As we exited the year, our business showed some positive and encouraging signs: We achieved year-over-year product order rate growth in both the third and fourth quarters (the latter adjusted for a 14-week quarter a year ago). This is the first time in nearly five years that we have seen an increase in year-over-year order rate growth in consecutive quarters. We reached two significant milestones in our Alpha AXP program. We have shipped more than one billion dollars' worth of Alpha AXP systems since the program's launch in November 1992, and Alpha AXP revenues surpassed VAX revenues for the first time in the fourth quarter, growing 54 percent from the preceding quarter. The new Digital 2100 Alpha AXP server, announced in the fourth quarter, got off to an excellent start. Market reception for this leadership price/performance product, which offers exceptional scalability, has been outstanding. Personal computer revenues demonstrated accelerating year-over-year growth rates each quarter, more than doubling in the fourth quarter and nearly doubling for the full year. We enter fiscal 1995 with a balance sheet that provides needed flexibility and resources and a portfolio of products and services more competitive than they have been in several years. We all want to see results quickly. We want the trauma of downsizing behind us and a return to sustained profitability. But it is important that we do not let our poor financial performance completely obscure the significant progress we have made in several major dimensions in less than two years. We enter fiscal 1995 with a balance sheet that provides needed flexibility and resources and a portfolio of products and services more competitive than they have been in several years. We all want to see results quickly. We want the trauma of downsizing behind us and a return to sustained profitability. But it is important that we do not let our poor financial performance completely obscure the significant progress we have made in several major dimensions in less than two years. Two years ago, our products were not competitive in performance or price/performance. Digital was a company wedded to its proprietary systems, with little or no credibility in the marketplace around our UNIX offering--a key requirement to be a competitor in today's open environments. Once merely an "also-ran," our UNIX is now a recognized leader in standards compliance for open computing. Today, Digital can lay legitimate claim to being a truly open systems leader, giving customers the flexibility and alternatives that they want--and with leadership price/performance. Today we can truly say we support industry-standard operating systems--UNIX, OpenVMS, Windows NT and MS-DOS--across a broad set of platforms. In two years, we have moved from being a company selling primarily through direct channels to one that has a healthier, market-driven mix of direct and indirect channels. In fiscal 1992, 29 percent of our products moved through indirect channels; in the year just passed (fiscal 1994), we sold 45 percent through indirect channels. And our goal for fiscal 1995 is more than 60 percent--which will be achieved in large part by a strategic refocus of our core systems business models. We are moving from being a low-volume, high-cost manufacturer and supplier to a higher-volume, lower-cost manufacturer and supplier. Over the past two years, unit volumes have exploded, driven by strong growth in PCs and Alpha AXP workstations. We shipped nearly four times the number of computer systems in fiscal 1994 compared with fiscal 1992, despite having reduced total worldwide manufacturing capacity. By the end of fiscal 1995, we will be shipping significantly greater volumes with a manufacturing population one-half the size of two years ago. We are refining our product and service cost structures to reflect the demands of our customers and the challenges of our competition--while establishing leadership price/performance across virtually every price band where we compete. These are major accomplishments. Two years into the turnaround, we have laid the groundwork for our future success. We are succeeding in several of our businesses, and many of our new products are being well received in the marketplace. We are adapting the best and most successful business strategies--honed and proven in the competitive PC, storage, components and service segments of our business--and applying them on a larger scale across the company. But the question remains: with all that we have going for us, why aren't we yet leading the industry with the sheer force of our global resources, our unparalleled products, technology and skills? And why are we not yet profitable? The reality is that despite our progress we still have some critical issues to address--and that is our mandate for fiscal 1995. To ensure that decisions made and actions taken will lead to financial success, we recently made one very important change to Digital's culture and business: we have cast aside matrix management and instituted clear accountability for revenue, profits, cash flows and assets within our business units. We are eliminating the costly infrastructure associated with the previous management system. The result will be a leaner, more decisive, more agile company, sharply focused on meeting the needs of customers, the demands of the marketplace and the challenges of our competitors. In today's complex multivendor computing environment, our customers value our ability to implement and support--directly and through partners--networked client/ server platforms and applications. We are convincing increasing numbers of customers that we can link computers worldwide--ours and others--and keep them working better than anyone else in the business. We will conduct our business by a few simple, strategic principles as we move through our transition to profitability: we will protect our installed base; we will organize and manage the company to market realities; we will not compete with our key partners; we will continue to build on our strength of high-performance networked platforms and engineer all of our products for network readiness; and we will differentiate Digital throughout the world by our outstanding global service and support capabilities. We have done a great deal of work to prepare Digital to return to profitability and position it for a strong, innovative future. There is more work to do. And we will do it. My goal for the Company, its stockholders, employees, customers and partners is to capitalize on that work by restoring profitability in fiscal year 1995. Robert B. Palmer President and Chief Executive Officer September 1, 1994 Q&A with Robert B. Palmer Commonly Asked Questions Below are questions that stockholders and others frequently ask about the Company: Q: Digital has not been profitable for some time. When can we expect profitability, and what will it take to get there? A: We have set an aggressive goal to return to profitability by the end of calendar year 1994. I cannot predict, however, when we will actually return to--and sustain--profitability; much work remains to be done. We must complete the restructuring plans we have announced, achieve a competitive cost structure, increase our penetration of indirect sales channels and build on the successes we have achieved in several areas, including PCs and Alpha AXP systems. Q: What are your financial goals? A: We are working aggressively to return to sustainable levels of profitability as soon as possible. As an interim goal, we have set a target of maintaining total gross margins (products and services combined) in the range of 30 to 32 percent of revenues. This will require a continued focus on manufacturing efficiency and pricing discipline. We are targeting spending on research and engineering in the range of 7 to 8 percent, and on selling, general and administrative expenses between 15 and 18 percent of revenues. These targets will be achieved through successful implementation of our restructuring plan and through greater reliance on indirect channels of distribution. While we do not necessarily expect to reach these spending targets for the full fiscal year 1995, we will make significant progress toward them. Q: There have been many rumors that the Company is considering divestments. Can you comment? A: For understandable business reasons, we cannot list what nonstrategic activities or operations the Company might divest in the future, but we can talk about our underlying strategic approach. As we strive to become more efficient, a critical element of our business strategy is to sharpen our focus on those products and services where we can provide added value to our customers as they choose and implement open, networked platforms and servers. Activities that do not support that focus are potential candidates for divestiture. For example, we recently announced our intention to sell portions of our storage business to a leading storage components manufacturer. The segments we are selling--disk and tape drives and thin-film heads businesses--have been fast-growing and successful for Digital in the OEM (original equipment manufacturer) marketplace, but not central to our business. We will continue to provide our customers with high-performance storage subsystems that incorporate disk and tape storage products that we will source from outside the Company. Q: What are you doing to improve employee morale and ensure that you keep the talent you need to be successful in the future? A: It's natural for people to feel good about their jobs when they can see success and for morale to suffer when the Company is doing poorly. Within businesses that are doing well--Alpha AXP systems, PCs, storage, components and peripherals, and customer service are all examples--morale is very good. The best way to improve the morale of all employees is to return to sustainable profitability as soon as possible. All our efforts are focused on that goal. We need to move through the painful but necessary downsizing as rapidly as we can. We also recognize that compensation must reward performance and instill accountability throughout the organization. Q: How will you provide the necessary cash for both your restructuring and operating needs? A: The funding of our activities through the next phase of Digital's turnaround is a critical challenge for the Company and an important metric for management. We still have one of the lowest debt to total capitalization ratios among the Fortune 50. We have laid out a plan to fund our restructuring and operating needs from internal sources. We believe this plan is credible and achievable. Our accounts receivable DSO (days sales outstanding) and inventory turns performance are not competitive today. If we had merely achieved the performance levels in these two asset categories that we achieved in fiscal 1993, we would have produced an additional $600 million in cash. We have specific plans in place to improve asset management. We also intend to cut capital spending this fiscal year by up to 40 percent compared with last year. Proceeds from divestments will further add to cash, and the Company has arranged for up to $600 million of backup liquidity in the form of an accounts receivable securitization facility. Q: So where does Digital stand today? A: We have a large and loyal installed base; a substantial--and growing-- list of partners; a strategy that makes the best use of our strong technology heritage and potential; talented, dedicated and enthusiastic employees; very competitive hardware, software and service offerings; and a balance sheet that enables us to continue to invest in our business while taking necessary restructuring actions. The pages that follow outline in detail what we believe are our sustaining advantages. Open Client/Server Computing Advanced Technology for Today's Business Needs. Helping customers reengineer operations, open new markets and develop new products. "Digital's commitment to open client/server computing began with our customers. They told us what they wanted. And we made the investments and alliances needed to make client/server computing something more than just a concept." --Enrico Pesatori, Vice President and General Manager Computer Systems Division Digital Equipment Corporation Many computer companies see client/server computing as the technology that links personal computers together in a local area network. Digital sees it as much more than that. Client/server computing can enable customers to simplify business processes to enhance both individual and corporate productivity. A client/server environment should be seamless, with no artificial barriers to keep people from sharing information and working together. At the same time, client/server computing splits applications to enable the cost-efficient distribution of computing resources. Client systems-- networked PCs, workstations and in some cases large systems--request services from other systems throughout the network. We're working with customers and strategic partners to take the concept of client/server computing and apply it across the entire enterprise to integrate people, processes, technology and information so everyone and everything can work together. This annual report details the products, services and technologies that are making client/server computing a reality. It qualifies and quantifies the client/server market and highlights the cost savings and productivity gains that client/server computing is bringing to Digital customers around the world. It gives customers, strategic partners and Digital developers an opportunity to share their thoughts about the future. And it explores new applications that are creating business opportunities for both Digital and its customers. Leadership in computer technology is not achieved overnight. The industry has always been driven by two very different needs. First, the need for personal productivity, the need to access data and process information, a need that was met first by timesharing and later by personal computers. Second, the need for organizational productivity, the need to gather, organize and process large volumes of data--a need that was met by the mainframe and later by peer-to-peer networks and clusters of midrange systems. Client/server computing brings these two very different styles of computing together. Digital's contribution was to develop the network platforms, software frameworks, integration and support services, strategic alliances, and business practices needed to fully implement the client/server concept. Working with our strategic partners, we are creating an open, enterprisewide computing environment to meet the needs of customers seeking to develop a competitive advantage or maximize the use of existing personnel and computing resources. As a company, we are focusing on our core competencies--the four prerequisites for leadership in open, multivendor client/server computing: Software--The software frameworks customers need to develop client/server applications and integrate PC, Macintosh, UNIX, OpenVMS, Windows NT, OSF/1, Sun, Hewlett-Packard, IBM and other systems. Systems--Powerful 64- and 32-bit client and server systems based on Alpha AXP, VAX and Intel microprocessors with the capacity to handle the huge amounts of information inherent in enterprise-wide client/server applications. Networks--The hardware and software needed to open up the Information Superhighway and link clients and servers--switches, routers, hubs, network adapters, network operating systems, and mobile/wireless and other telecommunications solutions. Services--The systems and network integration and multivendor customer services needed to plan, design, integrate, implement, manage and maintain open multivendor client/server networks that include both legacy systems and new technology. These four competencies are interrelated. And--combined with the organizational skills needed to develop and implement client/server environments--they provide the foundation upon which Digital, its customers and its strategic partners can base their future. "Digital's Components Division delivers world-class products to build open, networked client/server environments that simplify business processes and increase productivity. We provide networking hardware, StorageWorks subsystems, printers, terminals and other components to Digital and other computer manufacturers, as well as to distributors and resellers." --Charles Christ, Vice President and General Manager Components Division Digital Equipment Corporation "If you profess support for open client/server computing, you have to support multiple operating systems. Digital is fully committed to UNIX, OpenVMS and Windows NT because they all have a place in client/server environments." --William D. Strecker Chief Technical Officer and Vice President Advanced Technology Group Digital Equipment Corporation With open client/server computing, we are helping customers reengineer their operations, open new markets, develop new products and improve both personal and corporate productivity. Software Frameworks for Open Client/Server Computing [Two photographs. Top photograph of hubs and spokes linked together. Bottom photograph of a man and woman standing near a table on which rests a Digital personal computer, the DECpc XL 590. On and around the table are boxes containing Digital's LinkWorks software.] Teamwork--Digital, its strategic partners and independent software companies have developed more than 6,000 applications for Alpha AXP systems. Here Alexis Cox and Don Harbison of Digital's Software Products Group are pictured with Digital's LinkWorks software and the award-winning DECpc XL590. "Our next version of OLE COM (the Common Object Model) will support all Microsoft platforms and--through our strategic relationship with Digital-- multivendor systems in open client/server environments." --Jim Allchin, Vice President of Advanced Systems Microsoft Corporation The idea behind open client/server computing is simple, but its execution is often difficult. Client/server environments typically include computers from different manufacturers, multiple operating systems, multiple databases and multiple networks. Whether you approach client/server computing from an enterprise-wide perspective or take a departmental or application-specific perspective, you face a difficult and complex task. Fortunately, that task is becoming much easier. The software frameworks for integrating databases, electronic mail systems, local area networks and workgroup, production and technical applications across horizontal multivendor environments are in place together with the industry-standard "middleware" needed to link those applications. The Common Object Model being developed by Digital and Microsoft is an important component in frameworks and middleware, and in many client/server applications from Digital software partners. The concept behind object-oriented programming is straightforward. "Objects" are software building blocks--packages of data together with programming that applies to that data--that can be "linked" to create an application. The development of a common model for object-oriented programming for both personal computers and servers is critical in client/server computing, where different systems and applications have to work together. Having a common model simplifies program development. Ad hoc application--for example, searching multiple databases for specific information--can be created at the desktop by pointing to and clicking on "objects" on the screen. More complex applications take more work, but object-oriented programming is a welcome change from having to write line after line of code. The Digital/Microsoft Common Object Model has been called the software equivalent of Ethernet. Ethernet provides a plug-and-play environment for linking personal computers and other systems together in local area networks. The Common Object Model provides a similar plug-and-play environment for software. Roughly one-third of the Fortune 1000 industrial corporations will implement their first object-oriented applications this year, according to a survey by Forrester Research, Inc. Digital customers like Florida Power & Light, the Rehabilitative Services Commission and the Spicer Clutch Division of Dana Corporation have blazed the trail. These early adapters have reported a two- to fourfold increase in programmer productivity while developing new applications to give them an edge over their competition. Software Teamwork Brings It All Together [Photograph of hubs and spokes linked together] "I tell customers interested in open client/server computing to start with software. If you have the right software, you can support just about any computer or operating system." --William R. Demmer, Vice President Software Business Group Digital Equipment Corporation "Establishing an information framework does not require a massive overhaul of existing technology. In fact, Digital LinkWorks software enhances existing systems by enabling them to become part of an open, enterprise-wide client/server network." --Robert Staub, President VW-GEDAS Group VW-GEDAS: How Digital LinkWorks software simplified application development and user support VW-GEDAS, the systems integration subsidiary of Volkswagen, provides information-based solutions for both its parent company and commercial customers. Many of these solutions are based on Digital LinkWorks, an "object-oriented" software framework for Windows applications. With LinkWorks software, files created on Lotus 1-2-3, Microsoft Word, Excel and other desktop applications can be packaged together as a single "object. These "objects"--or clusters of related information--can be organized and represented as icons. This makes it easier for the user to access all the information on a particular subject without plowing through electronic file cabinets. The integration of desktop applications with corporate databases makes it easier for people to find the information they need to do their jobs. And it simplifies support by eliminating many of the user requests for reports and data that tie up data processing personnel. Bank of Montreal: Sharing customer information without compromising confidentiality. Many customers have legitimate concerns about making corporate or customer data available to employees. Unfortunately, many client/server applications lack the controls needed to ensure the confidentiality of this data. At the same time, data processing managers are concerned about the cost of developing and implementing client/server applications. Few software programs come in on-budget and on-schedule because, all too often, there is no framework around which programmers can develop applications. One reason the Bank of Montreal decided to work with Digital in implementing client/server computing was that Digital could provide the frameworks required to simplify systems and data management, and messaging, workgroup and production applications. Using these frameworks and object-oriented programming, the Bank of Montreal was able to provide authorized employees with easy access to corporate data without compromising customer confidentiality. "I can't stress strongly enough that this was a business project. We focused on finding ways to help people work together rather than on technology. Technology is just the means to an end. Digital understands that." --Mike Frow, Vice President Bank of Montreal Client/Server Growth CIOs in large companies expect the percentage of their client/server applications to increase from 5 percent in 1992 to 57 percent by 1995. 