0000950109-95-003899.txt : 19950926 0000950109-95-003899.hdr.sgml : 19950926 ACCESSION NUMBER: 0000950109-95-003899 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19950701 FILED AS OF DATE: 19950922 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL EQUIPMENT CORP CENTRAL INDEX KEY: 0000028887 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 042226590 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05296 FILM NUMBER: 95575493 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-K405 1 FORM 10-K405 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 1, 1995 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 Ident. No.) incorporation or organization) 111 Powdermill Road, Maynard, Massachusetts 01754-1499 ------------------------------------------- ---------- (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 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. [X] As of September 11, 1995, 150,443,245 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 11, 1995 was approximately $6.5 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1995 Annual Report to Stockholders are incorporated by reference in Part II hereof. Portions of the registrant's Proxy Statement for its 1995 Annual Meeting of Stockholders, scheduled to be held on November 9, 1995, 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 Asia-Pacific. 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:
1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Product sales 55.1% 53.5% 52.8% 55.2% 59.7% Service and other revenues 44.9% 46.5% 47.2% 44.8% 40.3% ----- ----- ----- ----- ----- 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 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 clients and servers based on Digital's Alpha/(TM)/ and VAX/(R)/ architectures, and the Intel/(R)/ X86 and Pentium/(R)/ architectures. ALPHA-BASED SYSTEMS: The Corporation's 64-bit, reduced instruction set computing ("RISC") architecture known as "Alpha/(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-based products, ranging from chips and boards to high performance workstations and servers to larger general purpose computer systems. Alpha supports three major operating systems: Digital UNIX/(R)/-- the Corporation's 64-bit UNIX/(R)/ operating system, the Corporation's OpenVMS/(TM)/ operating system and Microsoft Corporation's ("Microsoft") Windows NT/(R)/ operating system. The 2 Corporation is working with Microsoft to develop an integrated systems environment and to provide a comprehensive set of tools and utilities that will enable customers and software developers to write applications on Windows NT and deploy them easily on both Windows NT and OpenVMS. In April 1995, the Corporation introduced a new line of high performance database servers, the AlphaServer 8400 and 8200 systems, which, when running 64- bit applications for data warehousing from the Corporation's software partners, process data significantly faster than current 32-bit enterprise systems. Shortly after the close of the fiscal year, the Corporation also introduced a new line of high performance Alpha workstations. VAX AND INTEL-BASED SYSTEMS: The Corporation's offerings include a line of VAX systems and servers, from VAXstation/(TM)/ workstations to high performance servers which support the Corporation's OpenVMS operating system. In addition, the Corporation offers a full range of Intel-based and industry compatible personal computers, servers and network hardware and desktop integration products. These products support Microsoft's Windows/(R)/, Windows NT and Windows 95/(R)/ operating systems. STORAGE SYSTEMS AND OTHER INDUSTRY-COMPATIBLE PRODUCTS: During the fiscal year, the Corporation sold to Quantum Corporation portions of its storage business, including its magnetic disk drive, tape drive, solid state disk and thin-film heads businesses. The Corporation continues to offer its StorageWorks family of peripheral and data storage products which are designed to provide high-performance, flexible and scalable enterprise-wide storage solutions in multivendor environments. The Corporation is also a manufacturer and supplier of video terminals, printers and network components, such as hubs, routers and switches. The Corporation's enVISN (Enterprise Virtual Intelligent Switched Network) open network architecture creates flexible virtual networks linking users in different groups and sites by combining virtual LAN (local area network) technology, distributed routing and high speed switching with centralized, policy-based administration. 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. The Corporation, independently and through partners, offers software products consisting 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 and enable customers to integrate and manage multivendor environments. For example, the Corporation's Pathworks client and server products are designed to integrate the major network operating systems and provide users of personal computers with access to network resources and data. In addition, the Corporation has developed, in partnership with Microsoft, 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. 3 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. The Corporation's service 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. The Corporation's services organizations provide a full range of multivendor customer services through a global network of employees and partners. The Corporation's many multivendor customer service arrangements include localized service to Microsoft customers and serving as a worldwide software maintenance provider for Novell Corporation and an interactive service provider for MicroAge, Inc. 1995 BUSINESS DEVELOPMENTS DIVESTMENTS: During fiscal year 1995, the Corporation divested certain non-core businesses. In addition to the sale of portions of the Corporation's storage business as described above, the Corporation sold its relational database business to Oracle Corporation. The Corporation also sold its South Queensferry, Scotland semiconductor facility to a subsidiary of Motorola, Inc., and its contract manufacturing business, including a manufacturing plant in Augusta, Maine, to SCI Systems, Inc. See Note J of Notes to Consolidated Financial Statements incorporated by reference herein, for further information on the Corporation's investing and divesting activities. MICROSOFT ALLIANCE: Shortly after the end of the fiscal year, the Corporation expanded its relationship with Microsoft. Among the components of this strategic alliance is an agreement by Microsoft to release Alpha versions of server software products and client software products simultaneously with releases for Intel-based and RISC-based platforms, respectively; commitment by the Corporation, with funding by Microsoft, to develop expanded and enhanced support and systems integration services focusing on Microsoft-based solutions, including the training of certified professionals to provide these services; the licensing by Microsoft of the Corporation's clustering technology for inclusion in future Microsoft clustering solutions for Windows NT; and the cross-licensing of patent portfolios to facilitate cooperation. The alliance also includes joint marketing and field engagement. SALES AND DISTRIBUTION The Corporation directly sells, markets and supports its products and services through multiple 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 1, 1995, approximately 3% of the Corporation's total operating revenues were derived directly from sales to 4 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 65%, 62%, and 64% of total operating revenues for the fiscal years ended July 1, 1995, July 2, 1994, and July 3, 1993, 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, C 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. 5 ENVIRONMENTAL AFFAIRS The Corporation's facilities are subject to numerous laws and regulations designed to protect human health and safety and the environment. Under applicable state laws, the Corporation is incurring costs in connection with the investigation and remediation of certain properties owned and/or operated by the Corporation. 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. 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 1, 1995, July 2, 1994, and July 3, 1993, the Corporation spent $1.04 billion, $1.30 billion, and $1.53 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 61,700 employees worldwide at July 1, 1995. 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 55 Director; Chairman of the 1985 Board, President and Chief Executive Officer R. E. Caldwell 58 Vice President, Digital 1994 Semiconductor Charles F. Christ 56 Vice President and General 1993 Manager, Components Division Savino R.(Sid)Ferrales 45 Vice President, Worldwide Human 1995 Resources Ilene B. Jacobs 48 Vice President and Treasurer 1985
6 Vincent J. Mullarkey 47 Vice President, Finance and 1992 Chief Financial Officer Enrico Pesatori 54 Vice President and General 1993 Manager, Computer Systems Division E. C. Mick Prokopis 53 Vice President and Corporate 1994 Controller John J. Rando 43 Vice President and General 1993 Manager, Multivendor Customer Services Division Thomas C. Siekman 53 Vice President and General 1993 Counsel William D. Strecker 51 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. Ferrales, Pesatori and Prokopis. Prior to joining the Corporation, these officers held the following positions: Mr. Ferrales served as President of OMC Group, an organization and management consulting firm, from June 1994 to June 1995 and from January 1989 to June 1994 he was Vice President, Human Resources of Dell Computer Corporation. Mr. Pesatori had been President and Chief Executive Officer of Zenith Data Systems from January 1991 to January 1993; and from 1989 through 1990 he was Senior Vice President, Corporate Marketing of Ing. Olivetti & C. S.p.A.. 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., a publisher of computer-related magazines; from March 1992 to July 1992 he was Executive Vice President and Chief Financial Officer of MAST Industries, a subsidiary of and provider of sourcing services to The Limited, Inc.; and from 1989 to 1992 he was the Corporation's Finance Manager, Manufacturing, Engineering and Marketing. ITEM 2. PROPERTIES At the end of fiscal year 1995, the Corporation owned or leased approximately 32.9 million square feet of space worldwide. The Corporation occupied approximately 23.3 million square feet, leased or sub-leased to others approximately 2.0 million square feet, and due to restructuring actions, had vacant space of approximately 7.6 million square feet, most of which is available for sale or sub-lease. The total space owned or leased decreased by approximately 6.2 million square feet from the prior year. Approximately 52% of the occupied space is located in the United States; approximately 55% 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. ITEM 3. LEGAL PROCEEDINGS During the fourth quarter of fiscal 1994, 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 7 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 and the Corporation's financial results for the fiscal quarter ended April 2, 1994. The Massachusetts and New York lawsuits were all effectively consolidated into three cases, which were pending before the United States District Court for the District of Massachusetts. On August 8, 1995, the Massachusetts federal court granted the defendants' motion to dismiss all three cases in their entirety. On September 6, 1995, notices of appeal were filed in two of the cases. 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 "Information on common stock," which is incorporated herein by reference, appearing on pages 55 and 56 of the Corporation's 1995 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 1995 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 31 of the Corporation's 1995 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 1995 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. 8 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 1995 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 1995 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. See the sections entitled "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" which are incorporated herein by reference from the Corporation's Proxy Statement for its 1995 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 1995 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 1995 Annual Report to Stockholders: Report of Independent Accountants (page 32). Consolidated Statements of Operations for fiscal years 1995, 1994 and 1993 (page 33). Consolidated Balance Sheets as at July 1, 1995 and July 2, 1994 (page 34). Consolidated Statements of Cash Flows for fiscal years 1995, 1994 and 1993 (page 35). Consolidated Statements of Stockholders' Equity for fiscal years 1995, 1994 and 1993 (page 36). Notes to Consolidated Financial Statements (pages 37 through 51). 9 Eleven-Year Financial Summary (pages 26 and 27). Quarterly Financial Data (page 51). The Corporation's 1995 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 II - Valuation and Qualifying Accounts and Reserves 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. 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 10 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. 33-56477 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- 56479 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 Form 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, as amended.* (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, as amended.* (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 11 Annual Report on Form 10-K for the fiscal year ended June 27, 1992 and incorporated herein by reference).* (k) - Letter Agreement from the Corporation to Enrico Pesatori dated as of February 2, 1993 (filed as Exhibit 10(l) to the Corporation's Annual Report on Form 10-K for the fiscal year ended July 2, 1994 and incorporated herein by reference).* (l) - Letter Agreement from the Corporation to Savino R. Ferrales dated as of May 18, 1995.* 11 - Computation of net income/(loss) per share. 13 - The Corporation's 1995 Annual Report to Stockholders, certain portions of which have been incorporated herein by reference. 21 - List of Subsidiaries. 23 - Consent of independent accountants. 27 - Financial Data Schedule. *Indicates management contract or compensatory plan or arrangement. (b) Reports on Form 8-K: None. 12 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 22, 1995 By /s/Robert B. Palmer ------------------- ROBERT B. PALMER CHAIRMAN OF THE BOARD, 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 --------- ----- ---- Chairman of the Board, President and Chief Executive Officer /s/ Robert B. Palmer (Principal Executive -------------------- ROBERT B. PALMER Officer) and Director September 22, 1995 Vice President, Finance and Chief Financial Officer /s/ Vincent J. Mullarkey (Principal Financial ------------------------ VINCENT J. MULLARKEY Officer) September 22, 1995 Vice President and Corporate Controller /s/ E.C. Prokopis (Principal Accounting ----------------- E.C. PROKOPIS Officer) September 22, 1995 /s/ Vernon R. Alden Director September 22, 1995 ------------------- VERNON R. ALDEN /s/ Philip Caldwell Director September 22, 1995 ------------------- PHILIP CALDWELL /s/ Colby H. Chandler Director September 22, 1995 --------------------- COLBY H. CHANDLER /s/ Arnaud de Vitry Director September 22, 1995 ------------------- ARNAUD DE VITRY __________________ Director September __, 1995 FRANK P. DOYLE 13 /s/ Robert R. Everett Director September 22, 1995 --------------------- ROBERT R. EVERETT /s/ Kathleen F. Feldstein Director September 22, 1995 ------------------------- KATHLEEN F. FELDSTEIN /s/ Thomas P. Gerrity Director September 22, 1995 --------------------- THOMAS P. GERRITY /s/ Thomas L. Phillips Director September 22, 1995 ---------------------- THOMAS L. PHILLIPS /s/ Delbert C. Staley Director September 22, 1995 --------------------------- DELBERT C. STALEY 14 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 32 of the 1995 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 schedule listed in the index on page 10 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Boston, Massachusetts July 31, 1995 S-1 SCHEDULE II 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 Charged to Deductions Balance Beginning to Other from at end of Description of Period Operations Accts (Dr)/Cr Reserves (a) Period -------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR POSSIBLE LOSSES ON ACCOUNTS RECEIVABLE YEAR ENDED: July 01, 1995 111,925 55,307 29,886 (b) 46,463 150,655 July 02, 1994 110,764 50,247 1,286 50,372 111,925 July 03, 1993 129,686 22,596 10,801 (c) 52,319 (d) 110,764
(a) Uncollectible accounts and adjustments. (b) Reclassification of reserves for product sales returns and other allowances. (c) Reclassification of reserve from other current liabilities related to fiscal year 1991 acquisition. (d) Includes write-offs of amounts reserved at time of acquisition of businesses in prior periods. S-2 EX-3.D 2 BY LAWS Exhibit 3(d) BY-LAWS of DIGITAL EQUIPMENT CORPORATION (As amended through May 19, 1995) ARTICLE I. STOCKHOLDERS. 1. Annual Meeting. The annual meeting of stockholders shall be held on such date and at such time and place (within the United States) as shall be designated from time to time by vote of the Directors and stated in the notice of meeting. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu thereof, and any action taken at such meeting shall have the same effect as if taken at the annual meeting. Except as provided in Article II, Section 2, the only business which may be conducted at any such meeting of the stockholders shall (a) have been specified in the written notice of meeting (or any supplement thereto) given by or at the direction of the Directors or the President, (b) have otherwise been properly brought before the meeting by or at the direction of the Directors or the President, or (c) have otherwise been properly brought before the meeting by or on behalf of any stockholder who shall have been a stockholder of record on the record date for such meeting and who shall continue to be entitled to vote thereat. In addition to any other applicable requirements, for business to be properly brought before a meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Clerk of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than (50) days nor more than (75) days prior to the meeting; provided, however, that in the event that less than (65) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Clerk shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of capital stock of the corporation held of record, owned beneficially and represented by proxy by such stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and as of the date of such notice by the stockholder, and (iv) all other information which would be required to be included in a proxy statement filed with the Securities and Exchange Commission if, with respect to any such item of business, such stockholder were a participant in a solicitation subject to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Proxy Rules"). Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the meeting except in accordance with the procedures set forth in this Article I, provided, however, that nothing in this Article I shall be deemed to preclude discussion by any stockholder of any business properly brought before the meeting. The person presiding at the meeting may, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Article I, and if he should so determine, he shall so declare to the meeting and that business shall be disregarded. 2. Special Meetings. Special meetings of stockholders may be called by the President or by the Directors. Application to an officer of the corporation or to a court pursuant to Section 34(b) of Chapter 156B of the Massachusetts General Laws requesting the call of a special meeting of stockholders may be made only by stockholders who hold 90% in interest (or such lesser percentage in interest as shall be the maximum percentage permitted under Massachusetts law, including any enabling legislation or applicable grandfathering provisions). The business which may be transacted at a special meeting is limited to that set forth in the notice of the special meeting and, if the notice so provides, such other matters as the President or the Directors may bring before the meeting. All meetings of stockholders shall be held at the principal office of the corporation except as the Directors shall fix some other place within the United States for a meeting. 3. Notice of Meetings. A written notice of every meeting of stockholders, stating the place, date and hour thereof, and the purposes for which the meeting is to be held, shall be given by the Clerk or an Assistant Clerk or by the person calling the meeting at least seven days before the meeting or such longer period as required by law to each stockholder entitled to vote thereat and to each stockholder, who by law, by the Articles of Organization or by these By-Laws is entitled to such notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it postage prepaid and addressed to such stockholder at his address as it appears upon the books of the corporation. No notice need be given to any stockholder if a written waiver of notice, executed before or after the meeting by the stockholder or his attorney thereunto authorized, is filed with the records of the meeting. 4. Quorum. The holders of a majority in interest of all stock issued, outstanding and entitled to vote at a meeting shall constitute a quorum, but a lesser number may adjourn any meeting from time to time without further notice, except that if two or more classes of stock are entitled to vote as separate classes, then in the case of each such class a quorum shall consist of the holders of a majority in interest of that class outstanding and entitled to vote. 5. Voting and Proxies. Each stockholder shall have one vote for each share of stock entitled to vote held by him of record according to the records of the corporation, unless otherwise provided by the Articles of Organization. Stock-holders may vote either in person or by written proxy. Proxies shall be filed with the Clerk of the meeting, or of any adjournment thereof, before being voted. No proxy dated more than six months before the meeting named therein shall be valid and no proxy shall be valid after the final adjournment of such meeting. Notwithstanding the provisions of the preceding sentence, a proxy coupled with an interest sufficient in law to support an irrevocable power, including, without limitation, an interest in shares or in the corporation generally, may be made irrevocable if it so provides, need not specify the meeting to which it relates, and shall be valid and enforceable until the interest terminates, or for such shorter period as may be specified in the proxy. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. 6. Action at Meeting. When a quorum is present, the holders of a majority of the stock present or represented and voting on a matter, except where a larger vote is required by law, the Articles of Organization or these By- Laws, shall decide any matter to be voted on by the stockholders. Any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election. No ballot shall be required for such election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. The corpora-tion shall not directly or indirectly vote any shares of its stock. 7. Action without Meeting. Any action to be taken by stock-holders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action by a writing filed with the records of the meetings of stock-holders. Such consent shall be treated for all purposes as a vote at a meeting. ARTICLE II. DIRECTORS. 1. Powers. The business of the corporation shall be managed by a Board of Directors who may exercise all the powers of the corporation except as otherwise provided by law, by the Articles of Organization or by these By- Laws. In the event of a vacancy in the Board of Directors, the remaining Directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2. Nomination and Election. The Board of Directors shall consist of not less than 3 nor more than 15 persons. The number of the Board of Directors for each year shall be fixed by vote of a majority of the Directors then in office. The Board of Directors shall be classified with respect to the time for which they severally hold office, as provided in Section 50A of Chapter 156B of the Massachusetts General Laws, into three classes, as nearly equal in number as possible, the term of office of those of the first class ("Class I Directors") to continue until the 1990 annual meeting of stockholders and until their successors are duly elected and qualified, the term of office of those of the second class ("Class II Directors") to continue until the 1991 annual meeting of stockholders and until their successors are duly elected and qualified, and the term of those of the third class ("Class III Directors") to continue until the 1992 annual meeting of stockholders and until their successors are duly elected and qualified. At each annual meeting of stockholders the successors to the class of Directors whose term expires at that meeting shall be elected to hold office for a term continuing until the annual meeting of stockholders held in the third year following the year of their election and until their successors shall have been duly elected and qualified. Only persons who are nominated in accordance with the following procedures shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors at the annual meeting may be made at the annual meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board or by any stockholder entitled to vote for the election of Directors at the meeting who complies with the notice procedures set forth in this Article II. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Clerk of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than (50) days nor more than (75) days prior to the meeting; provided, however, that in the event that less than (65) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. Such stockholder's notice to the Clerk shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the citizenship of the person, (iv) the class and number of shares of capital stock of the corporation which are beneficially owned by the person, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to the Proxy Rules; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder, (ii) the class and number of shares of capital stock of the corporation which are beneficially owned by the stockholder as of the record date for the meeting (if such date shall then have been made publicly available) and of the date of such notice, (iii) a representation that the stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice, (iv) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder, (v) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the Proxy Rules and (vi) the consent of each nominee to serve as a director of the Corporation if so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as Director. No person shall be eligible for election as a Director unless nominated in accordance with the procedures set forth herein. The person presiding at the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 3. Vacancies. Vacancies and newly created directorships, whether resulting from an increase in the size of the Board of Directors, from the death, resignation, disqualification or removal of a Director or otherwise, shall be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the vacancy occurred or the new directorship was created and until such Director's successor shall have been elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of any incumbent Director. 