-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, H0pUld62BgT+DYbf/oSGKEP8T9nwCQ/cTLv4CGsndhx9Bi3bJiMM4pOmJtVWibvO mVb2G1DriBotlD/BbJ15bQ== 0000950135-94-000136.txt : 19940314 0000950135-94-000136.hdr.sgml : 19940314 ACCESSION NUMBER: 0000950135-94-000136 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19930703 FILED AS OF DATE: 19940311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL EQUIPMENT CORP CENTRAL INDEX KEY: 0000028887 STANDARD INDUSTRIAL CLASSIFICATION: 3570 IRS NUMBER: 042226590 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 34 SEC FILE NUMBER: 001-05296 FILM NUMBER: 94515524 BUSINESS ADDRESS: STREET 1: 146 MAIN ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 6178975111 10-K/A 1 AMENDMENT NO. 1 TO FORM 10-K 1 10-K/A Amendment No. 1 to Form 10-K (X) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended July 3, 1993 or ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from______________to_________________. Commission file number 1-5296 Digital Equipment Corporation (Exact name of registrant as specified in its charter) Massachusetts 04-2226590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 146 Main Street, Maynard, Massachusetts 01754-2571 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (508) 493-5111 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered (a) Common Stock, par value $1 New York Stock Exchange Pacific Stock Exchange Midwest Stock Exchange (a) In addition, shares of Common Stock of the registrant are listed on the Montreal Exchange and certain stock exchanges in Switzerland and Germany.
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (a) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicated by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [] As of September 7, 1993, 135,009,330 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 7, 1993 was approximately $5.6 billion. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1993 Annual Report to Stockholders are incorporated by reference in Part II hereof. 2 Portions of the registrant's Proxy Statement for its 1993 Annual Meeting of Stockholders, scheduled to be held on November 4, 1993, are incorporated by reference in Part III hereof. The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report on Form 10-K as set forth on the pages attached hereto: Part II Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Page 28 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
- ------------------------------------------------------------------------------------------------------- 1991 1992 1993 Income and Expense Items 1992-93 1991-92 1990-91 - ------------------------------------------------------------------------------------------------------- 59.7% 55.2% 52.8% Product sales (1)% (7)% 2% 40.3% 44.8% 47.2% Service and other revenues 9% 11% 17% - ------------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% Total operating revenues 3% - 7% - ------------------------------------------------------------------------------------------------------- 47.1% 55.2% 58.8% Cost of product sales (b) 5% 9% 2% 60.1% 62.3% 61.4% Service expense and cost of other revenues(b) 7% 15% 14% - ------------------------------------------------------------------------------------------------------- 52.3% 58.4% 60.1% Total cost of operating revenues 6% 12% 7% 11.9% 12.6% 10.6% Research and engineering expenses (13)% 6% 2% 32.1% 33.6% 30.9% Selling, general and administrative expenses (5)% 5% 13% 7.9% 10.8% - Restructuring charges (100)% 36% 100% - ------------------------------------------------------------------------------------------------------- (4.2)% (15.3)% (1.7)% Operating loss 89% (100+)% (100+)% - ------------------------------------------------------------------------------------------------------- 0.8% 0.7% .4% Interest income (34)% (15)% (20)% 0.3% 0.3% .4% Interest expense 32% (14)% 45% - ------------------------------------------------------------------------------------------------------- Loss before income taxes and cumulative (3.7)% (14.9)% (1.6)% effect of change in accounting principle 89% (100+)% (100+)% - ------------------------------------------------------------------------------------------------------- 0.7% 1.7% .2% Provision for income taxes (88)% 100+% 97% - ------------------------------------------------------------------------------------------------------- Loss before cumulative effect of change (4.4)% (16.6)% (1.7)% in accounting principle 89% (100+)% (100+)% - ------------------------------------------------------------------------------------------------------- Cumulative effect of change in accounting - 3.5% - principle, net of tax benefits (100)% - - - ------------------------------------------------------------------------------------------------------- (4.4)% (20.1)% (1.7)% Net loss 91% (100+)% (100+)% - ------------------------------------------------------------------------------------------------------- Note (a) Percentages of operating revenues may not be additive due to rounding. Note (b) Cost of product sales and service expense and cost of other revenues are shown as percentages of their related revenues.