1992 1995 5% 57% Source: Deloitte & Touche LLP [Bar graph represented by photographs of a hand on a keyboard] [Two photographs. Top photograph of Digital's Alpha AXP chip. Bottom photograph of three men and one woman near a Digital 2100 Alpha AXP server. The caption relating to both photographs reads "SYSTEMS A Two-Platform Strategy: Intel and Alpha AXP".] Alpha AXP systems like the Digital 2100 Alpha AXP server--shown here with George Murphy, Andrei Shishov, Rene Martinez and Fidelma Hayes of Digital's Systems Business Unit--combine raw speed with the ability to address massive databases. "Digital PCs and Alpha AXP systems are complementary. As a technological leader in personal, corporate and scientific computing, Digital is uniquely positioned to help its customers implement open client/server applications, whatever the platform." --Bernhard Auer, Vice President and General Manager Personal Computer Business Unit Digital Equipment Corporation In supporting network and client/server environments, Digital is focusing on two platforms: high-performance Intel personal computers and servers and Alpha AXP workstations, servers and systems with the highest performance and best price/performance in the industry. We support both 32-bit Intel and 64-bit Alpha AXP platforms because our customers need and want both. Buying decisions are based on applications and the speed with which a system runs those applications. A high-speed bus can increase system performance. Digital manufactures and sells chips that implement the new, industry-standard, high-speed PCI (Peripheral Component Interconnect) bus. By building highly reliable personal computers and servers around this bus--systems that are easy to upgrade and have high-performance, high-capacity disks--Digital was able to offer superior price/performance together with a three-year warranty. Combining technological leadership with comprehensive customer support, Digital broadened its distribution channels and doubled year-to-year personal computer sales. Today, Digital builds a complete family of high-performance Intel i486 and Pentium servers, and personal and notebook computers to run the thousands of applications that have been written for MS-DOS, Windows and Windows NT. Applications are also driving the sales of Alpha AXP systems. With more than 6,000 UNIX, OpenVMS and Windows NT applications from independent developers, we have shipped over one billion dollars' worth of Alpha AXP systems since the program's launch. Digital's Intel and Alpha AXP platforms are complementary. We have the PC-to-UNIX integration and networking software, the middleware and the multivendor service organization needed to integrate Intel and Alpha AXP systems in multivendor networks. As more and more customers link PCs and LANs in enterprise-wide networks and implement client/server applications, the need for faster processing speed and the ability to hold vast amounts of data in computer memory become critical. A 32-bit system can address only the equivalent of 96 file cabinets. This is why insurance, credit card, utility, distribution and manufacturing companies that process huge volumes of transactions and maintain massive databases are moving applications to 64-bit systems. At the same time, Alpha AXP systems provide the speed and raw computing power needed to tackle scientific and imaging applications that used to require multimillion-dollar supercomputers. While every major manufacturer of microprocessors has announced plans to move to a 64-bit RISC architecture, Digital is the only company to offer a complete family of 64-bit microprocessors, computers and operating systems. We're also addressing the needs of customers looking for systems to support mainframe downsizing and current applications with a complete line of Alpha AXP and VAX systems that support "industrial- strength" OpenVMS software. Many of the components and subsystems that account for the superior performance of Digital's systems are produced by our Components Division. Digital is a leading supplier of storage subsystems, networking products, terminals, printers and peripherals to other computer companies, systems integrators and distributors. Systems For Complex Commercial and Technical Applications [Photograph of Digital's Alpha AXP chip] "Alpha AXP chips lead the industry in performance, setting a standard in the open market and building momentum for Digital as a merchant vendor of microprocessors and PCI peripheral chips." --Ed Caldwell, Vice President, Digital Semiconductor Digital Equipment Corporation "It is not a question of when you will need 64 bits. It is a question of when you will need that thirty-third bit. For a lot of applications, that time is now." --Willy Shih, Vice President Product Strategy Computer Systems Division Digital Equipment Corporation "You don't just buy technology, you make an investment. And when you invest you have to look at the long term. You can't afford to buy equipment that will become obsolete in a matter of years." --Richard C. Zbikowski, Project Manager Boston Edison Energy Management Center Boston Edison: Alpha AXP systems provide the power for realtime energy management and control. Few realtime applications are as demanding as energy management and control. Electric utilities like Boston Edison have to balance the supply and demand for power. This requires highly reliable realtime processing and specialized application software. In updating its energy management and control system, Boston Edison was looking for a distributed, workstation-based solution that wouldn't become obsolete in a matter of years. They wanted an open architecture. They were one of the first, but by no means the last, major electric utility to move their energy management and control to Alpha AXP workstations and computers. In fact, of the 23 large (million-dollar-plus) energy management and control contracts signed by North American utilities in 1993, 13 of the wins went to Alpha AXP systems, according to a study by Newton-Evans Research of Ellicott City, Maryland. In the U.K., Southern Electric, Northern Electric, Yorkshire Electricity, SEEBOARD, London Electricity and the National Grid Company have all chosen Alpha AXP systems for major projects. Boston Edison chose Alpha AXP systems running UNIX and EMS/SCADA software over IBM RS6000 AIX systems. In addition to providing Edison with a price/performance advantage, Digital offered a 64-bit UNIX solution that supports clusters and multiprocessing while meeting X/Open and other industry standards. Equally important was the availability of EMS/SCADA realtime software from CAE Electronics, Ltd., a Digital Technical OEM partner. CAE, based in Montreal, Canada, is a worldwide leader in the development of power distribution systems and recently won two contracts to install Alpha AXP systems in China. Boston Edison's Alpha AXP systems form part of a power distribution network that serves more than 650,000 commercial, residential and industrial customers. First Data: How Unix and Alpha AXP technology gave a Digital business partner a competitive edge in the healthcare field. First Data Corp.'s Health Systems Group serves some 700 hospitals and healthcare facilities in the U.S. and international markets. The company designs and markets leading-edge healthcare technology solutions, including computer-based patient record applications. Three of their newest customer reference accounts are using UNIX-based Alpha AXP systems. At Georgetown Memorial, Roper and Union Memorial hospitals, these systems are dramatically reducing the time it takes to run major reports and financial reconciliations. At Georgetown Memorial, reports that took four to six hours are now completed in 20 minutes. At Roper Hospital, monthly financial reporting that took 24 hours is now finished in one to two hours. On the strength of this performance, First Data is closing additional Alpha AXP system sales. With Alpha AXP systems and services, Digital provides First Data with a robust, industrial-strength UNIX together with the tools needed to develop and maintain complex client/server and database applications. And it is the ability to develop new applications that provides Digital business partners like First Data with the competitive advantage they need to succeed in a changing marketplace. "Digital has given us what we needed: UNIX that meets industry standards. Alpha AXP systems that set the standard for performance. And the kind of support that comes with a true business partnership." --Larry Ferguson, President First Data Corp. Health Systems Group How big is 64 bits? If one bit of information is represented by the smallest printable dot--one pixel--a square representing 16 bits of information would consist of 65,536 pixels, and would cover an area of about three-quarters of an inch. A square representing 32 bits would cover an area eighteen by eighteen feet. To represent 64 bits, 4 billion times larger than 32 bits, an area the size of Greece, 51,000 square miles, would be required. 16 bits 32 bits 64 bits .75 square inch 16 square feet 51,000 square miles Source: Illuminata [Graphical representation of 16 bits through a square representing .75 inches; graphical representation of 32 bits through a square representing 16 square feet with a figure standing in the lower left corner; graphical representation of 64 bits through a map of Greece representing 51,000 square miles.] Networks Opening the Information Superhighway [Two photographs. Top photograph of a busy highway interchange. Bottom photograph of a man sitting on a table and a man and a woman standing behind a table on which rests the DEChub MultiSwitch. The caption relating to both photographs reads "NETWORKS Opening the Information Superhighway".] Networking no longer means making a choice among competing technologies. The DEChub MultiSwitch--pictured with Gary Vacon, Rich Graham and Cheryl Galvin of Digital's Network Product Business--provides a technology-independent backplane. ATM-ready, the DEChub MultiSwitch supports up to 16 Ethernet, Token Ring and FDDI plug-in modules. "We have a strategic relationship with Digital because we share a common goal: To make it easier for computer users and computers to work together. That's why Digital offers NetWare solutions and has incorporated Novell NetWare into its PATHWORKS network operating system." --Bob Frankenberg, Chairman and CEO Novell, Inc. The Information Superhighway is not a path from Point A to Point B. It is an emerging global information utility and commercial trade route that can be accessed by any computer, anywhere. Global access is not a concept developed by a government agency, nor is the Information Superhighway the creation of a giant corporation. In reality, the Information Superhighway is the network that is evolving from the interlinked communications systems that span the world. The Internet--an existing network of 21,000 computer networks in 60 countries that utilizes existing telecommunications links--is a prototype for the Information Superhighway, giving businesses and individuals a worldwide electronic mail network and access to remote databases, computer bulletin boards and applications. At the same time, many telecommunications networks are supporting applications that are opening new markets and creating new business opportunities--Electronic Data Interchange (EDI), mobile and wireless communications, multimedia, video-on-demand, on-line transaction processing, interoffice and intercompany electronic mail, and electronic publishing and distribution. Many of these applications are based on open client/server technology. Take video-on-demand, for example. The set-top system--the box that will sit on top of your video set--is the client. The computer system that stores and transmits a digital video image into your home is the server. Digital is working with U S West, NYNEX and USA Video to provide Alpha AXP servers to implement video-on-demand so television viewers can see the program or movie they want, when they want it. But there's more to the Information Superhighway than the client and server systems that will use the network. In addition to fiber-optic, coaxial, wireless and microwave communications, specialized network operating systems, hubs, bridges, repeaters, routers and high-speed digital switches are needed to manage traffic and link local and wide area networks together. Then there's the matter of security, keeping intruders out of your internal network and protecting confidential and proprietary information. Digital is providing hardware as well as networking and security software to both corporate customers and communication service providers. We are working with Australia's Optus Communications to build operational support systems-- the network operating, billing and administrative systems needed to control and manage a fully digital, transcontinental telecommunications network. We're providing Alpha AXP systems and high-speed FDDI switches to Glaxo Research and Development in Stevenage, England, to support growing network traffic as they develop, test and market new drugs in both Europe and the Americas. And we're working with virtually every one of our networking customers to help them access, move and manage information both within the enterprise and across the Information Superhighway so they can gain a competitive advantage. Networks Stops Along the Highway [Photograph of busy highway interchange] "Without networking you wouldn't have open computing environments where computers work together--where you can exchange ideas and data over the Internet. Digital builds the switches, routers, hubs and adapters around which customers can build open networks utilizing ATM, FDDI, Ethernet, Token Ring and other communications technologies." --Dr. Laurence G. Walker Vice President Network Product Business Digital Equipment Corporation "The Information Superhighway isn't going to mean much unless you have secondary roads to support local traffic. Here at Iowa State, we're working with Digital to build the open, high-speed multivendor network needed to support the academic and research programs of a large university." --Dr. George Strawn, Director of the Computation Center Iowa State University of Science and Technology Iowa State University: Building a science and research infrastructure around Alpha AXP systems. The Internet was originally set up to support government and academic research. It created a "virtual campus" where students and scientists at one institution could work with their peers, access data and use computer resources at other institutions around the world. Iowa State University of Science and Technology has been part of the Internet since 1985. Today, working with Digital, the University is developing the local infrastructure needed to support a multivendor computing environment. Using a Digital FDDI network and DECathena software, Iowa State's network now includes more than 800 client and 50 server workstations located in 45 buildings across the campus. Alpha AXP servers are a critical component because the network has to support projects that involve massive databases. With 64-bit addressing, Iowa State's Alpha AXP servers can manage databases and perform computations that used to require mainframes and supercomputers. Times Mirror: Linking businesses in a citywide multimedia LAN using an existing cable TV network. In a unique pilot program, Digital, Times Mirror Cable Television and Arizona State University joined together to provide an interactive, multimedia commerce network for companies in the Phoenix area. Times Mirror Cable Television is providing the infrastructure; Arizona State University, the demonstration facility and Internet access. Digital Alpha AXP systems control the network, while a ChannelWorks bridge links existing computers and LANs together. Digital is also providing the network management software and services needed to convert the existing cable system into a two-way interactive, high-speed network to support video, voice and data applications through-out the metropolitan area. By creating an open, broadband network, local businesses are able to work closely together. For example, McDonnell Douglas Helicopter Systems and Allied Signal Engine Division are now able to work with key local suppliers to dramatically reduce the time it takes to develop and manufacture new components. Times Mirror Cable Television and Digital demonstrated the capabilities of the Electronic Commerce Network (ECNet) for President Clinton and Vice President Gore at the White House. The network supports concurrent computer-aided design programs where engineers at prime and sub-contractor sites can view and revise engineering drawings simultaneously. It supports desktop videoconferencing and "white boarding" so users at different sites see and annotate the same document at the same time. The Electronic Commerce Network is typical of the new cable services based on Digital's ChannelWorks technology that are being built in the Americas, Europe, Asia and the Pacific Rim. "While everyone talks about the Information Superhighway, we've built an on-ramp right here in Phoenix. Local companies are using it to speed product development and intercompany communications. Large manufacturing companies and their suppliers are gaining the edge they need to compete in global markets." --Larry W. Wangberg President and Chief Executive Officer Times Mirror Cable Television and Chairman, National Cable Television Association "The really great thing about the Electronic Commerce Network (ECNet) is that we didn't have to invent whole new technologies to make it work, rather we integrated well-developed technologies to support new applications so local businesses could work closely together." --Darel Eschbach, Executive Director Telecommunications Services Arizona State University Services Supporting Open Client/Server Environments [Two photographs: Top photograph of several clocks each showing time in a different time zone. Bottom photograph of two men sitting on chairs and holding clipboards and one woman standing. The caption relating to both photographs reads "SERVICES Suporting Open/Server Environments".] A portfolio of services--Services account for nearly 50 percent of Digital's business. Digital professionals like Art Bolton, Yvonne Wong, and Randy Stotler provide systems and network integration services and support customers with multivendor computing environments in thousands of customer installations worldwide. "Client/server environments are, by their very nature, multivendor. Because of our networking leadership and extensive experience supporting multivendor environments, Digital is uniquely qualified to be a leader in supporting customers and their IT investments, today, and as they evolve to client/server computing." --John Rando, Vice President Multivendor Customer Services Digital Equipment Corporation Practically every computer company sells hardware or software for network and client/server environments. Most only support the equipment they sell. Digital is different. We provide the most comprehensive portfolio of systems and network integration and multivendor customer services in the industry. We will take complete responsibility for major projects, from initial feasibility studies all the way through implementation and management. This requires more than just an understanding of technology. Implementing a new system changes the way people work. That's why--in addition to providing multivendor systems and network integration--we work closely and have strategic alliances with independent consultants so together we can address the business as well as the technical issues facing our customers. And, as more and more customers adopt client/server solutions and build enterprise-wide networks, gaps in service coverage and service quality inevitably occur. Digital