4. Enlargement of Board. The number of the Board of Directors may be increased and one or more additional Directors elected by vote of a majority of the Directors then in office. 5. Resignation. Any Director may resign by delivering his written resignation to the corporation at its principal office or to the President, Clerk or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 6. Removal. Any Director may be removed from office only (a) for cause as defined in Section 50A of Chapter 156B of the Massachusetts General Laws and by the affirmative vote of a majority of the shares of the corporation outstanding and entitled to vote in the election of Directors or (b) for cause by vote of a majority of the Directors then in office. 7. Meetings. Regular meetings of the Board of Directors may be held without call or notice at such places and at such times as the Directors may from time to time determine, provided that any Director who is absent when such determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without a call or notice at the same place as the annual meeting of stockholders, or the special meeting held in lieu thereof, following such meeting of stockholders. Special meetings of the Board of Directors may be held at any time and place designated in a call by the Chairman of the Board, the President, Treasurer or two or more Directors. 8. Notice of Meetings. Notice of all special meetings of the Board of Directors shall be given to each Director by the Secretary, or if there be no Secretary, by the Clerk, or Assistant Clerk, or in case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. Notice shall be given to each Director in person or by telephone or by telegram sent to his business or home address at least twenty-four hours in advance of the meeting, or by written notice mailed to his business or home address at least forty-eight hours in advance of the meeting. Notice need not be given to any Director if a written waiver of notice, executed by him before or after the meetings, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice of a Directors' meeting need not specify the purposes of the meeting. 9. Quorum. At any meeting of the Board of Directors, a majority of the Directors then in office shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time without further notice. 10. Action at Meeting. At any meeting of the Directors at which a quorum is present, the vote of a majority of those present and voting on any matter, unless a different vote is specified by law, by the Articles of Organization, or by these By-Laws, shall be sufficient to decide such matter. 11. Action by Consent. Any action by the Board of Directors may be taken without a meeting if a written consent thereto is signed by all the Directors and filed with the records of the Directors' meetings. Such consent shall be treated as a vote of the Directors for all purposes. 12. Committees. The Directors may, by vote of a majority of the Directors then in office, elect from their number an executive or other committees and may by like vote delegate thereto some or all of their powers except those which by law, the Articles of Organization or these By-Laws they are prohibited from delegating. Except as the Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Directors or in such rules, its business shall be conducted as nearly as may be in the same manner as is provided by these By-Laws for the Directors. ARTICLE III. OFFICERS. 1. Enumeration. The officers of the corporation shall consist of a President, a Treasurer, a Clerk, and such other officers, including a Chairman of the Board, a Secretary, one or more Vice Presidents, Assistant Treasurers, Assistant Clerks, and Assistant Secretaries as the Board of Directors may determine. In addition, there shall be such other officers and agents as the President shall see fit to appoint or employ. Without limiting the foregoing, the President may designate one or more employees of the corporation having the title of vice president, but who shall not be officers of the Corporation, who shall hold such title at the pleasure of the President and who shall have such powers and duties as the President may from time to time designate. 2. Election. The President, Treasurer and Clerk shall be elected annually by the Directors at their first meeting following the annual meeting of stockholders. Other officers may be chosen by the Directors at such meeting or at any other meeting. 3. Qualification. The President may, but need not be, a Director. No officer need be a stockholder. Any two or more offices may be held by the same person, provided that the President and Clerk shall not be the same person. The Clerk shall be a resident of Massachusetts unless the corporation has a resident agent appointed for the purpose of service of process. Any officer may be required by the Directors to give bond for the faithful performance of his duties to the corporation in such amount and with such sureties as the Directors may determine. 4. Tenure. Except as otherwise provided by law, by the Articles of Organization or by these By-Laws, the President, the Treasurer and the Clerk shall hold office until the first meeting of the Directors following the annual meeting of stockholders and thereafter until his successor is chosen and qualified. The other officers shall hold office until the first meeting of the Directors following the annual meeting unless a shorter term is specified in the vote choosing or appointing them. Any officer may resign by delivering his written resignation to the corporation at its principal office or to the President, Clerk or Secretary, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 5. Removal. The Directors may remove any officer with or without cause by a vote of a majority of the entire number of Directors then in office, provided, that an officer may be removed for cause only after reasonable notice and opportunity to be heard by the Board of Directors prior to action thereon. 6. President, Chairman of the Board and Vice President. The President shall, unless otherwise provided by the Directors, be the chief executive officer of the corporation and shall, subject to the direction of the Directors, have general supervision and control of its business. Unless otherwise provided by the Directors he shall preside, when present, at all meetings of stockholders and, unless a Chairman of the Board has been elected and is present, of the Directors. If a Chairman of the Board of Directors is elected, he shall preside at all Meetings of the Board of Directors at which he is present. The Chairman shall have such other powers as the Directors may from time to time designate. Any Vice President elected by the Board of Directors shall have such powers and shall perform such duties as the Directors may from time to time designate. 7. Treasurer and Assistant Treasurers. The Treasurer shall, subject to the direction of the Directors, have general charge of the financial affairs of the corporation and shall cause to be kept accurate books of account. He shall have custody of all funds, securities, and valuable documents of the corporation, except as the Directors may otherwise provide. Any Assistant Treasurer shall have such powers as the Directors may from time to time designate. 8. Clerk and Assistant Clerks. The Clerk shall keep a record of the meetings of stockholders. Unless a Transfer Agent is appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the principal office of the corporation or at his office, the stock and transfer records of the corporation, in which are contained the names of all stockholders and the record address, and the amount of stock held by each. In case a Secretary is not elected or in case the Secretary and Assistant Secretaries are absent, the Clerk shall keep a record of the meetings of the Directors. In the absence of the Clerk, an Assistant Clerk, if one be elected, otherwise a Temporary Clerk, designated by the person presiding at the meeting, shall perform the duties of the Clerk. Any Assistant Clerk shall have such other powers as the Directors may from time to time designate. 9. Secretary and Assistant Secretary. The Secretary, if one be elected, shall keep a record of the meetings of the Directors. In the absence of the Secretary, an Assistant Secretary shall perform the duties of the Secretary. Any Assistant Secretary shall have such other powers as the Directors may from time to time designate. 10. Other Powers and Duties. Each officer elected by the Board of Directors shall, subject to these By-Laws, have in addition to the designated powers specifically set forth in these By-Laws, such duties and powers as are customarily incident to his office, and such duties and powers as the Directors may from time to time designate. ARTICLE IV. CAPITAL STOCK. 1. Certificates of Stock. Each stockholder shall be entitled to a certificate of the capital stock of the corporation in such form as may be prescribed from time to time by the Board of Directors. The certificate shall be signed by the President or a Vice President, and by the Treasurer or an Assistant Treasurer, but when a certificate is countersigned by a transfer agent or a registrar, other than a Director, officer or employee of the corporation, such signatures may be facsimiles. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the time of its issue. The corporation may maintain, or cause to be maintained, stockholder open accounts in which shall be recorded all stockholders' ownership of stock and all changes therein. Certificates need not be issued for shares so recorded in a stockholder's open account unless requested by the stockholder. Every certificate for shares of stock which are subject to any restriction on transfer pursuant to the Articles of Organization, the By-Laws or any agreement to which the corporation is a party, shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back either the full text of the restriction or a statement of the existence of such restriction and a statement that the corporation will furnish a copy to the holder of such certificate upon written request and without charge. Every certificate issued when the corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series authorized to be issued or a statement of the existence of such preferences, powers, qualifications and rights, and a statement that the corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. 2. Transfers. Subject to the restrictions, if any, stated or noted on the stock certificates, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with necessary transfer stamps affixed, and with such proof of the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Articles of Organization or by these By-Laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other dispo-sition of such stock, until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-Laws. It shall be the duty of each stockholder to notify the corporation of his post office address. 3. Record Date. The Directors may fix in advance a time of not more than sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend or the making of any distribution to stockholders, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the corporation after the record date. Without fixing such record date the Directors may for any of such purposes close the transfer books for all or any part of such period. 4. Replacement of Certificates. In case of the alleged loss or destruction or the mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Directors may prescribe. 5. Reacquisition of Stock. Shares of stock previously issued which have been reacquired by the corporation may be restored to the status of authorized but unissued shares by vote of the Board of Directors, without amendment of the Articles of Organization. ARTICLE V. PROVISIONS RELATIVE TO DIRECTORS, OFFICERS, STOCKHOLDERS AND EMPLOYEES. 1. Certain Contracts and Transactions. In the absence of fraud or bad faith, no contract or transaction by this corporation shall be void, voidable or in any way affected by reason of the fact that the contract or transaction is (a) with one or more of its officers, directors, stockholders or employees, (b) with a person who is in any way interested in this corporation or (c) with a corporation, organization or other concern in which an officer, director, stockholder or employee of this corporation is an officer, director, stockholder, employee or in any way interested. The provisions of this section shall apply notwithstanding the fact that the presence of a director or stockholder, with whom a contract or transaction is made or entered into or who is an officer, director, stockholder or employee of a corporation, organization or other concern with which a contract or transaction is made or entered into or who is in any way interested in such contract or transaction, was necessary to constitute a quorum at the meeting of directors (or any authorized committee thereof) or stockholders at which such contract or transaction was authorized and/or that the vote of such director or stockholder was necessary for the adoption of such contract or transaction, provided that if said interest was material, it shall have been known or disclosed to the directors or stockholders voting at said meeting on said contract or transaction. A general notice to any person voting on said contract or transaction that an officer, director, stockholder or employee has a material interest in any corporation, organization or other concern shall be sufficient disclosure as to such officer, director, stockholder or employee with respect to all contracts and transactions with such corporation, organization or other concern. This section shall be subject to amendment or repeal only by action of the stockholders. 2. Indemnification. (a) Each director, officer and employee shall be indemnified by this corporation against any cost, expense (including attorneys' fees), judgment, liability and/or amount paid in settlement reasonably incurred by or imposed upon him in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency), to which he may be made a party or otherwise involved or with which he shall be threatened, by reason of his being, or related to his status as, a director, officer, or employee of this corporation or of any other organization which he serves or has served as director, officer or employee at the request of this corporation, or which he serves or has served at the request of this corporation in any capacity with respect to any employee benefit plan (whether or not he continues to be a director, officer or employee of the corporation or such other organization, or whether or not he is continuing to serve in any capacity with respect to any employee benefit plan, at the time such action, suit or proceeding is brought or threatened), except with respect to matters as to which he shall be finally adjudicated in any such action, suit or proceeding not to have acted in good faith in the reasonable belief that his action was in the best interest of the corporation or, to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such plan. Unless otherwise provided by the corporation, in the event of settlement of any action, suit or proceeding brought or threatened, such indemnification shall be limited to matters covered by the settlement as to which the corporation is advised by independent counsel (which may be the counsel regularly employed by the corporation) that such person, in the opinion of such counsel, acted in good faith in the reasonable belief that his action was in the best interest of the corporation, or, to the extent that such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such plan. The foregoing right of indemnification shall be in addition to any rights to which any such person may otherwise be entitled and shall inure to the benefit of the executors or administrators of each such person. The corporation may pay the expenses incurred by any such person in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by such person to repay such amount if it is determined that such person is not entitled to indemnification hereunder or otherwise, which undertaking may be accepted without reference to the financial ability of such person to make repayment. This Section 2(a) shall be subject to amendment or repeal only by action of the stockholders. (b) The directors may, without stockholder approval, authorize the corporation to enter into agreements, including any amendments or modifications thereto, with any of its directors, officers or other persons described in paragraph (a) providing for indemnification of such persons to the maximum extent permitted under applicable law and the corporation's Articles of Organization and By-Laws. ARTICLE VI. MISCELLANEOUS PROVISIONS. 1. Fiscal Year. Except as from time to time otherwise determined by the Directors, the fiscal year of the corporation shall be the fifty-two/fifty- three week period ending the Saturday nearest the last day of June. 2. Seal. The seal of the corporation shall, subject to alteration by the Directors, bear its name, the word "Massachusetts", and the year of its incorporation. 3. Execution of Instruments. All deeds, leases, transfers, contracts, bonds, notes and other obligations authorized to be executed by an officer of the corporation in its behalf shall be signed by the President or a Vice President or the Treasurer except as the Directors may generally or in particular cases otherwise determine. 4. Voting of Securities. Except as the Directors may otherwise designate, the President or Treasurer may waive notice of, and appoint any person or persons to act as proxy or attorney in fact for this corporation (with or without power of substitution) at any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5. Articles of Organization. All references in these By-Laws to the Articles of Organization shall be deemed to refer to the Articles of Organization of the corporation, as amended and in effect from time to time. 6. Corporate Records. The original, or attested copies of the Articles of Organization, By-Laws and records of all meetings of the incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the corporation, or at an office of its transfer agent or of the Clerk, and shall be open at all reasonable times to the inspection of any stockholder for any proper purpose but not to secure a list of stockholders for the purpose of selling said list or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the corporation. 7. Principal Office. The principal office of the corporation shall be in the Town of Maynard, Middlesex County, Commonwealth of Massachusetts. 8. Amendments. These By-Laws may be amended or repealed in whole or in part at any annual or special meeting of the stockholders by a vote of a majority of the stock present and entitled to vote, provided notice of the proposed amendment, alteration or repeal shall have been given in the notice of said meeting. In addition, if permitted by the Agreement of Association and/or the Articles of Organization, the Directors may make, amend or repeal the By-Laws in whole or in part, except with respect to any provision thereof which by law, the Agreement of Association or the Articles of Organization as from time to time amended, or the By-Laws, requires action by the stockholders. Any By-Law adopted by the Directors may be amended or repealed by the stockholders in the manner hereinabove in this Article set forth. Not later than the time of giving notice of the meeting of stockholders next following the making, amending or repealing by the Directors of any By-Law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-Laws. ARTICLE VII. MASSACHUSETTS CHAPTER 110D. Until such time as this Article VII shall be repealed or these By-Laws shall be amended to provide otherwise in accordance with Article VI, Section 8 of these By-Laws, the provisions of Chapter 110D of the Massachusetts General Laws shall not apply to "control share acquisitions" of the Corporation within the meaning of said Chapter 110D. EX-10.F 3 1990 STOCK OPTION PLAN Exhibit 10(f) DIGITAL EQUIPMENT CORPORATION 1990 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS, AS AMENDED Section 1 -- Purpose The purpose of the 1990 Stock Option Plan for Nonemployee Directors (the "Plan") is to increase the proprietary interest of nonemployee members of the Board of Directors in the continued success of Digital Equipment Corporation (the "Company") and to provide them with an incentive to continue to serve as directors. Section 2 -- Administration The Plan shall be administered by the Compensation and Stock Option Committee of the Board of Directors of the Company, or any successor committee thereto. The Committee shall have responsibility finally and conclusively to interpret the provisions of the Plan and to decide all questions of fact arising in its application. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan. Section 3 -- Type of Options Options granted pursuant to the Plan shall be nonstatutory options which are not intended to meet the requirements of Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"). Section 4 -- Eligibility Directors of the Company who are not employees of the Company or any subsidiary or affiliate thereof ("Nonemployee Directors") shall be eligible to participate in the Plan. Each Nonemployee Director to whom stock options are granted shall be a participant ("Participant") under the Plan. Section 5 -- Stock Available under the Plan Subject to adjustment as provided in Section 10 below, an aggregate of 100,000 shares of the Company's Common Stock shall be available for issuance pursuant to the provisions of the Plan. Such shares may be authorized and unissued shares or may be shares issued and thereafter acquired by the Company. If an option granted under the Plan shall expire or terminate for any reason without having been exercised in whole or in part, the unpurchased shares subject to such option shall again be available for subsequent option grants under the Plan. Section 6 -- Automatic Grant of Options (a) Each Nonemployee Director in office at the time the Plan is approved by the Company's stockholders pursuant to Section 7.7 hereof shall receive automatically and without further action by the Board of Directors or the Committee a grant of an option to purchase 5,000 shares of Common Stock of the Company in accordance with the provisions of Section 7, and subject to adjustment as provided in Section 10. Such grant shall be made as of the date of approval of the Plan by the Company's stockholders. (b) Each Nonemployee Director who commences his or her service as a director after approval of the Plan by the Company's stockholders pursuant to Section 7.7 hereof shall receive automatically and without further action by the Board of Directors or the Committee a grant of an option to purchase 5,000 shares of Common Stock of the Company in accordance with the provisions of Section 7, and subject to adjustment as provided in Section 10. Such grant shall be made as of the date of such Nonemployee Director's commencement of service as a director of the Company. Section 7 -- Terms and Conditions of Options 7.1 Exercise of Options. (a) Each option granted under the Plan shall be exercisable at the rate of 20% per year commencing on the first anniversary of the date the Participant begins serving as a Director, subject to the provisions of Section 9 hereof. Each option granted under the Plan to Nonemployee Directors who commenced service as a director prior to the date of stockholder approval of the Plan shall be exercisable to the extent of 20% of the shares covered by the option for each year of service completed as of such date, subject to the provisions of Section 9 hereof. (b) Notwithstanding the provisions of paragraph (a) above, an option granted to any Participant shall become immediately exercisable in full upon the first to occur of: (1) The death of any Participant, in which case the option may be exercised by the Participant's executor or administrator, or if not so exercised, by the legatees or distributees of his or her estate or by such other person or persons to whom the Participant's rights under the option shall pass by will or by the applicable laws of descent and distribution; (2) Such time as the Participant ceases to be a director of the Company by reason of his or her permanent disability. (c) In the event that a Participant ceases to be a director of the Company as a result of retirement from the Board of Directors at a time when such Participant is eligible to receive benefits under the Company's Retirement Arrangement for Nonemployee Directors in effect as of the effective date of this Plan, or if not eligible to receive such benefits, at a time when such Participant has reached age 70 and has completed at least five years of service as a Director of the Company, such Participant shall retain the option granted to him or her under the Plan whether or not it is fully exercisable at the time of such retirement, and such option, if not fully exercisable at the time of such retirement, shall become exercisable in accordance with the terms of paragraph (a) above, as if the Participant's service as a director had continued. (d) In the event that the Participant ceases to be a director of the Company for any reason other than those specified in paragraphs (b) and (c) above prior to the time a Participant's option becomes fully exercisable, the option will terminate with respect to the shares as to which the option is not then exercisable and all rights of the Participant to such shares shall terminate without further obligation on the part of the Company. (e) In the event that the Participant ceases to be a director of the Company after his or her option has become exercisable in whole or in part, such option shall remain exercisable in whole or in part, as the case may be, in accordance with the terms hereof. (f) Options granted under the Plan shall expire ten years from the date on which the option is granted, unless terminated earlier in accordance with the Plan; provided, however, that in the event a Participant ceases to be a Director of the Company by reason of death, including without limitation in the event that a Participant dies after ceasing to be a Director of the Company by reason of disability or retirement, any option granted to such Participant hereunder shall expire one year from the date of the Participant's death (whether or not this period ends after expiration of the exercise period). 7.2 Exercise Price. The exercise price of an option shall be 100% of the fair market value per share of Common Stock of the Company on the date the option is granted. For purposes of the Plan, "fair market value" of a share of stock on any date shall mean the average of the high and low selling prices of the Company's Common Stock on the New York Stock Exchange Composite Transactions Index as of the date of grant, or if the date of grant is not a business day, as of the last business day for which prices are available prior to the date of grant. 