3 Overview Fiscal 1993 marked a year of significant change for the Corporation, as it responded to the changing environment in the information technology industry. The Corporation's operating results for fiscal 1993 reflect the effects of restructuring actions taken during the past several years. Although the Corporation reported a net loss of $251 million for the year, it demonstrated consistent year over year improvement in operating results for the last three quarters of the year, posting a net profit of $113 million for the fourth quarter. Service revenues have continued to grow, and represent a larger percentage of total operating revenues than ever before. In addition, the mix of products and services which make up the Corporation's total operating revenues has changed dramatically over the last several years. At the beginning of fiscal 1993, the Corporation introduced new models of its traditional VAX systems which are designed to upgrade easily to Alpha AXP systems. The Alpha AXP architecture, announced during fiscal 1992, is designed to run multiple operating systems and to be the foundation for a leading high- performance computer family. During the year, the Corporation introduced personal computers, workstations and client-server computer systems based on the Alpha AXP architecture, as well as DEC OSF/1 V1.2, the Corporation's unified UNIX operating system for the Alpha AXP family of systems. Sales of Alpha AXP computer systems and components represent a significant future revenue opportunity. For fiscal 1993, the sale of Alpha AXP computer systems did not have a significant impact on operating results. As the price/performance of computer systems has improved, the profitable sale and service of these products have become increasingly dependent on low-cost product design and manufacture, and on efficient delivery in high volumes. At the same time, customer needs for solutions, which integrate hardware and software products from multiple vendors, present an opportunity to the Corporation to provide, in addition to its broad product and maintenance service offerings, consulting, planning and integration expertise through direct sales channels focused on specific industries. The Corporation has implemented organizational changes which it believes will enable it to respond to these changing business models. The effectiveness of these newly implemented changes cannot yet be measured, but the Corporation believes they are necessary for it to compete successfully in the various businesses in which it participates. Page 29 Revenues In fiscal 1993, total operating revenues, which were $14.4 billion, grew by $440 million or 3%, following an increase of $20 million, or less than 1% in fiscal 1992 and $1 billion or 7% in fiscal 1991. Non-U.S. revenues accounted for 64% of total operating revenues in fiscal 1993, up from 63% in fiscal 1992 and 60% in fiscal 1991. European revenues increased to $7 billion in fiscal 1993, up from $6.8 billion and $6.3 billion in fiscal 1992 and 1991, respectively. The increase in fiscal 1993 European revenues, as reported in U.S. dollars, was principally attributable to favorable foreign currency fluctuations. Over the last several years, the Corporation has increased its presence in European markets primarily through two acquisitions completed in fiscal 1992 and 1991 (see Note J). Product sales for fiscal 1993 were $7.6 billion, or 53% of total operating revenues, compared with $7.7 billion or 55% of revenues in fiscal 1992 and $8.3 billion or 60% of revenues in fiscal 1991. While the Corporation shipped substantially more computer systems in fiscal 1993 than in fiscal 1992, product sales for fiscal 1993 were essentially unchanged compared with the prior year, due primarily to a continued shift in the mix of product sales toward low-end, lower-priced computer systems and away from the Corporation's traditional proprietary mid-range products. In fiscal 1993, service and other revenues totaled $6.8 billion or 47% of total operating revenues. Service revenues grew by $549 million or 9%, following increases of 11% and 17% in fiscal 1992 and 1991, respectively. The Corporation's service revenues are derived principally from hardware and software product services and systems integration services. The growth in service revenues for fiscal 1993 was due to increased demand for systems integration and other professional and consulting services and the service of non-Digital products. In response to customer demand for a worldwide integrated services provider, the Corporation is focusing on multivendor customer service opportunities. 4 TOTAL OPERATING REVENUES
Year $ Millions - ----------------------------------------------------------------------------------------------------- 93 ************************************************************************************* 14371 ++++++++++++++++++++++++++++++++++++++++++ 6783 92 ************************************************************************************ 13931 +++++++++++++++++++++++++++++++++++++++ 6235 91 *********************************************************************************** 13911 +++++++++++++++++++++++++++++++++++ 5612 90 ****************************************************************************** 12943 ++++++++++++++++++++++++++++++ 4797 89 ***************************************************************************** 12742 +++++++++++++++++++++++++++++ 4552 88 ************************************************************************ 11475 ++++++++++++++++++++++++ 3934 87 ********************************************************* 9389 +++++++++++++++++++++ 3135 86 ********************************************** 7590 ++++++++++++++++ 2487 85 **************************************** 6686 +++++++++++++++ 2156 84 ********************************** 5584 ++++++++++++ 1780 83 ************************** 4272 ++++++++++ 1444 - ----------------------------------------------------------------------------------------------------- ++++ Service and Other Revenues **** Total Operating Revenues