is filling these gaps. We provide multivendor services, technical systems and network integration services, and customer training in more than 100 countries to support both local and worldwide enterprises. Today, we are the only service provider prepared to take ownership of all the support issues found in multivendor environments. We run help desks and train users. We pull wire and install hardware and software upgrades. And we provide a full range of system management services including asset management and remote and on-site performance analysis and tuning. As testimony to our open client/server support capabilities, Digital won InfoWorld magazine's 1994 award for best client/server technical support. Digital supports hardware and software from IBM, Hewlett-Packard, Olivetti, Apple, Compaq, Sun, Microsoft, WordPerfect, Oracle, NeXT and other companies. In many cases, hardware and software companies rely on Digital to support their products. For example, Digital has formal alliances with Dell, Microsoft, Novell, National Semiconductor, British Telecom (BT) and other computer, component and telecommunications companies to support their customers in key markets around the world. Professional and multivendor customer services represent a $6-billion-a-year business for Digital with systems and network integration accounting for more than one-third of the total. Today, Digital is one of the four largest systems integration companies in the world and is ranked second by both International Data Corporation and Computer Reseller News magazine. Offering both systems integration and multivendor customer services, Digital has all the resources needed to help customers plan, design, implement, manage, maintain and support open client/server environments around the world. Services Supporting the Customer 24 Hours a Day [Photograph of several clocks each showing time in a different time zone] "Our customers are looking for a business partner. They want to deal with a computer company that can provide systems and network integration and multivendor services. A company that can help them apply technology in ways that enhance productivity and protect current and future investments." --Enrico Pesatori, Vice President and General Manager Computer Systems Division Digital Equipment Corporation "Having a service partner who can handle everything from chip swaps to fixing laser printers is essential to keeping the Society's business running smoothly on any given day." --Robert Jackson Information Technology General Manager Yorkshire Building Society Yorkshire Building Society: Bringing operational simplicity to a multivendor network. The Yorkshire Building Society, with 136 branches throughout the United Kingdom, faced a problem that is shared by many customers with multivendor computing environments: Whom do you call when you have a problem? In all too many cases, the source of a problem is not easily identified. Is it a hardware or a software problem? Is it a problem with the local computer, with the local area network, or with a laser printer or networked file server? It's a problem that's compounded when you have equipment from IBM, Hewlett-Packard, Philips, Olivetti, Dell and other computer manufacturers running software created by dozens of different companies. Yorkshire Building Society found the simple answer: Call Digital. We provide the multivendor customer services that they need to keep everything running, in every office. Having a single service organization provides operational simplicity while reducing costs and eliminating the delays that often occur when it's not clear who owns a particular problem. And when many customer branches lack on-site expertise, it is particularly important that they be able to work with someone they know and trust. Tokyo Digital Phone: Building the business support system for a new cellular network In April 1992, Digital was called in by Tokyo Digital Phone (TDP) and its partners in the DPG (Digital Phone Group)--CDP (Central DP) and KDP (Kansai DP)--to build a business support system costing approximately 3 billion yen ($29 million) for a new cellular telephone company entering the highly competitive Tokyo/Nagoya/Osaka market. In April 1994, when the new network went into operation, the business support system was up and running. BACUSS--the Billing and Accounting Customer Support System--is a multivendor, client/server system that interfaces directly with DPG's switching system to handle leads, customer orders, customer care, inventory, billing, and account and agent management. TDP and Digital recognized that client/server computing would provide a competitive advantage because it is scalable and allows the cost-efficient distribution of computing resources while making information readily available where and as needed. DPG plans to license BACUSS to other cellular telephone companies looking for a complete customer support system. In addition to undertaking major systems integration projects like BACUSS, Digital provides strategic and operations management services to help its clients move to and function effectively within client/server environments. "We see Digital as a true business partner rather than just a company we contracted with for specific products and services. And having a close relationship with the people you do business with is the key to staying on-schedule and on-budget." --Yosai Hayashi, Managing Director Tokyo Digital Phone Co., Ltd. Rate of growth 1994 Digital is a leading provider of multivendor customer services. Multivendor Support Desktop Support PC Integration 30% 30% 50% Source: Deloitte & Touche LLP [Bar chart is superimposed over a map of the world] Teamwork Digital's Culture and Values [Photograph of front cover of Digital's 1994 Environmental Health & Safety Annual Report, showing the globe and captioned Earth Vision] As individuals and as a company, we have a tradition of achievement in protecting the environment and in ensuring the health and safety of our fellow employees. If you'd like a copy of our Environmental, Health and Safety Annual Report, write to: Digital Equipment Corporation Environmental, Health and Safety 111 Powdermill Road (MSO2-3/B16) Maynard, Massachusetts 01754-1418 "Technology alone does not guarantee success. The challenge is to apply technology to the problems facing the customer and the community. As a company, and as individuals, we welcome that challenge." --Robert B. Palmer, President and Chief Executive Officer Digital Equipment Corporation Throughout this annual report, we have focused on the importance of teamwork. Open client/server computing is not something that we implement by ourselves; it is a concept that can be implemented only in partnership with others. Teamwork is based on trust. That means being honest in dealing with our customers and business partners as well as with each other. It means respect for the individual. It means that we are accountable--as individuals and as a company--for meeting our commitments to our customers and business partners. These core values create an environment that encourages innovation and involvement. Digital is recognized as a leader in the development of managed healthcare programs for its employees. And Digital was one of the first companies in the country to establish an HIV/AIDS program office to educate its employees. We recognize our responsibility for the environment. We eliminated CFCs and other ozone-depleting substances from our products, processes and services. We introduced energy-efficient PCs. And we integrated environmental compatibility features into our new video terminals and have a program to extend environmental compatibility to other products, media, documentation and packaging. These are not isolated activities. In every country where we do business, we try to make a difference. Digital employees volunteer their time and skills to schools, hospitals and other community organizations. At the same time, the company has a formal Corporate Contributions Program as well as an External Research Program that supports projects at 125 colleges and universities around the world. We believe that computer technology can help make this a better world, and that as individuals and as a company we have a contribution to make. Financial Statements Eleven-Year Financial Summary 26 Management's Discussion and Analysis of Results of Operations and Financial Condition 28 Report of Management 34 Report of Independent Accountants 35 Consolidated Statements of Operations 36 Consolidated Balance Sheets 37 Consolidated Statements of Cash Flows 38 Consolidated Statements of Stockholders' Equity 39 Notes to Consolidated Financial Statements Note A - Significant Accounting Policies 40 Note B - Geographic Operations 41 Note C - Income Taxes 43 Note D - Capitalized Computer Software Development Costs 44 Note E - Restructuring Actions 45 Note F - Debt 46 Note G - Postretirement and Other Postemployment Benefits 46 Note H - Commitments and Contingencies 49 Note I - Other Financial Instruments 50 Note J - Investing Activities 50 Note K - Stock Plans 51 Note L - Stockholders' Equity 52 Note M - Subsequent Event 53 Supplementary Information Quarterly Financial Data 54 Stock Information 54 Officers and Management 55 Directors 56 Committees of the Board 57 Corporate Consulting Engineers 57 Headquarters 58 Investor Information 59 Customer Inquiries 60
Eleven-Year Financial Summary (dollars in millions except per share data and stock prices) 1994 1993 1992 1991 ________________________________________________________________________________________________ Revenues Product sales $ 7,191 $ 7,588 $ 7,696 $ 8,299 Service and other revenues 6,260 6,783 6,235 5,612 ______________________________________ Total operating revenues 13,451 14,371 13,931 13,911 ______________________________________ Costs and Expenses Cost of product sales, service and other revenues 8,912 8,631 8,132 7,278 Research and engineering expenses 1,301 1,530 1,754 1,649 Selling, general and administrative expenses 1 5,234 4,447 6,181 5,572 ______________________________________ Operating income/(loss) (1,996) (237) (2,136) (588) ______________________________________ Net interest income/(expense) (24) 13 57 68 ______________________________________ Income/(loss) before income taxes and cumulative effect of change in accounting principle (2,020) (224) (2,078) (520) ______________________________________ Provision for income taxes 85 27 232 97 ______________________________________ Net income/(loss)2 $(2,156) $ (251) $(2,796) $ (617) _______________________________________ Net income/(loss) applicable per common share 2,3,4 $(15.80) $ (1.93) $(22.39) $ (5.08) _______________________________________ Weighted average shares outstanding (in millions) 137 130 125 122 _______________________________________ Financial Position Inventories $ 2,064 $ 1,755 $ 1,614 $ 1,595 Accounts receivable, net of allowance $ 3,319 $ 3,020 $ 3,594 $ 3,317 Net property, plant and equipment $ 3,129 $ 3,178 $ 3,570 $ 3,778 Total assets $10,580 $10,950 $11,284 $11,875 Long-term debt $ 1,011 $ 1,018 $ 42 $ 150 Stockholders' equity $ 3,280 $ 4,885 $ 4,931 $ 7,624 Stockholders' equity per common share 3 $ 20.24 $ 36.19 $ 38.58 $ 61.18 General Information and Ratios Current ratio 1.4:1 1.8:1 1.4:1 2.0:1 Quick ratio .9:1 1.2:1 1.0:1 1.4:1 Working capital $ 1,832 $ 2,964 $ 2,015 $ 3,777 Investments in property, plant and equipment $ 682 $ 529 $ 710 $ 738 Depreciation $ 574 $ 699 $ 733 $ 772 Total debt as a percentage of total debt plus equity 24.1% 17.5% 1.8% 2.2% Operating income/(loss) as a percentage of revenues (14.8)% (1.7)% (15.3)% (4.2)% Income/(loss) before income taxes as a percentage of revenues (15.0)% (1.6)% (14.9)% (3.7)% Effective tax rate 4.2% 12.0% 11.2% 18.8% Net income/(loss) as a percentage of revenues (16.0)% (1.7)% (20.1)% (4.4)% Net income/(loss) as a percentage of average stockholders' equity (52.8)% (5.1)% (44.5)% (7.8)% Net income/(loss) as a percentage of average total assets (20.0)% (2.3)% (24.1)% (5.2)% Number of days sales of accounts receivable outstanding 76 69 83 76 Inventory turns 4.7 5.1 5.1 4.6 Number of employees at year-end--regular 77,800 89,900 107,900 115,100 Number of employees at year-end--other 5,000 4,300 5,900 5,900 Common stockholders at year-end 77,722 86,611 99,644 98,023 Common stock yearly high and low sales prices $ 43-18 $ 49-30 $ 72-33 $ 87-45 ______________________________________________________________________________________________
Eleven-Year Financial Summary (cont.) (dollars in millions except per share data and stock prices) 1990 1989 1988 1987 _______________________________________________________________________________________________ Revenues Product sales $ 8,146 $ 8,190 $ 7,541 $ 6,254 Service and other revenues 4,797 4,552 3,934 3,135 _______________________________________ Total operating revenues 12,943 12,742 11,475 9,389 _______________________________________ Costs and Expenses Cost of product sales, service and other revenues 6,795 6,242 5,468 4,514 Research and engineering expenses 1,614 1,525 1,306 1,010 Selling, general and administrative expenses 1 4,521 3,639 3,066 2,253 _______________________________________ Operating income/(loss) 13 1,336 1,635 1,612 _______________________________________ Net interest income/(expense) 111 85 106 77 _______________________________________ Income/(loss) before income taxes and cumulative effect of change in accounting principle 124 1,421 1,741 1,689 _______________________________________ Provision for income taxes 50 348 435 552 _______________________________________ Net income/(loss)2 $ 74 $ 1,073 $ 1,306 $ 1,137 _______________________________________ Net income/(loss) applicable per common share 2,3,4 $ .59 $ 8.45 $ 9.90 $ 8.53 _______________________________________ Weighted average shares outstanding (in millions) 125 127 132 133 _______________________________________ Financial Position Inventories $ 1,538 $ 1,638 $ 1,575 $ 1,453 Accounts receivable, net of allowance $ 3,207 $ 2,965 $ 2,592 $ 2,312 Net property, plant and equipment $ 3,868 $ 3,646 $ 3,095 $ 2,127 Total assets $ 11,655 $ 10,668 $ 10,112 $ 8,407 Long-term debt $ 150 $ 136 $ 124 $ 269 Stockholders' equity $ 8,182 $ 8,036 $ 7,510 $ 6,294 Stockholders' equity per common share 3 $ 66.76 $ 66.12 $ 59.47 $ 49.87 General Information and Ratios Current ratio 2.3:1 2.9:1 2.9:1 3.4:1 Quick ratio 1.6:1 1.9:1 2.0:1 2.4:1 Working capital $ 4,332 $ 4,501 $ 4,516 $ 4,377 Investments in property, plant and equipment $ 1,028 $ 1,223 $ 1,518 $ 748 Depreciation $ 759 $ 659 $ 516 $ 435 Total debt as a percentage of total debt plus equity 2.0% 2.0% 3.6% 4.2% Operating income/(loss) as a percentage of revenues .1% 10.5% 14.2% 17.2% Income/(loss) before income taxes as a percentage of revenues 1.0% 11.2% 15.2% 18.0% Effective tax rate 40.0% 24.5% 25.0% 32.7% Net income/(loss) as a percentage of revenues .6% 8.4% 11.4% 12.1% Net income/(loss) as a percentage of average stockholders' equity .9% 13.8% 18.9% 18.9% Net income/(loss) as a percentage of average total assets .7% 10.3% 14.1% 14.6% Number of days sales of accounts receivable outstanding 86 76 75 78 Inventory turns 4.3 3.9 3.6 3.4 Number of employees at year-end--regular 116,900 118,400 113,900 103,000 Number of employees at year-end--other 7,100 7,400 7,600 7,500 Common stockholders at year-end 92,934 99,084 103,162 99,379 Common stock yearly high and low sales prices $103-70 $122-86 $199-99 $174-82
Eleven-Year Financial Summary (cont.) (dollars in millions except per share data and stock prices) 1986 1985 1984 _____________________________________________________________________________________ Revenues Product sales $ 5,103 $ 4,530 $ 3,804 Service and other revenues 2,487 2,156 1,780 ____________________________ Total operating revenues 7,590 6,686 5,584 ____________________________ Costs and Expenses Cost of product sales, service and other revenues 4,282 4,087 3,379 Research and engineering expenses 814 717 631 Selling, general and administrative expenses 1 1,665 1,432 1,179 ____________________________ Operating income/(loss) 829 450 395 ____________________________ Net interest income/(expense) 28 (19) 6 ____________________________ Income/(loss) before income taxes and cumulative effect of change in accounting principle 857 431 401 ____________________________ Provision for income taxes 240 (16)5 72 ____________________________ Net income/(loss)2 $ 617 $ 447 $ 329 ____________________________ Net income/(loss) applicable per common share 2,3,4 $ 4.81 $ 3.71 $ 2.87 ____________________________ Weighted average shares outstanding (in millions) 131 124 115 ____________________________ Financial Position Inventories $ 1,200 $ 1,756 $ 1,852 Accounts receivable, net of allowance $ 1,903 $ 1,539 $ 1,527 Net property, plant and equipment $ 1,867 $ 1,731 $ 1,511 Total assets $ 7,173 $ 6,369 $ 5,593 Long-term debt $ 333 $ 837 $ 441 Stockholders' equity $ 5,728 $ 4,555 $ 3,979 Stockholders' equity per common share 3 $ 44.54 $ 38.43 $ 34.42 General Information and Ratios Current ratio 4.9:1 4.9:1 3.8:1 Quick ratio 3.5:1 2.8:1 1.9:1 Working capital $ 4,223 $ 3,694 $ 3,001 Investments in property, plant and equipment $ 564 $ 572 $ 452 Depreciation $ 384 $ 315 $ 253 Total debt as a percentage of total debt plus equity 5.9% 15.7% 10.3% Operating income/(loss) as a percentage of revenues 10.9% 6.7% 7.1% Income/(loss) before income taxes as a percentage of revenues 11.3% 6.4% 7.2% Effective tax rate 28.0% (3.7)%5 18.0% Net income/(loss) as a percentage of revenues 8.1% 6.7% 5.9% Net income/(loss) as a percentage of average stockholders' equity 12.0% 10.5% 8.7% Net income/(loss) as a percentage of average total assets 9.1% 7.5% 6.5% Number of days sales of accounts receivable outstanding 79 75 83 Inventory turns 2.9 2.3 2.1 Number of employees at year-end--regular 88,300 83,000 79,800 Number of employees at year-end--other 6,400 6,000 5,800 Common stockholders at year-end 76,860 68,810 44,389 Common stock yearly high and low sales prices $ 94-46 $ 63-39 $ 61-33 _____________________________________________________________________________________ 1 Includes restructuring charges of $1,206M in 1994, $1,500M in 1992, $1,100M in 1991 and $550M in 1990. Includes reduction in carrying value of intangible assets of $310M in 1994. 2 In fiscal year 1994, net loss and net loss per share include a one-time charge of $71M, or $.51 per share, and a one-time benefit of $20M, or $.14 per share, for the cumulative effect of changes in accounting principles. In fiscal year 1992, net loss and net loss per share include the cumulative effect of change in accounting principle of $485M and $3.89, respectively. 3 Per share data adjusted to reflect two-for-one stock split in May 1986. 4 See Note A of Notes to Consolidated Financial Statements. 5 Includes elimination of DISC taxes of $63M accrued prior to 1984.
Management's Discussion and Analysis of Results of Operations and Financial Condition Income and Expense Items as a Percentage of Total Operating Revenues (a) Percentage Changes
___________________________________________________________________________________________________ 1992 1993 1994 Income and Expense Items 1993-94 1992-93 1991-92 ___________________________________________________________________________________________________ 55.2% 52.8% 53.5% Product sales (5)% (1)% (7)% 44.8% 47.2% 46.5% Service and other revenues (8)% 9% 11% ___________________________________________________________________________________________________ 100.0% 100.0% 100.0% Total operating revenues (6)% 3% - ___________________________________________________________________________________________________ 55.2% 58.8% 69.1% Cost of product sales (b) 11% 5% 9% 62.3% 61.4% 63.0% Service expense and cost of other revenues (b) (5)% 7% 15% ___________________________________________________________________________________________________ 58.4% 60.1% 66.3% Total cost of operating revenues 3% 6% 12% 12.6% 10.6% 9.7% Research and engineering expenses (15)% (13)% 6% 33.6% 30.9% 29.9% Selling, general and administrative expenses (9)% (5)% 5% 10.8% - 9.0% Restructuring charges NM (100)% 36% ___________________________________________________________________________________________________ (15.3)% (1.7)% (14.8)% Operating loss 100+% (89)% 100+% ___________________________________________________________________________________________________ 0.7% .4% .3% Interest income (23)% (34)% (15)% 0.3% .4% .5% Interest expense 44% 32% (14)% __________________________________________________________________________________________________ Loss before income taxes and cumulative (14.9)% (1.6)% (15.0)% effect of change in accounting principle 100+% (89)% 100+% ___________________________________________________________________________________________________ 1.7% .2% .6% Provision for income taxes 100+% (88)% 100+% ___________________________________________________________________________________________________ Loss before cumulative effect of change (16.6)% (1.7)% (15.6)% in accounting principle 100+% (89)% 100+% ___________________________________________________________________________________________________ Cumulative effect of change in accounting 3.5% - .4% principle, net of tax benefits NM (100)% - ___________________________________________________________________________________________________ (20.1)% (1.7)% (16.0)% Net loss 100+% (91)% 100+% ___________________________________________________________________________________________________ Note (a) Percentages of operating revenues may not be additive due to rounding. Note (b) Cost of product sales and service expense and cost of other revenues are shown as percentages of their related revenues. NM - Not meaningful.