7.3 Payment of Exercise Price. (a) Subject to the terms and conditions of the Plan and the documentation of the options pursuant to Section 7.5 hereof, an option granted hereunder shall, to the extent then exercisable, be exercisable in whole or in part by giving written notice to the Company stating the number of shares with respect to which the option is being exercised, accompanied by payment in full for such shares; provided, however, that there shall be no such exercise at any one time as to fewer than one hundred (100) shares or all of the remaining shares then purchasable by the person or persons exercising the option, if fewer than one hundred (100) shares. (b) Options granted under the Plan may be paid for by delivery of cash or a check to the order of the Company in an amount equal to the exercise price of such options, or by delivery to the Company of shares of Common Stock of the Company already owned by the Participant having a fair market value equal in amount to the exercise price of the option being exercised, provided that such method is consistent with applicable tax laws, or by any combination of such methods of payment. 7.4 Rights as a Stockholder. Except as specifically provided by the Plan, the grant of an option will not give a Participant rights as a stockholder; the Participant will obtain such rights, subject to any limitations imposed by the Plan, upon actual receipt of Common Stock of the Company. 7.5 Documentation of Option Grants. Option grants shall be evidenced by written instruments prescribed by the Committee from time to time. The instruments may be in the form of agreements to be executed by both the Participant and the Company or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms of the grant. 7.6 Nontransferability of Options. No option granted under the Plan shall be assignable or transferable by the Participant to whom it is granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution. During the life of the Participant, the option shall be exercisable only by such person (or in the event of incapacity, by the person or persons properly appointed to act on his or her behalf). 7.7 Approvals. The effectiveness of the Plan and of the grant of all options is subject to (i) the approval of the Plan by the affirmative vote of a majority of the shares of the Company's Common Stock present in person or by proxy and entitled to vote at a meeting of the stockholders at which the Plan is presented for approval and (ii) receipt by the Company of an opinion of counsel or the written concurrence of the Staff of the Securities and Exchange Commission with opinions as set forth in a no-action letter, related to compliance of the Plan with Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, (the "1934 Act"), and such other matters deemed necessary or appropriate by counsel for the Company. In the event that such approval as aforesaid has not been received on or before August 13, 1991, or in the event that such opinion or concurrence has not been received on or before August 13, 1991, then in either such event the Plan and options granted hereunder shall be null and void, and upon the occurrence of both such approval and opinion or concurrence as aforesaid, the Plan and such options shall become effective as of the date of the stockholders' approval of the Plan. Notwithstanding anything to the contrary in the Plan, no options granted hereunder shall become exercisable until such approval and opinion or concurrence have been received. The Company's obligation to sell and deliver shares of stock under the Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of the stock. Section 8 -- Regulatory Compliance and Listing (a) The issuance or delivery of any shares of stock subject to exercisable options hereunder may be postponed by the Committee for such period as may be required to comply with any applicable requirements under the Federal securities laws, any applicable listing requirements of any national securities exchange or any requirements under any law or regulation applicable to the issuance or delivery of such shares. The Company shall not be obligated to issue or deliver any such shares if the issuance or delivery thereof would constitute a violation of any provision of any law or of any regulation of any governmental authority or any national securities exchange. (b) No discretion concerning decisions regarding the Plan shall be afforded to a person who is not a "disinterested person" within the meaning of Section 16 of and Rule 16b-3 promulgated under the 1934 Act. Sections 4 and 6 hereof shall not be amended more than once every six months, other than to comport with changes in the Code or the rules thereunder. Should any provision of this paragraph require modification or be unnecessary to comply with the requirements of Section 16 of and Rule 16b-3 under the 1934 Act, the Committee may waive such provision and/or amend this Plan to add to or modify the provisions hereof accordingly. Section 9 -- Holding Periods Any option granted under the Plan may not be exercised for at least six months after the grant thereof, and the shares of stock that are received upon exercise of any option granted under the Plan may not be sold for at least six months after acquisition thereof, except in the event of the disability or death of the holder thereof. Should any provision of this paragraph require modification or be unnecessary to comply with the requirements of Section 16 of and Rule 16b-3 under the 1934 Act, the Committee may waive such provision and/or amend this Plan to add to or modify the provisions hereof accordingly. Section 10 -- Adjustment in Event of Changes in Capitalization In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution with respect to holders of the Company's Common Stock other than normal cash dividends, automatic adjustment shall be made in the number and kind of shares as to which outstanding options or portions thereof then unexercised shall be exercisable and in the available shares set forth in Section 5 hereof, to the end that the proportionate interest of the option holder shall be maintained as before the occurrence of such event. Such adjustment in outstanding options shall be made without change in the total price applicable to the unexercised portion of such options and with a corresponding adjustment in the option price per share. Automatic adjustment shall also be made in the number and kind of shares subject to options subsequently granted under the Plan. Section 11 -- No Right to Reelection Nothing in the Plan shall be deemed to create any obligation on the part of the Board of Directors to nominate any Nonemployee Director for reelection by the Company's stockholders, nor confer upon any Nonemployee Director the right to remain a member of the Board of Directors for any period of time, or at any particular rate of compensation. Section 12 -- Amendment and Termination (a) Except as provided in Section 8(b), the Board of Directors shall have the right to amend, modify or terminate the Plan at any time and from time to time; provided, however, that unless required by law, no such amendment or modification shall (a) affect any right or obligation with respect to any grant theretofore made; (b) in any manner affect the requirements set forth in Section 8(b) hereof; or (c) unless previously approved by the stockholders, increase the number of shares of Common Stock available for grants as provided in Section 5 hereof (as adjusted pursuant to Section 10 hereof). In addition, no such amendment shall, unless previously approved by the stockholders (where such approval is necessary to satisfy then applicable requirements of federal securities laws, the Code or rules of any stock exchange on which the Company's Common Stock is listed), (i) in any manner affect the eligibility requirements set forth in Section 4 hereof, (ii) increase the number of shares of Common Stock subject to any option, (iii) change the purchase price of the shares of Common Stock subject to any option, (iv) extend the period during which options may be granted under the Plan, or (v) materially increase the benefits to Participants under the Plan. (b) Unless earlier terminated by the Board of Directors, the Plan shall terminate on December 31, 2000; provided, however, that options which are granted on or before this date shall remain exercisable in accordance with their respective terms after the termination of the Plan. Section 13 -- Governing Law The Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. EX-10.H 4 RETIREMENT ARRANGEMENT Exhibit 10(h) --------------------------------------------------------------------------- Digital Equipment Corporation --------------------------------------------------------------------------- Retirement Arrangement for Non-Employee Directors -------------------------------------------------------------------------------- I. Name and Purpose The name of this plan is the Digital Equipment Corporation Retirement Arrangement for Non-Employee Directors (the "Plan"). Its purpose is to recognize and reward the valuable service provided to Digital Equipment Corporation by its non-employee directors by supplementing their retirement income. II. Effective Date The Plan shall become effective for any non-employee director terminating service with the Digital Equipment Corporation Board of Directors (the "Board") on or after 18 May 1987. III. Eligibility for Participation All non-employee directors of Digital Equipment Corporation on 18 May 1987 shall be eligible to participate and shall begin participation in the Plan on 18 May 1987. All non- employee directors of Digital Equipment Corporation who are appointed to the Board on or after 19 May 1987 shall be eligible to participate in the Plan and shall begin participation upon the effective date of their appointment or election to the Board. Any director who begins participation shall be a participant (a "Participant") in the Plan for life. Notwithstanding the foregoing paragraph, effective upon and subject to the approval of the 1995 Stock Option Plan for Non-Employee Directors by the stockholders of Digital Equipment Corporation, eligibility to participate in the Plan shall be limited only to those individuals who commenced service as a director prior to January 1, 1995. IV. Entitlement to Retirement Benefit Any Participant in the Plan as of 18 May 1987, and any other Participant in the Plan having reached age seventy (70) and with at least five (5) years of service as a non-employee director of Digital Equipment Corporation, who terminates service with the Board on or after 18 May 1987 shall be entitled to an annualized -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- benefit for life which is equal in amount to the annual retainer in effect for non-employee directors as of the Participant's date of termination of service on the Board. For purposes of determining years of service for purposes of this Section IV., time for which a Participant receives a disability benefit under Section VI. of this Plan shall be considered time included in years of service. Furthermore, termination of service for purposes of this Section IV. shall mean the later of actual termination of service and cessation of disability benefits under Section VI. hereof, if applicable. V. Payment of Retirement Benefit The benefit due to a Participant under this Plan shall be paid as quarterly installments, each equal to one-fourth of the annual benefit provided for in IV. above. Installments shall become due and payable as of the first day of each calendar quarter. The first such payment shall become due and payable as of the first day of the calendar quarter next following the date on which the Participant terminates service as a director of Digital Equipment Corporation. The last such payment shall become due and payable as of the first day of the calendar quarter in which the Participant dies. Payment shall be mailed to the last known address of the Participant. It shall be the responsibility of the Participant to ensure that Digital Equipment Corporation is provided his or her correct address. There shall be no death benefit hereunder. VI. Entitlement to Disability Benefit Any Participant in the Plan who terminates service on the Board as a result of a total disability on or after 18 May 1987 at a time when he or she does not qualify for a retirement benefit under Section IV. above shall be entitled to an annual benefit for the period of time during which he or she is disabled or until he or she attains the age and service requirements for a retirement benefit under IV. above, whichever is shorter, which is equal in amount to the annual retainer in effect for non-employee directors as of his or her date of termination of service on the Board. Total disability shall mean a physical or mental condition which, in the sole and unfettered discretion of the Board, makes continued service on the Board impossible or undesirable. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- VII. Payment of Disability Benefit Any payments under Section VI. hereof shall be paid according to the provisions of Section V. hereof as if such disability benefit were a retirement benefit and as if the termination of the Participant's service on the Board as a result of total disability were termination of service after age seventy (70) with five (5) full years of service on the Board. The disability benefit hereunder shall cease on ending of the disability or on the attainment of the age and service requirements for a retirement benefit and no disability payment shall be made after the date on which the disability ends or the said requirements have been met. No duplication of benefits between disability benefits and retirement benefits shall be permitted. VIII. Participant's Rights in Benefit A Participant shall not have any interest in the benefits under this Plan until they are distributed in accordance with the Plan. Until paid, all amounts payable under the Plan shall remain the sole property of the Corporation, subject to the claims of its general creditors and available for its use for whatever purposes are desired. With respect to unpaid benefits, a Participant is merely a general creditor of the Corporation, and the obligation of the Corporation hereunder is purely contractual and shall not be funded or secured in any way. This Plan is not, and is not intended to be, for employees of Digital Equipment Corporation and is not a plan subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). IX. Non-Assignability The right of a Participant to the payment of benefits as provided in the Plan shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation. X. Administration The Administrator of this Plan shall be the Office of the President of the Corporation. The Administrator shall have authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions hereof, and may -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- delegate the authority to administer the Plan to such delegee as the Administrator of its sole and unfettered discretion believes appropriate. XI. Amendment and Termination The Plan may at any time be amended, modified, or terminated by the Board of Directors of the Corporation. No amendment, modification or termination shall, without the consent of a Participant, adversely affect such Participant's right with respect to benefits accrued as of the date of amendment, modification, or termination. An accrued benefit as of a particular date shall mean that benefit to which a Participant would be entitled under the Plan if it had remained in existence after the date of termination of the Plan, but with no additional service performed by the Participant and with no change of disability status by the Participant after the termination date. -------------------------------------------------------------------------------- EX-10.L 5 LETTER AGREEMENT Exhibit 10(l) May 18, 1995 Mr. Savino Ferrales 10080 Circleview Drive Austin, TX 78733 Re: Offer of Employment Dear Sid: I am pleased to offer you the position of Vice President, Human Resources, reporting to me. Your base salary will be at an annual rate of $300,000. Your date of hire will be mutually agreed upon should you accept this offer. New Hire Bonus -------------- A one-time, new hire bonus of $75,000, subject to all appropriate taxes and deductions, will be paid to you as soon as practicable, after your date of hire. Should you terminate your employment with Digital within a period of one year from your date of hire, you agree to repay this amount to the Company immediately upon termination. Cash Incentive Program ---------------------- You will participate in Digital's Cash Incentive Program. Any payment thereunder will be made solely at the discretion of Digital's Board of Directors, subject to Company and individual performance and subject to all other terms and conditions of the Program, which may be revised from time to time at the discretion of the Company. Notwithstanding the foregoing, payment of an amount equal to $75,000 will be guaranteed for Fiscal Year 1996 provided you are employed by Digital on the payment date. Stock Awards ------------ I will recommend to the Compensation and Stock Option Committee of Digital's Board of Directors (the "CSOC") to grant you a stock award of 4,000 shares of Digital common stock under the 1990 Equity Plan. Your stock award will be granted on the date that the CSOC approves such award and is subject to restrictions on your ability Mr. Savino Ferrales May 18, 1995 Page 2 to sell, transfer, pledge or dispose of the stock for a period of time. In addition, if you leave Digital for reasons other than death, permanent disability or as otherwise specified in your stock award agreement, you will forfeit all the shares for which restrictions have not lapsed. These restrictions will lapse with respect to 50% of your shares one year from your date of hire and with respect to 50% of your shares two years from your date of hire. We will also recommend to the CSOC to grant you a non-qualified stock option to purchase 50,000 shares (the "Option Shares") of Digital common stock under the 1990 Equity Plan. The exercise price of this stock option will be equal to the fair market value of Digital common stock on the date the option is granted by the CSOC. The option will become exercisable with respect to 33% of the Option Shares one year from your date of hire, an additional 33% of the Option Shares two years from your date of hire and the remaining 34% of the Option Shares three years from your date of hire. Both stock and option grants are subject to approval by the CSOC and you will be notified, upon the grant having been made, by a separate award letter for each and a stock option agreement. You will be solely responsible for any income taxes associated with your receipt of such stock awards. Employee Benefits ----------------- As a regular employee, you will be eligible to participate in Digital's U.S. employee benefit plans under the terms separately provided for under each such plan or arrangement, except that you will be eligible for four weeks of vacation on an annual basis. Relocation ---------- In lieu of standard relocation benefits, Digital will pay you an amount equal to $75,000, as soon as practicable after your date of hire. In addition, Digital will provide you with $20,000 in assistance under the Renters Relocation Program, contingent upon your signing a repayment obligation agreement. You will receive a tax adder with respect to both amounts for the calendar year 1995. Stock Repayment --------------- Upon submitting to Digital evidence of a demand for repayment under your Dell Corporation Special Nonstatutory Stock Option Agreement, Digital will pay you an 2 Mr. Savino Ferrales May 18, 1995 Page 3 amount equal to the amount demanded (but not in excess of $69,000). You will receive a tax adder with respect to this amount for the calendar year 1995. Status ------ The position offered is as a regular employee on an at-will basis. In addition this offer is contingent upon compliance with the Immigration Reform and Control Act of 1986. In essence, the Act requires you to establish your identity and employment eligibility. To do so, you will be required to complete Section 1 of the attached Employment Verification Form and bring the documents identified in the attachment to your new hire orientation. You will not be able to commence employment with Digital until you are able to present the required documents at your new hire orientation. Your offer is also contingent on your signing Digital's Employee Invention and Confidential Agreement at your orientation. Please make yourself familiar with the contents of these documents, which we have enclosed for your review. Validity of Offer ----------------- This offer is valid until May 25, 1995. If this offer has not been accepted in writing by then, it will cease to be valid and will be withdrawn. If you have any questions regarding your employment, please do not hesitate to contact Russ Johnson at (508) 493-9282. Very truly yours, /s/ Robert B. Palmer Robert B. Palmer President and Chief Executive Officer 3 Mr. Savino Ferrales May 18, 1995 Page 4 I have read and agree to the terms as stated above and I accept the offer of employment. /s/ Savino R. Ferrales 5/18/95 ------------------------------- ---------------- Signature Date 4 EX-11 6 COMPUTATION OF NET INCOME Exhibit 11 DIGITAL EQUIPMENT CORPORATION Computation of Net Income/(Loss) Per Common and Common Equivalent Share Year Ended
--------------------------------------------------------------------------------------- July 1, 1995 July 2, 1994 July 3, 1993 --------------------------------------------------------------------------------------- (In Thousands Except Per Share Data) Net income/(loss)........... $ 121,818 (b) $ (2,156,063) (d) $ (251,330) --------------- ---------------- --------------- --------------- ---------------- --------------- Net income/(loss) applicable to common and common equivalent shares........... $ 86,318 $ (2,166,713) $ (251,330) (a) (b) (c) (d) --------------- ---------------- --------------- --------------- ---------------- --------------- Weighted-average number of common shares outstanding during the year............. 144,907 137,090 130,409 --------------- ---------------- --------------- --------------- ---------------- --------------- ---------------------------------------------------------------------------------------- June 27, 1992 June 29, 1991 ---------------------------------------------------------------------------------------- (In Thousands Except Per Share Data) Net income/(loss)........... $ (2,795,507) (e) $ (617,427) ---------------- --------------- ---------------- --------------- Net income/(loss) applicable to common and common equivalent shares........... $ (2,795,507) (e) $ (617,427) ---------------- --------------- ---------------- --------------- Weighted-average number of common shares outstanding during the year............. 124,864 121,588 ---------------- --------------- ---------------- ---------------
See next page for notes to Exhibit 11. Exhibit 11, cont'd. Year Ended
--------------------------------------------------------------------------------------------- July 1, 1995 July 2, 1994 July 3, 1993 --------------------------------------------------------------------------------------------- (In Thousands Except Per Share Data) Common stock equivalents from application of "treasury stock" method to unexercised and out- standing stock options.......... 1,424 -- -- --------------- ---------------- --------------- --------------- ---------------- --------------- Total weighted-average number of common and common equivalent shares used in the computation of net income per common and common equivalent share........ 146,331 137,090 130,409 --------------- ---------------- --------------- --------------- ---------------- --------------- Net income/(loss) applicable per common and common equivalent share............... $ 0.59 (b) $ (15.80) (d) $ (1.93) --------------- ---------------- --------------- --------------- ---------------- --------------- ------------------------------------------------------------------------------------------------ June 27, 1992 June 29, 1991 ------------------------------------------------------------------------------------------------ (In Thousands Except Per Share Data) Common stock equivalents from application of "treasury stock" method to unexercised and out- standing stock options.......... -- -- ---------------- --------------- ---------------- --------------- Total weighted-average number of common and common equivalent shares used in the computation of net income per common and common equivalent share........ 124,864 121,588 ---------------- --------------- ---------------- --------------- Net income/(loss) applicable per common and common equivalent share............... $ (22.39) (e) $ (5.08) ---------------- --------------- ---------------- ---------------
(a) Includes dividends paid and declared on Series A 8 7/8% cumulative preferred stock totaling $35,500,000. (b) Net income and net income per common and common equivalent share include the cumulative effect of a change in accounting principle of $64,503,000 and $0.44, respectively. (c) Includes dividends paid and declared on Series A 8 7/8% cumulative preferred stock totaling $10,650,000. (d) Net loss and net loss per common share include the cumulative effect of changes in accounting principles of $51,026,000 and $0.37, respectively. (e) Net loss and net loss per common share include the cumulative effect of a change in accounting principle of $485,495,000 and $3.89, respectively. EX-13 7 1995 ANNUAL REPORT [LOGO OF DIGITAL EQUIPMENT CORPORATION APPEARS HERE] [FOUR PHOTOGRAPHS SHOWING AN ALPHASERVER 8400 SYSTEM, A DIGITAL PERSONAL COMPUTER RUNNING MICROSOFT WINDOWS 95, AN ALPHASERVER 2100 AND A HINOTE ULTRA NOTEBOOK COMPUTER APPEAR HERE] Digital Equipment Corporation 1995 annual report Digital Equipment Corporation is a world leader in implementing and supporting networked platforms and applications in multivendor environments. 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. Digital's products and services for open client/server computing are helping customers simplify business practices and enhance organizational productivity. The company does business in more than 100 countries and develops and manufactures products in the Americas, Europe and Asia-Pacific. Contents 2 Chairman's letter 6 Introduction: customer needs and market realities 8 High-performance computing: a billion instructions per second 12 Software: creating an integrated software environment 16 Multivendor services and systems integration: the added value 20 Advanced technology: looking to the future 24 Contributing to the community 25 Financial statements [FOUR PHOTOGRAPHS SHOWING AN ALPHASERVER 8400 SYSTEM, ADIGITAL PERSONAL COMPUTER RUNNING MICROSOFT WINDOWS 95, AN ALPHASERVER 2100 AND A HINOTE ULTRA NOTEBOOK COMPUTER APPEAR ON THIS PAGE.] Working with partners to build open networks to span the enterprise and the world Digital has the ability--directly and through its partners--to implement and support networked platforms and applications in multivendor environments more cost effectively and quickly than anyone else. We have the software and integration services needed to build networks that connect the enterprise with its employees, customers, suppliers and the world. The barriers are down. The base technologies--the World Wide Web and the Internet, wireless and mobile computing, broadband networks and virtual LANs-- are in place to enable individuals and businesses to take full advantage of computer communications. Annual Meeting The annual meeting of stockholders will be held at 11:00 a.m., Thursday, November 9, 1995, at the World Trade Center, Commonwealth Pier, 164 Northern Avenue, Boston, Massachusetts, 02210. Common stockholders of record on September 11, 1995 will be entitled to vote at this meeting.