NON-UNITED STATES REVENUES - -------------------------- Year $ Millions - ------------------------------------------------------------------------------------------------------------ 93 ****************************************************************************************** 9164 92 **************************************************************************************** 8799 91 ************************************************************************************ 8380 90 ************************************************************************** 7281 89 *********************************************************************** 7017 88 ********************************************************** 5730 87 ********************************************* 4413 86 ******************************** 3179 85 *************************** 2642 84 ******************** 1978 83 **************** 1543 - ------------------------------------------------------------------------------------------------------------
5 Page 30 Expenses and Profit Margins The Corporation's total gross margin for fiscal 1993 was $5.7 billion (40% of total operating revenues), compared with $5.8 billion in fiscal 1992 (42% of total operating revenues) and $6.6 billion in fiscal 1991 (48% of total operating revenues). The Corporation's gross margin on fiscal 1993 product sales was $3.1 billion (41% of product sales), compared with $3.4 billion (45% of product sales) for fiscal 1992 and $4.4 billion (53% of product sales) for fiscal 1991. The continued decline in product gross margin was due to several factors, including a continued shift in the Corporation's mix of product sales from larger systems toward low-end systems which typically carry lower margins. In addition, competitive pricing actions taken by the Corporation in the period also contributed to the decline in product gross margins. The Corporation is addressing the industry trend toward lower product gross margins by continuing to reduce manufacturing costs, eliminating excess capacity, streamlining its product offerings and using externally supplied components and subsystems, where appropriate. Gross margin on service revenues for fiscal 1993 was $2.6 billion (39% of service revenues), compared with $2.4 billion in fiscal 1992 (38% of service revenues) and $2.2 billion (40% of service revenues) in fiscal 1991. The improvement in service gross margin for fiscal 1993 was due to a higher volume of service revenues and to greater efficiencies in service delivery. The decline in service gross margin as a percentage of service revenues in fiscal 1992 compared with fiscal 1991 was due in part to slow growth in the higher-margin hardware maintenance business and substantially higher growth in newer service offerings such as systems integration, which have relatively lower margins. Demonstrating the Corporation's efforts to bring research and engineering (R&E) spending in line with industry norms, R&E expenses declined 13% to $1.5 billion, or 10.6% of total operating revenues in fiscal 1993. This compares with $1.8 billion or 12.6% of total operating revenues in fiscal 1992, and $1.6 billion or 11.9% of total operating revenues in fiscal 1991. The decrease in R&E expenses was due to several factors, including the elimination of redundant engineering efforts and streamlined product offerings, which resulted in a reduction in employee population. The Corporation's R&E investment program is focused on maintaining a strong, consistently market-driven product set and on attaining and sustaining technology leadership in selected areas. 6 RESEARCH AND ENGINEERING
Year $ Millions - ------------------------------------------------------------------------------------------------------------ 93 ****************************************************************************** 1530 92 **************************************************************************************** 1754 91 *********************************************************************************** 1649 90 ********************************************************************************* 1614 89 ***************************************************************************** 1525 88 ****************************************************************** 1306 87 *************************************************** 1010 86 ****************************************** 814 85 ************************************* 717 84 ******************************** 631 83 ************************* 472 - ------------------------------------------------------------------------------------------------------------
7