Revenues In fiscal 1994, total operating revenues, which were $13.5 billion, declined by $921 million or 6%, following an increase of $440 million or 3% in fiscal 1993 and an increase of $20 million, or less than 1% in fiscal 1992. Non-U.S. revenues accounted for 62% of total operating revenues in fiscal 1994, down from 64% in fiscal 1993 and 63% in fiscal 1992. European revenues declined to $5.9 billion in fiscal 1994, down from $7 billion and $6.8 billion in fiscal 1993 and 1992, respectively. The decline in fiscal 1994 European revenues was due principally to weak demand for the Corporation's products and services in that region, exacerbated by the difficulties associated with the Digital-Kienzle business acquired in 1991 (see Note J) and negative effects of foreign currency fluctuations, discussed below. Product sales for fiscal 1994 were $7.2 billion, or 53% of total operating revenues, compared with $7.6 billion, or 53% of revenues, and $7.7 billion, or 55% of revenues in fiscal 1993 and 1992, respectively. While the Corporation shipped substantially more computer systems in fiscal 1994 than in the previous fiscal year, product sales for fiscal 1994 declined compared with the prior two years, due principally to a continued shift in the mix of product sales toward low-end, lower-priced computer systems and away from the Corporation's proprietary mid-range products. In fiscal 1994, the Corporation experienced substantial growth in demand for Alpha AXP-based systems, particularly workstations, and for Intel-based personal computer products, as well as certain storage and component products. Alpha AXP systems revenue represented approximately 13% of fiscal 1994 product sales, up from 3% for fiscal 1993. Revenues from the sale of Intel-based personal computers represented 19% of fiscal 1994 product sales, up from 9% for fiscal 1993. VAX systems revenues declined from 34% of product sales in fiscal 1993 to 19% in fiscal 1994, as the Corporation is in the midst of a major product transition. In the fourth quarter of fiscal 1994, revenues from the sale of Alpha AXP systems exceeded revenues from the sale of VAX systems for the first time. In fiscal 1994, service and other revenues totaled $6.3 billion, or 47% of total operating revenues, compared with $6.8 billion, or 47% of total operating revenues, and $6.2 billion, or 45% of total operating revenues, for fiscal 1993 and 1992, respectively. Service revenues declined by $524 million or 8% in fiscal 1994, following increases of 9% and 11% in fiscal 1993 and 1992, respectively. The decline in service revenues for fiscal 1994 was due to several factors, including lower levels of revenue from the Corporation's VAX systems maintenance business, greater reliability of and lower maintenance revenue associated with the Corporation's newer, lower-priced products, and increased competition in the maintenance business. In addition, revenues from systems integration and consulting services were essentially unchanged from fiscal 1993, as the Corporation became more selective in pursuing systems integration and other consulting opportunities. Service revenue associated with the maintenance of other vendors' products grew in fiscal 1994, partially offsetting the declines noted above. The Corporation expects the market trends affecting service revenues from maintenance of VAX systems to continue over the next year. Movements in currency exchange rates are one of many competitive, industry and economic factors which affect the Corporation's operating results. The Corporation does business in more than 100 countries in major and emerging markets. Revenues and costs in non-U.S. operations, including certain product costs, are denominated in applicable local currencies. While the effects of foreign currency translation for a fiscal period are included in applicable revenue and expense categories, they are difficult to quantify precisely because the Corporation responds to movements in currency exchange rates through pricing, expense, sourcing or other management actions, as market conditions permit. During fiscal 1994 and prior periods, the Corporation entered into foreign exchange contracts covering most of its net monetary assets, liabilities and firm commitments, with maturities which generally did not exceed six months, to increase the predictability of the rate at which non-U.S. revenues were translated into U.S. dollars. During fiscal 1994, the net effect of foreign currency translation and gains and losses on foreign exchange contracts was negative compared with fiscal 1993, whereas the net effect in fiscal 1993 compared with fiscal 1992 was positive. (See Notes A and I.) Total Operating Revenues Year $ Millions ____________________________________________________________________ 94 ********************************************* 13451 +++++++++++++++++++++ 6260 93 ************************************************** 14371 +++++++++++++++++++++++ 6783 92 ************************************************ 13931 ++++++++++++++++++++ 6235 91 *********************************************** 13911 ++++++++++++++++ 5612 90 ****************************************** 12943 +++++++++++++ 4797 89 **************************************** 12742 +++++++++++ 4552 88 *********************************** 11475 ++++++++++ 3934 87 ***************************** 9389 ++++++++ 3135 86 ************************* 7590 ++++++ 2487 85 ********************* 6686 +++++ 2156 84 *************** 5584 ++++ 1780 ____________________________________________________________________ ++++ Service and Other Revenues **** Total Operating Revenues Non-United States Revenues Year $ Millions ____________________________________________________________________ 94 *********************************************** 8300 93 ***************************************************** 9164 92 ************************************************** 8799 91 ************************************************ 8380 90 ******************************************* 7281 89 **************************************** 7017 88 ********************************* 5730 87 ****************************** 4413 86 ************************* 3179 85 ********************* 2642 84 ****************** 1978 ____________________________________________________________________ Expenses and Profit Margins The Corporation's total gross margin for fiscal 1994 was 34% of total operating revenues, compared with 40% of total operating revenues in fiscal 1993 and 42% of total operating revenues in fiscal 1992. The Corporation's gross margin on fiscal 1994 product sales was 31% of product sales, compared with 41% of product sales and 45% of product sales for fiscal 1993 and 1992, respectively. The decline in product gross margin was due to several factors, including pricing, a continued shift in the Corporation's mix of product sales toward low-end systems, which typically carry lower margins, and a business model shift toward greater use of indirect channels of distribution. Recognizing these competitive conditions and the need to lower manufacturing costs, the Corporation closed several manufacturing plants in fiscal 1994, and recently announced the closure of three more plants in fiscal 1995. The Corporation has implemented and will continue to refine organizational changes intended to increase accountability in order to improve profitability and facilitate the design and manufacture of products for volume markets. Gross margin on service revenues for fiscal 1994 was 37% of service revenues, compared with 39% of service revenues and 38% of service revenues in fiscal 1993 and 1992, respectively. The two percentage point decline in service gross margin was due to a decline in revenue from the Corporation's higher-margin systems maintenance business, as described above. Research and engineering (R&E) spending for fiscal 1994 totaled $1.3 billion (10% of total operating revenues), compared with $1.5 billion (11% of total operating revenues) in fiscal 1993 and $1.8 billion (13% of total operating revenues) in fiscal 1992. The decrease in R&E expenses was due to several factors, including ongoing actions to eliminate redundant engineering efforts and streamline product offerings, which resulted in a reduction in employee population. The Corporation's R&E investment program is focused on maintaining a strong, consistently market-driven product set and on attaining and sustaining technology leadership in selected areas. Fiscal 1994 selling, general and administrative (SG&A) expenses were $4.0 billion (30% of total operating revenues) compared with $4.4 billion (31% of total operating revenues) and $4.7 billion (34% of total operating revenues) for fiscal 1993 and 1992, respectively. Included in SG&A expenses for fiscal 1994 were $310 million of non-cash write-offs and write-downs associated with intangible assets. (See Note J.) The decrease in SG&A expenses in fiscal 1994 was due principally to reductions in employee population, as well as reductions in other overhead costs. Research and Engineering Year $ Millions ___________________________________________________________________ 94 *************************************** 1301 93 ********************************************** 1530 92 ****************************************************** 1754 91 *************************************************** 1649 90 ************************************************* 1614 89 ********************************************** 1525 88 **************************************** 1306 87 ******************************** 1010 86 ************************** 814 85 *********************** 717 84 ********************* 631 ___________________________________________________________________ Regular Employee Population Year Thousands ___________________________________________________________________ 94 ************************* 78 93 *********************************** 90 92 ****************************************** 108 91 ********************************************** 115 90 *********************************************** 117 89 ************************************************ 118 88 ********************************************** 114 87 **************************************** 103 86 ********************************* 88 85 ****************************** 83 84 **************************** 80 ___________________________________________________________________ While expenses continue to decline, the Corporation's cost structure is still too high for the level and mix of total operating revenues. As a result, at the end of fiscal 1994 the Corporation approved additional restructuring actions. In the fourth quarter of fiscal 1994,the Corporation accrued restructuring costs of $1.2 billion to cover actions taken in the fourth quarter and planned actions for fiscal 1995 and 1996. Approximately $679 million of this charge was to cover the cost of employee separations to be completed by the end of fiscal 1995. The remaining $527 million was for facility closures and related costs. The cost of employee separations includes termination benefits for approximately 20,000 employees. A portion of these employee separations occurred near the end of the fourth quarter of fiscal 1994 and the remainder will occur by the end of fiscal 1995. These employees are located principally in the United States and Europe. Planned restructuring actions for fiscal 1995 include employee separations across most organizations and functions, with approximately 40% to come from sales and marketing, as the Corporation sells more products and services through indirect channels of distribution. The planned facility closures cover 10 million square feet of office and manufacturing space, principally in the United States and Europe. Cash expenditures associated with these restructuring actions are expected to be approximately $580 million in the first half of fiscal 1995, $420 million for the remainder of fiscal 1995 and $240 million related to facility closures beyond fiscal 1995. These actions do not include workforce or facility reductions that may result from divestments. See Note E for a description of the Corporation's restructuring actions and related costs. As a result of actions associated with restructuring charges to operations in fiscal 1992, 1991 and 1990, the Corporation has eliminated an estimated $2.8 billion of annualized operating expenses, including approximately $2.5 billion of annual cash expense related to workforce reductions and approximately $335 million related to facility operating costs. When completed, the actions associated with the restructuring charge in fiscal 1994 are expected to result in the elimination of additional annualized operating expenses of approximately $1.8 billion, including $1.5 billion of cash expense. Total employee population decreased by 11,400 during fiscal 1994. The Corporation had approximately 77,800, 89,900 and 107,900 regular employees at the end of fiscal 1994, 1993 and 1992, respectively, and an additional 5,000, 4,300 and 5,900 temporary and contract workers at the end of fiscal 1994, 1993 and 1992, respectively. Interest income in fiscal 1994 decreased to $49 million from $64 million in fiscal 1993 and $96 million in fiscal 1992, reflecting lower interest rates and lower average cash balances. Interest expense increased to $73 million from $51 million in fiscal 1993 and $39 million in fiscal 1992. The increase in fiscal 1994 interest expense was due principally to the full year's interest expense on $1 billion of long-term debt issued during fiscal 1993. Interest expense for fiscal 1994 included the differential received on interest rate swap agreements entered into in the first quarter of fiscal 1994, relating to $750 million of long-term debt. In fiscal 1994, the Corporation's income tax expense was $85 million on a pre-tax loss of $2.0 billion. (See Note C.) In fiscal 1993, the Corporation's income tax expense was $27 million on a pre-tax loss of $224 million. Income tax expense reflects several factors, including income taxes provided for profitable non-U.S. operations and an inability to recognize currently U.S. and certain non-U.S. tax benefits from operating losses. In addition, fiscal 1994 income tax expense includes a $70 million reduction in net deferred tax assets associated with non-U.S. operations. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes, effective July 4, 1993. The Corporation had previously accounted for income taxes under Accounting Principles Board Opinion No. 11. In the first quarter of fiscal year 1994, the Corporation recorded a one-time benefit of $20 million, or $.14 per share, for the recognition of previously unrecognized tax benefits. There is no cash flow impact from the adoption of SFAS No. 109. The standard was adopted on a prospective basis and amounts presented for prior years were not restated. (See Note C.) In the fourth quarter of fiscal 1994, the Corporation adopted SFAS No. 112 - Employers' Accounting for Postemployment Benefits, effective as of the beginning of the fiscal year. SFAS No. 112 requires accrual accounting of benefits provided to former or inactive employees after employment but before retirement. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits, and continuation of benefits such as health care benefits and life insurance coverage. The cumulative effect of adopting this standard resulted in a one-time charge to income of $71 million (the "transition obligation"), or $.51 per common share. This transition obligation represents principally the cost of providing medical, dental and life insurance benefits to individuals in the U.S. currently on long-term disability during the estimated remaining period in which they will receive disability benefits. The annual expense under the new standard, exclusive of the transition obligation, is not significantly different than the annual expense under the Corporation's former practice. There is no cash flow impact from the adoption of SFAS No. 112. The first quarter of fiscal 1994 has been restated to reflect the change in accounting principle. (See Supplementary Information, Quarterly Financial Data.) Prior years' consolidated financial statements have not been restated to reflect the adoption of SFAS No. 112. In November 1992, the Financial Accounting Standards Board issued SFAS No. 115 - Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 expands the use of fair value accounting for certain debt and equity securities. The Corporation will adopt SFAS No. 115 in the first quarter of fiscal 1995. At the end of fiscal 1994, the Corporation had unrecognized gains on long-term investments of approximately $65 million that would be subject to SFAS No. 115 treatment. Availability of Funds to Support Current and Future Operations and Spending for Operations Cash and cash equivalents totaled $1.2 billion, $1.6 billion and $1.3 billion at the end of fiscal 1994, 1993 and 1992, respectively. Net cash used by operating activities was $375 million in fiscal 1994, compared with net cash generated of $47 million and $431 million in fiscal 1993 and 1992, respectively. The $375 million net use of cash from operating activities in fiscal 1994 was due principally to restructuring activities, the net loss for the year and increased inventory levels in support of increased demand for Alpha AXP, personal computer and certain storage products. Net cash generated by operating activities in fiscal 1993 was principally the result of improved accounts receivable, offset by expenditures for restructuring activities, the net loss for the year and decreased accounts payable. Net cash used for investing activities was $626 million, $884 million and $981 million in fiscal 1994, 1993 and 1992, respectively. Capital expenditures totaled $682 million in fiscal 1994, compared with $529 million and $710 million in fiscal 1993 and 1992, respectively. Capital expenditures in fiscal 1994 included $206 million toward the construction of and purchase of equipment for a new semiconductor fabrication facility in Hudson, Massachusetts. This project has a currently estimated total cost of $425 million. Approximately $54 million of the remaining $91 million of unexpended costs on the Hudson project is expected to be spent in fiscal 1995. The Corporation expects total capital expenditures in fiscal 1995 to be less than $500 million. The Corporation disposed of property, plant and equipment and other assets in fiscal 1994, generating approximately $121 million in cash proceeds, compared with $68 million and $15 million in fiscal 1993 and 1992, respectively, principally as a result of restructuring activities. Subsequent to the end of the fiscal year, the Corporation and Quantum Corporation ("Quantum") signed an agreement providing for Quantum's purchase of a portion of the Corporation's storage business for $400 million. (See Note M.) The Corporation also sold its shares of the common stock of Ing. Olivetti & C. S.p.A. subsequent to the end of fiscal 1994 for approximately $148 million in cash. (See Note J.) Net cash generated from financing activities was $538 million and $1.1 billion in fiscal 1994 and 1993, respectively, and net cash used was $36 million in fiscal 1992. The principal financing activity in fiscal 1994 was the issuance and sale of preferred stock, as discussed below, generating net proceeds of $387 million. The Corporation also received $150 million during fiscal 1994 from the issuance of common stock under the Corporation's stock plans, compared with $196 million and $232 million in fiscal 1993 and 1992, respectively. On January 21, 1994, the Corporation filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, covering the registration of debt securities, preferred stock, depositary shares, and warrants to purchase equity and debt securities, in an aggregate amount of $1.0 billion. In March 1994, the Corporation issued and sold 16,000,000 Depositary Shares under the shelf registration statement, each representing a one-fourth interest in a share of the Corporation's Series A 8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock"), par value $1.00 per share. Dividends on the Series A Preferred Stock accrue at the annual rate of 8 7/8% (approximately $36 million in the aggregate). The Corporation paid approximately $2 million in dividends in the fourth quarter of fiscal 1994. In addition, prior to the end of fiscal 1994, the Corporation's Board of Directors declared a quarterly dividend on the Series A Preferred Stock (totaling approximately $9 million), which was paid on July 15, 1994. (See Note L.) Total long-term debt was $1.0 billion at the end of fiscal 1994 and fiscal 1993 and $91 million at the end of fiscal 1992. At the end of fiscal 1994, substantially all of the Corporation's available lines of credit were unused, including a three-year $750 million committed credit facility. Shortly after the end of the fiscal year, the Corporation terminated its credit facility, having replaced it as a source of liquidity with an accounts receivable securitization facility. (See Note F.) Investments in Property, Plant and Equipment Depreciation Expense Year $ Millions ______________________________________________________________________ 94 *********************** 682 ++++++++++++++++ 574 93 *************** 529 +++++++++++++++++++++++++ 699 92 ************************** 710 ++++++++++++++++++++++++++++ 733 91 ***************************** 738 +++++++++++++++++++++++++++++++++ 772 90 ******************************************* 1028 +++++++++++++++++++++++++++++++ 759 89 ********************************************** 1223 ++++++++++++++++++++++ 659 88 **************************************************** 1518 +++++++++++++ 516 87 ********************************** 748 ++++++++++ 435 86 *************** 564 +++++++ 384 85 **************** 572 ++++++ 315 84 ********** 452 +++++ 253 _____________________________________________________________________ +++ Depreciation *** Investments Availability of Funds to Support Current and Future Operations and Spending for Operations (continued) The Corporation estimates that $1.0 billion of cash will be expended on planned restructuring activities in fiscal 1995, and an additional $240 million beyond fiscal 1995. The Corporation intends to fund planned restructuring activities from operations, asset management efforts and existing cash, although if required, additional sources of cash are expected to be available, as discussed above. 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. Report of Management The Corporation's management is responsible for the preparation of the financial statements in accordance with generally accepted accounting principles and for the integrity of all the financial data included in this annual report. In preparing the financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being reported. Management maintains a system of internal accounting controls that is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management's policies for conducting its business. This system includes policies which require adherence to ethical business standards and compliance with all laws to which the Corporation is subject. The internal controls process is continuously monitored by direct management review and an internal audit program under which periodic independent reviews are made. The Corporation's independent public accountants annually review the accounting and control systems of the Corporation. Their audit includes a review of the internal control structure to the extent they consider necessary and selective tests of transactions to support their report. The Board of Directors, through its Audit Committee, which is composed of four Board members who are independent of management, is responsible for determining that management fulfills its responsibility with respect to the Corporation's financial statements and the system of internal accounting controls. The Audit Committee meets regularly with representatives of management, the independent accountants and the Corporation's internal auditors to review audits, financial reporting and internal control matters, and when appropriate, meets with the Corporation's outside counsel on relevant matters. The independent accountants and the internal auditors have full and free access to the Audit Committee and regularly meet privately with the Audit Committee. Coopers & Lybrand, independent accountants, have been engaged by the Audit Committee of the Board of Directors, with the approval of the stockholders, to audit the Corporation's financial statements. Their report follows. Robert B. Palmer President and Chief Executive Officer Vincent J. Mullarkey Vice President, Finance and Chief Financial Officer Report of Independent Accountants To The Stockholders and Directors, Digital Equipment Corporation We have audited the accompanying consolidated balance sheets of Digital Equipment Corporation as of July 2, 1994 and July 3, 1993, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three fiscal years in the period ended July 2, 1994. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Digital Equipment Corporation as of July 2, 1994 and July 3, 1993, and the consolidated results of its operations and cash flows for each of the three fiscal years in the period ended July 2, 1994, in conformity with generally accepted accounting principles. As discussed in Note G to the consolidated financial statements, the Corporation changed its method of accounting for postretirement benefits other than pensions in fiscal 1992. Coopers & Lybrand Boston, Massachusetts July 26, 1994 Consolidated Statements of Operations Digital Equipment Corporation
(in thousands except per share data) Year Ended _________________________________________________________________________________________________ July 2, 1994 July 3,1993 June 27, 1992 _________________________________________________________________________________________________ Revenues (Notes A and B) Product sales $ 7,191,251 $ 7,587,994 $ 7,696,029 Service and other revenues 6,259,539 6,783,375 6,234,843 __________________________________________ Total operating revenues 13,450,790 14,371,369 13,930,872 __________________________________________ Costs and Expenses (Notes A, G, and K) Cost of product sales 4,968,025 4,464,445 4,248,118 Service expense and cost of other revenues 3,943,612 4,166,946 3,883,705 Research and engineering expenses 1,301,347 1,530,119 1,753,898 Selling, general and administrative expenses (Note J) 4,027,869 4,447,160 4,680,822 Restructuring charges (Note E) 1,206,000 - 1,500,000 __________________________________________ Operating loss (1,996,063) (237,301) (2,135,671) Interest income 49,422 63,831 96,176 Interest expense 73,353 50,837 38,517 __________________________________________ Loss before income taxes and cumulative effect of changes in accounting principles (2,019,994) (224,307) (2,078,012) Provision for income taxes (Notes A and C) 85,043 27,023 232,000 __________________________________________ Loss before cumulative effect of changes in accounting principles (2,105,037) (251,330) (2,310,012) Cumulative effect of changes in accounting principles, net of tax (Notes C and G) 51,026 - 485,495 __________________________________________ Net Loss (2,156,063) (251,330) (2,795,507) Dividends on preferred stock (Note L) 10,650 _ _ __________________________________________ Net loss applicable to common stock (2,166,713) (251,330) (2,795,507) __________________________________________ Per Common Share (Note A) Loss applicable before cumulative effect of changes in accounting principles $ (15.43) $ (1.93) $ (18.50) Cumulative effect of changes in accounting principles (.37) - (3.89) __________________________________________ Net Loss Applicable per Common Share (Note A) $ (15.80) $ (1.93) $ (22.39) __________________________________________ Weighted average common shares outstanding 137,090 130,409 124,864 _________________________________________________________________________________________________ The accompanying notes are an integral part of these financial statements.