Fiscal Year 1995 1994 Total operating revenues $13,813,062,000 $13,450,790,000 Restructuring charges $ -- $1,206,000,000 Net income/(loss) $121,818,000 ($2,156,063,000) Net income/(loss) per $0.59 ($15.80) common share Total stockholders' equity $3,528,280,000 $3,279,799,000 Number of common 68,572 77,722 stockholders Stockholders' equity per $20.89 $20.24 common share Number of employees 61,700 77,800
1 [PHOTOGRAPH OF ROBERT B. PALMER, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF DIGITAL APPEARS HERE] Chairman's letter To our Stockholders, Employees, Customers and Partners: The past year was one of tremendous accomplishment for Digital, a year in which we returned to profitability, added significant strength to our product portfolio and positioned our businesses for sustainable, long-term growth and industry leadership. The restructuring plan we put in place a year ago helped produce three consecutive quarters of operating profit. As a result, Digital ended the year with net income of $122 million, or $0.59 per common share. It was our first profitable year since 1990. Overall, Digital's market value increased more than $3 billion in FY95, a clear signal that we are on the right track and an encouraging sign of renewed confidence in Digital's future. There are a number of reasons for this improvement, but none is more important than the hard work of Digital's employees. The company's success is the direct result of their dedication and determination. Their efforts, together with the commitment and loyalty of our customers and partners, built the foundation we need for sustainable profitability. Our turnaround is not complete. We have more work to do and no intention of becoming complacent. But from operating results...to products...to services...to strategies for growth, we have an excellent story to tell--a story that says as much about our future as it does about our past. Operating results Income generated by the company's businesses increased by more than half-a- billion dollars in FY95. Total operating revenues grew three percent, or $362 million over FY94. Adjusted for divestments, total operating revenues were up six percent year-over-year. Total product orders grew seven percent over the previous year, or 13 percent adjusted for divestments. This indicates growing market acceptance and demand for our products. We ended the year with a gross margin of 32 percent, meeting our goal by focusing on manufacturing efficiency and pricing discipline. 2 We also made significant progress in getting our costs to more competitive levels. During the past three years, we eliminated more than $2 billion of expenses on an annualized basis. Overall, operating expenses in FY95 dropped 14 percent year-over-year to 31 percent of revenue. Reducing employment was the most difficult task we had to perform, but it was absolutely critical to our turnaround plan. We ended the year with approximately 61,700 employees worldwide, down more than 16,000--or 21 percent--from FY94. In the past five years, we have cut our population in half, and we did this while maintaining revenue at approximately the same level. This makes Digital one of the very few large, multinational companies that has maintained revenue during a major restructuring. Overall, we have strengthened our balance sheet, increasing cash to $1.6 billion. At 23 percent, our debt to debt plus equity position remains one of the lowest among Fortune 100 companies. This positions us well for the competitive challenges ahead. Strategic relationships Changes in the way we do business were never more evident than when we invited a partner to join us in introducing our new AlphaServer 8400 system. This is our most powerful enterprise server for large commercial and scientific applications, powered by our most advanced Alpha microprocessor and running the only enterprise 64-bit UNIX operating system in the industry. Combined with 64-bit database software introduced by our partner Oracle Corporation on the same day, this system delivers unprecedented performance. By working closely with Oracle--and by having a focused marketing plan in place when the system was announced--Digital delivered a product that is winning broad market acceptance. And the momentum has continued with other database partners, including Informix, Sybase and Software AG, who subsequently announced plans to offer 64-bit database software to exploit the advantages of Digital's platform. These alliances underscore our strategy of combining the best of Digital with the best of our partners to deliver the best information technology solutions to our customers. 3 To leverage our product and service strengths and meet customer needs, Digital will continue to form key strategic alliances. The expansion of our long- standing relationship with Microsoft is the most recent example. That alliance combines Microsoft's industry-leading desktop and client/server software with Digital's leadership enterprise systems, service, support and systems integration. This powerful combination enables customers to implement Microsoft Windows and Windows NT-based business applications and integrate them into the most complex computing environments. As part of this agreement, Microsoft committed to release future server software on Intel and Alpha systems simultaneously and also committed to simultaneous release of client software on Alpha and other RISC systems. This represents a strong endorsement of the tremendous market advantages of Digital's Alpha-based systems and architecture. It also reinforces our determination to build on that technology and position Digital for long-term growth. Strategy for growth As our financial turnaround progressed last year, we devoted considerable time and energy to defining our strategy for the future--a strategy built on our core competencies and responsive to the rapidly evolving information technology needs of our customers. Executing these strategies and demonstrating that we can grow profitably will be significant challenges in the year ahead. During the past year we created independent business units that are competing according to the market rules of the 90s. The previous business model-- vertically integrated businesses dedicated to providing a Digital solution to every customer problem--is simply no longer competitive. Today, the most successful companies focus on their most promising market segments. Digital is poised to be among those successful companies. We will choose our market opportunities carefully, competing aggressively and according to the rules of those markets. At the same time, we will help customers improve their productivity and competitiveness through connectivity solutions that build on Digital's unique strengths in ser- 4 vices and networking. As our partnerships with Oracle and Microsoft demonstrate, we will not do it alone. We will work hand-in-hand with our partners to deliver value to our customers, building on the excellence of our individual businesses and the synergy among them. Our goals for 1996 and beyond are very straightforward: To help our customers create more value for their customers and shareholders. To build cooperative, mutually beneficial relationships with our partners. To create a rewarding environment for our employees. And, through these efforts, to achieve long-term, sustainable growth and profitability for Digital and increased value for our shareholders. /s/ Robert B.Palmer Robert B.Palmer Chairman of the Board, President and Chief Executive Officer 5 Customer needs and market realities Customers around the world are making it very clear what they want from the computer industry. They want an open computing environment that includes products and services from different vendors. They want an open marketplace with alternate channels of distribution so they can buy what they need, when they need it, from whomever they choose. They want to be able to network and integrate new technology with existing systems. They want to manage computer resources and support users in a way that will reduce costs while implementing their business strategies. [PHOTOGRAPH OF ALPHA CHIP ON WHICH IS SUPERIMPOSED THE WORDS "DESKTOP", "ENTERPRISE" AND "DATACENTER" APPEARS HERE] Digital is combining the power of its billion-instruction-per-second Alpha chips with Windows NT, OpenVMS, and UNIX software, systems integration, and multivendor and network services to build networks that span the desktop, the enterprise and the datacenter. Digital is responding to these customer concerns by focusing its resources on helping customers build the networked information systems they need to compete in today's changing business environment. Digital has the ability--directly and through its partners--to implement and support networked platforms and applications in multivendor environments more cost effectively and quickly than anyone else. In this annual report, we'd like to show you the technology, support services, business alliances and market realities on which this capability is based. Standardization, open systems and the accelerating rate of technological change have profoundly altered the industry and the way our customers buy. In the past, the industry was vertically integrated. That is, large computer companies provided systems, software, applications, peripherals, networks and services based on their own proprietary technologies. That has changed. 6 In response to customer needs for flexible, open and more economical systems, the industry is moving toward a competitive model based on horizontal market segments where one company may be a leader in database technology, another in components, and a third in operating systems. For those who master it, this specialization has proven to be a very successful and profitable business strategy. The lesson: market and organizational focus drives success. Today, Digital has that focus. We're concentrating our efforts on those market segments where we have unique competencies--networking, multivendor services, software, high- performance systems--while developing a network of alliances with industry leaders whose competencies complement our own. An inherent paradox In this way, we are addressing the paradox inherent in a segmented marketplace. As horizontal segments have become more distinct and independent, the market has rewarded those vendors who narrowed their focus. At the same time--and here is the paradox--customers find themselves in need of a vendor with capabilities broad enough to integrate and support their various systems and networks. This is the opportunity that Digital is addressing. We have the technological resources and organizational skills to tie the segments together. Our global presence in multivendor services and systems integration, our leadership in high-performance computing--and the strong partnerships we have forged with companies that are leaders in particular market segments--place Digital in a unique position to provide customers with: . Connectivity between the desktop and the enterprise . Connectivity and integration among enterprise information systems . Internetworking to link the enterprise to customers, partners, suppliers and public networks . The ability to manage all the elements of an enterprise solution "By working closely with our partners, Digital is delivering enterprise solutions that help our customers become more productive, more efficient and more competitive."--Enrico Pesatori, Vice President and General Manager, Computer Systems Division 7 [PHOTOGRAPH OF AN ALPHASERVER 8400 SYSTEM, ON WHICH IS SUPERIMPOSED A PORTION OF A FINANCIAL APPLICATION, APPEARS HERE] Digital's AlphaServer 8400 system delivers the industry's highest RISC performance for business-critical applications at one-tenth the price of the most widely used mainframes. 8 A billion instructions per second High-performance systems, servers and clients Applications and performance drive the market. Whether you're looking at a personal computer, a workstation, a server or a database engine, your buying decision will be based--in large part--on the application you want to run and the speed with which it runs on a particular system. The Alpha advantage Digital's 64-bit Alpha systems run more than 7,000 applications and offer the highest performance and the best price/performance in the industry. We have the fastest microprocessors on the market today. And, although every major manufacturer has announced plans to move to a 64-bit architecture to respond to the speed and processing power of Alpha systems, Digital is the only company to offer a complete family of 64-bit microprocessors and computer systems--the only company with a commercial 64-bit UNIX operating system. Our first Alpha chip--introduced in 1992--had a two-to-one performance advantage over the fastest 32-bit microprocessor. Despite several years of competitive scrambling by the rest of the industry, Digital has maintained its performance lead. Digital's newest Alpha chip, produced at our chip fabrication facility in Hudson, Massachusetts, operates at 300 MHz, processes more than one billion instructions per second (BIPS) and contains 9.3 million transistors. Alpha symmetrical multiprocessing systems and Alpha clusters are tackling some of the largest and most complex applications in the world. Digital pioneered clustering technology so that a number of computers could share a common database and be managed as a single system. Today, customers can combine VAX and Alpha systems in OpenVMS clusters. We developed a software gateway to more than 60 different database systems so that you can get the data you need over the network regardless of the system on which it resides. We also provide the integration and support services customers need to downsize mainframe applications. Today, many database applications are simply outstripping the capabilities of competitive systems that can only support up to four gigabytes of memory. This limits the amount of data with which these systems can work. Alpha systems don't have this limitation. An AlphaServer 8400 system can keep 14 gigabytes of data in memory for immediate access. This means that an Alpha system can support all the memory a customer needs to run even the most complex database and scientific applications. The potential limits of a 64-bit architecture boggle the imagination. In theory, a 64-bit system could support enough memory to address or track all the data in 400 billion file cabinets. 9 [PHOTOGRAPH OF AN ALPHASERVER 8400 SYSTEM APPEARS HERE] Digital's AlphaServer 8400 system is the first computer to deliver performance of more than 300 SPECint92. With up to 12 300-MHz processors and up to 14 gigabytes of memory, AlphaServer 8400 systems are redefining performance and price/performance standards. Sybase, Informix and Software AG are actively developing--and Oracle is already delivering--64-bit database software for Alpha systems. With an Oracle database, customers can access data more than 200 times faster than they can with 32-bit software. This 64-bit database technology provides the foundation for next-generation applications including: . Decision support . Data warehousing . Data mining/micromarketing . Simulation and modeling . Realtime worldwide geographic information systems . On-line transaction processing . Interactive video A "killer" application Industry analysts are calling 64-bit database software the "killer application" that will open the floodgates of demand for 64-bit systems and lead to the downsizing of many mainframe applications in the retail, insurance, credit card, utility, distribution, manufacturing and other industries, and in research institutions and government agencies that process huge amounts of data. Intel and Alpha: the desktop and the enterprise In addition to building Alpha servers that match mainframes and supercomputers in processing power, Digital offers a complete family of Alpha workstations and Intel-based servers and personal computers. Alpha workstations have set a new standard for price/performance and cost of ownership. They support high- speed 3-D graphics, enhanced video capture, built-in "whiteboarding" and speech recognition. In addition, Digital's Intel-based servers and personal computers combine new and proven technology with service and support customers have come to expect from Digital. In the past two-and-a-half years, Digital has built a multi-billion-dollar-a- year PC business and shouldered its way from twenty-seventh to eleventh place in worldwide PC shipments by: . Building high-quality Intel-based servers and personal computers that offer the latest technology at the right price points . Making these servers and personal computers available through the distribution and retail channels from which customers want to buy . Providing comprehensive, award-winning services "With the introduction of the Alpha architecture in 1992, we set new performance standards for the industry. With the second generation chip, we again raised the bar. With each generation of the Alpha chip family, we will extend our lead as a frontrunner."--R. E. Caldwell, Vice President, Digital Semiconductor 10 [PHOTOGRAPH OF AN OFFICE IN WHICH SEVERAL PEOPLE ARE WORKING ON DIGITAL PERSONAL COMPUTERS APPEARS HERE] Digital was one of the first PC companies to offer systems based on the PCI (Peripheral Component Interconnect) bus and one of the first companies to offer 64-bit graphics and Pentium-based systems. We were also the first company in the industry to offer home theater-quality audio on our line of retail PCs. Our HiNote Ultra notebook systems showed the industry how to squeeze a full- function 75 MHz system with built-in wireless capabilities into a package measuring just 1.2 inches thick and weighing about four pounds. And, through our alliance with Microsoft, Digital is helping customers capitalize on Windows 95 and Windows NT capabilities to bring new levels of functionality to the desktop. We're making advanced server and PC technology available to businesses in the U.S., Europe and Asia-Pacific through distributors like Merisel, MicroAge and Metrologies. And we're reaching the growing small business and home user markets through retail chains and volume retailers like CompUSA, Sam's Club and Circuit City. -------------------------------------------------------------------------------- Setting a higher standard -------------------------------------------------------------------------------- Unprecedented: Linley Gwennap of The Microprocessor Report called the Alpha chip's performance lead over its competitors "nearly unprecedented in the microprocessor industry." Digital inside: Digital Semiconductor's PCI-Ethernet controller chips are used by five of the ten leading NIC (Network Interface Connection) card vendors and have claimed 70 percent of this emerging PCI-Ethernet market. Head-to-head: PC Magazine gave Digital's Prioris HX 590 server an "Editor's Choice" award in a head-to-head review of 14 departmental file servers. SCO World gave it a "Top of the World" award in a comparison test of five dual- processor PC servers. StorageWorks: Digital's storage business grew 22 percent over last year. We build plug-and-play storage systems--integrating disk, tape and optical drives from storage component manufacturers with our high-performance RAID (Redundant Array of Inexpensive Disks) array controllers and storage management software. We provide the industry's broadest range of interoperable storage solutions for desktop, enterprise and network environments. Applications range from simple file storage to large transactional databases and high-accessibility production systems. Best RAID disk array: According to PC Digest magazine, Digital's RAID Array 230 "has the fastest performance and the widest range of features" and "is one of the least expensive units tested." Hot iron: Digital's Alpha and Intel-based systems received six of the ten 1995 "Hot Iron" Awards presented by AIM Technology at the UNIFORUM trade show. The world's only: Digital's GIGAswitch/FDDI is the world's only FDDI (Fiber Distributed Data Interface) networking switch and was recently selected by R&D magazine as one of the year's most technologically significant new products. Making connections: According to Dataquest, Digital ranks second in the U.S. Ethernet switching market and second in the number of FDDI hub ports shipped worldwide. Customer innovation: Three of the ten winners in the seventh annual Computerworld Smithsonian Awards Program for the innovative use of technology were Digital customers. The Fox Chase Cancer Center was cited for consolidating chromosome research performed at four separate sites into a single genetic map, helping to put the Human Genome Project ahead of schedule. MCI Telecommunications won for a system that provides around-the-clock monitoring and access capabilities for network users. Another Alpha customer, the PharMark Corp., was cited for a system that identifies patients at high risk for drug- induced conditions. Switching servers: When Datamation and Cowen & Company surveyed mainframe sites they found more respondents planning to switch to Digital network servers than any other product. "Megaframe": According to Brad Day, director and principal analyst of client/server computing for Dataquest, "The AlphaServer 8200/8400 has put a stake in the ground in the new megaframe server segment of the market. The balanced optimization of I/O bus bandwidth, memory and disk capacity makes this a unique competitive platform within the high-end database server market. Digital can now claim to have the fastest servers, based on its 21164 BIPS Alpha chip." [PHOTOGRAPH OF A DIGITAL PERSONAL COMPUTER RUNNING MICROSOFT WINDOWS 95 AND ANOTHER DIGITAL PERSONAL RUNNING PATHWORKS AND ON WHICH IS SUPERIMPOSED THE WORDS "WINDOWS", "PATHWORKS", "NETWARE" AND "DBASE" APPEARS HERE.] On the day Windows 95 was announced, Digital--building on its alliance with Microsoft--introduced a complete line of personal computers that optimize Windows 95 for enterprise computing environments. Creating an integrated software environment Windows NT, OpenVMS, Digital UNIX and 7,000 applications In the past, departmental and corporate applications--whether in manufacturing, distribution, marketing or sales--were written as stand-alone programs. That has changed. Today, management expects applications to work together and wants to see information presented in a consistent manner. This requires systems and network integration, multivendor services and software frameworks for integrating new and existing applications. By offering three server operating systems--Windows NT, OpenVMS and Digital UNIX--Digital gives customers a choice, enabling them to match computer resources to the environment where they are used. Digital UNIX While the integration of the Windows NT and OpenVMS operating systems plays an important role in Digital's client/server strategy, the Digital UNIX operating system is playing an increasingly important role in high-performance applications. In fact, sales of Digital's X/Open-branded and POSIX-compliant UNIX operating system grew 40 percent last year. As the only full-function 64-bit commercial UNIX currently available, Digital UNIX supports very large databases (up to 14 gigabytes of system memory today), symmetrical multiprocessing, clustering, mechanical design automation and other complex 64-bit applications in the aerospace, petrochemical, automotive, electronics and biomedical industries. At the same time, it provides a high level of interoperability with Windows NT and OpenVMS applications. And, with Digital UNIX, Alpha systems run 32-bit applications much faster than competitive RISC processors. According to a leading industry analyst at the Yankee Group, this operating system provides Digital with "uninterrupted price/performance leadership in UNIX systems for the foreseeable future." Windows NT and OpenVMS Windows NT provides a consistent way of presenting data and working with applications on both Alpha and Intel-based systems. This is particularly important in client/server computing. If different programs have a different look and feel, it is very difficult for users to navigate among them. Windows NT was designed for the server in client/server environments. Running on a Digital Alpha or Intel uniprocessor, symmetrical multiprocessor or cluster, Windows NT can process requests and provide client services for applications running on Windows, Windows 95 and other systems on a local area network. 13 Digital was one of the first computer companies to support Windows NT. Working in partnership with Microsoft, we're implementing a seamless client/server computing environment that includes: . Windows and Windows 95 for the desktop . Windows NT for the server . OpenVMS for the enterprise As part of our alliance, Digital and Microsoft are implementing common application interface standards for Windows NT and OpenVMS programs. By following these standards, software developers and customers will be able to write programs that can be deployed on both Windows NT and OpenVMS platforms. At the same time, Digital and Microsoft software developers are working together to integrate Digital cluster technology with Windows NT and to develop Windows NT applications for Digital Alpha systems. This integration will provide current and future OpenVMS users with a growing library of applications that will run on a system that meets the standards-- X-Open branding and POSIX compliance--customers use to define an open system while meeting their requirements for high-availability, around-the-clock operations, multi-site clustering and disaster tolerance. Beyond the desktop In addition to operating systems, Digital--working with its partners--has developed software frameworks for integrating databases, electronic mail systems, local area networks and workgroup, production and technical applications across multivendor environments. Digital PATHWORKS "LAN to enterprise" networking software is one of the key elements in this software Digital's top-of-the-line, Pentium-powered Celebris GL 5120 personal computer provides the power and sizzling graphics needed to implement today's complex workgroup, business and financial applications. [PHOTOGRAPH OF DIGITAL CELEBRIS GL 5120 PERSONAL COMPUTER RUNNING PATHWORKS APPEARS HERE] "Software drives hardware sales. Working with partners like Microsoft, we're giving our customers a choice of operating systems and more applications from which to choose."--William D. Strecker, Vice President, Advanced Technology Group and Chief Technical Officer 14 [PHOTOGRAPH OF HANDS AT A KEYBOARD OF A DIGITAL PERSONAL COMPUTER APPEARS HERE] portfolio. With PATHWORKS software, customers can build a common environment for NetWare, Macintosh, MS-DOS, Windows, LAN Manager, UNIX, OS/2 and OpenVMS systems. PATHWORKS software includes the Mosaic browser so users can navigate the Internet's World Wide Web. In addition, we have developed the software and the networking switches, hubs and routers needed to link Ethernet and token ring LANs running Novell, Microsoft and Apple networking software and integrate them with corporate and wide area TCP/IP and SNA networks. An integrated environment Digital can provide the software customers need to build, maintain and manage integrated multivendor computing environments and networks that: . Integrate new and existing systems in a seamless, multivendor computing environment that extends from the desktop to the datacenter . Provide customers with the widest possible choice of Windows NT, OpenVMS and UNIX applications . Link employees working in different groups and sites together into cohesive teams by creating virtual local area networks that extend across the enterprise and the globe . Create a consistent, reliable and manageable computing environment while reducing operating and support costs -------------------------------------------------------------------------------- More to choose from -------------------------------------------------------------------------------- Applications, applications, applications: With more than 7,000 UNIX, OpenVMS and Windows NT applications, Alpha is the most successful new product in Digital's history. Although priced considerably lower than the first VAX systems, Alpha revenues topped $4 billion in the first three years. By comparison, it took five years for sales of VAX systems to reach the billion-dollar mark. Microsoft and Alpha: Digital will introduce Alpha and Intel-based systems optimized for Windows NT while Microsoft will release Microsoft BackOffice and other server software simultaneously on Alpha and Intel platforms. Award-winning technology: Digital cluster technology for Windows NT won the "Most Significant Technology" award at COMDEX. The ultimate client: With Digital's Alpha-based Multia desktop workstations, users can tap into servers running Windows, Windows NT, UNIX and legacy applications. At the same time, Multia desktops can be configured and managed from a single server. This dramatically cuts support costs, as each system does not have to be configured individually. Data warehousing: Baxter Healthcare is replacing mainframes with AlphaServer systems running SAP R/3 and the Oracle7 database. This will give immediate access to a huge database and the processing power needed to manage a $9-billion company. The Digital advantage: "Digital has a commanding lead in 64-bit application availability as well as in performance." --Andrew Allison, Editor, Inside the New Computer Industry. Help: Digital offers Windows, Windows 95, and Windows NT users on-site and remote support 24 hours a day, 365 days a year from local service offices in more than 100 countries, and has established 29 Microsoft Authorized Support Centers--more than any other Microsoft Solution Provider. In addition, Digital has 800 Microsoft-certified professionals and is training another 1,500 to support Microsoft Windows running on both Alpha and Intel systems from different manufacturers. First, worldwide: Novell named Digital as its first worldwide software maintenance provider. Digital now manages the procurement of upgrades, documentation and media at Novell sites, making it easier for NetWare users to keep their client/server software current. In addition to providing worldwide software maintenance, Digital also participates in Novell's Authorized Service Center Program. 