TOTAL EMPLOYEE POPULATION - ------------------------- Year Thousands - ----------------------------------------------------------------------------------- 93 *********************************************** 94 92 ******************************************************* 114 91 ************************************************************ 121 90 ************************************************************** 124 89 *************************************************************** 126 88 ************************************************************* 122 87 ******************************************************* 111 86 *********************************************** 95 85 ******************************************** 89 84 ******************************************* 86 83 ************************************ 73 - -----------------------------------------------------------------------------------
8 Page 31 Fiscal 1993 selling, general and administrative (SG&A) expenses were $4.4 billion (30.9% of total operating revenues), compared with $4.7 billion (33.6% of total operating revenues) in fiscal 1992 and $4.5 billion (32.1% of total operating revenues) in fiscal 1991. The 5% decrease in SG&A expenses in fiscal 1993 was primarily the result of reductions in employee population, complemented by reductions in other overhead costs, and a reduction in expense derived from the repurchase and cancellation of certain outstanding stock options. At the time the repurchase of the options was approved, the Corporation's stock price was substantially below the exercise price of the options. The Corporation believed that the options were providing limited, if any, incentive value to optionholders and no longer enhanced the Corporation's ability to retain their services over the remaining option period, yet the Corporation was required to continue recognizing annual compensation expense associated with the options. After evaluating various alternatives, the Corporation concluded that the repurchase and cancellation of the options was in the best interests of the Corporation and the optionholders (see Note K). The Corporation has and will continue its efforts to streamline selling and administrative practices, reduce costs and increase productivity. As part of this effort, the Corporation is emphasizing and continues to derive an increasing portion of product sales from indirect and telemarketing channels. In addition, during fiscal 1993, the Corporation implemented competitive incentive compensation programs for its sales force in selected countries and is expanding these programs to include essentially all countries by the end of fiscal 1994. Fiscal 1992 SG&A expenses increased $209 million compared with fiscal 1991, due principally to the acquisitions of Digital-Kienzle and the Philips Information Systems Division (see Note J). In order to implement plans designed to achieve a competitive cost structure, the Corporation absorbed restructuring charges of $1.5 billion, $1.1 billion and $550 million in fiscal years 1992, 1991 and 1990, respectively, to cover costs of employee separations, facilities consolidations, asset retirements, relocation and related costs (see Note E). The Corporation has reduced employee population significantly, as noted below, closed or sold a number of businesses, plants and other facilities (approximately 11.4 million square feet) and plans to take further restructuring actions. During fiscal 1993, the Corporation took a number of actions consistent with the restructuring reserve established at the end of fiscal 1992, discussed below. These actions, totaling $808 million, utilized approximately $630 million of cash, $455 million for employee-related activities and $175 million for facility-related actions, and included a noncash write-off related to property, plant and equipment ($139 million) and other actions for the balance of the amount. At the end of fiscal 1992, having fully utilized the 1991 restructuring reserve and in response to an unanticipated drop in product sales during the second half of fiscal 1992 and resulting operating losses, additional restructuring plans were formulated. These plans resulted in the establishment of approximately $1.0 billion of reserves related to employee separations and $500 million of reserves related to facilities associated with these employees. During fiscal 1992, $990 million of restructuring reserves was utilized. Of that amount, cash expenditures were approximately $760 million for employee-related activities and $110 million for facility-related actions; the Corporation also recorded a noncash write-off of $58 million related to property, plant and equipment and the balance covered other actions. 9 In fiscal 1991, despite the introduction of new products, the Corporation continued to experience essentially flat product sales, unforeseen and persistent weakness in the U.S. market, the commencement of slowing economic activity in overseas markets and the intensification of the pervasive change in industry demand to low-end products. As the shift to low-end products further accelerated, price competition intensified. The Corporation's operating income, before restructuring, declined as Selling, General and Administrative costs increased at a rate greater than product sales. Therefore, in the fourth quarter of fiscal 1991, a restructuring reserve of $1.1 billion was provided, of which $550 million was for employee separations and the balance for facility consolidations and equipment retirements and other programs. The reserve included reductions in office space related to employee separations throughout the Corporation. During fiscal 1991, restructuring actions utilized cash of approximately $385 million for