Consolidated Balance Sheets Digital Equipment Corporation
(in thousands) _______________________________________________________________________________________________ July 2, 1994 July 3, 1993 _______________________________________________________________________________________________ Assets Current Assets Cash and cash equivalents (Note A) $ 1,180,863 $ 1,643,195 Accounts receivable, net of allowance of $111,925 and $110,764 3,318,854 3,020,252 Inventories (Note A) 2,063,978 1,755,140 Prepaid expenses and deferred income taxes (Note C) 324,676 463,928 ____________________________ Total current assets 6,888,371 6,882,515 Net property, plant and equipment (Note A) 3,129,489 3,178,291 Other assets (Notes A, C, D and J) 561,911 889,537 ____________________________ Total assets $10,579,771 $10,950,343 _______________________________________________________________________________________________ Liabilities and Stockholders' Equity Current Liabilities Bank loans and current portion of long-term debt (Note F) $ 32,614 $ 21,335 Accounts payable 1,197,350 822,434 Income taxes payable (Note C) 20,753 57,614 Salaries, wages and related items 619,756 556,151 Deferred revenues and customer advances (Note A) 1,239,792 1,138,323 Accrued restructuring costs (Note E) 1,351,075 738,989 Other current liabilities 594,925 583,868 ____________________________ Total current liabilities 5,056,265 3,918,714 Deferred income taxes (Note C) 4,758 - Long-term debt (Note F) 1,010,680 1,017,577 Postretirement and other postemployment benefits (Note G) 1,228,269 1,128,653 ____________________________ Total liabilities 7,299,972 6,064,944 ____________________________ Commitments and contingencies (Note H) Stockholders' Equity (Notes K and L) 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 - Common stock, $1.00 par value; authorized 450,000,000 shares; 142,287,078 shares and 135,489,805 shares issued 142,287 135,490 Additional paid-in capital 3,390,040 2,851,960 Retained earnings/(deficit) (256,528) 1,937,627 Treasury stock at cost; 0 shares and 497,551 shares - (39,678) ____________________________ Total stockholders' equity 3,279,799 4,885,399 ____________________________ Total liabilities and stockholders' equity $10,579,771 $10,950,343 _______________________________________________________________________________________________ The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Cash Flows Digital Equipment Corporation
(in thousands) ________________________________________________________________________________________________ July 2, 1994 July 3,1993 June 27, 1992 ________________________________________________________________________________________________ Cash Flows from Operating Activities Net loss $(2,156,063) $ (251,330) $(2,795,507) ________________________________________ Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 573,970 698,631 732,536 Amortization 106,584 139,552 100,292 Reduction in carrying value of intangible assets (Note J) 310,000 - - Other adjustments to income 84,026 185,617 269,095 (Increase)/decrease in accounts receivable (298,602) 574,016 (86,163) (Increase)/decrease in inventories (308,838) (141,106) 155,881 (Increase)/decrease in prepaid expenses 82,513 (26,552) 42,908 Increase/(decrease) in accounts payable 374,916 (218,866) 277,918 Increase in taxes 18,913 75,590 55,142 Increase/(decrease) in salaries, wages, benefits and related items (Note G) 163,221 (49,581) 1,115,240 Increase/(decrease) in deferred revenues and customer advances 101,469 (70,312) 101,421 Increase/(decrease) in accrued restructuring costs (Note E) 612,086 (807,915) 510,200 Decrease in other current liabilities (39,101) (60,828) (48,259) _______________________________________ Total adjustments 1,781,157 298,246 3,226,211 _______________________________________ Net cash flows from operating activities (374,906) 46,916 430,704 _______________________________________ Cash Flows from Investing Activities Investment in property, plant and equipment (682,100) (528,691) (710,436) Proceeds from the disposition of property, plant and equipment 97,456 46,049 15,141 Investment in other assets (Note J) (64,377) (423,573) (139,459) Proceeds from the disposition of other assets 23,516 22,100 - Business acquisitions, net of cash acquired (Note J) - - (146,387) _______________________________________ Net cash flows from investing activities (625,505) (884,115) (981,141) _______________________________________ Net cash flows from operating and investing activities (1,000,411) (837,199) (550,437) _______________________________________ Cash Flows from Financing Activities Proceeds from issuance of debt 22,742 984,482 25,821 Payments to retire debt (19,451) (36,860) (108,472) Purchase of treasury shares - - (185,292) Issuance of preferred, common and treasury shares, including tax effects 536,563 195,600 231,502 Dividends paid (1,775) - - _______________________________________ Net cash flows from financing activities 538,079 1,143,222 (36,441) _______________________________________ Net increase/(decrease) in cash and cash equivalents (462,332) 306,023 (586,878) Cash and cash equivalents at beginning of year 1,643,195 1,337,172 1,924,050 _______________________________________ Cash and cash equivalents at end of year $ 1,180,863 $1,643,195 $ 1,337,172 ________________________________________________________________________________________________ The accompanying notes are an integral part of these financial statements.
Consolidated Statements of Stockholders' Equity Digital Equipment Corporation
Additional Retained Total Preferred Common Paid-in Earnings/ Treasury Stockholders' (in thousands) Stock Stock Capital (Deficit) Stock Equity _____________________________________________________________________________________________________________________ June 29, 1991 - $130,008 $2,636,141 $5,344,855 $(487,165) $ 7,623,839 _____________________________________________________________________________________________________________________ Purchase of 3,014,083 shares of treasury stock (185,292) (185,292) Shares issued under stock plans (266,660) 498,251 231,591 Restricted stock plans, charge to operations 56,303 56,303 Net loss-1992 (2,795,507) (2,795,507) ____________________________________________________________________________________________________________________ June 27, 1992 - $130,008 $2,692,444 $2,282,688 $(174,206) $ 4,930,934 ____________________________________________________________________________________________________________________ Shares issued under stock plans 5,482 149,321 (93,731) 134,528 195,600 Restricted stock plans, charge to operations 42,038 42,038 Repurchase unexercised option shares (31,843) (31,843) Net loss-1993 (251,330) (251,330) _____________________________________________________________________________________________________________________ July 3, 1993 - $135,490 $2,851,960 $1,937,627 $ (39,678) $ 4,885,399 _____________________________________________________________________________________________________________________ Issuance of preferred stock $4,000 382,745 386,745 Shares issued under stock plans 6,797 130,785 (27,442) 39,678 149,818 Restricted stock plans, charge to operations 24,550 24,550 Dividends declared--preferred stock (10,650) (10,650) Net loss-1994 (2,156,063) (2,156,063) _____________________________________________________________________________________________________________________ July 2, 1994 $4,000 $142,287 $3,390,040 $ (256,528) $ - $ 3,279,799 _____________________________________________________________________________________________________________________ See Notes K and L of Notes to Consolidated Financial Statements. Cash dividends on common stock have never been paid by the Corporation. The Corporation commenced paying dividends on preferred stock issued in fiscal 1994. ______________________________________________________________________________________________________________ The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements Note A - Significant Accounting Policies ___________________________________________________________________________ Principles of Consolidation - The consolidated financial statements of the Corporation include the financial statements of the parent and its U.S. and non-U.S. subsidiaries. All intercompany accounts and profits have been eliminated. Certain prior years' amounts have been reclassifed to conform with current year presentation. Fiscal Year - The fiscal year of the Corporation is the fifty-two/fifty-three week period ending the Saturday nearest the last day of June. The fiscal years ended July 2, 1994 and June 27, 1992 included 52 weeks. The fiscal year ended July 3, 1993 included 53 weeks. Translation of Foreign Currencies - For non-U.S. operations, the U.S. dollar is the functional currency. Monetary assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates. Nonmonetary assets such as inventories and property, plant and equipment are translated at historical rates. Income and expense items are translated at average exchange rates prevailing during the year, except that inventories and depreciation charged to operations are translated at historical rates. Exchange gains and losses arising from translation are included in current income. The Corporation enters into foreign exchange option and forward contracts to hedge the impact of exchange rate movements on operations and the asset and liability positions of non-U.S. subsidiaries. The impact of exchange rate movements on contracts used to hedge transactions is included in income when the operating revenues and expenses are recognized and, for contracts used to hedge assets and liabilities, in the period in which the exchange rates change. The cash flows related to these contracts are classified in the Consolidated Statements of Cash Flows, as part of cash flows from operating activities. See Note I for information on the Corporation's foreign exchange contracts. Revenue Recognition - Revenues from product sales are recognized at the time the product is shipped. Service and other revenues are recognized ratably over the contractual period or as the services are performed. Warranty - Warranty revenues are recognized ratably over the warranty period; warranty-related costs are recognized as service expense is incurred. The Corporation also provides warranty coverage as a product attribute on certain products. Estimated costs to repair such products are accrued as product cost when the product is shipped. Net Income/(Loss) Applicable per Common Share - Per common share amounts are calculated based on the weighted average number of common shares and common share equivalents outstanding during periods of net income, after deducting applicable preferred stock dividends. Common share equivalents are attributable to stock options. Per share amounts are calculated based only on the weighted average number of common shares outstanding during periods of net loss, after deducting applicable preferred stock dividends. Cash Equivalents - The Corporation considers all highly liquid temporary cash investments with maturities of three months or less at date of acquisition to be cash equivalents. Cash equivalents are valued at cost plus accrued interest, which approximates market. Taxes - In general, the Corporation's practice is to reinvest the earnings of its foreign subsidiaries in those operations, and repatriation of retained earnings is done only when it is advantageous to do so. Applicable taxes are provided only on amounts planned to be remitted. Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market. (in thousands) ____________________________________________________________________ July 2, 1994 July 3, 1993 ____________________________________________________________________ Raw materials $ 476,172 $ 331,506 Work-in-process 605,503 502,200 Finished goods 982,303 921,434 ____________________________________________________________________ Total inventories $ 2,063,978 $ 1,755,140 ____________________________________________________________________ Property, Plant and Equipment - Property, plant and equipment are stated at cost. (in thousands) ___________________________________________________________________ July 2, 1994 July 3, 1993 ___________________________________________________________________ Land $ 356,586 $ 363,264 Buildings 1,967,815 1,887,211 Leasehold improvements 414,622 532,369 Machinery and equipment 4,281,866 $ 4,410,586 ___________________________________________________________________ Total property, plant and equipment 7,020,889 7,193,430 Less accumulated depreciation 3,891,400 4,015,139 ___________________________________________________________________ Net property, plant and equipment $ 3,129,489 $ 3,178,291 ___________________________________________________________________ Note A - Significant Accounting Policies (continued) ___________________________________________________________________ Depreciation expense is computed principally on the following bases: Classification Depreciation Lives and Methods __________________________________________________________ Buildings 33 years (straight-line) Leasehold Life of assets or term of lease, Improvements whichever is shorter (straight-line) Machinery and Equipment 3 to 10 years (accelerated methods) __________________________________________________________ When assets are retired, or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts. Gains or losses resulting from restructuring actions are included in accrued restructuring costs. Other resulting gains and losses are included in income. Other Assets - Other assets include equity investments, capitalized software development costs, goodwill, deferred taxes and other intangible assets. Software development costs are capitalized beginning at the time that technical feasibility is established. These costs are amortized over three years from the date the products are available for general use. Goodwill is amortized using the straight-line method over the estimated useful life of the asset, subject to periodic review of realizability. Other intangible assets are amortized using unit-volume and straight-line methods, as applicable, over their estimated useful lives, subject to periodic review of realizability. Note B Geographic Operations __________________________________________________________________________ Industry - The Corporation operates in one business segment: the design, manufacture, sale and service of networked computer systems. Non-U.S. Operations - Sales and marketing operations outside the United States are conducted principally through sales subsidiaries in Canada, Europe, Central and South America, Asia and the Pacific Rim; by direct sales from the parent corporation and through various representative distributorship arrangements and value-added resellers. The Corporation's non-U.S. manufacturing operations include plants in the Americas, Europe, Asia and the Pacific Rim. The products of these manufacturing plants are sold to the Corporation's sales subsidiaries, the parent corporation or other manufacturing plants for further processing. Intercompany transfers between geographic areas are accounted for at prices which are intended to be representative of unaffiliated party transactions. Sales to unaffiliated customers outside the United States, including U.S. export sales, were $8.3 billion, $9.2 billion, and $8.8 billion for the fiscal years ended July 2, 1994, July 3, 1993 and June 27, 1992, respectively, which represented 62%, 64% and 63%, respectively, of total operating revenues. Where applicable, the retained earnings of substantially all of the Corporation's international subsidiaries have been reinvested to support operations. These accumulated retained earnings, before elimination of intercompany transactions, aggregated $2.9 billion, $4.0 billion and $3.6 billion at July 2, 1994, July 3, 1993 and June 27, 1992, respectively. Note B - Geographic Operations (continued) _____________________________________________________________________________
(in thousands) _____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 _____________________________________________________________________________ Net Revenues United States: Unaffiliated customer sales $ 5,176,748 $ 5,219,276 $ 5,154,159 Inter-area transfers 1,830,749 1,793,832 1,900,455 _____________________________________________ 7,007,497 7,013,108 7,054,614 _____________________________________________ Europe: Unaffiliated customer sales 5,832,332 6,973,709 6,751,222 Inter-area transfers 373,354 633,935 520,953 _____________________________________________ 6,205,686 7,607,644 7,272,175 _____________________________________________ Canada, Asia, Latin Americas, Pacific Rim: Unafiliated customer sales 2,441,710 2,178,384 2,025,491 Inter-area transfers 1,707,291 1,378,870 1,168,956 _____________________________________________ 4,149,001 3,557,254 3,194,447 _____________________________________________ Eliminations (3,911,394) (3,806,637) (3,590,364) _____________________________________________ Net revenue $ 13,450,790 $ 14,371,369 $ 13,930,872 ____________________________________________________________________________ Income/(Loss) United States $ (740,709) $ (363,454) $ (1,971,032) Europe (1,109,188) 12,446 (184,951) Canada, Asia, Latin Americas, Pacific Rim (170,097) 115,091 68,313 Eliminations 23,931 (1,384) (48,001) ______________________________________________ Operating loss (1,996,063) (237,301) (2,135,671) ______________________________________________ Interest income 49,422 63,831 96,176 Interest expense 73,353 50,837 38,517 ______________________________________________ Loss before income taxes and cumulative effect of changes in accounting principles $ (2,019,994) $ (224,307) $ (2,078,012) _____________________________________________________________________________ Assets United States $ 4,997,184 $ 4,202,395 $ 4,766,206 Europe 4,098,780 4,910,165 5,195,715 Canada, Asia, Latin Americas, Pacific Rim 1,945,236 1,730,754 1,854,167 Corporate assets 1,180,863 1,444,259 1,183,387 Eliminations (1,642,292) (1,337,230) (1,715,166) ______________________________________________ Total assets $ 10,579,771 $ 10,950,343 $ 11,284,309 _____________________________________________________________________________
Note C - Income Taxes ____________________________________________________________________________ Income/(loss) before income taxes and cumulative effect of changes in accounting principles (in thousands)
______________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 _____________________________________________________________________________ U.S. $ (754,844) $ (383,808) $ (1,934,186) Non-U.S. (1,265,150) 159,501 (143,826) ______________________________________________ Total $ (2,019,994) $ (224,307) $ (2,078,012) _____________________________________________________________________________ Reconciliation of U.S. federal statutory rate to actual tax rate _____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 _____________________________________________________________________________ U.S. federal statutory tax (benefit) rate (35.0)% (34.0)% (34.0)% Tax benefit of manufacturing operations in:(a) Puerto Rico - (8.1) 1.7 Ireland (2.3) (16.0) (3.4) Singapore (0.1) (7.8) - Benefit not recorded due to net loss carryforward position U.S. 13.5 60.5 31.5 Non-U.S. 41.1 21.6 16.5 Non-U.S. tax rates (12.0) (0.8) 0.2 Other (1.0) (3.4) (1.3) __________________________________________ Effective tax rate 4.2% 12.0% 11.2% _____________________________________________________________________________ Note (a) The income from products manufactured for export by the Corporation's manufacturing subsidiary in Ireland is subject to a 10% tax rate through December 2010. The income from certain products manufactured by the Corporation's manufacturing subsidiary in Singapore is taxed at 15% through December 1995. During fiscal year 1993, the Corporation discontinued its manufacturing operation in Puerto Rico.