15 [PHOTOGRAPH OF AN ALPHASERVER 2100, ON WHICH IS SUPERIMPOSED A CIRCUIT, APPEARS HERE] High-performance systems--like the Alpha 2100 server--that support multivendor computing environments play a key role in network services and systems integration. 16 The added value Multivendor services and systems integration Traditionally, MIS managers have seen service as an expense. Digital is showing how it can add value to multivendor networks and environments while reducing support costs. The goal is not simply to address problems as they arise or to provide additional resources when personnel or budgets are constrained, but to reduce the cost of ownership, improve asset management and provide a better return on investment by helping users take full advantage of their computer resources. Digital is helping its customers reduce the direct and hidden costs inherent in planning, designing, implementing and maintaining multivendor computer networks and hardware and software systems from the desktop to the datacenter. These costs can be substantial--particularly for large corporations with geographically dispersed operations. According to the Gartner Group, it can cost a company as much as $8,000 a year to own and operate a personal computer. Return on investment is harder to measure. However, Digital's Multivendor Customer Services Division has grown into a multi-billion dollar, 22,000-person business by demonstrating ways to cut service and network integration costs and ensure the success of new investments in information technology. Lifecycle services We support customers through the entire lifecycle, from asset acquisition to product retirement. We help customers plan, design, implement, manage and maintain hardware, software and networks. And we provide these services 24 hours a day, 365 days a year in more than 100 different countries. Our role is not limited to supporting Digital systems. As a multivendor service organization, we support hardware, software and networking products from IBM, Hewlett-Packard, Olivetti, Intel, Dell, Apple, Compaq, Sun, Microsoft, Novell, Oracle, NeXT and 1,400 other vendors. In many cases, hardware and software companies rely on Digital as a focal point to support their products. 17 A key alliance For example, our alliance with Microsoft is designed to help customers implement client/server solutions where Windows, Windows 95, Windows NT, OpenVMS and other systems work together in a seamless environment. Working in partnership with Microsoft, Digital can help customers manage Windows implementation and support costs by providing installation, software integration, help desk and network support services for both local and global companies. Digital's PC and Software Utility programs With the introduction of our PC Utility program, Digital became the first computer company to provide business customers with lifecycle services to support desktop users including: . Planning and local area network design . Multivendor product procurement . Staging, installation and training . Hardware, software and networking upgrades . Help desk support . Trade-in and product disposal Digital's AlphaServer 2100 4/275 system supports up to four processors, two gigabytes of memory and industry-standard PCI and EISA I/O. It offers twice the performance of competitive systems at half the price. [PHOTOGRAPH OF AN ALPHASERVER 2100 4/275 SYSTEM APPEARS HERE] "Digital's services enable companies to rapidly assimilate multivendor technology and capture a competitive advantage."--John J. Rando, Vice President and General Manager, Multivendor Customer Services Division 18 [PHOTOGRAPH OF TWO PEOPLE IN AN OFFICE WITH A COMPUTER, ONE OF WHOM IS SPEAKING ON A TELEPHONE, APPEARS HERE] Our Software Utility program provides customers with an enterprise-wide service that includes software acquisition, license management and tracking and maintenance to help reduce support costs and ensure the smooth implementation and integration of new applications. Systems integration Digital is one of the four largest systems integration companies in the world. In fact, Digital is ranked second by both International Data Corporation and Computer Reseller News magazine. We take a "hands-on" approach. Working in partnership with the customer--and in many cases with outside consultants and other computer companies--we are ready to tackle downsizing programs, design and implement IT infrastructures and reengineer business processes to integrate them with advanced information technology. -------------------------------------------------------------------------------- Supporting customers around the world -------------------------------------------------------------------------------- Lifecycle service: "Although many companies have attempted to package sets of services to meet the needs of the IS services market, Digital has assembled one of the most comprehensive sets of offerings yet."--Kurt Johnson, International Data Corporation. Service innovation: PC Utility, Digital's complete personal computer service, won the 1995 Harold H. Short, Jr. Innovations in Service Award presented by Service News. The Microsoft network: When Microsoft entered the on-line service business, they selected Digital to manage the datacenter--including hundreds of servers--for this new global online service. Best support: Digital received the first annual InfoWorld magazine award for Best Client/Server Technical Support. MicroAge: Digital was named "New Vendor of the Year" by MicroAge. Almost overnight, Digital became one of the top ten suppliers to the Tempe, Arizona distribution company. Within the hour: Out of the five million help desk calls to Digital Customer Support Centers, 75 percent were resolved within the hour, 92 percent within the same day. Banking on Digital's PC Utility: With 170 branch banking offices throughout South Australia, 1,500 Digital PCs, 81 Digital servers, 76 local area networks, software and network equipment from dozens of different companies, the Bank of South Australia turned to Digital for complete PC support services. Digital prestaged PCs with preconfigured images, installed local area networks, deinstalled old equipment and continues to provide user support for bank employees. A bull market: The Spanish stock exchanges are moving their transaction processing from an IBM environment to a cluster of VAX systems and a network of 85 AlphaServers that will be installed in stockbroker offices together with 400 Pentium-powered Digital PCs. The S.I.B.E. system--Sistema de Interconexion Bursatil Espanol--was developed by the Madrid Stock Exchange and will support the fixed income and equities market. A sure bet: Working in partnership with GTECH UK, Digital helped The Camelot Group, operators of the United Kingdom's National Lottery, build a secure network to process ticket sales from 35,000 retailers throughout England, Scotland, Wales and Northern Ireland. The network--which went online this past year--is based on an open operating platform with custom encryption boards. It includes both VAX systems running Digital's OpenVMS operating system and Alpha systems running the Digital UNIX operating system. 19 [PHOTOGRAPH OF DIGITAL'S HINOTE ULTRA NOTEBOOK COMPUTER RUNNING DIGITAL'S HOME PAGE ON THE INTERNET APPEARS HERE.] Digital's Home Page on the Internet as seen on a HiNote Ultra notebook. With Digital's Mobilizer for Windows software, notebook users can work anywhere, anytime without an active network connection. 20 Looking to the future Interactive video, mobile and wireless computing, the Internet and virtual networking To help customers and business partners successfully build new interactive network applications and integrate them with existing systems, networks and applications, Digital developed the enVISN (Enterprise Virtual Intelligent Switched Network) architecture. This hardware and software architecture provides the foundation for creating not only virtual LANs, but virtual networks that can bring everyone in the enterprise together. It is the link between existing network investments and the advanced communications and switching technologies needed to support growing network traffic. It provides a roadmap for our customers and business partners and a blueprint for the development of new networking hardware and software. Hardware and software based on the enVISN architecture--together with Digital's interactive video, Internet, mobile and wireless products--are redefining networking as we know it. Mobilizer for Windows Mobilizer for Windows software is one of the new Digital products that is redefining the way people think of networks. With this software and a notebook computer, users--whether they are at home or on the road--can access E-mail, file and database servers and other network resources just the way they would if they were sitting in the office with a desktop computer connected to their network. Building on sophisticated caching, queuing, resynchronization and redirection technology, Mobilizer for Windows software integrates existing mail, file and database applications and "mobilizes" them on a remote notebook system so applications run the same way regardless of whether the user is on- or off-line. 21 Interactive video The video server market is another example that shows how computers are changing the way we live and work. PC users and television viewers want to choose the multimedia and video programs they want--when they want them. The AlphaStudio Broadcast System has the storage, speed and capacity needed to create, produce and store the highest quality video available for broadcasters and businesses. In the studio, AlphaServers can produce special effects, titling and morphing with an ease never before possible. With Digital's Mediaplex software, an AlphaServer system can combine video, audio, text and other data to make movies, games, educational and other multimedia applications available to thousands of subscribers over public broadband networks and private LANs and WANs. Digitized video makes it possible for cable companies to insert local commercials into network programs on a town-by-town basis. It is the foundation for video-on-demand and pay-per-view systems for hotels, cable franchises, home shopping networks, new educational and financial services and interactive video applications for business. While multimedia and interactive video applications are still in their infancy, 64-bit technology predominates. More cable and telecommunications companies have selected AlphaServer systems for interactive video trials and deployment over competing products from other computer companies. Digital customers include Ameritech, NYNEX, U S WEST, British Telecom, Svenska Kable- TV in Sweden and TMN Networks, Inc. of Canada. Opening up the Internet The Internet will grow in importance as more and more customers use it as a business tool. All our Alpha and Intel-based platforms are Internet-ready. Digital has also developed a broad set of Internet products and services that are available through our distribution channels. And we're sharing what we learned from our own creative use of the Internet while working with Commerce Net, the World Wide Web Consortium and other industry groups. Working with our partners, we're helping customers implement electronic commerce, collaboration and information-sharing over the Internet. Weighing as little as four pounds and measuring just 1.2 inches thick, Digital's HiNote Ultra notebooks put desktop performance and graphics into a sleek package designed for mobile and wireless computing. [PHOTOGRAPH OF DIGITAL'S HINOTE ULTRA NOTEBOOK COMPUTER APPEARS HERE] "Leading-edge technology is creating new applications and new opportunities for Digital and for our customers."--Charles F. Christ, Vice President and General Manager, Components Division 22 [PHOTOGRAPH OF PORTIONS OF THREE BUSINESSMEN RUNNING IN BUSINESS SUITS APPEARS HERE] Our own Internet web server contains more than 6,000 pages of product and market information and is accessed more than 150,000 times a week. Search capabilities and hypertext links are provided so customers with World Wide Web capability can point-and-click their way smoothly from document to document, following threads of thought and interest. We're even giving customers direct access to Alpha computers so they can log on and test-drive their software on these systems. The virtual network Interactive video, mobile and wireless computing and the Internet are changing the very definition of networking. In the past, a network was a defined entity. It covered a specific area. It served specific users. And it was usually optimized for specific applications. That is changing. Communications technologies are converging. Digital's enVISN network architecture gives our customers and business partners the foundation they need to capitalize on this convergence and: . Use the Internet as a business tool . Implement interactive video and other multimedia applications . Create local and wide area virtual networks when, where and as needed to support workgroups, project teams and corporate initiatives and programs . Preserve existing networking investments while implementing distributed routing, high-speed Ethernet, FDDI and ATM switching and other new technologies . Reduce network operating and support costs -------------------------------------------------------------------------------- Moving along the information superhighway -------------------------------------------------------------------------------- Creating virtual LANs: "Digital's enVISN provides users with a practical roadmap leading to virtual LANs that save network managers' time in managing workgroup, department and project teams."--Michael Howard, President, Infonetics Research, Inc. Immediate returns: In the largest live Internet project ever, Digital and the California Secretary of State created a multimedia news center to provide realtime access to state-wide election returns. There were more than one million accesses on election day--giving the media and the public both the immediacy of live television and the depth of newspaper coverage. The start-to-finish election returns provided instant, up-to-the-minute information about all candidates, propositions and campaign spending. Customer choice: Westminster Cable, owned by British Telecommunications plc, is testing an interactive video-on-demand service in the London market. Using Digital's Mediaplex technology, Westminster Cable will offer subscribers a choice of 200 constantly updated movie titles so they can see what they want, when they want it. In addition to offering viewers a wide range of TV channels, Westminster's cable network carries the Reuters 1000 business information service, which can be accessed by personal computers via the cable TV network. Cy-brary: Using the Internet, libraries in the San Francisco Bay Area will be able to access over 400,000 pieces of sheet music that are being stored on a multimedia AlphaServer computer. Lands' End/MicroMall: MicroMall, Inc.--using Digital's video server technology and the resources of the Digital Media Studio--is building an at-home shopping environment for interactive cable networks. Lands' End, a major worldwide catalog house featuring men's and women's sportswear, was the first retailer to sign up for the new service. MicroMall is a unified direct marketing approach that enables retailers to advertise and sell their goods and services over multiple interactive networks, with production, promotion, merchandising, usage tracking, transaction management and billing handled by one point of contact. A national resource: The Government of Canada and the Province of Quebec joined with Digital to finance and create a National Multimedia Institute for the design, development, storage and distribution of multimedia applications, information, and solutions over multiple broadband networks and the Internet. A thousand channels: Adlink will use Digital Mediaplex video servers to connect its headquarters to more than 50 cable facilities throughout Southern California to deliver locally customized ads over the 20 cable TV channels originating at each facility. R&D commitment: According to Business Week, in 1994 Digital had the eighth largest R&D budget of any company based in the United States. Johnny Mnemonic: Sony Pictures Imageworks used Digital PCs to produce high-end visual effects and graphics for TriStar Pictures' "futuristic cyberpunk thriller," Johnny Mnemonic. http://www.digital.com: If you want information about Digital products or services, or if you want to test-drive an Alpha computer, here's our World Wide Web site address. 23 Contributing to the community Children and young people represent the future. Digital is focusing its Corporate Contributions Program around the theme of "Children and Youth: Investing in the Future." Digital is a national sponsor of City Year, a U.S. program that brings together young adults from diverse backgrounds in a year of full-time community service. Hundreds of Digital employees are actively involved in this program, and the company has provided funding and equipment to help bring it to cities throughout the United States. The success of the program is such that President Clinton based Americorps--his national service program--in part on the City Year model. Digital's Contributions Program also provides corporate funding to assist local Digital operations around the world in efforts to help children in their communities to reach full potential. We are supporting more than 80 innovative programs around the world, including the Foundation for Handicapped Children in Lazni, Slovakia; the Foundation for Political Refugees in Zaandam, The Netherlands; the Centro de Reabilitacao Profissional de Cercizimbra in Sessimbra, Portugal; and the North Avenue Day Nursery in Chicago, Illinois. Project Reach is another example of our commitment to play a constructive role in the countries where we do business. This program is providing tuition assistance, leadership training and support to more than 50 undergraduates in South African universities. In addition to these programs, Digital: . Established an HIV/AIDS program office to help educate its employees . Eliminated ozone-depleting CFCs from all its products, processes and services . Funds an External Research Program that supports projects at 125 colleges and universities around the world . Published a formal code of business conduct . Reaffirmed "Earth Vision," the company's long-standing commitment to protecting and preserving the environment Taken together, these initiatives reflect Digital's core values and the belief--shared by management and employees alike--that we can help bring the world together. [PHOTOGRAPH OF THE ARCHBISHOP DESMOND TUTU HUMAN RIGHTS AWARD APPEARS HERE.] Digital was one of the five recipients of the first annual Archbishop Desmond Tutu Human Rights Awards presented by Kagiso Trust and the Parliamentary Human Rights Foundation Awards Committee of South Africa. "Digital's employees are continuously making a difference. They have a tradition of working together, building the future on common values and goals."--Sid Ferrales, Vice President, Worldwide Human Resources 24 Financial statements 26 Eleven-year financial summary 28 Management's discussion and analysis of results of operations and financial condition 32 Report of management 32 Report of independent accountants Consolidated financial statements 33 Consolidated statements of operations 34 Consolidated balance sheets 35 Consolidated statements of cash flows 36 Consolidated statements of stockholders' equity Notes to consolidated financial statements 37 Note A: Significant accounting policies 38 Note B: Geographic operations 40 Note C: Income taxes 41 Note D: Capitalized computer software development costs 42 Note E: Restructuring actions 43 Note F: Debt 43 Note G: Postretirement and other postemployment benefits 46 Note H: Commitments and contingencies 46 Note I: Financial instruments 48 Note J: Investing and divesting activities 49 Note K: Stock plans 50 Note L: Stockholders' equity Supplementary information 51 Quarterly financial data 52 Officers and management 53 Directors 54 Committees of the Board 54 Corporate Consulting Engineers 55 Investor information 25 Eleven-year financial summary
(dollars in millions except per share data and stock prices/6/) 1995 1994 1993 1992 -------------------------------------------------------------------------------------------------------------------------------- Revenues Product sales $ 7,616 $ 7,191 $ 7,588 $ 7,696 Service and other revenues 6,197 6,260 6,783 6,235 -------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 13,813 13,451 14,371 13,931 -------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of product sales, service and other revenues 9,392 8,912 8,631 8,132 Research and engineering expenses 1,040 1,301 1,530 1,754 Selling, general and administrative expenses/1/ 3,273 5,234 4,447 6,181 -------------------------------------------------------------------------------------------------------------------------------- Operating income/(loss) 108 (1,996) (237) (2,136) -------------------------------------------------------------------------------------------------------------------------------- Net interest income/(expense) (33) (24) 13 57 -------------------------------------------------------------------------------------------------------------------------------- Income/(loss) before income taxes and cumulative effect of changes in accounting principles 76 (2,020) (224) (2,078) -------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes 18 85 27 232 -------------------------------------------------------------------------------------------------------------------------------- Net income/(loss)/2/ $ 122 $(2,156) $ (251) $ (2,796) -------------------------------------------------------------------------------------------------------------------------------- Net income/(loss) applicable per common share/2,3,4/ $ .59 $(15.80) $ (1.93) $ (22.39) -------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (in millions)/4/ 146 137 130 125 -------------------------------------------------------------------------------------------------------------------------------- Financial position Inventories $ 2,054 $ 2,064 $ 1,755 $ 1,614 Accounts receivable, net of allowance $ 3,219 $ 3,319 $ 3,020 $ 3,594 Net property, plant and equipment $ 2,269 $ 3,129 $ 3,178 $ 3,570 Total assets $ 9,947 $10,580 $10,950 $ 11,284 Long-term debt $ 1,013 $ 1,011 $ 1,018 $ 42 Stockholders' equity $ 3,528 $ 3,280 $ 4,885 $ 4,931 Stockholders' equity per common share/3/ $ 20.89 $ 20.24 $ 36.19 $ 38.58 -------------------------------------------------------------------------------------------------------------------------------- General information and ratios Current ratio 1.7:1 1.4:1 1.8:1 1.4:1 Quick ratio 1.1:1 .9:1 1.2:1 1.0:1 Working capital $ 3,026 $ 1,832 $ 2,964 $ 2,015 Investments in property, plant and equipment $ 366 $ 682 $ 529 $ 710 Depreciation $ 508 $ 574 $ 699 $ 733 Total debt as a percentage of total debt plus equity 22.5% 24.1% 17.5% 1.8% Operating income/(loss) as a percentage of revenues 0.8% (14.8)% (1.7)% (15.3)% Income/(loss) before income taxes as a percentage of revenues 0.5% (15.0)% (1.6)% (14.9)% Effective tax rate 24.2% 4.2% 12.0% 11.2% Net income/(loss) as a percentage of revenues 0.9% (16.0)% (1.7)% (20.1)% Net income/(loss) as a percentage of average stockholders' equity 3.6% (52.8)% (5.1)% (44.5)% Net income/(loss) as a percentage of average total assets 1.2% (20.0)% (2.3)% (24.1)% Non-U.S. revenues as a percentage of total revenues 65% 62% 64% 63% Number of days sales of accounts receivable outstanding 77 76 69 83 Inventory turns 4.6 4.7 5.1 5.1 Number of employees at year-end 61,700 77,800 89,900 107,900 Common stockholders at year-end 68,572 77,722 86,611 99,644 Common stock yearly high and low sales prices $ 49-18 $ 43-18 $ 49-30 $ 72-33 --------------------------------------------------------------------------------------------------------------------------------
/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. 26
1991 1990 1989 1988 1987 1986 1985 ----------------------------------------------------------------------------------------------------------------------------------- Revenues Product sales $ 8,299 $ 8,146 $ 8,190 $ 7,541 $ 6,254 $ 5,103 $ 4,530 Service and other revenues 5,612 4,797 4,552 3,934 3,135 2,487 2,156 ----------------------------------------------------------------------------------------------------------------------------------- Total operating revenues 13,911 12,943 12,742 11,475 9,389 7,590 6,686 ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses Cost of product sales, service and other revenues 7,278 6,795 6,242 5,468 4,514 4,282 4,087 Research and engineering expenses 1,649 1,614 1,525 1,306 1,010 814 717 Selling, general and administrative expenses/1/ 5,572 4,521 3,639 3,066 2,253 1,665 1,432 ----------------------------------------------------------------------------------------------------------------------------------- Operating income/(loss) (588) 13 1,336 1,635 1,612 829 450 ----------------------------------------------------------------------------------------------------------------------------------- Net interest income/(expense) 68 111 85 106 77 28 (19) ----------------------------------------------------------------------------------------------------------------------------------- Income/(loss) before income taxes and cumulative effect of changes in accounting principles (520) 124 1,421 1,741 1,689 857 431 ----------------------------------------------------------------------------------------------------------------------------------- Provision for income taxes 97 50 348 435 552 240 (16)/5/ ----------------------------------------------------------------------------------------------------------------------------------- Net income/(loss)/2/ $ (617) $ 74 $ 1,073 $ 1,306 $ 1,137 $ 617 $ 447 ----------------------------------------------------------------------------------------------------------------------------------- Net income/(loss) applicable per common share/2,3,4/ $ (5.08) $ .59 $ 8.45 $ 9.90 $ 8.53 $ 4.81 $ 3.71 ----------------------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding (in millions)/4/ 122 125 127 132 133 131 124 ----------------------------------------------------------------------------------------------------------------------------------- Financial position Inventories $ 1,595 $ 1,538 $ 1,638 $ 1,575 $ 1,453 $ 1,200 $ 1,756 Accounts receivable, net of allowance $ 3,317 $ 3,207 $ 2,965 $ 2,592 $ 2,312 $ 1,903 $ 1,539 Net property, plant and equipment $ 3,778 $ 3,868 $ 3,646 $ 3,095 $ 2,127 $ 1,867 $ 1,731 Total assets $ 11,875 $ 11,655 $ 10,668 $ 10,112 $ 8,407 $ 7,173 $ 6,369 Long-term debt $ 150 $ 150 $ 136 $ 124 $ 269 $ 333 $ 837 Stockholders' equity $ 7,624 $ 8,182 $ 8,036 $ 7,510 $ 6,294 $ 5,728 $ 4,555 Stockholders' equity per common share/3/ $ 61.18 $ 66.76 $ 66.12 $ 59.47 $ 49.87 $ 44.54 $ 38.43 ----------------------------------------------------------------------------------------------------------------------------------- General information and ratios Current ratio 2.0:1 2.3:1 2.9:1 2.9:1 3.4:1 4.9:1 4.9:1 Quick ratio 1.4:1 1.6:1 1.9:1 2.0:1 2.4:1 3.5:1 2.8:1 Working capital $ 3,777 $ 4,332 $ 4,501 $ 4,516 $ 4,377 $ 4,223 $ 3,694 Investments in property, plant and equipment $ 738 $ 1,028 $ 1,223 $ 1,518 $ 748 $ 564 $ 572 Depreciation $ 772 $ 759 $ 659 $ 516 $ 435 $ 384 $ 315 Total debt as a percentage of total debt plus equity 2.2% 2.0% 2.0% 3.6% 4.2% 5.9% 15.7% Operating income/(loss) as a percentage of revenues (4.2)% .1% 10.5% 14.2% 17.2% 10.9% 6.7% Income/(loss) before income taxes as a percentage of revenues (3.7)% 1.0% 11.2% 15.2% 18.0% 11.3% 6.4% Effective tax rate 18.8% 40.0% 24.5% 25.0% 32.7% 28.0% (3.7)%/5/ Net income/(loss) as a percentage of revenues (4.4)% .6% 8.4% 11.4% 12.1% 8.1% 6.7% Net income/(loss) as a percentage of average stockholders' equity (7.8)% .9% 13.8% 18.9% 18.9% 12.0% 10.5% Net income/(loss) as a percentage of average total assets (5.2)% .7% 10.3% 14.1% 14.6% 9.1% 7.5% Non-U.S. revenues as a percentage of total revenues 60% 56% 55% 50% 47% 42% 40% Number of days sales of accounts receivable outstanding 76 86 76 75 78 79 75 Inventory turns 4.6 4.3 3.9 3.6 3.4 2.9 2.3 Number of employees at year-end 115,100 116,900 118,400 113,900 103,000 88,300 83,000 Common stockholders at year-end 98,023 92,934 99,084 103,162 99,379 76,860 68,810 Common stock yearly high and low sales prices $ 87-45 $ 103-70 $ 122-86 $ 199-99 $ 174-82 $ 94-46 $ 63-39 -----------------------------------------------------------------------------------------------------------------------------------