employee-related activities and $60 million for facility-related actions. In addition, a noncash write-off of approximately $59 million related to property, plant and equipment was recorded against the reserve. Other adjustments to income on the statement of cash flows includes a noncash write-off for property, plant and equipment, related to restructuring, of $139 million, $58 million and $59 million for fiscal 1993, 1992 and 1991, respectively. As a result of the restructuring activities to date, the Corporation has eliminated an estimated $2 billion of annual operating costs, including approximately $1.8 billion of annual cash expenses related to employee separations, and $200 million of facility operating costs of which approximately one-half is annual cash expense. The Corporation believes that the reserve remaining at the end of fiscal 1993 of $739 million is adequate for presently planned restructuring actions, which will eliminate additional operating costs in fiscal 1994 and beyond. Of the reserve remaining at the end of fiscal 1993 ($739 million), the Corporation estimates that approximately $600 million of cash will be utilized in fiscal 1994 and beyond. The Corporation further believes its cash balance of $1.6 billion is sufficient for all presently planned restructuring actions. Total employee population decreased by 19,600 during fiscal 1993. The Corporation had approximately 89,900, 107,900 and 115,100 regular employees at the end of fiscal 1993, 1992 and 1991, respectively, and an additional 4,300, 5,900 and 5,900 temporary and contract workers at the end of fiscal 1993, 1992 and 1991, respectively. Interest income in fiscal 1993 decreased to $64 million from $96 million in fiscal 1992 and $113 million in fiscal 1991, reflecting lower interest rates and lower average cash balances. Interest expense increased to $51 million in fiscal 1993 from $39 million and $45 million in fiscal 1992 and 1991, respectively. The increase in fiscal 1993 interest expense resulted principally from the issuance of $1 billion of long-term debt during the year. In fiscal 1993, the Corporation's income tax expense was $27 million on a pre-tax loss of $224 million (see Note C). In fiscal 1992, the Corporation's income tax expense was $232 million on a pre-tax loss of $2.1 billion. The tax expense reflects several factors, including taxes provided for profitable non-U.S. operations and an inability to recognize currently U.S. tax benefits from operating losses. For fiscal 1993, the Corporation reported a net loss of $251 million, compared with a loss of $2.8 billion and $617 million for fiscal 1992 and 1991, respectively. The fiscal 1992 loss included a $1.5 billion restructuring charge and a one-time charge of $485 million for the cumulative effect of an accounting change. 10 In November 1992, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 112 - Employers' Accounting for Postemployment Benefits. SFAS No. 112 requires employers to recognize an obligation for benefits provided to employees after employment but before retirement. The Corporation must adopt SFAS No. 112 no later than the end of fiscal 1995. The Corporation has not adopted SFAS No. 112, and has not yet determined the impact of such adoption on the Corporation's consolidated financial position or results of operations. Adoption of SFAS No. 112 will have no cash flow impact on the Corporation. In February 1992, the FASB issued SFAS No. 109 - Accounting for Income Taxes. The Corporation will adopt SFAS No. 109 in the first quarter of fiscal 1994. SFAS No. 109 requires, among other things, the recognition of a deferred tax asset or liability for estimated future tax effects attributable to temporary differences and carryforwards. Upon adoption, the Corporation expects to recognize additional gross deferred tax assets of approximately $1.9 billion, which will consist primarily of tax benefits associated with net operating loss carryforwards, postretirement benefits and restructuring charges of approximately $1 billion, $360 million and $230 million, respectively. The additional gross assets will be almost entirely offset by valuation allowances, resulting in a one-time benefit of approximately $20 million to the consolidated statement of operations. The adoption of SFAS No. 109 will have no cash flow impact on the Corporation (see Note C). On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed into law. This act, among other things, raises the U.S. corporate statutory tax rate from 34% to 35%. Due to the net operating loss carryforwards, the Corporation does not expect the change in the statutory tax rate to have a material impact on the Corporation's consolidated financial position or results of operations for the foreseeable future. 