Components of provisions for (benefits from) U.S. federal and non-U.S. income taxes (in thousands)
____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 ____________________________________________________________________________ U.S. federal: Current $ - $ (5,023) $(155,883) Deferred (14,431) (19,871) 107,249 ____________________________________________ Total (14,431) (24,894) (48,634) ____________________________________________ Non-U.S.: Current 5,618 (57,525) 92,794 Deferred 92,989 103,497 183,998 ____________________________________________ Total 98,607 45,972 276,792 ____________________________________________ State income taxes 867 5,945 3,842 ____________________________________________ Total income taxes $ 85,043 $ 27,023 $ 232,000 ____________________________________________________________________________
The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes, effective July 4, 1993. The Corporation had previously accounted for income taxes under Accounting Principles Board Opinion No. 11. In the first quarter of fiscal year 1994, the Corporation recorded a one-time benefit of $20,000,000 or $.14 per common share, for the recognition of previously unrecognized tax benefits. There is no cash flow impact from the adoption of SFAS No. 109. The standard was adopted on a prospective basis and amounts presented for prior years were not restated. Note C - Income Taxes (continued) ____________________________________________________________________________ Significant components of deferred tax assets and liabilities (in thousands)
______________________________________________________________________ Year ended July 2, 1994 ______________________________________________________________________ Assets Liabilities ______________________________________________________________________ Inventory-related transactions $ 101,933 $ 8,437 Depreciation 61,335 44,693 Deferred warranty revenue 80,506 - Postretirement/postemployment benefits 400,037 18,323 Restructuring 446,505 - Tax loss carryforwards 1,424,927 - Tax credit carryforwards 149,013 - Intangible assets 106,368 - Other 168,392 98,465 ________________________ Gross deferred tax balances 2,939,016 169,918 Valuation allowance 2,677,673 - ________________________ Net deferred tax balances $ 261,343 $169,918 _____________________________________________________________________
The gross deferred tax asset from tax loss carryforwards of $1.4 billion represents $3.7 billion of net operating loss carryforwards on a tax return basis which will generally expire as follows: $200,000,000 in 1998, $350,000,000 in 1999, $1.2 billion in 2007, $500,000,000 in 2008, $600,000,000 in 2009, and the remainder thereafter. Tax credit carryforwards will generally expire as follows: $40,000,000 in 2001, $50,000,000 in 2002, $50,000,000 in 2003, and the remainder thereafter. Major changes in the components of temporary differences and carryforwards for the period ended July 2, 1994 include increases in gross deferred tax assets relating to restructuring, tax loss carryforwards and intangibles in the amounts of $211,938,000, $399,725,000 and $106,368,000, respectively. For the period ended July 2, 1994, the total valuation allowance for deferred tax assets increased $872,887,000. The increase in the valuation allowance resulted from increased gross deferred tax assets associated with tax loss carryforwards, restructuring and other deferred tax assets. Gross deferred taxes were increased by $32,410,000 as a result of statutory tax rate changes, fully offset by valuation allowances. Fiscal year 1994 income tax expense includes a $70,000,000 reduction in net deferred tax assets associated with non-U.S. operations. In connection with its normal examination of the Corporation's 1989, 1990 and 1991 tax returns, the Internal Revenue Service has proposed adjustments. The Corporation believes its judgments in these matters have been appropriate and any adjustments which might result would not have a material effect on the financial statements. In fiscal years 1994, 1993 and 1992, income taxes paid were approximately $42,419,000, $53,889,000 and $144,620,000, respectively. See Note A for further explanation of the Corporation's income tax accounting policies. Note D - Capitalized Computer Software Development Costs _____________________________________________________________________________ Unamortized computer software development costs were $124,780,000 and $138,024,000 at July 2, 1994 and July 3, 1993, respectively. Amortization expense was $67,515,000, $68,978,000 and $63,956,000 for the years ended July 2, 1994, July 3, 1993 and June 27, 1992, respectively. Accumulated amortization was $208,837,000 and $168,845,000 at July 2, 1994 and July 3, 1993, respectively. Note E - Restructuring Actions ____________________________________________________________________________ Accrued restructuring costs and charges include the cost of involuntary employee termination benefits, facility closures and related costs associated with restructuring actions. Employee termination benefits include severance, wage continuation, notice pay, medical and other benefits. Facility closures and related costs include gains and losses on disposal of property, plant and equipment, lease payments and related costs. Restructuring costs are accrued and charged to expense in accordance with an approved management plan, supported by an appropriate level of specificity for the planned actions. Actual restructuring costs are recognized as a reduction in the accrued liability in the period incurred. While expenses continue to decline, the Corporation's cost structure is still too high for the level and mix of total operating revenues. As a result, at the end of fiscal year 1994, the Corporation approved additional restructuring actions and accrued related costs of $1.2 billion. Cash expenditures associated with these actions are expected to be approximately $580,000,000 in the first half of fiscal 1995, $420,000,000 in the second half of fiscal 1995 and $240,000,000 related to facility closures beyond fiscal 1995. These actions do not include workforce or facility reductions that may result from divestments. The cost of employee separations associated with the fiscal year 1994 charge includes termination benefits for approximately 20,000 employees. A portion of these employee separations occurred near the end of the fourth quarter of fiscal 1994 and the remainder will occur in fiscal 1995. These employees are located principally in the U.S. and Europe. The greatest portion of employee separations, approximately 40%, are expected to come from sales and marketing functions, as the Corporation sells more products through indirect channels of distribution. Most other organizations and functions also will be affected by the planned reduction in employees. The fiscal 1994 charge also covers costs associated with closure of 10 million square feet of facilities, including office and manufacturing space, principally in the U.S. and Europe. Restructuring actions have resulted in termination of approximately 12,000, 17,000 and 10,000 employees in fiscal years 1994, 1993 and 1992, respectively.
Accrued restructuring costs (in thousands) ____________________________________________________________________________ Year ended July 2, 1994 July 3, 1993 June 27, 1992 ____________________________________________________________________________ Balance, beginning of year $ 738,989 $ 1,546,904 $ 1,036,704 __________________________________________ Charges to operations: Employee separations 679,000 - 1,000,000 Facility closures and related costs 527,000 - 500,000 __________________________________________ 1,206,000 - 1,500,000 __________________________________________ Costs incurred: Employee separations 372,450 454,900 759,500 Facility closures and related costs 212,300 314,250 168,480 Other 9,164 38,765 61,820 __________________________________________ 593,914 807,915 989,800 __________________________________________ Balance, end of year $1,351,075 $ 738,989 $ 1,546,904 __________________________________________ Cash expenditures: Employee separations $ 532,000 $ 651,300 $ 822,150 Facility closures and related costs, net of proceeds 67,550 174,700 106,050 __________________________________________ $ 599,550 $ 826,000 $ 928,200 ____________________________________________________________________________
At the end of fiscal year 1992, having fully utilized the balance of restructuring costs accrued at the end of fiscal 1991 and in response to an unanticipated decline in product sales during the second half of fiscal 1992 and resulting operating losses, additional restructuring plans were formulated. These actions resulted in the accrual of $1.5 billion of restructuring costs. Note F - Debt ___________________________________________________________________________________________
Long-term debt, exclusive of current maturities (in thousands): ___________________________________________________________________________________________ Maturity Date (Calendar Year) Interest Rate July 2,1994 July 3, 1993 ___________________________________________________________________________________________ Lease obligations 1997-2002 7.64%-11.0%(a) $ 17,950 $ 24,578 Notes (b) 1997 7% 250,000 250,000 Notes (b) 2002 7 1/8% 250,000 250,000 Debentures (b) 2012 8 5/8% 250,000 250,000 Debentures (b) 2023 7 3/4% 250,000 250,000 Unamortized discount and commissions (b) (15,092) (16,183) Other debt obligations 7,822 9,182 ___________________________ Total long-term debt, exclusive of current maturities $ 1,010,680 $ 1,017,577 ___________________________ Note (a) Weighted average interest rate at July 2, 1994 and July 3, 1993 of 8.5% and 8.7%, respectively. Note (b) The Notes and Debentures are not redeemable prior to maturity and are not entitled to any sinking fund. The unamortized discount and commissions relate to these Notes and Debentures. ____________________________________________________________________________
Principal payments during the next five fiscal years are as follows: 1995 - $2,984,000; 1996 - $5,416,000; 1997 - $5,648,000; 1998 - $256,266,000; 1999 - $935,000. In fiscal years 1994, 1993 and 1992, interest paid was $76,203,000, $37,123,000 and $43,494,000, respectively. Based primarily on dealer quotes, the fair value of long-term borrowings, including current maturities, was approximately $834,000,000 and $1.1 billion at July 2,1994 and July 3,1993, respectively. The Corporation has entered into interest rate swap agreements which effectively convert a portion of the long-term debt from fixed to variable rates. As of July 2, 1994, the net face amount of interest rate swaps outstanding was $1.3 billion, of which a net $750,000,000 was subject to variable rates as a result of offsetting positions. Based on dealer quotes, the fair value of such agreements, which represents the replacement value, was a net payable of $42,800,000 at July 2, 1994. There were no interest rate swaps in effect at July 3,1993. The Corporation had available lines of credit totaling $1.2 billion for fiscal years ended July 2,1994 and July 3,1993. Included in these lines of credit was a $750,000,000 committed credit facility which was terminated by the Corporation on July 25,1994, having been replaced as a source of liquidity with an accounts receivable securitization facility as described below. Substantially all of these lines of credit were unused at the end of fiscal 1994 and 1993. Except for the $750,000,000 credit facility, which was subject to an annual facility fee of 0.25%, commitment fees on the unused lines of credit were neither material nor significant. In addition to available lines of credit, in June 1994, the Corporation entered into a five-year agreement with a major financial institution (i) providing for the transfer and sale by the Corporation to a wholly-owned subsidiary of the Corporation of a designated pool of domestic trade accounts receivable (the "Receivables") and (ii) allowing the Corporation to sell to a group of investors an undivided ownership interest in the Receivables for proceeds of up to $600,000,000 (the "Purchase Limit"). The agreement includes annual program fees totaling 0.2% of the Purchase Limit. As of July 2, 1994, the entire $600,000,000 was available to the Corporation; however, no interests in the Receivables had been sold. Note G - Postretirement and Other Postemployment Benefits _____________________________________________________________________________ Pension Plans - The Corporation and its subsidiaries have defined benefit and defined contribution pension plans covering substantially all employees. The benefits are based on years of service and compensation during the employee's career. Pension cost is based on estimated benefit payment formulas. It is the Corporation's policy to make tax-deductible contributions to the plans in accordance with local laws. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. For the U.S. pension plan, there were no contributions in the fiscal years 1994, 1993 or 1992 due to the full funding limit of the Omnibus Budget Reconciliation Act of 1987. The assets of the plans include corporate equity and debt securities, government securities and real estate. The Corporation's fiscal year 1994 pension cost, before curtailment gains, declined, reflecting the positive effects of restructuring activities and a change in future discretionary plan improvements. The net periodic pension cost for defined contribution pension plans was $12,585,000, $7,944,000 and $11,202,000 for the fiscal years ended July 2,1994, July 3,1993 and June 27, 1992, respectively. The measurement dates for all plans were within 90 days of year-end. The Corporation recognized a one-time charge of $161,658,000 in fiscal 1992 for special early retirement pension benefits as a component of restructuring costs.
Components of net periodic pension cost (in thousands) ____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 ____________________________________________________________________________ Service cost for benefits earned during the period $ 180,694 $ 192,546 $ 234,842 Interest cost on projected benefit obligations 191,525 201,203 180,898 Actual return on plan assets (143,465) (291,127) (166,055) Net amortization and deferral (79,567) 79,421 (47,927) _____________________________________________ Net periodic pension cost before curtailment gains 149,187 182,043 201,758 Curtailment gains (272,918) - (138,100) _____________________________________________ Net periodic pension cost for defined benefit pension plans $ (123,731) $ 182,043 $ 63,658 _____________________________________________ Total pension cost for all pension plans $ (107,686) $ 189,293 $ 87,833 _____________________________________________________________________________ Significant actuarial assumptions for pension plans _____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 _____________________________________________________________________________ U.S. pension plan: Discount rate 8.0% 8.0% 8.5% Expected long-term rate of return on plan assets 9.0% 9.0% 9.0% Rate of increase in future compensation levels 6.0% 6.0% 6.5% Non-U.S. pension plans: Discount rate 5.0- 9.5% 5.0- 9.0% 5.0- 9.0% Expected long-term rate of return on plan assets 6.0-10.0% 6.0-10.0% 6.0-10.0% Rate of increase in future compensation levels 2.8- 7.2% 3.5- 7.5% 4.8- 8.0% ____________________________________________________________________________
Funded status of pension plans as of the year-end measurement date (in thousands) ______________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 ______________________________________________________________________________ Actuarial present value of benefit obligations: Vested benefit obligation $ (1,448,067) $ (1,321,322) _____________________________ Accumulated benefit obligation $ (1,635,422) $ (1,497,035) _____________________________ Projected benefit obligation $ (2,558,421) $ (2,606,673) Plan assets at fair value 2,727,675 2,536,614 _____________________________ Over/(under) funded projected benefit obligation 169,254 (70,059) Contributions made after measurement date but before end of fiscal year 2,762 2,916 Unrecognized net gain (326,710) (275,390) Unrecognized prior service cost/(credit) (88,519) 67,427 Unrecognized net transition asset (88,916) (78,597) ____________________________ Pension liability recognized on the balance sheet $ (332,129) $ (353,703) ____________________________________________________________________________
Note G - Postretirement and Other Postemployment Benefits (continued) ____________________________________________________________________________ Postretirement Benefits Other Than Pensions - The Corporation has defined benefit postretirement plans that provide medical and dental benefits for U.S. retirees and their eligible dependents. Substantially all of the Corporation's U.S. employees may become eligible for postretirement benefits if they reach retirement age while working for the Corporation. The majority of the Corporation's non-U.S. subsidiaries do not offer postretirement benefits other than pensions to retirees. The Corporation's postretirement benefits plans other than pensions are funded as costs are incurred. Fiscal year 1993 expense reflects a reduction from the prior year resulting from cost sharing changes. Retiree contributions for the U.S. medical plan are based on length of service for employees retiring after fiscal 1993. The Corporation also recognized a one-time charge of $142,985,000 in fiscal year 1992 for special early postretirement benefits other than pensions as a component of restructuring costs. The Corporation adopted Statement of Financial Accounting Standards No. 106 - - Employers' Accounting for Postretirement Benefits Other Than Pensions in fiscal year 1992 and elected to recognize the cumulative effect immediately for its U.S. and material non-U.S. plans, which resulted in a charge of $485,495,000, net of tax benefits of $4,188,000, to fiscal year 1992 results.