/2/ In fiscal year 1995, net income and net income per share include a one-time benefit of $65M, or $.44 per share, for the cumulative effect of a change in accounting principle. 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. /6/ Note: amounts may not be additive due to rounding. 27 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 ------------------------------ ------------------------------------------------------ ----------------------------------- 1993 1994 1995 Income and expense items 1994-95 1993-94 1992-93 ------------------------------ ------------------------------------------------------ ----------------------------------- 52.8% 53.5% 55.1% Product sales 6% (5)% (1)% 47.2% 46.5% 44.9% Service and other revenues (1)% (8)% 9% ------------------------------ ------------------------------------------------------ ----------------------------------- 100.0% 100.0% 100.0% Total operating revenues 3% (6)% 3% ------------------------------ ------------------------------------------------------ ----------------------------------- 58.8% 69.1% 70.9% Cost of product sales (b) 9% 11% 5% 61.4% 63.0% 64.5% Service expense and cost of other revenues (b) 1% (5)% 7% ------------------------------ ------------------------------------------------------ ----------------------------------- 60.1% 66.3% 68.0% Total cost of operating revenues 5% 3% 6% 10.6% 9.7% 7.5% Research and engineering expenses (20)% (15)% (13)% 30.9% 29.9% 23.7% Selling, general and administrative expenses (19)% (9)% (5)% - 9.0% - Restructuring charges NM NM NM ------------------------------ ------------------------------------------------------ ----------------------------------- (1.7)% (14.8)% .8% Operating income/(loss) 100+% 100+% (89)% ------------------------------ ------------------------------------------------------ ----------------------------------- .4% .3% .4% Interest income 16% (23)% (34)% .4% .5% .7% Interest expense 23% 44% 32% ------------------------------ ------------------------------------------------------ ----------------------------------- Income/(loss) before income taxes and cumulative (1.6)% (15.0)% .5% effect of changes in accounting principles 100+% 100+% (89)% ------------------------------ ------------------------------------------------------ ----------------------------------- .2% .6% .1% Provision for income taxes (78)% 100+% (88)% ------------------------------ ------------------------------------------------------ ----------------------------------- Income/(loss) before cumulative effect of changes (1.7)% (15.6)% .4% in accounting principles 100+% 100+% (89)% ------------------------------ ------------------------------------------------------ ----------------------------------- (Benefit)/charge due to cumulative effect of changes - .4% (.5)% in accounting principles, net of tax benefits 100+% NM NM ------------------------------ ------------------------------------------------------ ----------------------------------- (1.7)% (16.0)% .9% Net income/(loss) 100+% 100+% (91)% ------------------------------ ------------------------------------------------------ -----------------------------------
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 1995, total operating revenues increased $362 million or 3% to $13.8 billion, following a decrease of $921 million or 6% in fiscal 1994, and an increase of $440 million or 3% in fiscal 1993. Non-U.S. revenues accounted for 65% of total operating revenues in fiscal 1995, up from 62% and 64% in fiscal 1994 and 1993, respectively. In fiscal 1995, strong growth in the Asia-Pacific region and slight growth in Europe were offset by a modest decline in United States revenues. At the end of fiscal 1994 and during fiscal 1995, the Corporation implemented restructuring and other actions in response to the fiscal 1994 decline in European revenues which resulted principally from weak demand for the Corporation's products and services in that region, exacerbated by difficulties associated with the Digital-Kienzle business (see Note J). Product sales for fiscal 1995 were $7.6 billion, or 55% of total operating revenues, compared with $7.2 billion, or 53% of revenues in fiscal 1994 and $7.6 billion, or 53% of revenues in fiscal 1993. Product sales increased in fiscal 1995 due principally to increased demand for Alpha-based systems and Intel-based personal computers, offset by the effects of divestments and reduced VAX systems revenue as the Corporation approaches the end of a major product transition. Adjusted for divestments as described below, product sales for fiscal 1995 increased by 14% over the prior year. For the year, Alpha-based systems represented 22% of product sales, up from 13% and 3% in fiscal 1994 and 1993, respectively. Revenue from Intel-based personal computers represented 26% of product sales, up from 19% in fiscal 1994 and 9% in fiscal 1993. VAX systems revenues represented 10% of product sales, down from 19% and 34% in fiscal 1994 and 1993, respectively. The remainder of product sales included revenue from the sale of software, storage subsystems, network products, memory products, printers and other component parts. Increased demand for the Corporation's UNIX-based offerings and server products contributed to the growth in Alpha-based systems revenue in fiscal 1995. New products and expanded distribution channels contributed to growth in demand for the Corporation's personal computer products. The Corporation also experienced growing demand for certain networks and storage subsystem products. 28 Revenues (continued) -------------------------------------------------------------------------------- In fiscal 1995, service and other revenues totaled $6.2 billion, or 45% of total operating revenues, compared with $6.3 billion, or 47% of total operating revenues in fiscal 1994 and $6.8 billion, or 47% of total operating revenues in fiscal 1993. In fiscal 1995, the components of the Corporation's service revenues reflected the changing nature of the Corporation's business, including anticipated lower levels of revenue from VAX systems maintenance business, increased revenues from multivendor maintenance services and more competitive pricing. In addition, the Corporation experienced a lower level of revenue from consulting services, as the Corporation focuses on systems integration opportunities which best align with its technical competencies. During fiscal 1995, the Corporation sold portions of its storage business, its relational database business, a software distribution subsidiary, a contract manufacturing business and a semiconductor facility. In fiscal 1994, these businesses generated approximately 5% of total consolidated operating revenues but had an immaterial effect on the consolidated net loss. In addition, as part of the Corporation's ongoing restructuring actions, the Corporation transferred part of its business in Germany to a new, independent, employee-owned company, effective as of October 1, 1994. In fiscal 1994, this business represented less than 1% of total consolidated operating revenues and had an immaterial effect on the consolidated results of operations. -------------------------------------------------------------------------------- Operating revenues -------------------------------------------------------------------------------- [ ] Product sales [ ] Service and other revenue Dollars in billions [BAR GRAPH APPEARS HERE] Expenses and profit margins -------------------------------------------------------------------------------- The Corporation's total gross margin for fiscal 1995 was 32% of total operating revenues, compared with 34% and 40% for fiscal 1994 and 1993, respectively. The Corporation's gross margin on fiscal 1995 product sales was 29%, compared with 31% and 41% of product sales in fiscal 1994 and 1993, respectively. The decline in product gross margin for the year was due to several factors, including the continued shift in the Corporation's product sales toward lower- end, industry-standard systems which typically carry lower margins, as well as greater use of indirect distribution channels, partially offset by the divestment of certain low-margin businesses and increased demand for higher margin server products. The decline in product gross margin in fiscal 1994 was due principally to pricing, as well as the product mix and distribution channel shifts noted above. In fiscal 1995, revenues associated with products sold through indirect channels of distribution accounted for approximately 58% of product sales, compared with 45% and 33% in fiscal 1994 and 1993, respectively. Gross margin on service revenues for fiscal 1995 was 36%, compared with 37% and 39% of service revenues in fiscal 1994 and 1993, respectively. The decline in service gross margin was due to a continuing shift in the mix of service revenues toward multivendor and other service offerings, which generally carry lower margins than the Corporation's VAX system maintenance services, as well as lower margins from systems integration and other consulting services. Research and engineering (R&E) spending for fiscal 1995 totaled $1 billion, or 8% of total operating revenues, compared with $1.3 billion, or 10% of total operating revenues in fiscal 1994 and $1.5 billion, or 11% of total operating revenues in fiscal 1993. The decrease in R&E expense in fiscal 1995 was due principally to the elimination of redundant engineering efforts, more standardized product offerings and divestments. The Corporation believes that its R&E spending is appropriate to support current operations and to maintain a strong, consistently market-driven product set. Selling, general and administrative (SG&A) expenses for fiscal 1995 were $3.3 billion, or 24% of total operating revenues, compared with $4.0 billion (including $310 million of non-recurring charges), or 30% of total operating revenues and $4.4 billion, or 31% of total operating revenues, for fiscal 1994 and 1993, respectively (see Note J). The decrease in SG&A expense in fiscal 1995 was due principally to restructuring actions. 29 Expenses and profit margins (continued) -------------------------------------------------------------------------------- At the end of fiscal 1994, the Corporation approved a restructuring plan intended to achieve a more competitive cost structure. While certain restructuring actions remain to be implemented in fiscal 1996, the Corporation expects to meet the objectives of the plan. The total estimated cost of planned restructuring actions remains unchanged (see Note E). While the Corporation has made progress in reducing costs, the Corporation continues to review opportunities to improve its cost structure. Total employee population decreased by 16,100 during fiscal 1995 to approximately 61,700. The Corporation had approximately 77,800 and 89,900 employees at the end of fiscal 1994 and 1993, respectively. The net effect of currency exchange rate movements on revenues was positive in fiscal 1995 compared with fiscal 1994 and negative in fiscal 1994 when compared with fiscal 1993. These effects were offset substantially by the effects of currency exchange rate movements on non-dollar denominated costs and by competitive responses to market conditions resulting from currency fluctuations (see also Note I for a further description of the Corporation's use of foreign exchange option and forward contracts). Interest income in fiscal 1995 was $57 million, up from $49 million in fiscal 1994 and down from $64 million in fiscal 1993. The increase in interest income in fiscal 1995 reflects higher interest rates and higher average cash balances. Interest expense increased to $90 million from $73 million and $51 million in fiscal 1994 and 1993, respectively, due to rising interest rates partially offset by the differential received on interest rate swap agreements in fiscal 1995 and 1994 (see Note I). In fiscal 1995, income tax expense was $18 million on a pre-tax income of $76 million. Income tax expense in fiscal 1994 was $85 million, including a $70 million reduction in net deferred tax assets associated with non-U.S. operations, on a pre-tax loss of $2.0 billion. Income tax expense was $27 million on a pre-tax loss of $224 million in fiscal 1993. Income tax expense reflects several factors, including income taxes provided for profitable non- U.S. operations, benefit taken for net operating loss carryforwards in certain non-U.S. operations and an inability to recognize currently U.S. and certain non-U.S. tax benefits from operating losses (see Note C). Operating expenses Dollars in billions -------------------------------------------------------------------------------- [BAR GRAPH APPEARS HERE] -------------------------------------------------------------------------------- Employees Thousands of employees -------------------------------------------------------------------------------- [BAR GRAPH APPEARS HERE] -------------------------------------------------------------------------------- US dollar relative to major foreign currencies Fiscal 1991 equals 1.00 -------------------------------------------------------------------------------- [BAR GRAPH APPEARS HERE] 30 Expenses and profit margins (continued) -------------------------------------------------------------------------------- The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115 - Accounting for Certain Investments in Debt and Equity Securities, effective July 3, 1994. The Corporation recorded a one-time benefit of $65 million, or $.44 per common share, from unrealized gains on long-term investments. There was no cash flow impact from the adoption of SFAS No. 115 (see Note J). In March 1995, the Financial Accounting Standards Board issued SFAS No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that an impairment loss be recognized for long-lived assets and certain identified intangibles when the carrying amount of an asset may not be recoverable. The Corporation must adopt SFAS No. 121 by fiscal 1997. The Corporation does not expect the adoption of SFAS No. 121 to have a material effect on the consolidated results of operations or financial position of the Corporation. Adoption of SFAS No. 121 will have no cash flow impact on the Corporation. Availability of funds to support current and future operations and spending for operations -------------------------------------------------------------------------------- Cash and cash equivalents totaled $1.6 billion, $1.2 billion and $1.6 billion at the end of fiscal 1995, 1994 and 1993, respectively. Net cash used by operating activities was $348 million and $375 million in fiscal 1995 and 1994, respectively, compared with net cash generated of $47 million in fiscal 1993. The $348 million net use of cash from operating activities in fiscal 1995 was due principally to restructuring activities and increased inventory levels in support of increased demand for Alpha-based systems and personal computer product line extensions. Net cash generated from investing activities, including divestments, was $669 million in fiscal 1995, compared with net cash used of $626 million and $884 million in fiscal 1994 and 1993, respectively. During fiscal 1995, the Corporation sold all of its shares of Ing. Olivetti & C. S.p.A. common stock, portions of its storage business, its relational database business, a software distribution subsidiary, a contract manufacturing business and a semiconductor facility and other assets generating approximately $863 million in cash proceeds. The sale of property, plant and equipment generated an additional $209 million in cash proceeds. Capital spending was $366 million for fiscal 1995, compared with $682 million for fiscal 1994, due to continued efforts to focus and control all spending in the Corporation and a reduced level of spending for a new fabrication facility in Hudson, Massachusetts, as the initial construction neared completion. Net cash generated from financing activities was $100 million, $538 million and $1.1 billion in fiscal 1995, 1994 and 1993, respectively. The principal financing activity for fiscal 1995 was the issuance of stock under the Corporation's employee stock purchase plans. Cash generated was offset by the payment of approximately $36 million of dividends on preferred stock. In the third quarter of fiscal 1994, the Corporation issued and sold preferred stock generating net proceeds of $387 million. Dividends of approximately $2 million were paid in fiscal 1994. In fiscal 1993, the Corporation issued a total of $1.0 billion of long-term debt. Long-term debt was $1.0 billion at the end of fiscal 1995, 1994 and 1993. At the end of fiscal 1995, substantially all of the Corporation's available lines of credit were unused. During the first quarter of fiscal 1995, the Corporation terminated its domestic credit facility, having replaced it as a source of liquidity with a domestic accounts receivable securitization facility. During the fourth quarter of fiscal 1995, the Corporation entered into an accounts receivable securitization facility in the United Kingdom as an additional source of liquidity (see Note F). For fiscal 1995, cash expenditures for restructuring activities were $524 million, net of proceeds of approximately $200 million from the sale of property, plant and equipment. Cash expenditures for the year were less than originally projected due to lower than anticipated facilities-related costs, the timing of cash payments for employee separation actions and higher than originally estimated cash proceeds from the sale of property, plant and equipment associated with restructuring actions. Due principally to higher than anticipated proceeds from the sale of facilities, the Corporation currently estimates that the total net cash expenditures for restructuring actions will be approximately $900 million, including approximately $300 million expected to be paid in fiscal 1996 (see Note E). The Corporation's need for, cost of and access to funds are dependent on future operating results, as well as conditions external to the Corporation. The Corporation historically has maintained a conservative capital structure, and believes that its current cash position and its sources of and access to capital are adequate to support current and future operations. 31 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 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 L.L.P., independent accountants, have been engaged by the Audit Committee of the Board of Directors, with the approval of the stock- holders, to audit the Corporation's financial statements. Their report follows. /s/ Robert B. Palmer Robert B. Palmer Chairman of the Board, President and Chief Executive Officer /s/ Vincent J. Mullarkey 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 1, 1995 and July 2, 1994, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three fiscal years in the period ended July 1, 1995. 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 1, 1995 and July 2, 1994, and the consolidated results of its operations and cash flows for each of the three fiscal years in the period ended July 1, 1995, in conformity with generally accepted accounting principles. As discussed in Note J to the consolidated financial statements, the Corporation changed its method of accounting for certain investments in debt and equity securities in fiscal 1995. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Boston, Massachusetts July 31, 1995 32 Consolidated statements of operations Digital Equipment Corporation
(in thousands except per share data) ----------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 ----------------------------------------------------------------------------------------------------------------------------- Revenues (Notes A and B) Product sales $ 7,616,441 $ 7,191,251 $ 7,587,994 Service and other revenues 6,196,621 6,259,539 6,783,375 ----------------------------------------------------------------------------------------------------------------------------- Total operating revenues 13,813,062 13,450,790 14,371,369 ----------------------------------------------------------------------------------------------------------------------------- Costs and expenses (Notes A, D, G, and K) Cost of product sales 5,397,723 4,968,025 4,464,445 Service expense and cost of other revenues 3,993,970 3,943,612 4,166,946 Research and engineering expenses 1,040,028 1,301,347 1,530,119 Selling, general and administrative expenses (Note J) 3,272,913 4,027,869 4,447,160 Restructuring charges (Note E) - 1,206,000 - ----------------------------------------------------------------------------------------------------------------------------- Operating income/(loss) 108,428 (1,996,063) (237,301) Interest income 57,497 49,422 63,831 Interest expense (Notes F and I) 90,268 73,353 50,837 ----------------------------------------------------------------------------------------------------------------------------- Income/(loss) before income taxes and cumulative effect of changes in accounting principles 75,657 (2,019,994) (224,307) Provision for income taxes (Notes A and C) 18,342 85,043 27,023 ----------------------------------------------------------------------------------------------------------------------------- Income/(loss) before cumulative effect of changes in accounting principles 57,315 (2,105,037) (251,330) (Benefit)/charge due to cumulative effect of changes in accounting principles, net of tax (Notes C, G and J) (64,503) 51,026 - ----------------------------------------------------------------------------------------------------------------------------- Net income/(loss) 121,818 (2,156,063) (251,330) Dividends on preferred stock (Note L) 35,500 10,650 - ----------------------------------------------------------------------------------------------------------------------------- Net income/(loss) applicable to common stock $ 86,318 $ (2,166,713) $ (251,330) ----------------------------------------------------------------------------------------------------------------------------- Per common share (Note A) Income/(loss) applicable before cumulative effect of changes in accounting principles $ .15 $ (15.43) $ (1.93) Benefit/(charge) due to cumulative effect of changes in accounting principles .44 (.37) - ----------------------------------------------------------------------------------------------------------------------------- Net income/(loss) applicable per common share (Note A) $ .59 $ (15.80) $ (1.93) ----------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding (Note A) 146,331 137,090 130,409 -----------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 33 Consolidated balance sheets Digital Equipment Corporation
(dollars in thousands) ------------------------------------------------------------------------------------------------------------------------------ July 1, 1995 July 2, 1994 ------------------------------------------------------------------------------------------------------------------------------ Assets: Current assets Cash and cash equivalents (Note A) $ 1,602,148 $ 1,180,863 Accounts receivable, net of allowance of $150,655 and $111,925 3,219,082 3,318,854 Inventories (Note A) 2,053,620 2,063,978 Prepaid expenses, deferred income taxes and other current assets (Note C) 397,047 324,676 ------------------------------------------------------------------------------------------------------------------------------ Total current assets 7,271,897 6,888,371 Net property, plant and equipment (Note A) 2,268,722 3,129,489 Other assets (Notes A, C, D and J) 406,533 561,911 ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 9,947,152 $ 10,579,771 ------------------------------------------------------------------------------------------------------------------------------ Liabilities and stockholders' equity: Current liabilities Bank loans and current portion of long-term debt (Note F) $ 14,371 $ 32,614 Accounts payable 1,113,160 1,197,350 Income taxes payable (Note C) 76,757 20,753 Salaries, wages and related items 562,442 619,756 Deferred revenues and customer advances (Note A) 1,232,050 1,239,792 Accrued restructuring costs (Note E) 492,046 1,351,075 Other current liabilities 755,466 594,925 ------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 4,246,292 5,056,265 Deferred income taxes (Note C) 16 4,758 Long-term debt (Note F) 1,012,885 1,010,680 Postretirement and other postemployment benefits (Note G) 1,159,679 1,228,269 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 6,418,872 7,299,972 ------------------------------------------------------------------------------------------------------------------------------ Commitments and contingencies (Note H) ------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity (Notes K and L) Preferred stock, $1.00 par value (liquidation preference of $100 per share); authorized 25,000,000 shares; 4,000,000 shares of Series A 8 7/8% Cumulative Preferred Stock issued and outstanding 4,000 4,000 Common stock, $1.00 par value; authorized 450,000,000 shares; 149,777,573 shares and 142,287,078 shares issued 149,778 142,287 Additional paid-in capital 3,544,712 3,390,040 Retained deficit (170,210) (256,528) ------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 3,528,280 3,279,799 ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 9,947,152 $ 10,579,771 ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 34 Consolidated statements of cash flows Digital Equipment Corporation
(in thousands) -------------------------------------------------------------------------------------------------------------------------------- July 1, 1995 July 2, 1994 July 3, 1993 -------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income/(loss) $ 121,818 $ (2,156,063) $ (251,330) -------------------------------------------------------------------------------------------------------------------------------- Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation 507,966 573,970 698,631 Amortization 67,624 106,584 139,552 (Gain)/loss on disposition and write-down of other assets (Note J) (57,333) 310,000 - Other adjustments to income (34,576) 84,026 185,617 (Increase)/decrease in accounts receivable 42,862 (298,602) 574,016 Increase in inventories (Note A) (272,037) (308,838) (141,106) (Increase)/decrease in prepaid expenses and other current assets (17,862) 82,513 (26,552) Increase/(decrease) in accounts payable (49,517) 374,916 (218,866) Increase in taxes (Note C) 16,813 18,913 75,590 Increase/(decrease) in salaries, wages, benefits and related items (Note G) 31,306 163,221 (49,581) Increase/(decrease) in deferred revenues and customer advances 544 101,469 (70,312) Increase/(decrease) in accrued restructuring costs (Note E) (859,029) 612,086 (807,915) Increase/(decrease) in other current liabilities 153,911 (39,101) (60,828) -------------------------------------------------------------------------------------------------------------------------------- Total adjustments (469,328) 1,781,157 298,246 -------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities (347,510) (374,906) 46,916 -------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Investment in property, plant and equipment (365,551) (682,100) (528,691) Proceeds from the disposition of property, plant and equipment (Notes E and J) 208,505 97,456 46,049 Investment in other assets (Note J) (37,687) (64,377) (423,573) Proceeds from the disposition of other assets (Note J) 863,468 23,516 22,100 -------------------------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities 668,735 (625,505) (884,115) -------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating and investing activities 321,225 (1,000,411) (837,199) -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Proceeds from issuance of debt 13,253 22,742 984,482 Payments to retire debt (29,336) (19,451) (36,860) Issuance of preferred, common and treasury shares, including tax effects 151,643 536,563 195,600 Dividends paid (35,500) (1,775) - -------------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities 100,060 538,079 1,143,222 -------------------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents 421,285 (462,332) 306,023 Cash and cash equivalents at beginning of year 1,180,863 1,643,195 1,337,172 -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 1,602,148 $ 1,180,863 $ 1,643,195 --------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 35 Consolidated statements of stockholders' equity Digital Equipment Corporation
(in thousands) --------------------------------------------------------------------------------------------------------------------------------- Additional Retained Total Preferred Common paid-in earnings/ Treasury stockholders' stock stock capital (deficit) stock equity --------------------------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------------------------------------------------------- Shares issued under stock plans 7,491 143,993 151,484 Restricted stock plans, charge to operations 10,679 10,679 Dividends declared--preferred stock (35,500) (35,500) Net income--1995 121,818 121,818 --------------------------------------------------------------------------------------------------------------------------------- July 1, 1995 $ 4,000 $149,778 $3,544,712 $ (170,210) $ - $ 3,528,280 ---------------------------------------------------------------------------------------------------------------------------------
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 in fiscal 1994 on preferred stock issued in March 1994. The accompanying notes are an integral part of these financial statements. 36 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 significant intercompany accounts and profits have been eliminated. Certain prior years' amounts have been reclassified 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 1, 1995 and July 2, 1994 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. Revenue recognition: Revenues from product sales are recognized at the time the product is shipped. Provisions for product sales returns and allowances are recorded in the same period as the related revenue. Service and other revenues are recognized ratably over the contractual period or as the services are performed. Warranty: Warranty service revenues are recognized ratably over the warranty period; warranty-related costs are recognized as 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 1, 1995 July 2, 1994 -------------------------------------------------------------------------------- Raw materials $ 595,829 $ 476,172 Work-in-process 434,408 605,503 Finished goods 1,023,383 982,303 -------------------------------------------------------------------------------- Total inventories $ 2,053,620 $ 2,063,978 --------------------------------------------------------------------------------
Property, plant and equipment: Property, plant and equipment are stated at cost.