11 Page 32 Availability of Funds to Support Current and Future Operations and Spending for Operations Cash and cash equivalents totaled $1.6 billion, $1.3 billion and $1.9 billion at the end of fiscal 1993, 1992 and 1991, respectively. Net cash flows from operating activities were $47 million in fiscal 1993 compared with $431 million and $1 billion in fiscal 1992 and 1991, respectively. Fiscal 1993 cash flows from operating activities were primarily the result of improved accounts receivable, offset by restructuring activities, the net loss for the year and decreased accounts payable. Net cash used for investing activities was $884 million, $981 million and $1 billion in fiscal 1993, 1992 and 1991 respectively. In fiscal 1993, the Corporation completed its purchase of a minority interest in Ing. Olivetti & C. S.p.A. for $288 million (see Note J). Capital expenditures totaled $529 million in fiscal 1993 (including approximately $117 million for the construction of a semiconductor fabrication plant and purchase of equipment in Hudson, Massachusetts), compared with $710 million and $738 million in fiscal 1992 and 1991, respectively. The Corporation intends to continue making investments in support of its objective of sustaining technology leadership in selected areas. As a result, the Corporation expects that its capital expenditures for fiscal 1994 will be somewhat greater than for fiscal 1993, including an estimated $175 million for the Hudson project. This project has an anticipated total cost of $425 million, with a remaining $123 million to be expended in fiscal 1995 and 1996. The Corporation disposed of property, plant and equipment and other assets in fiscal 1993, generating approximately $68 million in cash proceeds compared with $15 million in fiscal 1992. Cash flows from financing activities were $1.1 billion, ($36) million and ($99) million in fiscal 1993, 1992 and 1991, respectively. The principal financing activity in fiscal 1993 was the issuance of $1 billion in aggregate principal amount of notes and debentures under the Corporation's $1 billion shelf registration statement filed during the first quarter of fiscal 1993 (see note F). The Corporation also received $196 million during fiscal 1993 from the issuance of common stock under the Corporation's stock purchase plans compared with $232 million and $240 million in fiscal 1992 and 1991, respectively. Total debt was $1.04 billion, $91 million and $173 million at the end of fiscal 1993, 1992 and 1991, respectively. At the end of fiscal 1993, substantially all of the available lines of credit were unused, including a three-year $750 million committed credit facility, entered into by the Corporation with a syndicate of banks in May 1993. The Corporation historically has maintained a conservative capital structure, and believes that its current cash position and debt capacity are adequate to support current and future operations. 12 Investments in Property, Plant and Equipment Depreciation Expense
Year $ Millions - ------------------------------------------------------------------------------------------------------------ 93 ********************************** 529 +++++++++++++++++++++++++++++++++++++++++++ 699 92 ******************************************** 710 +++++++++++++++++++++++++++++++++++++++++++++ 733 91 ********************************************** 738 ++++++++++++++++++++++++++++++++++++++++++++++++ 772 90 ************************************************************** 1028 +++++++++++++++++++++++++++++++++++++++++++++++ 759 89 **************************************************************************** 1223 +++++++++++++++++++++++++++++++++++++++++ 659 88 ***************************************************************************************** 1518 +++++++++++++++++++++++++++++++++ 516 87 ********************************************** 748 ++++++++++++++++++++++++++++ 435 86 ************************************ 564 +++++++++++++++++++++++++ 384 85 ************************************* 572 +++++++++++++++++++++ 315 84 ***************************** 452 +++++++++++++++++ 253 83 *************************** 419 ++++++++++++++ 203 - ------------------------------------------------------------------------------------------------------------ ++++ Depreciation **** Investments
13 Page 33 Report of Management The Corporation's management is responsible for the preparation of the financial statements in accordance with generally accepted accounting principles and for the integrity of all the financial data included in this annual report. In preparing the financial statements, management makes informed judgments and estimates of the expected effects of events and transactions that are currently being reported. Management maintains a system of internal accounting controls that is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed and recorded in accordance with management's policies for conducting its business. This system includes policies which require adherence to ethical business standards and compliance with all laws to which the Corporation is subject. The internal controls process is continuously monitored by direct management review and an internal audit program under which periodic independent reviews are made. The Corporation's independent public accountants annually review the accounting and control systems of the Corporation. Their audit includes a review of the internal control structure to the extent they consider necessary and selective tests of transactions to support their report. The Board of Directors, through its Audit Committee, which is composed of three Board members who are independent of management, is responsible for determining that management fulfills its responsibility with respect to the Corporation's financial statements and the system of internal accounting controls. The Audit Committee meets regularly with representatives of management, the independent accountants and the Corporation's internal auditors to review audits, financial reporting, and internal control matters, and when appropriate, meets with the Corporation's outside counsel on relevant matters. The independent accountants and the internal auditors have full and free access to the Audit Committee and regularly meet privately with the Audit Committee. Coopers & Lybrand, independent accountants, have been engaged by the Audit Committee of the Board of Directors, with the approval of the stockholders, to audit the Corporation's financial statements. Their report follows. /a/ Robert B. Palmer President and Chief Executive Officer /a/ William M. Steul Vice President, Finance and Chief Financial Officer 14 Item 8. Financial Statements and Supplementary Data Page 34 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 3, 1993 and June 27, 1992, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three fiscal years in the period ended July 3, 1993. 