Components of net periodic postretirement benefits costs (in thousands) ____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 ____________________________________________________________________________ Service cost for benefit earned during the period $ 24,949 $ 25,560 $ 37,543 Interest cost on accumulated postretirement benefits obligations 47,309 50,915 42,525 Actual return on plan assets - - - Net amortization and deferral (9,964) (8,538) - __________________________________________ Net periodic postretirement benefit cost before curtailment gains 62,294 67,937 80,068 Curtailment gains (37,773) (30,000) - __________________________________________ Net periodic postretirement benefits cost $ 24,521 $ 37,937 $ 80,068 _____________________________________________________________________________ Significant actuarial assumptions for other postretirement benefits plans (dollars in thousands) _____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 June 27, 1992 ____________________________________________________________________________ U.S. plans: Discount rate 8.0% 8.0% 8.5% Health care cost trend rate, current year 9.3% 10.6% 13.8% Health care cost trend rate, ultimate year 5.5% 6.0% 6.0% Trend rate decreases to the ultimate rate in the year 2005 2005 2005 Effect of a 1% increase in the trend rate: Increase in accumulated postretirement benefits obligation $110,011 $137,913 $148,386 Increase in net periodic postretirement benefits cost $ 15,643 $ 17,598 $ 19,674 Non-U.S. plans: Discount rate 5.0- 8.5% 5.0- 8.5% 5.0- 8.5% Health care cost trend rate, current year 4.0-12.0% 5.0-13.0% 5.0-14.0% Health care cost trend rate, ultimate year 4.0- 7.0% 5.0- 7.0% 5.0- 7.0% Trend rates decrease to the ultimate rates in the years 1994-2007 1993-2050 1992-2050 Effect of a 1% increase in the trend rate: Increase in accumulated postretirement benefit obligation $ 6,057 $ 5,861 $ 4,280 Increase in net periodic postretirement benefit cost $ 909 $ 564 $ 578 _____________________________________________________________________________
Funded status of other postretirement benefits plans as of the year-end measurement date (in thousands) ____________________________________________________________________________ Year Ended July 2, 1994 July 3, 1993 ____________________________________________________________________________ Accumulated postretirement benefit obligations: Retirees $ (371,191) $ (413,887) Fully eligible plan participants (22,180) (20,572) Other active plan participants (233,065) (298,154) _____________________________ Unfunded accumulated postretirement benefit obligation (626,436) (732,613) Unrecognized actuarial net loss 1,057 149,482 Unrecognized prior service credit (116,138) (139,610) _____________________________ Other postretirement benefits liability recognized on the balance sheet $ (741,517) $ (722,741) _____________________________________________________________________________
Postemployment Benefits - In the fourth quarter of fiscal year 1994, the Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 112 - Employers' Accounting for Postemployment Benefits, effective as of the beginning of the fiscal year. This standard requires the accrual of benefits provided to former or inactive employees, after employment but before retirement. These benefits include, but are not limited to, salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits and continuation of benefits such as health care and life insurance coverage. The cumulative effect of adopting this standard resulted in a one-time charge to income of $71,068,000 (the "transition obligation"), or $.51 per common share. This transition obligation represents principally the cost of providing medical, dental and life insurance benefits to individuals in the U.S. currently on long-term disability, during the estimated remaining period in which they will receive disability benefits. The annual expense under the new standard, exclusive of the transition obligation, is not significantly different than the annual expense under the Corporation's former practice. There is no cash flow impact from the adoption of SFAS No. 112. The first quarter of fiscal year 1994 has been restated to reflect the change in accounting principle. Prior years' consolidated financial statements have not been restated to reflect this change. Note H - Commitments and Contingencies ____________________________________________________________________________ Lease Commitments - Minimum annual rentals under noncancelable leases (which are principally for leased real estate, vehicles and equipment) for the fiscal years listed are as follows: Fiscal Years (in thousands) _______________________________________________________________ 1995 $ 304,895 1996 265,081 1997 194,866 1998 190,148 1999 106,002 Later years 514,661 ______________________________________________________________ Total minimum lease payments $ 1,575,653 ______________________________________________________________ Total rental expense for the fiscal years ended July 2, 1994, July 3, 1993 and June 27, 1992 amounted to $436,080,000, $503,094,000 and $544,811,000, respectively. Litigation - During the fourth quarter, the Corporation was named as a defendant in several purported class action lawsuits filed in the U.S. District Court for the Southern District of New York and the U.S. District Court for the District of Massachusetts 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 (the "Series A Preferred Stock") and the Corporation's financial results for the quarter ended April 2, 1994. The Corporation's directors, certain of its officers and the managing underwriters of the Corporation's Series A Preferred Stock offering were also named as defendants in certain of the actions. Plaintiffs alternatively seek unspecified monetary damages or rescission of their purchase of the Series A Preferred Stock. The Corporation believes that the claims asserted are without merit and intends to vigorously defend itself against the claims. Note I - Other Financial Instruments ____________________________________________________________________________ Off-Balance-Sheet Risk - The Corporation enters into foreign exchange option and forward contracts on a continuing basis for periods consistent with its committed exposures to limit potential losses from adverse exchange rate movements on operations and to delay the short-term impact of foreign currency movements on 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 and six months, respectively. The Corporation does not anticipate any material adverse effect due to exchange rate movements over the short-term period covered by these contracts. The Corporation does not engage in speculation. See Note A for information on the Corporation's accounting policy on foreign exchange. As of July 2, 1994, the net face amount of foreign exchange option contracts outstanding, substantially all of which were in European currencies, was $363,000,000. Based on dealer quotes, the fair value of such contracts was a net receivable of $2,000,000 at July 2, 1994. There were no foreign exchange option contracts in effect prior to the fourth quarter of fiscal year 1994. As of July 2, 1994 and July 3, 1993, the net face amount of foreign exchange forward contracts outstanding, substantially all of which were in European currencies, was $558,000,000 and $1.1 billion, respectively. Based on dealer quotes, the fair value of such contracts, which represents the replacement value, was a net payable of $46,000,000 at July 2, 1994 and a net receivable of $14,400,000 at July 3, 1993. Fair Value - The fair value of cash equivalents, debt, foreign exchange contracts and investments is disclosed in relevant notes to the financial statements. For all other financial instruments, the carrying amount approximates fair value. Concentration of Credit Risk - Financial instruments which potentially subject the Corporation to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Corporation places its temporary cash investments with high credit qualified financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Corporation's customer base, and their dispersion across many different industries and geographies. As of July 2, 1994, the Corporation had no significant concentrations of credit risk. Note J - Investing Activities ___________________________________________________________________________ In June 1992, the Corporation entered into agreements to purchase common stock of Ing. Olivetti & C. S.p.A. ("Olivetti") and to form a strategic alliance with Olivetti. Pursuant to these agreements, as amended, the Corporation purchased a total of 98,533,000 shares of Olivetti common stock in fiscal year 1993 for a total investment of approximately $287,800,000. As part of the alliance agreement, as amended, Olivetti has agreed to purchase a minimum level of Alpha AXP products from the Corporation over a specified period of time. The Olivetti stock is recorded at $83,800,000. The remainder of the purchase price was recorded as an intangible asset to be amortized over a period not to exceed ten years. While the Corporation expects to generate significant revenues from the sale of Alpha AXP products to Olivetti in the long term, in fiscal year 1994, the sale of Alpha AXP products to Olivetti fell significantly short of levels called for in the alliance agreement. In the fourth quarter, the Corporation concluded that revenues and profits in the future, although significant, would continue below levels called for in the agreement. Accordingly, in the fourth quarter, the Corporation reduced the carrying value of the intangible asset by $116,000,000 to its expected net realizable value and included this amount as a charge to Selling, General and Administration (SG&A) expenses on the Statement of Operations. The remainder of the intangible asset will be amortized over a period not to exceed eight years using the greater of unit-volume or straight-line methods. At the end of fiscal year 1994, the investment in Olivetti stock had a fair value of $147,000,000. Subsequent to the end of the fiscal year, the Corporation sold all of its shares of Olivetti stock for approximately $147,500,000. On November 11, 1991, the Corporation signed an agreement with Philips Electronics N.V. of The Netherlands to acquire most of the Philips Information Systems Division ("Division"). The purchase price for the acquired business was equal to the net asset value of the business as at October 27, 1991, and was $146,387,000, net of cash acquired in the purchase. The fiscal year 1992 operating results and statement of financial position reflect the full consolidation of the acquired business as from October 28, 1991, including purchase price adjustments made in the fourth quarter of fiscal 1992. The acquisition included the Division's activities for financial institutions, small and medium enterprises,image and document management systems and all related customer service activities. The acquisition has been accounted for as a purchase, and accordingly, the assets and liabilities have been recorded at their estimated fair value at the date of acquisition. The acquisition had no material effect on the total operating results for fiscal year 1992, the year in which it was acquired. Revenue and operating results for the Corporation's Digital-Kienzle business, acquired in fiscal year 1991, fell significantly short of operating plan for fiscal 1994 and from results of prior years despite restructuring efforts and management changes in fiscal 1994 aimed at improving results. During the fourth quarter of fiscal 1994, plans for further restructuring actions to be taken in fiscal 1995 were finalized. The Corporation concluded that the discounted cash flow, including restructuring actions associated with the acquired business, will no longer support the carrying value of the unamortized goodwill. Accordingly, the unamortized balance of goodwill related to the acquisition of approximately $194,000,000 was written off as a charge to operations. This was included in SG&A expenses on the Statement of Operations. Note K - Stock Plans ____________________________________________________________________________ Stock Options and Awards - Under its Equity Plan, the Corporation has awarded restricted stock to certain officers and key employees. Under such Equity Plan and its Restricted Stock Option Plans, the Corporation has granted options to certain officers and key employees to purchase common stock at a price determined by the Board of Directors. Shares purchased under the plans are either subject to repurchase options and restrictions on sales which lapse over an extended time period not exceeding 10 years, or become exercisable ratably over periods of up to five years. In fiscal year 1992, certain options were granted under such Equity Plan which become exercisable ratably over five years, but only if the common stock achieves certain price performance criteria. Information concerning activity during the three years ended July 2, 1994 was as follows: Options Outstanding _______________________________________________________________________ Shares Average Reserved for Price Future Grants Shares per Share _______________________________________________________________________ June 29, 1991 3,281,810 19,305,823 $ 72.42 Additional Shares Available for Grant 1,950,123 - $ - Options Granted (2,901,830) 2,901,830 $ 58.00 Shares Awarded (623,490) - $ - Options Exercised - (795,879) $ 29.73 Options Cancelled 493,879 (493,879) $ 82.47 Options Terminated (428,994) - $ - _______________________________________________________________________ June 27, 1992 1,771,498 20,917,895 $ 71.81 Additional Shares Available for Grant 1,950,123 - $ - Options Granted (3,737,045) 3,737,045 $ 41.41 Shares Awarded (277,650) - $ - Options Exercised - (553,486) $ 27.67 Options Cancelled 1,623,333 (1,623,333) $ 66.42 Options Cancelled under Repurchase Program 2,653,570 (2,653,570) $ 153.00 Options Terminated (3,362,938) - $ - _______________________________________________________________________ July 3, 1993 620,891 19,824,551 $ 56.89 Additional Shares Available for Grant 2,032,347 - $ - Options Granted (896,650) 896,650 $ 23.07 Shares Awarded (307,460) - $ - Options Exercised - (106,612) $ 33.78 Options Cancelled 2,243,356 (2,243,356) $ 52.08 Options Terminated (1,248,476) - $ - Regrant program: Cancelled 5,765,914 (5,765,914) $ 59.10 Terminated (2,843,639) - $ - Regrant (2,328,910) 2,328,910 $ 22.88 _______________________________________________________________________ July 2, 1994 3,037,373 14,934,229 $ 49.59 _______________________________________________________________________ Note K - Stock Plans (continued) ___________________________________________________________________________ The excess, if any, of the fair market value of shares on the measurement date over the exercise price is charged to operations each year as the restrictions lapse. In May 1994, the Board of Directors approved a program to offer employees of the Corporation (other than executive officers of the Corporation), the opportunity to exchange their outstanding stock options for new options to purchase a reduced number of shares of common stock at a per share exercise price equal to the fair market value of the common stock on the date the program was approved (the "Regrant Program"). Under the Regrant Program, outstanding options granted between 1985 and 1993 to purchase up to 11,854,084 shares of common stock with an average exercise price of $59.43 per share could be exchanged for new options to purchase up to 4,554,870 shares with an exercise price of $22.88 per share. The new options vest over four years and have a seven-year term. As of July 3, 1994 and as reflected in the table above, options to purchase 5,765,914 shares had been exchanged and canceled for new options to purchase a total of 2,328,910 shares. As of July 22, 1994, the last date for acceptance of the Regrant Program, options to purchase a total of 10,208,736 shares had been exchanged and canceled for new options to purchase a total of 3,969,630 shares. No compensation expense was reversed as a result of the Regrant Program. Future expense associated with options canceled, and not replaced by new options under the Regrant Program, will no longer be recognized, resulting in an expense reduction of approximately $31,000,000 over four years. In April 1993, the Board of Directors approved the repurchase of outstanding options to purchase up to 2.8 million shares of common stock granted to certain employees in fiscal year 1988 at an exercise price of $153.00 per share which represented a discount of $30.00 per share from the fair market value of the common stock on the date of grant. The original options to purchase 3.2 million shares were subject to restrictions lapsing and amortizing ratably over ten years. Optionholders were offered $3.00 per unexercised option share in return for the cancellation of the option. The repurchase price was determined after taking into account option pricing models, the opinion of an independent advisor and the financial and compensation objectives of the program. The Corporation repurchased approximately 2.7 million shares at a cost of approximately $8,000,000, which was charged to operations in fiscal 1993. In addition, the Corporation reversed compensation expense recorded in previous years of $31,843,000 with a corresponding reduction of additional paid-in capital. Employee Stock Purchase Plans - Under the Corporation's Employee Stock Purchase Plans, all U.S. and certain non-U.S. employees may be granted the opportunity to purchase common stock at 85% of market value on the first or last business day of the six-month payment period, whichever is lower. Common stock reserved for future employee purchases aggregated 5,133,014 shares at July 2,1994. There were 6,938,772 shares issued at an average price of $23.72 per share during the year ended July 2,1994; 6,404,574 shares issued at an average price of $28.38 per share during the year ended July 3,1993; and 4,788,819 shares issued at an average price of $43.21 per share during the year ended June 27,1992. There have been no charges to income in connection with these Plans other than incidental expenses related to the issuance of the shares. Federal income tax benefits relating to such Plans, if any, have been credited to additional paid-in capital. Stock Option Plan for Non-Employee Directors - The Stock Option Plan for Non-Employee Directors provides for a one-time grant of an option to purchase 5,000 shares of the Corporation's common stock to non-employee directors. The exercise price of an option is 100% of the fair market value per share of common stock of the Corporation on the date the option is granted. An aggregate of 100,000 shares of common stock are authorized for issuance under the Plan, of which 50,000 have been granted at an average purchase price of $49.01 per share. The options become exercisable at the rate of 20% per year, with credit given for past service. None of these options had been exercised as of July 2, 1994. Note L - Stockholders' Equity ____________________________________________________________________________ On January 21, 1994, the Corporation filed with the Securities and Exchange Commission a shelf registration statement on Form S-3 under the Securities Act of 1933, as amended, covering the registration of debt securities, preferred stock, depositary shares, and warrants to purchase equity and debt securities, in an aggregate amount of $1 billion. In March 1994, the Corporation issued and sold 16,000,000 Depositary Shares under the shelf registration statement, each representing a one-fourth interest in a share of the Corporation's Series A 8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock"), par value $1.00 per share. Dividends on the Series A Preferred Stock accrue at the annual rate of 8 7/8%, or $35,500,000 per year. Dividends of $10,650,000 were declared in fiscal 1994 commencing in March 1994. At July 2, 1994, there were declared and unpaid dividends of $8,875,000. These dividends were paid on July 15,1994. The Series A Preferred Stock was offered to the public at $100 per share ($25 per Depositary Share) for a total of $400,000,000, leaving a balance of $600,000,000 available for future issuance under the shelf registration. The net proceeds of $387,000,000 from the Series A Preferred Stock offering is available for working capital and other general corporate purposes. The Series A Preferred Stock is not convertible into, or exchangeable for, shares of any other class or classes of stock of the Corporation. The Series A Preferred Stock is not redeemable prior to April 1,1999. On or after April 1,1999, the Corporation, at its option, may redeem shares of the Series A Preferred Stock, as a whole or in part, for cash at the redemption price per share of $100 ($25 per Depositary Share), plus accrued and unpaid dividends to the redemption date. Upon dissolution, liquidation or the winding up of the affairs of the Corporation, the holders of the Series A Preferred Stock will be entitled to receive $100 per share ($25 per Depositary Share), plus accrued and unpaid dividends, before any distribution to holders of the Corporation's common stock. The Corporation did not purchase any shares of its common stock during fiscal years 1994 and 1993. The Corporation purchased on the open market 3,014,083 shares of its common stock at an aggregate purchase price of $185,292,000, or $61.48 per share, during the year ended June 27, 1992. All of the acquired shares were held as common stock in treasury, and subsequently issued to employees under the Stock Plans. The difference between the average acquisition cost of the shares and the proceeds from issuance is charged to retained earnings. The Corporation adopted a Stockholder Rights Plan in December 1989 pursuant to which the Corporation authorized the distribution of one Common Stock Purchase Right for each share of outstanding common stock. Under certain conditions, each Right may be exercised for one share of common stock at an exercise price of $400, subject to adjustment. Under circumstances defined in the Plan, the Rights entitle holders to purchase stock having a value of twice the exercise price of the Rights. Until they become exercisable, the Rights are not transferable apart from the common stock. The Rights may be redeemed by the Corporation at any time prior to the occurrence of certain events at $.01 per Right. The Plan will expire on December 21, 1999, unless the Rights are earlier redeemed by the Corporation. Note M - Subsequent Event ____________________________________________________________________________ Subsequent to the end of the fiscal year, the Corporation and Quantum Corporation ("Quantum") signed an agreement providing for Quantum's purchase of the Corporation's magnetic disk drive, tape drive, solid state disk and thin-film heads businesses for $400,000,000, $70,000,000 of which is to be paid in the form of an interest-bearing note. The transaction includes the Corporation's interest in Rocky Mountain Magnetics, Inc., facilities in Shrewsbury, Massachusetts and Penang, Malaysia, and the lease of facilities in Colorado Springs, Colorado and Batam, Indonesia. There are approximately 5,000 regular and temporary employees in the businesses being sold. The sale has been approved by the Board of Directors of both companies, but is subject to appropriate government approvals and other conditions. The transaction is expected to close shortly after October 1, 1994. Supplementary Information Quarterly Financial Data (unaudited)
____________________________________________________________________________________________________ Income/ Income/ (Loss) (Loss) Total Before After Net Income/ (in millions except Operating Gross Income Income Income/ (Loss)per per share data) Revenues Profit Taxes Taxes1 (Loss) Common Share2 ____________________________________________________________________________________________________ For the year ended July 2, 1994 Fourth Quarter $ 3,923 $1,175 $(1,673) $(1,747) $ (1,747) $(12.64) Third Quarter 3,259 1,101 (178) (183) (183) (1.34) Second Quarter 3,254 1,173 (69) (72) (72) (.53) First Quarter3 3,015 1,090 (100) (103) (154) (1.14) ___________________________________________________________________ Total Year $13,451 $4,539 $(2,020) $(2,105) $ (2,156) $(15.80) ____________________________________________________________________________________________________ For the year ended July 3, 1993 Fourth Quarter $ 3,914 $1,576 $ 120 $ 113 $ 113 $ .85 Third Quarter 3,454 1,373 (28) (30) (30) (.23) Second Quarter 3,689 1,514 (66) (74) (74) (.57) First Quarter 3,314 1,277 (250) (260) (260) (2.04) __________________________________________________________________ Total Year $14,371 $5,740 $ (224) $ (251) $ (251) $ (1.93) ___________________________________________________________________________________________________ 1 Before cumulative effect of changes in accounting principles. 2 Income/(loss) per share is computed independently for each of the quarters presented and therefore does not sum to the total for the year. 3 Restated to reflect the adoption of SFAS No. 112 - Employers Accounting for Postemployment Benefits.