(in thousands) July 1, 1995 July 2, 1994 -------------------------------------------------------------------------------- Land $ 244,187 $ 356,586 Buildings 1,418,636 1,967,815 Leasehold improvements 355,887 414,622 Machinery and equipment 3,457,017 4,281,866 -------------------------------------------------------------------------------- Total property, plant and equipment 5,475,727 7,020,889 Less accumulated depreciation 3,207,005 3,891,400 -------------------------------------------------------------------------------- Net property, plant and equipment $ 2,268,722 $ 3,129,489 --------------------------------------------------------------------------------
Depreciation expense is computed principally on the following bases:
Classification Depreciation lives and methods -------------------------------------------------------------------------------- Buildings 10 to 33 years (straight-line) -------------------------------------------------------------------------------- Leasehold Life of assets or term of lease, improvements whichever is shorter (straight-line) -------------------------------------------------------------------------------- Machinery and 3 to 10 years (principally equipment 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. 37 Note A: Significant accounting policies (continued) -------------------------------------------------------------------------------- Other assets: Other assets include long term 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 no more than 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 through sales subsidiaries throughout the world; by direct sales from the parent corporation; and through various representative distributorship arrangements, value-added resellers and retailers. The Corporation's non-U.S. manufacturing operations include plants in Canada, Europe and Asia-Pacific. 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 $9.0 billion, $8.3 billion, and $9.2 billion for the fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993, respectively, which represented 65%, 62% and 64%, respectively, of total operating revenues. 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. These accumulated retained earnings, before elimination of intercompany transactions, aggregated $3.0 billion, $2.9 billion and $4.0 billion at July 1, 1995, July 2, 1994 and July 3, 1993, respectively. 38 Note B: Geographic operations (continued) --------------------------------------------------------------------------------
(in thousands) ----------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 ----------------------------------------------------------------------------------------------------------------------- Net revenues United States: Unaffiliated customer sales $ 4,816,024 $ 5,176,748 $ 5,219,276 Inter-area transfers 1,426,305 1,830,749 1,793,832 ----------------------------------------------------------------------------------------------------------------------- 6,242,329 7,007,497 7,013,108 ----------------------------------------------------------------------------------------------------------------------- Europe: Unaffiliated customer sales 5,973,188 5,832,332 6,973,709 Inter-area transfers 792,277 373,354 633,935 ----------------------------------------------------------------------------------------------------------------------- 6,765,465 6,205,686 7,607,644 ----------------------------------------------------------------------------------------------------------------------- Canada, Latin America, Asia-Pacific: Unaffiliated customer sales 3,023,850 2,441,710 2,178,384 Inter-area transfers 2,081,764 1,707,291 1,378,870 ----------------------------------------------------------------------------------------------------------------------- 5,105,614 4,149,001 3,557,254 ----------------------------------------------------------------------------------------------------------------------- Eliminations (4,300,346) (3,911,394) (3,806,637) ----------------------------------------------------------------------------------------------------------------------- Net revenue $ 13,813,062 $ 13,450,790 $ 14,371,369 ----------------------------------------------------------------------------------------------------------------------- Income/(loss) United States $ (231,180) $ (740,709) $ (363,454) Europe 236,641 (1,109,188) 12,446 Canada, Latin America, Asia-Pacific 70,196 (170,097) 115,091 Eliminations 32,771 23,931 (1,384) ----------------------------------------------------------------------------------------------------------------------- Operating income/(loss) 108,428 (1,996,063) (237,301) ----------------------------------------------------------------------------------------------------------------------- Interest income 57,497 49,422 63,831 Interest expense 90,268 73,353 50,837 ----------------------------------------------------------------------------------------------------------------------- Income/(loss) before income taxes and cumulative effect of changes in accounting principles $ 75,657 $ (2,019,994) $ (224,307) ----------------------------------------------------------------------------------------------------------------------- Assets United States $ 3,924,941 $ 4,997,184 $ 4,202,395 Europe 3,321,429 4,098,780 4,910,165 Canada, Latin America, Asia-Pacific 2,335,236 1,945,236 1,730,754 Corporate assets 1,602,148 1,180,863 1,444,259 Eliminations (1,236,602) (1,642,292) (1,337,230) ----------------------------------------------------------------------------------------------------------------------- Total assets $ 9,947,152 $ 10,579,771 $ 10,950,343 -----------------------------------------------------------------------------------------------------------------------
39
Note C: Income taxes -------------------------------------------------------------------------------------------------------------------------------- Income/(loss) before income taxes and cumulative effect of changes in accounting principles (in thousands) -------------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 -------------------------------------------------------------------------------------------------------------------------------- U.S. $ (231,180) $ (754,844) $ (383,808) Non-U.S. 306,837 (1,265,150) 159,501 -------------------------------------------------------------------------------------------------------------------------------- Total $ 75,657 $ (2,019,994) $ (224,307) -------------------------------------------------------------------------------------------------------------------------------- Reconciliation of U.S. federal statutory rate to actual tax rate -------------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 -------------------------------------------------------------------------------------------------------------------------------- U.S. federal statutory tax (benefit) rate 35.0% (35.0)% (34.0)% Tax benefit of manufacturing operations in: (a) Puerto Rico - - (8.1) Ireland (40.2) (2.3) (16.0) Singapore (12.6) (.1) (7.8) Tax impact due to net loss carryforward position: U.S. 106.9 13.5 60.5 Non-U.S. (93.2) 41.1 21.6 Non-U.S. tax rates 27.3 (12.0) (.8) Other 1.0 (1.0) (3.4) -------------------------------------------------------------------------------------------------------------------------------- Effective tax rate 24.2% 4.2% 12.0% --------------------------------------------------------------------------------------------------------------------------------
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 1, 1995 July 2, 1994 July 3, 1993 -------------------------------------------------------------------------------------------------------------------------------- U.S. federal: Current $ - $ - $ (5,023) Deferred (7,318) (14,431) (19,871) -------------------------------------------------------------------------------------------------------------------------------- Total (7,318) (14,431) (24,894) -------------------------------------------------------------------------------------------------------------------------------- Non-U.S.: Current 48,388 5,618 (57,525) Deferred (26,260) 92,989 103,497 -------------------------------------------------------------------------------------------------------------------------------- Total 22,128 98,607 45,972 -------------------------------------------------------------------------------------------------------------------------------- State income taxes 3,532 867 5,945 -------------------------------------------------------------------------------------------------------------------------------- Total income taxes $ 18,342 $ 85,043 $ 27,023 --------------------------------------------------------------------------------------------------------------------------------
40 Note C: Income taxes (continued) -------------------------------------------------------------------------------- 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 was 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.
Significant components of deferred tax assets and liabilities (in thousands) --------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 --------------------------------------------------------------------------------------------------------- Assets Liabilities Assets Liabilities --------------------------------------------------------------------------------------------------------- Inventory-related transactions $ 148,399 $ 12,893 $ 101,933 $ 8,437 Depreciation 65,083 55,314 61,335 44,693 Deferred warranty revenue 101,094 - 80,506 - Postretirement/postemployment benefits 447,948 23,524 400,037 18,323 Restructuring 199,319 - 446,505 - Tax loss carryforwards 1,419,630 - 1,424,927 - Tax credit carryforwards 166,526 - 149,013 - Intangible assets 55,447 16,388 106,368 - Research and engineering 504,382 - - - Other 164,685 67,209 168,392 98,465 --------------------------------------------------------------------------------------------------------- Gross deferred tax balances 3,272,513 175,328 2,939,016 169,918 Valuation allowance 2,967,035 - 2,677,673 - --------------------------------------------------------------------------------------------------------- Net deferred tax balances $ 305,478 $ 175,328 $ 261,343 $ 169,918 ---------------------------------------------------------------------------------------------------------
The gross deferred tax asset from tax loss carryforwards of $1.4 billion represents $3.6 billion of net operating loss carryforwards on a tax return basis which will generally expire as follows: $100,000,000 in 1998, $200,000,000 in 1999, $1.2 billion in 2007, $500,000,000 in 2008, and the remainder thereafter. Tax credit carryforwards will generally expire as follows: $20,000,000 in 2001, $50,000,000 in 2002, $70,000,000 in 2003, $20,000,000 in 2004 and the remainder thereafter. Tax benefit arising from previously unrecognized operating loss carryforwards amounted to approximately $42,000,000 and $4,000,000 for the fiscal years ended July 1, 1995 and July 2, 1994, respectively. Major changes in the components of temporary differences and carryforwards for the fiscal year ended July 1, 1995 include an increase in gross deferred tax assets related to research and engineering in the amount of $504,382,000, and decreases in gross deferred tax assets related to restructuring and intangible assets in the amounts of $247,186,000 and $50,921,000, respectively. For the fiscal year ended July 1, 1995, the total valuation allowance for deferred tax assets increased $289,362,000, which is attributable to the increase in gross deferred tax assets. For the fiscal year ended July 2, 1994, the total valuation allowance increased by $872,887,000, resulting from increased gross deferred tax assets associated with tax loss carryforwards, restructuring and other deferred tax assets. Gross deferred taxes were increased by $10,334,000 and $32,410,000 for the fiscal years ended July 1, 1995 and July 2, 1994, respectively, as a result of statutory tax rate changes, fully offset by valuation allowances. In fiscal years 1995, 1994 and 1993, net income taxes paid were approximately $3,008,000, $42,419,000 and $53,889,000, 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 $100,989,000 and $124,780,000 at July 1, 1995 and July 2, 1994, respectively. Amortization expense was $59,335,000, $67,515,000 and $68,978,000 for the years ended July 1, 1995, July 2, 1994 and July 3, 1993, respectively. Accumulated amortization was $197,419,000 and $208,837,000 at July 1, 1995 and July 2, 1994, respectively. 41 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 were accrued and charged to expense in accordance with approved management plans. The Corporation's cost structure at the end of fiscal year 1994 was too high for the level and mix of total operating revenues. As a result, the Corporation approved additional restructuring actions and accrued related costs of $1.2 billion. The cost of employee separations associated with the fiscal 1994 charge included termination benefits for approximately 20,000 employees, located principally in the U.S. and Europe. The greatest portion of employee separations, approximately 40%, were to come from sales and marketing functions, as the Corporation sells more products through indirect channels of distribution. Most other organizations and functions also were affected by the reduction in employees. A portion of these employee separations occurred near the end of the fourth quarter of fiscal 1994. 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. During fiscal year 1995, restructuring actions resulted in approximately 7,400 employee separations. While some restructuring actions remain to be implemented in fiscal 1996, the number of involuntary separations is expected to be lower than originally planned due principally to a higher level of voluntary separations and employees transferred in connection with divesting activities. However, associated cost savings were offset by an increase in estimated separation costs for certain non-U.S. employees. The Corporation's experience in property dispositions in fiscal year 1995 was favorable to plan on a cost per square foot basis. During fiscal 1995, the Corporation sold, or entered into agreements to sell, approximately 5.3 million square feet of space including the Corporation's former headquarters facilities in Maynard, Massachusetts, generating approximately $200,000,000 of cash proceeds. The remaining reserve balance of $492,046,000 is adequate to cover currently planned restructuring actions, the majority of which are facilities related.
Accrued restructuring costs (in thousands) ----------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 ----------------------------------------------------------------------------------------------------------------------------- Balance, beginning of year $1,351,075 $ 738,989 $1,546,904 ----------------------------------------------------------------------------------------------------------------------------- Charges to operations: Employee separations -- 679,000 -- Facility closures and related costs -- 527,000 -- ----------------------------------------------------------------------------------------------------------------------------- Total charges to operations -- 1,206,000 -- ----------------------------------------------------------------------------------------------------------------------------- Costs incurred: Employee separations 507,816 372,450 454,900 Facility closures and related costs 323,029 212,300 314,250 Other 28,184 9,164 38,765 ----------------------------------------------------------------------------------------------------------------------------- Total costs incurred 859,029 593,914 807,915 ----------------------------------------------------------------------------------------------------------------------------- Balance, end of year $ 492,046 $1,351,075 $ 738,989 ----------------------------------------------------------------------------------------------------------------------------- Cash expenditures: Employee separations $ 562,629 $ 532,000 $ 651,300 Facility closures and related costs, net of proceeds (38,850) 67,550 174,700 ----------------------------------------------------------------------------------------------------------------------------- Net cash expenditures $ 523,779 $ 599,550 $ 826,000 ----------------------------------------------------------------------------------------------------------------------------- Number of employee terminations due to restructuring actions 7,400 12,000 17,000 -----------------------------------------------------------------------------------------------------------------------------
42 Note F: Debt --------------------------------------------------------------------------------
Long-term debt, exclusive of current maturities (in thousands) ----------------------------------------------------------------------------------------------------------------------------- Maturity date (Calendar year) Interest rate July 1, 1995 July 2, 1994 ----------------------------------------------------------------------------------------------------------------------------- Lease obligations 1997-2002 7.64%-11.0%(a) $ 16,091 $ 17,950 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) (14,150) (15,092) Other debt obligations 10,944 7,822 ----------------------------------------------------------------------------------------------------------------------------- Total long-term debt, exclusive of current maturities $ 1,012,885 $ 1,010,680 -----------------------------------------------------------------------------------------------------------------------------
Note (a) Weighted average interest rate at July 1, 1995 and July 2, 1994 of 8.5%. 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: 1996 - $5,437,000; 1997 - $13,238,000; 1998 - $257,129,000; 1999 - $1,212,000; 2000- $1,115,000. In fiscal years 1995, 1994 and 1993, interest paid was $86,157,000, $76,203,000 and $37,123,000, respectively. The Corporation had available lines of credit totaling $308,885,000 and $1.2 billion as of July 1, 1995 and July 2, 1994, respectively. In fiscal year 1994, these lines of credit included 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 1995 and 1994. Commitment fees on the unused lines of credit were neither material nor significant. 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 commitment fees up to a maximum of 0.2% of the Purchase Limit. During the third quarter of fiscal 1995, the Corporation elected to amend the Purchase Limit under the agreement from $600,000,000 to $500,000,000. As of July 1, 1995 and July 2, 1994, no interests in the Receivables had been sold. In May 1995, Digital Equipment Co. Limited, a wholly-owned subsidiary of the Corporation incorporated in the United Kingdom, entered into a five-year agreement with a major financial institution allowing it to sell an undivided ownership interest in a designated pool of trade accounts receivables (the "UK Receivables") to a group of investors for proceeds of up to approximately $125,000,000 (80,000,000 pounds). Commitment fees under the agreement are neither material nor significant. As of July 1, 1995, no interests in the UK 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 1995, 1994 or 1993. The assets of the plans include corporate equity and debt securities, government securities and real estate. 43 Note G: Postretirement and other postemployment benefits (continued) -------------------------------------------------------------------------------- The Corporation's fiscal year 1995 pension cost before curtailment gains declined, reflecting the positive effects of restructuring activities and increased returns on invested pension assets. The net periodic pension cost for defined contribution pension plans was $6,816,000, $12,585,000 and $7,944,000 for the fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993, respectively. The measurement dates for all plans were within 90 days of year- end.
Components of net periodic pension cost (in thousands) --------------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 --------------------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned during the period $ 156,112 $ 180,694 $ 192,546 Interest cost on projected benefit obligations 182,363 191,525 201,203 Actual return on plan assets (344,486) (143,465) (291,127) Net amortization and deferral 91,251 (79,567) 79,421 --------------------------------------------------------------------------------------------------------------------------------- Net periodic pension cost before curtailment gains 85,240 149,187 182,043 Curtailment gains - (272,918) - --------------------------------------------------------------------------------------------------------------------------------- Net periodic pension cost for defined benefit pension plans $ 85,240 $(123,731) $ 182,043 --------------------------------------------------------------------------------------------------------------------------------- Total pension cost for all pension plans $ 95,249 $(107,686) $ 189,293 --------------------------------------------------------------------------------------------------------------------------------- Significant actuarial assumptions for pension plans --------------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 --------------------------------------------------------------------------------------------------------------------------------- U.S. pension plan: Discount rate 7.5% 8.0% 8.0% Expected long-term rate of return on plan assets 9.0% 9.0% 9.0% Rate of increase in future compensation levels 5.0% 6.0% 6.0% --------------------------------------------------------------------------------------------------------------------------------- Non-U.S. pension plans: Discount rate 5.0 - 9.5% 5.0 - 9.5% 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 3.0 - 7.0% 2.8 - 7.2% 3.5 - 7.5% ---------------------------------------------------------------------------------------------------------------------------------
Funded status of pension plans as of the year-end measurement date (in thousands) ---------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 ---------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefit obligation $(1,725,467) $(1,448,067) ---------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $(1,891,032) $(1,635,422) ---------------------------------------------------------------------------------------------------------------- Projected benefit obligation $(2,727,920) $(2,558,421) Plan assets at fair value 3,073,995 2,727,675 ---------------------------------------------------------------------------------------------------------------- Over funded projected benefit obligation 346,075 169,254 Contributions made after measurement date but before end of fiscal year - 2,762 Unrecognized net gain (544,685) (326,710) Unrecognized prior service credit (41,623) (88,519) Unrecognized net transition asset (84,091) (88,916) ---------------------------------------------------------------------------------------------------------------- Pension liability recognized on the balance sheet $ (324,324) $ (332,129) ----------------------------------------------------------------------------------------------------------------
44 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 fiscal year 1995 postretirement benefit cost before curtailment gains declined, reflecting the positive effects of restructuring activities and lower U.S. health care cost trends. The Corporation's postretirement benefits plans other than pensions are funded as costs are incurred.
Components of net periodic postretirement benefits costs (in thousands) --------------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 --------------------------------------------------------------------------------------------------------------------------------- Service cost for benefit earned during the period $ 18,455 $ 24,949 $ 25,560 Interest cost on accumulated postretirement benefits obligations 41,279 47,309 50,915 Actual return on plan assets - - - Net amortization and deferral (9,919) (9,964) (8,538) --------------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefit cost before curtailment gains 49,815 62,294 67,937 Curtailment gains (20,741) (37,773) (30,000) --------------------------------------------------------------------------------------------------------------------------------- Net periodic postretirement benefits cost $ 29,074 $ 24,521 $ 37,937 --------------------------------------------------------------------------------------------------------------------------------- Significant actuarial assumptions for postretirement benefits plans (dollars in thousands) --------------------------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 July 3, 1993 --------------------------------------------------------------------------------------------------------------------------------- U.S. plans: Discount rate 7.5% 8.0% 8.0% Health care cost trend rate, current year 7.0% 9.3% 10.6% Health care cost trend rate, ultimate year 5.5% 5.5% 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 $100,617 $110,011 $137,913 Increase in net periodic postretirement benefits cost $ 13,645 $ 15,643 $ 17,598 --------------------------------------------------------------------------------------------------------------------------------- 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 4.0-11.0% 4.0-12.0% 5.0-13.0% Health care cost trend rate, ultimate year 4.0- 7.0% 4.0- 7.0% 5.0- 7.0% Trend rates decrease to the ultimate rates in the years 1995-2006 1994-2007 1993-2050 Effect of a 1% increase in the trend rate: Increase in accumulated postretirement benefit obligation $ 8,072 $ 6,057 $ 5,861 Increase in net periodic postretirement benefit cost $ 1,043 $ 909 $ 564 ---------------------------------------------------------------------------------------------------------------------------------
Funded status of postretirement benefits plans as of the year-end measurement date (in thousands) ---------------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 July 2, 1994 ---------------------------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligations: Retirees $(334,578) $(371,191) Fully eligible plan participants (15,862) (22,180) Other active plan participants (243,587) (233,065) ---------------------------------------------------------------------------------------------------------------- Unfunded accumulated postretirement benefit obligation (594,027) (626,436) Unrecognized net (gain)/loss (44,092) 1,057 Unrecognized prior service credit (93,041) (116,138) ---------------------------------------------------------------------------------------------------------------- Other postretirement benefits liability recognized on the balance sheet $(731,160) $(741,517) ----------------------------------------------------------------------------------------------------------------
45 Note G: Postretirement and other postemployment benefits (continued) -------------------------------------------------------------------------------- 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 was no cash flow impact from the adoption of SFAS No. 112. 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) -------------------------------------------------------------------------------- 1996 $ 260,875 1997 202,876 1998 207,683 1999 262,506 2000 68,864 Later years 360,481 -------------------------------------------------------------------------------- Total minimum lease payments $1,363,285 --------------------------------------------------------------------------------
Total rental expense for the fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993 amounted to $282,084,000, $436,080,000 and $503,094,000, respectively. Litigation: Several purported class action lawsuits were filed against the Corporation during the fourth quarter of fiscal year 1994 alleging violations of the Federal securities laws arising from alleged misrepresentations and omissions in connection with the Corporation's issuance and sale of Series A 8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock") and the Corporation's financial results for the quarter ended April 2, 1994. During fiscal 1995, the lawsuits were consolidated into three cases, which were pending before the United States District Court for the District of Massachusetts. On August 8, 1995, the Massachusetts federal court granted the defendants' motion to dismiss all three cases in their entirety. On September 6, 1995, notices of appeal were filed in two of the cases. Note I: Financial instruments -------------------------------------------------------------------------------- Foreign exchange options: In the ordinary course of business, the Corporation enters into foreign exchange option contracts for periods consistent with its committed exposures to limit potential losses from adverse exchange rate movements on operations. The contracts are primarily in European currencies, Australian dollars and Japanese yen and generally have maturities which do not exceed three months. The impact of exchange rate movements on contracts used to hedge revenue and expense transactions is included in income in the period the related operating revenues and expenses are recognized. Premiums on foreign exchange option contracts are amortized over the life of the contract. Unamortized premiums are included in prepaid assets. The Corporation does not anticipate any material adverse effect due to exchange rate movements over the short-term period covered by these contracts. Foreign exchange forwards: In the ordinary course of business, the Corporation enters into foreign exchange forward contracts for periods consistent with its committed exposures to mitigate the effect of foreign currency movements on the U.S. dollar value of monetary asset and liability positions of non-U.S. subsidiaries. The contracts are primarily in European currencies, Australian dollars and Japanese yen and generally have maturities which do not exceed three months. The impact of exchange rate movements on contracts used to hedge monetary assets and liabilities is included in income in the period in which the exchange rates change. With respect to foreign exchange option contracts and foreign exchange forward contracts, there were no deferred gains or losses at July 1, 1995. Also, the Corporation does not hold or issue foreign exchange futures contracts or foreign exchange option contracts for trading purposes. 46 Note I: Financial instruments (continued) -------------------------------------------------------------------------------- Interest rate swaps: The Corporation has entered into interest rate swap agreements, with maturities of up to 10 years, to manage its exposure to interest rate movements by effectively converting a portion of its long-term debt from fixed to variable rates. The net face amount of interest rate swaps subject to variable rates as of July 1, 1995 and July 2, 1994 was $250,000,000 and $750,000,000, respectively, as a result of offsetting positions. These agreements involve the exchange of fixed rate payments for variable rate payments without the exchange of the underlying principal amount. Fixed interest rate payments are at rates ranging from 5.45% to 5.75%. Variable rate payments are based on the 6 month U.S. dollar LIBOR. Interest rate differentials paid or received under these swap agreements are recognized over the life of the contracts as adjustments to interest expense. The Corporation does not hold or issue interest rate swaps for trading purposes. Fair value: The carrying amounts reflected in the consolidated balance sheets for cash, cash equivalents, accounts receivable, bank loans, current portion of long-term debt and accounts payable approximate fair value due to the short maturities of these instruments. The fair values for long-term debt and hedging instruments are based on dealer quotes for those instruments. The fair values represent estimates of possible value which may not be realized in the future.