Stock Information The Corporation's common stock is listed and traded on the Chicago Stock Exchange, New York Stock Exchange, Pacific Stock Exchange, Montreal Exchange and several European stock exchanges. There were 77,722 shareholders of record as of July 2, 1994. The high and low quarterly sales prices for the past three fiscal years are as follows: 1994 _____________________________________________________________________ Fiscal Quarter High Low _____________________________________________________________________ Fourth $30 5/8 $18 1/4 Third 38 1/8 27 3/4 Second 39 1/8 34 1/8 First 43 1/8 35 1/4 _____________________________________________________________________ 1993 _____________________________________________________________________ Fiscal Quarter High Low Fourth $48 1/4 $38 1/4 Third 49 1/4 32 3/4 Second 40 5/8 30 3/8 First 44 33 1/4 _____________________________________________________________________ 1992 _____________________________________________________________________ Fiscal Quarter High Low _____________________________________________________________________ Fourth $54 7/8 $33 1/4 Third 65 1/2 49 1/4 Second 65 48 1/2 First 71 3/4 53 7/8 _____________________________________________________________________ Officers and Management _________________________________________________________ *Robert B. Palmer President and Chief Executive Officer Bernhard Auer Vice President and General Manager, Personal Computer Business Unit Lawrence P. Cabrinety Vice President, Components and Peripherals Business Unit *R. E. Caldwell Vice President, Digital Semiconductor Bobby A. F. Choonavala Vice President; President, Asia Pacific *Charles F. Christ Vice President and General Manager, Components Division Harold D. Copperman Vice President; President, The Americas Vincenzo Damiani Vice President and General Manager, Accounts Business Unit President, Digital Europe William R. Demmer Vice President, Software Business Group *Richard M. Farrahar Vice President, Human Resources Samuel H. Fuller Vice President, Corporate Research Charles B. Holleran Vice President, Communications *Ilene B. Jacobs Vice President and Treasurer Gail S. Mann Assistant General Counsel, Secretary and Clerk Robert E. McNulty Vice President and Chief Information Officer *Vincent J. Mullarkey Vice President, Finance and Chief Financial Officer *Enrico Pesatori Vice President and General Manager, Computer Systems Division *E. C. Mick Prokopis Vice President and Corporate Controller *John J. Rando Vice President, Multivendor Customer Services Robert J. Rennick Vice President and General Manager, Storage Subsystems Business Unit *Thomas C. Siekman Vice President and General Counsel *William D. Strecker Vice President, Advanced Technology Group and Chief Technical Officer Laurence G. Walker Vice President and General Manager, Network Product Business Unit *"Executive Officer" under the Securities Exchange Act of 1934. Directors ________________________________________________________________________ Robert B. Palmer President and Chief Executive Officer Digital Equipment Corporation Vernon R. Alden Director and Trustee of several organizations Former Chairman, The Boston Company, Inc. Philip Caldwell Senior Managing Director of Lehman Brothers Inc. Retired Chairman of the Board and Chief Executive Officer, Ford Motor Company Director of several corporations Colby H. Chandler Director of several corporations, Retired Chairman of the Board and Chief Executive Officer, Eastman Kodak Company Arnaud de Vitry Engineering consultant and Director and Trustee of several organizations Robert R. Everett Retired President of the MITRE Corporation Kathleen F. Feldstein President of Economics Studies, Inc. and Director of several organizations Thomas P. Gerrity Dean, Wharton School of the University of Pennsylvania and Director of several corporations Thomas L. Phillips Director of several corporations, Retired Chairman of the Board and Chief Executive Officer, Raytheon Company Delbert C. Staley Director of several corporations, Retired Chairman of the Board and Chief Executive Officer, NYNEX Corporation [Photograph of members of Digital's Board of Directors] Board of Directors, Digital Equipment Corporation: Standing, left to right: Colby H. Chandler, Thomas L. Phillips, Kathleen F. Feldstein, Robert B. Palmer, Arnaud de Vitry, Delbert C. Staley. Seated: Vernon R. Alden, Thomas P. Gerrity, Robert R. Everett, Philip Caldwell. Committees of the Board ____________________________________________________________________________ Audit Committee Philip Caldwell, Chairman Vernon R. Alden Colby H. Chandler Kathleen F. Feldstein Compensation and Stock Option Committee Thomas L. Phillips, Chairman Robert R. Everett Thomas P. Gerrity Delbert C. Staley Nominating Committee Arnaud de Vitry, Chairman Vernon R. Alden Colby H. Chandler Thomas L. Phillips Corporate Consulting Engineers _____________________________________________________________ Peter F. Conklin Corporate Consulting Engineer Layered Software Group Daniel W. Dobberpuhl Corporate Consulting Engineer Semiconductor Engineering Richard B. Grove Corporate Consulting Engineer System Software Group Robert J. Hannemann Corporate Consulting Engineer System Hardware Group Richard J. Hollingsworth Senior Corporate Consulting Engineer Semiconductor Operations Alan Kotok Corporate Consulting Engineer Advanced Technology Group Nancy Kronenberg Corporate Consulting Engineer System Hardware Group Butler Lampson Senior Corporate Consulting Engineer Corporate Research Richard Lary Corporate Consulting Engineer Mass Storage Jesse Lipcon Corporate Consulting Engineer Vice President, OpenVMS Systems Alan G. Nemeth Corporate Consulting Engineer System Software Group Mahendra Patel Vice President and Corporate Consulting Engineer Computer Systems Division Jeff Schriesheim Corporate Consulting Engineer System Software Group Richard Sites Corporate Consulting Engineer Corporate Research Robert E. Stewart Corporate Consulting Engineer System Hardware Group William D. Strecker Senior Corporate Consulting Engineer Vice President, Advanced Technology Group Chief Technical Officer Robert M. Supnik Vice President and Senior Corporate Consulting Engineer Computer Systems Division Charles P. Thacker Corporate Consulting Engineer Corporate Research Gayn B. Winters Corporate Consulting Engineer Advanced Technology Group Richard T. Witek Corporate Consulting Engineer Semiconductor Engineering Headquarters __________________________________________________________________ Corporate Headquarters Digital Equipment Corporation 146 Main Street Maynard, Massachusetts 01754-2571 Telephone: (508) 493-5111 Telex: 4430127 Digital ACT Fax: (508) 493-8780 European Headquarters Digital Equipment Corporation International (Europe) 12 Avenue des Morgines Case Postale 176 CH-1213 Petit-Lancy 1, Geneva Switzerland Telephone: (41)-(22) 709-4111 Telex: 845-422593 DEC CH Fax: (41)-(22) 709-4140 Asia Pacific Headquarters Digital Equipment Asia Pacific Pte Ltd. 300 Beach Road #39-00 The Concourse Singapore 0719 Telephone: (65) 299-7188 Fax: (65) 295-1296 Investor Information ____________________________________________________________________________ The Corporation's common stock (Ticker Symbol "DEC") is listed and traded on the: Chicago Stock Exchange Montreal Exchange New York Stock Exchange Pacific Stock Exchange Swiss Stock Exchanges of Zurich, Geneva and Basel; and the German Stock Exchanges of Frankfurt, Munich and Berlin. Unlisted trading privileges have been granted by the: Boston Stock Exchange Cincinnati Stock Exchange Philadelphia Stock Exchange Luxembourg Stock Exchange The Corporation's Depositary Shares, each representing one-fourth of a share of the Corporation's Series A 8 7/8% Cumulative Preferred Stock (Ticker Symbol DEC PRA), are listed and traded on the New York Stock Exchange. The Corporation maintains an Investor Relations office to assist stockholders. Investors' inquiries are welcome, by telephone or letter. Financial community information and requests to be placed on the Corporation's mailing list should be directed to: Director, Investor Relations Digital Equipment Corporation 146 Main Street (MLO3-2/F41) Maynard, Massachusetts 01754-2571 Telephone: (508) 493-7182 Fax:(508) 493-7633 Requests for specific information are handled as follows: Digital Equipment Corporation's annual report on Form 10-K for the fiscal year ended July 2, 1994, including schedules thereto, which is filed with the Securities and Exchange Commission, will be sent without charge upon written request. The Corporation's annual report, filings with the Securities and Exchange Commission, interim reports and additional information about the Corporation and its products can be obtained by addressing: Digital Equipment Corporation, Inquiry Section c/o Moore Business Forms Suite 100 293 Boston Post Road Marlboro, Massachusetts 01752 Telephone: (508) 229-4752 As a company, we have a tradition of achievement in protecting the environment and in ensuring the health and safety of our fellow employees. A copy of our Environmental, Health and Safety Annual Report can be obtained by writing: Digital Equipment Corporation Corporate Environmental Health and Safety 111 Powdermill Road (MSO2-3/B16) Maynard, Massachusetts 01754-1418 Inquiries of an administrative nature relating to stockholder accounting records, stock transfer, change of address, and employee purchases should be directed to: Digital Equipment Corporation Investor Services 111 Powdermill Road (MSO1-1/L12) Maynard, Massachusetts 01754-1418 Telephone: (508) 493-3703 Telephone: (508) 493-5213 Transfer Agent and Registrar for Common Stock First Chicago Trust Company of New York is the principal stock transfer agent and registrar, and maintains the stockholder accounting records. The agent will respond to questions on change of ownership, lost stock certificates, consolidation of accounts and change of address. Digital Equipment Corporation is also a stock transfer agent and registrar, and maintains employees stockholder accounting records. A change of address should be reported promptly by sending a signed and dated note or postcard to First Chicago Trust Company of New York. Stockholders should state the name in which the stock is registered, account number, social security number (if available), as well as the old and new addresses. First Chicago Trust Company of New York P.O. Box 2500 Jersey City, New Jersey 07303-2500 Telephone: (201) 324-0498 Depositary for the Series A 8 7/8% Cumulative Preferred Stock: Citibank N.A. Address correspondence to: Citicorp Data Distributor 404 Sette Drive Paramus, New Jersey 07653 (800) 422-2066 Eliminating Duplicate Mailings ______________________________________________________________________ To maintain more than one account, but eliminate duplicate mailings of annual and quarterly reports to the same address, send the labels (or a copy of the labels) from a company mailing to the Investor Services Department, P.O. Box 490, Maynard, Massachusetts 01754, indicating the names you wish to keep on the mailing list for annual and quarterly reports and the names you wish to delete. This will affect only these mailings; proxy materials will continue to be sent to each account. Consolidating Accounts _________________________________________________________________________ To consolidate separate accounts into one account, contact the Investor Services Department, P.O. Box 490, Maynard, Massachusetts 01754, to obtain necessary forms and instructions. Auditors Coopers & Lybrand One Post Office Square Boston, Massachusetts 02109 Telephone: (617) 478-5000 Legal Counsel Testa, Hurwitz & Thibeault 53 State Street Exchange Place Boston, Massachusetts 02109-2809 Telephone: (617) 248-7000 Customer Inquiries __________________________________________________________________________ Digital Equipment Corporation customers who have questions and/or problems relating to their accounts should contact U.S. Customer Relations at (800) 332-4636. Digital believes the customer, market, and product information in this annual report is accurate as of its publication date. This information is subject to change without notice. Digital is not responsible for any inadvertent errors. Digital will conduct its business in a manner that conserves the environment. The following are trademarks of Digital Equipment Corporation: Alpha AXP, ChannelWorks, DECathena, DEChub, DECpc, Digital, the DIGITAL logo, LinkWorks, OpenVMS, PATHWORKS, StorageWorks, and VAX. The following are third-party trademarks: Hewlett-Packard is a registered trademark of Hewlett-Packard Company. IBM and AIX are registered trademarks of International Business Machines Corporation. Intel and i486 are trademarks and Pentium is a registered trademark of Intel Corporation. Lotus and 1-2-3 are registered trademarks of Lotus Development Corporation. Macintosh is a registered trademark of Apple Computer, Inc. Microsoft, MS-DOS, and Excel are registered trademarks and Windows and Windows NT are trademarks of Microsoft Corporation. Novell and NetWare are registered trademarks of Novell, Inc. OSF/1 is a registered trademark of Open Software Foundation, Inc. Sun is a registered trademark of Sun Microsystems, Inc. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company, Ltd. X/Open is a trademark of X/Open Company, Ltd. Printed in U.S.A. EA-C3688-87/94 09 23 225.0 MRO Copyright 1994 Digital Equipment Corporation All Rights Reserved Printed on Recycled Paper EX-22 6 Exhibit 22 SUBSIDIARIES The following is a list of the Corporation's consolidated subsidiaries as of July 2, 1994. The Corporation owns, directly or indirectly, 100% of the voting securities of each subsidiary, unless marked with an asterisk. State or Jurisdiction of Name Organization Basys Automation Systems, Inc. Delaware Basys Automation Systems Limited United Kingdom CASE & CAD Engineering Produktveckling i Stockholm Sweden Computer Insurance Company Rhode Island DEC Digital Equipment Corporation A.G./S.A. Switzerland DECsys - Digital Systems (1993) Ltd. Israel Digital DV - Leasing und CAD-Vertriebs GmbH Germany Digital Computer Taiwan Limited Taiwan Digital Equipment AB Sweden Digital Equipment Asia Pacific Pte. Ltd. Singapore Digital Equipment (BCFI) AB Sweden Digital Equipment B.V. Netherlands Digital Equipment Betriebliche Altersversorgung G.m.b.H. Germany Digital Equipment of Canada Limited/Digital Equipment du Canada Limitee Canada Digital Equipment Caribbean, Inc. Delaware Digital Equipment Centre Technique (Europe) S.A.R.L. France Digital Equipment Chile Limitada Chile Digital Equipment China Incorporated Peoples Republic of China Digital Equipment China Ltd. Delaware Digital Equipment do Brazil Ltda. Brazil Digital Equipment Co. Limited United Kingdom Digital Equipment Corporation A/S Norway Digital Equipment Corporation A/S Denmark Digital Equipment Corporation (Australia) Pty. Ltd. Australia Digital Equipment Corporation (Consultancy) Limited States of Jersey Digital Equipment Corporation (Thailand) Ltd. Thailand Digital Equipment Deutschland (Holding) GmbH Germany Digital Equipment Corporation Espana, S.A. Spain Digital Equipment Corporation Finance B.V. Netherlands Digital Equipment Osterreich Aktiengesellschaft Austria Digital Equipment Corporation International Massachusetts Digital Equipment Corporation International (Europe) Switzerland Digital Equipment Corporation Japan Japan Digital Equipment Corporation OY Finland Digital Equipment Corporation de Puerto Rico Delaware Digital Equipment Corporation (New Zealand) Limited New Zealand A/O Digital Equipment Corporation, Russia Russia Digital Equipment Corporation Services-Europe S.A./N.V. Belgium Digital Equipment (Cyprus) Ltd. Cyprus Digital Equipment s.r.o. Czech Republic Digital Equipment Data Systems Aktiengesellschaft Austria Digital Equipment (DEC) Limited Israel Digital Equipment (DEC) Technical Center (Israel) Limited Israel Digital Equipment Dienstleistungen GmbH Germany Digital Equipment Distribution (Ireland) Limited Republic of Ireland Digital Equipment Enterprises Espana, S.A. Spain Digital Equipment Filipinas Incorporated Philippines Digital Equipment Finance Corporation Delaware Digital Equipment Foreign Sales Corporation B.V. Netherlands Digital Equipment France France Digital Equipment GmbH Germany Digital Equipment Gulf W.L.L. Bahrain Digital Equipment Hellas S.A. Greece Digital Equipment (Holdings) B.V. Netherlands Digital Equipment Holdings Italia S.p.a. Italy Digital Equipment Hong Kong Limited Hong Kong Digital Equipment (Hungary) Computing Technology Ltd. Hungary Digital Equipment (India) Ltd. India Digital Equipment International B.V. Netherlands Digital Equipment International Betriebliche Altersversorgungsgesellschaft G.m.b.H. Germany Digital Equipment International Finance B.V. Netherlands Digital Equipment International G.m.b.H. Germany Digital Equipment International Limited Switzerland Digital Equipment Ireland Limited Republic of Ireland Digital Equipment Korea, Incorporated Korea Digital Equipment (Malaysia) Sdn. Bhd. Malaysia Digital Equipment Maroc S.A.R.L. Morocco Digital Equipment de Mexico, S.A. de C.V. Mexico Digital Equipment Middle East Limited States of Jersey Digital Equipment PCdirect GmbH (Germany) Germany Digital Equipment Panama, Inc. Panama Digital Equipment Parts Center B.V. Netherlands Digital Equipment Polska SP.Zo.o. Poland Digital Equipment Portugal, Limitada Portugal Digital Equipment PRC Limited Hong Kong Digital Equipment Properties Limited United Kingdom Digital Equipment Romania s.r.l. Romania Digital Equipment S.A./N.V. Belgium Digital System Services AB Sweden Digital Equipment Slovakia s.r.o. Slovakia Digital Equipment SME Limited United Kingdom Digital Equipment S.p.a. Italy Digital Equipment Scotland Limited United Kingdom Digital Equipment Service Industries Solutions Company Limited United Kingdom Digital Equipment Services, Inc. Delaware Digital Equipment Singapore (PTE) Limited Singapore Digital Equipment (Small Medium Enterprise) B.V. Netherlands Digital Equipment Storage Products (Malaysia) Sdn BHD Malaysia Digital Equipment System-Integration GmbH Germany Digital Equipment Corporation C.I.S. B.V. Netherlands Digital Equipment (Thailand) Ltd. Thailand Digital Equipment Turkiye A.S. Turkey Digital Equipment de Venezuela (D.E.V.) C.A. Venezuela Digital Growth, Inc. Massachusetts Digital Incorporated Delaware Digital International Sales Corporation Delaware Digital-Kienzle Computersysteme GmbH & Co. K.G. Germany Digital-Kienzle Computersysteme Verwaltungsgesellschaft mbH Germany Digital-PCS Systemtechnik GmbH Germany Digital Realty Corporation Delaware Digital Receivables Financing Corporation Delaware Digital Sales and Services South Africa (Pty.) Limited Republic of South Africa Digital Sociedade de Previdencia Privada Brazil *EA Systems, Inc. Delaware Elebra Computadores S.A. Brazil Old Colony Insurance Limited Bermuda *Rocky Mountain Magnetics, Inc. Delaware Rostvold System A/S Norway Serrata Consulting Limited Canada SIPAC S.p.a. Italy Societe Civile Immobiliere (SCI) Parc du Bois Briard France 800-Software, Inc. California EX-24 7 Exhibit 24 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (Forms S-8) and related prospectuses of the Digital Equipment Corporation 1976 and 1985 Restricted Stock Option Plans (No. 33-970), 1990 Equity Plan (No. 33-37631), 1990 Stock Option Plan for Nonemployee Directors (No. 33-37628), 1968 Employee Stock Purchase Plan (No. 33-50945) and 1981 International Employee Stock Purchase Plan (No. 33-50963) and the Registration Statement and related propsectuses on Form S-3 (No. 33-51987), of our reports dated July 26, 1994 on our audits of the consolidated financial statements and financial statement schedules of Digital Equipment Corporation as of July 2, 1994 and July 3, 1993 and for each of the three fiscal years in the period ended July 2, 1994, which reports are incorporated by reference or included in this Annual Report on Form 10-K. /s/Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts September 15, 1994 -----END PRIVACY-ENHANCED MESSAGE-----