Fair value of financial instruments (in thousands) -------------------------------------------------------------------------------- Face Carrying Fair amount amount value -------------------------------------------------------------------------------- July 1, 1995 Long-term debt $1,027,035 $1,012,885 $1,004,043 Hedging instruments: Option contracts $ 611,100 $ 3,983 $ 3,291 Forward contracts $ 977,008 $ (238) $ 1,610 Interest rate swaps $1,250,000 $ -- $ (30,978) -------------------------------------------------------------------------------- July 2, 1994 Long-term debt $1,025,772 $1,010,680 $ 831,077 Hedging instruments: Option contracts $ 363,000 $ 1,994 $ 2,048 Forward contracts $ 557,656 $ (47,073) $ (45,776) Interest rate swaps $1,250,000 $ -- $ (42,800) --------------------------------------------------------------------------------
The face amount of hedging instruments does not necessarily represent amounts exchanged by the parties and thus is not a direct measure of the exposure of the Corporation through its use of hedging instruments. The amounts exchanged are calculated on the basis of face amounts and other terms of the hedging instruments, which relate to interest rates, exchange rates or other financial indexes. Concentration of credit risk: Financial instruments which potentially subject the Corporation to concentrations of credit risk consist principally of temporary cash investments, trade receivables and hedging instruments. 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. The Corporation is exposed to credit-related losses in the event of nonperformance by counterparties to hedging instruments. The counterparties to these contracts are major financial institutions. The Corporation continually monitors its positions and the credit ratings of its counterparties and limits the amount of contracts it enters into with any one party. 47 Note J: Investing and divesting activities -------------------------------------------------------------------------------- During fiscal year 1995, the Corporation sold portions of its storage business, its relational database business, a software distribution subsidiary, a contract manufacturing business and a semiconductor manufacturing facility. In fiscal 1994, these businesses represented approximately 5% of total consolidated operating revenues but had an immaterial effect on the consolidated net loss. At the end of the fourth quarter of fiscal year 1995, the Corporation sold its South Queensferry, Scotland semiconductor facility and related assets to a subsidiary of Motorola, Inc. for net proceeds of approximately $128,000,000. Assets sold included approximately $8,000,000 of inventory and $127,000,000 of net property, plant and equipment. Approximately 530 employees were transferred to Motorola at the time of sale. At the end of the third quarter of fiscal year 1995, the Corporation sold its contract manufacturing business to SCI Systems, Inc. for net proceeds of approximately $75,000,000. Assets sold included approximately $47,000,000 of inventory and $20,000,000 of net property, plant and equipment, including a manufacturing plant in Augusta, Maine. Approximately 700 employees were transferred to SCI Systems, Inc. at the time of sale. At the beginning of the second quarter of fiscal year 1995, the Corporation sold its magnetic disk drive, tape drive, solid state disk and thin film heads businesses (the "Business") to Quantum Corporation ("Quantum") for an aggregate purchase price of $360,000,000, generating net proceeds of $348,000,000. Assets sold included approximately $180,000,000 of inventory and $154,000,000 of net property, plant and equipment, including facilities in Shrewsbury, Massachusetts and Penang, Malaysia, as well as the Corporation's interest in Rocky Mountain Magnetics, Inc. Quantum is leasing facilities owned by the Corporation in Colorado Springs, Colorado and leased by the Corporation in Batam, Indonesia. Approximately 3,100 employees were transferred to Quantum upon sale of the Business. Also during the second quarter of fiscal year 1995, the Corporation sold its relational database business and related assets to Oracle Corporation for net proceeds of $107,000,000. Approximately 250 employees were transferred to Oracle Corporation at the time of sale. 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 agreed to purchase a minimum level of Alpha products from the Corporation over a specified period of time. The Olivetti stock was 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 expected to generate significant revenues from the sale of Alpha products to Olivetti in the long term, in fiscal year 1994, the sale of Alpha products to Olivetti fell significantly short of levels called for in the alliance agreement. In the fourth quarter of fiscal 1994, the Corporation concluded that revenues and profits in the future, although potentially significant, would continue below levels called for in the agreement. Accordingly, in the fourth quarter of fiscal 1994, 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 administrative (SG&A) expenses on the Statement of operations. The remainder of the intangible asset is being amortized over a period not to exceed eight years using the greater of unit-volume or straight-line methods. The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 115 -- Accounting for Certain Investments in Debt and Equity Securities, effective July 3, 1994. SFAS No. 115 expands the use of fair value accounting for certain debt and equity securities. At the date of adoption, the Corporation recorded a one-time unrealized gain of $64,503,000, or $.44 per common share related to the value of Olivetti common stock. Subsequently, in the first quarter of fiscal year 1995, the Corporation sold all of its shares of Olivetti stock for approximately $149,000,000, thereby realizing the gain. The cash flow effect is included in the gain/(loss) on disposition and write-down of other assets in the Statement of cash flows. 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, would 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. 48 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. At July 1, 1995, 4,457,650 options to purchase shares were exercisable at prices ranging from $19.25 to $153.00. 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. 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 options to purchase 5,765,914 shares had been exchanged and cancelled for new options to purchase a total of 2,328,910 shares. During fiscal year 1995, an additional 4,476,977 shares were exchanged and cancelled for new options to purchase a total of 1,663,430 shares. No further exchanges may occur under this program. No compensation expense was reversed as a result of the Regrant Program. Future expense associated with options cancelled, 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 the years 1995 to 1998.
Stock option plans -------------------------------------------------------------------------------- Shares Average reserved for price future grants Shares per share -------------------------------------------------------------------------------- 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 Additional shares available for grant 2,134,306 - - Options granted (2,781,930) 2,781,930 $25.42 Shares awarded (897,680) - - Options exercised - (677,299) $26.58 Options cancelled 3,278,129 (3,278,129) $35.73 Options terminated (1,748,323) - - Regrant program: Cancelled 4,476,977 (4,476,977) $59.26 Terminated (2,479,767) - - Regrant (1,663,430) 1,663,430 $22.88 -------------------------------------------------------------------------------- July 1, 1995 3,355,655 10,947,184 $41.01 --------------------------------------------------------------------------------
49 Note K: Stock plans (continued) -------------------------------------------------------------------------------- In April 1993, the Board of Directors approved the repurchase of outstanding options to purchase up to 2,800,000 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 3,200,000 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 2,700,000 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 7,547,860 shares at July 1, 1995. There were 6,085,154 shares issued at an average price of $21.96 per share during the year ended July 1, 1995; 6,938,772 shares issued at an average price of $23.72 per share during the year ended July 2, 1994; and 6,404,574 shares issued at an average price of $28.38 per share during the year ended July 3, 1993. 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 1, 1995. 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. At July 1, 1995, there were declared and unpaid dividends of $8,875,000. These dividends were paid on July 17, 1995. Total dividends of $10,650,000 were declared in fiscal year 1994, commencing after issuance in March 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. 50 Note L: Stockholders' equity (continued) -------------------------------------------------------------------------------- The Corporation adopted a Stockholder Rights Plan in December 1989 pursuant to which the Corporation authorized the distribution of one Common Stock Purchase Right ("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.
------------------------------------------------------------------------------------------------------------------------------ Supplementary information Quarterly financial data (unaudited) ------------------------------------------------------------------------------------------------------------------------------ Income/ Income/ (loss) (loss) Income/ Total before after Net (loss) per operating Gross income income income/ common (in millions except per share data/4/) revenues profit taxes taxes/1/ (loss) share/2/ ------------------------------------------------------------------------------------------------------------------------------ For the year ended July 1, 1995 Fourth quarter $ 3,750 $ 1,215 $ 165 $ 160 $ 160 $ 1.01 Third quarter 3,467 1,115 79 74 74 .44 Second quarter 3,473 1,148 23 19 19 .07 First quarter 3,122 943 (191) (195) (131) (.98) ------------------------------------------------------------------------------------------------------------------------------ Total year $ 13,813 $ 4,421 $ 76 $ 57 $ 122 $ 0.59 ------------------------------------------------------------------------------------------------------------------------------ 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 quarter/3/ 3,015 1,090 (100) (103) (154) (1.14) ------------------------------------------------------------------------------------------------------------------------------ Total year $ 13,451 $ 4,539 $ (2,020) $ (2,105) $ (2,156) $ (15.80) ------------------------------------------------------------------------------------------------------------------------------
/1/ Before cumulative effect of changes in accounting principles. /2/ The sum of the quarter's earnings per share does not equal the year-to-date earnings per share due to changes in average share calculations. This is in accordance with prescribed reporting requirements. /3/ Restated to reflect the adoption of SFAS No. 112 - Employers Accounting for Postemployment Benefits /4/ Note: amounts may not be additive due to rounding. 51 Officers and management -------------------------------------------------------------------------------- *Robert B. Palmer Chairman of the Board, President and Chief Executive Officer *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 and General Manager, Systems Business Unit Vincenzo Damiani Vice President and General Manager, Accounts Business Unit; President, Digital Europe *Savino R. (Sid) Ferrales Vice President, Worldwide Human Resources Richard J. Fishburn Vice President and Chief Information Officer Samuel H. Fuller Vice President, Corporate Research Charles B. Holleran Vice President, Communications *Ilene B. Jacobs Vice President and Treasurer Gail S. Mann Vice President, Assistant General Counsel, Secretary and Clerk *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 and General Manager, Multivendor Customer Services Division Robert J. Rennick Vice President and General Manager, Storage 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. 52 Directors -------------------------------------------------------------------------------- Robert B. Palmer Chairman of the Board, 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. Director of several corporations, Retired Chairman of the Board and Chief Executive Officer, Ford Motor Company 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 Frank P. Doyle** Executive Vice President, General Electric Company Director of several corporations Robert R. Everett Retired President of the MITRE Corporation Kathleen F. Feldstein President of Economics Studies, Inc. and Director of several corporations 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 *Mr. Caldwell will retire on November 9, 1995, the date of the 1995 Annual Meeting of Stockholders. **Effective August 24, 1995. [PHOTOGRAPH OF DIGITAL'S BOARD OF DIRECTORS APPEARS HERE] Board of Directors, Digital Equipment Corporation: left to right, back row (standing): Colby H. Chandler, Kathleen F. Feldstein, Frank P. Doyle, Delbert C. Staley, Thomas P. Gerrity. Middle row (seated): Philip Caldwell, Thomas L. Phillips, Arnaud de Vitry, Robert R. Everett. Front row: Vernon R. Alden, Robert B. Palmer. 53 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 Strategic Direction Committee Robert B. Palmer, Chairman Robert R. Everett Thomas P. Gerrity Delbert C. Staley *Mr. Caldwell will retire on November 9, 1995, the date of the 1995 Annual Meeting of Stockholders. Corporate Consulting Engineers -------------------------------------------------------------------------------- Daniel W. Dobberpuhl Senior Corporate Consulting Engineer Digital Semiconductor Richard B. Grove Corporate Consulting Engineer UNIX Business Segment Robert J. Hannemann Corporate Consulting Engineer Components & Peripherals Business Unit William R. Hawe Corporate Consulting Engineer Network Product Business Unit Richard J. Hollingsworth Senior Corporate Consulting Engineer Vice President, Semiconductor Manufacturing & Technology Digital Semiconductor Alan Kotok Corporate Consulting Engineer Internet Business Group William A. Laing Corporate Consulting Engineer Computer Systems Division Richard F. Lary Corporate Consulting Engineer Storage Business Unit Jesse Lipcon Corporate Consulting Engineer Vice President, Systems Business Group Maurice P. Marks Corporate Consulting Engineer Digital Semiconductor Alan G. Nemeth Corporate Consulting Engineer UNIX Business Segment Mahendra R. Patel Corporate Consulting Engineer Vice President, Systems Engineering Systems Business Unit Jeffrey A. Schriesheim Corporate Consulting Engineer Windows NT Business Segment Richard L. Sites Corporate Consulting Engineer Corporate Research Group Robert E. Stewart Corporate Consulting Engineer Workstations Business Segment William D. Strecker Senior Corporate Consulting Engineer Vice President, Advanced Technology Group Chief Technical Officer Robert M. Supnik Senior Corporate Consulting Engineer Vice President, Architecture & Technology Computer Systems Division Charles P. Thacker Corporate Consulting Engineer Corporate Research Group Richard T. Witek Corporate Consulting Engineer Digital Semiconductor 54 Investor information -------------------------------------------------------------------------------- Information on common stock The Corporation's common stock (Ticker Symbol "DEC") is listed and traded on the: Chicago Stock Exchange New York Stock Exchange Pacific Stock Exchange Swiss Stock Exchanges of Zurich, Geneva and Basel German Stock Exchanges of Frankfurt, Munich and Berlin Common stock price composite: There were 68,572 shareholders of record as of July 1, 1995. The high and low quarterly sales prices for the past three fiscal years were as follows:
-------------------------------------------------------------------------------- Fiscal quarter High Low -------------------------------------------------------------------------------- 1995 Fourth 49 1/2 37 3/8 Third 38 7/8 31 1/8 Second 36 5/8 24 7/8 First 29 1/4 18 3/8 -------------------------------------------------------------------------------- 1994 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 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 --------------------------------------------------------------------------------
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. For questions on change of ownership, lost stock certificates, consolidation of accounts and change of address, please contact: First Chicago Trust Company of New York P.O. Box 2500 Jersey City, New Jersey 07303-2500 Telephone: (201) 324-0498 For change of address, send a signed and dated note or postcard to First Chicago Trust Company of New York and include the name in which the stock is registered, account number and social security number, as well as the old and new addresses. Employee investor services: Digital Equipment Corporation is also a stock transfer agent and registrar, and maintains employee stockholder accounting records. Inquiries of an administrative nature relative to employee stockholder accounting records and employee purchases should be directed to: Digital Equipment Corporation 111 Powdermill Road MSO1-1/L12 Maynard, Massachusetts 01754 (508) 493-3703, (508) 493-5213 55 Investor information (continued) -------------------------------------------------------------------------------- Information on preferred stock The Corporation's Depositary Shares, each representing one-fourth of a share of the Corporation's Series A 8 7/8% Cumulative Preferred Stock (the "Preferred Stock") (Ticker Symbol DEC PRA), is listed and traded on the New York Stock Exchange. The Preferred Stock carries a 8 7/8% cumulative annual dividend payable quarterly on January 15, April 15, July 15, and October 15 of each year. 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 Stockholder communications The Investor Relations Department is available to assist stockholders. Investor inquiries regarding financial information are welcome by letter, telephone or the Internet. The annual report on Form 10-K for the fiscal year ended July 1, 1995, including schedules thereto, which is filed with the Securities and Exchange Commission, will be sent without charge upon written request to: Digital Equipment Corporation Investor Relations Department 111 Powdermill Road MSO2-3/B17 Maynard, Massachusetts 01754 Telephone: (508) 493-7182 Fax: (508) 493-7633 Digital Shareholder Direct: Financial results, quarterly and annual reports and news on the Corporation's products and services is available via voice, fax or mail by calling 1-800-998-9332 (U.S., Canada and Latin America only) Digital on the Internet: Access to financial and Corporate information is also available through the Corporation's home page on the Internet: http://www.digital.com Eliminate duplicate mailings To maintain more than one account, but eliminate duplicate mailings of annual reports to the same address, send a copy of the label from a Corporate mailing to the Investor Services Department, indicating the names you wish to keep on the mailing list and the names you wish to delete. Auditors Coopers & Lybrand L.L.P. One Post Office Square Boston, Massachusetts 02109 Telephone: (617) 478-5000 56 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, AlphaServer, AlphaStation, AlphaStudio, ChannelWorks, Celebris, Digital, the Digital logo, enVISN, GIGAswitch, HiNote, HiNote Ultra, Mediaplex, Mobilizer, Multia, OpenVMS, PATHWORKS, PC Utility, Prioris, StorageWorks, VAX and VMS. The following are third-party trademarks: Apple and Macintosh are registered trademarks of Apple Computer, Inc. Ameritech is a trademark of Ameritech Corporation. British Telecom is a registered trademark of British Telecommunications Public Limited Company. CompUSA is a registered trademark of CompService, Inc. Compaq is a trademark of Compaq Computer Corporation. Computer Associates is a registered trademark of Computer Associates International, Inc. Dell is a registered trademark of Dell Computer Corporation. Hewlett-Packard is a registered trademark of Hewlett-Packard Company. IBM and OS/2 are registered trademarks of International Business Machines Corporation. Informix is a registered trademark of Informix Software, Inc. Intel and Pentium are registered trademarks of Intel Corporation. MicroAge is a trademark of Computer Center, Inc. MicroMall is a registered trademark of MicroMall, Inc. Microsoft, MS-DOS and Windows are registered trademarks and Windows NT and BackOffice are trademarks of Microsoft Corporation. Mosaic is a trademark of Mosaic Communications Corporation. NeXT is a trademark of NeXT Computer, Inc. Novell and NetWare are registered trademarks of Novell, Inc. NYNEX is a trademark of NYNEX Corporation, Incorporated. Olivetti is a registered trademark of Ing. Olivetti & C. S.p.A. Oracle is a registered trademark of Oracle Corporation. POSIX is a registered trademark of the Institute of Electrical and Electronic Engineers. Reuters is a trademark of Reuters Limited. Sun is a registered trademark of Sun Microsystems, Inc. Sybase is a registered trademark of Sybase, Inc. UNIFORUM is a trademark of UNIFORUM. UNIX is a registered trademark in the United States and other countries, licensed exclusively through X/Open Company. X/Open is a trademark of X/Open Company, Ltd. Printed in USA EA-C5173-87/95 09 23 235.0 Copyright 1995 Digital Equipment Corporation All rights reserved [LOGO OF RECYCLED PAPER APPEARS HERE] Printed on recycled paper Digital Equipment Corporation 111 Powdermill Road Maynard Massachusetts 01754 EX-21 8 LIST OF SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The following is a list of the Corporation's consolidated subsidiaries as of July 1, 1995. 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 CASE & CAD Engineering Produktveckling i Stockholm Sweden Computer Insurance Company Rhode Island DEC Digital Equipment Corporation A.G./S.A. Switzerland 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 (New Zealand) Limited New Zealand AOZT Digital Equipment Corporation 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 (DEC) Limited Israel Digital Equipment (DEC) Technical Center (Israel) Limited Israel 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 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 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 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 Polska Z.O.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 Services, Inc. Delaware Digital Equipment Singapore (PTE) Limited Singapore 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 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 Computer Insurance Company Limited Bermuda Serrata Consulting Limited Canada SIPAC S.p.a. Italy Societe Civile Immobiliere (SCI) Parc du Bois Briard France
EX-23 9 ACCOUNTANTS CONSENT Exhibit 23 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. 33-56477) and 1981 International Employee Stock Purchase Plan (No. 33-56479) and the Registration Statement on Form S-3 (No. 33-51987) and related prospectuses, of our reports dated July 31, 1995 on our audits of the consolidated financial statements and financial statement schedule of Digital Equipment Corporation as of July 1, 1995, and July 2, 1994 and for each of the three fiscal years in the period ended July 1, 1995, 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 22, 1995 EX-27 10 ARTICLE 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF THE CORPORATION FOR THE YEAR ENDED JULY 1, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS JUL-01-1995 JUL-03-1994 JUL-01-1995 1,602,148 0 3,369,737 150,655 2,053,620 7,271,897 5,475,727 3,207,005 9,947,152 4,246,292 1,012,885 149,778 0 4,000 3,374,502 9,947,152 7,616,441 13,813,062 5,397,723 9,391,693 4,312,941 55,307 90,268 75,657 18,342 57,315 0 0 64,503 121,818 0.59 0.59