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 3, 1993 and June 27, 1992, and the consolidated results of its operations and cash flows for each of the three fiscal years in the period ended July 3, 1993, in conformity with generally accepted accounting principles. As discussed in Note G to the consolidated financial statements, the Corporation changed its method of accounting for postretirement benefits other than pensions in fiscal 1992. /a/ Coopers & Lybrand Boston, Massachusetts July 28, 1993 15 Page 35 Consolidated Statements of Operations
(in thousands except per share data) Year Ended - ----------------------------------------------------------------------------------- July 3, 1993 June 27, 1992 June 29, 1991 - ----------------------------------------------------------------------------------- Revenues (Notes A and B) Product sales $ 7,587,994 $ 7,696,029 $ 8,298,515 Service and other revenues 6,783,375 6,234,843 5,612,489 ------------------------------------------ Total operating revenues 14,371,369 13,930,872 13,911,004 ------------------------------------------ Costs and Expenses (Notes A, G and K) Cost of product sales 4,464,445 4,248,118 3,905,355 Service expense and cost of other revenues 4,166,946 3,883,705 3,373,025 Research and engineering expenses 1,530,119 1,753,898 1,649,380 Selling, general and administrative expenses 4,447,160 4,680,822 4,471,629 Restructuring charges (Note E) - 1,500,000 1,100,000 ------------------------------------------ Operating loss (237,301) (2,135,671) (588,385) ------------------------------------------ Interest Income 63,831 96,176 113,221 Interest expense 50,837 38,517 44,556 ------------------------------------------ Loss before income taxes and cumulative effect of change in accounting principle (224,307) (2,078,012) (519,720) Provision for income taxes (Notes A and C) 27,023 232,000 97,707 ------------------------------------------ Loss before cumulative effect of change in accounting principle (251,330) (2,310,012) (617,427) Cumulative effect of change in accounting principle, net of tax (Note G) - 485,495 - ------------------------------------------ Net Loss $ (251,330) $(2,795,507) $ (617,427) ------------------------------------------ Per Share (Note A) Loss before cumulative effect of change in accounting principle $ (1.93) $ (18.50) $ (5.08) Cumulative effect of change in accounting principle - (3.89) - ------------------------------------------ Net Loss per Share (Note A) $ (1.93) $ (22.39) $ (5.08) ------------------------------------------ Weighted average shares outstanding (Note A) 130,409 124,864 121,558 - -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 16 Page 36 Consolidated Balance Sheets
(in thousands) - -------------------------------------------------------------------------------- July 3, 1993 June 27,1992 - -------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents (Note A) $ 1,643,195 $ 1,337,172 Accounts receivable, net of allowance of $110,764 and $129,686 3,020,252 3,594,268 Inventories (Note A) Raw materials 331,506 264,871 Work-in-process 502,200 495,632 Finished goods 921,434 853,531 --------------------------- Total inventories 1,755,140 1,614,034 Prepaid expenses and deferred income taxes (Note C) 463,928 575,364 --------------------------- Total current assets 6,882,515 7,120,838 --------------------------- Property, Plant and Equipment (Note A) Land 363,264 372,989 Buildings 1,887,211 1,871,710 Leasehold improvements 532,369 592,971 Machinery and equipment 4,410,586 4,835,454 --------------------------- Total property, plant and equipment 7,193,430 7,673,124 Less accumulated depreciation 4,015,139 4,103,422 --------------------------- Net property, plant and equipment 3,178,291 3,569,702 --------------------------- Other assets (Notes A, C, D and J) 889,537 593,769 --------------------------- Total assets $10,950,343 $11,284,309 - -------------------------------------------------------------------------------- Liabilities and Stockholders' Equity Current Liabilities Bank loans and current portion of long-term debt (Note F) $ 21,335 $ 49,061 Accounts payable 822,434 1,041,300 Income taxes payable (Note C) 57,614 63,725 Salaries, wages and related items 556,151 551,727 Deferred revenues and customer advances (Note A) 1,138,323 1,208,635 Restructuring reserve (Note E) 738,989 1,546,904 Other current liabilities 583,868 644,696 -------------------------------------- Total current liabilities 3,918,714 5,106,048 Deferred income taxes (Note C) - 23,033 Long-term debt (Note F) 1,017,577 41,636 Postretirement benefits (Note G) 1,128,653 1,182,658 -------------------------------------- Total liabilities 6,064,944 6,353,375 Commitments (Note H) Stockholders' Equity (Notes K, L and M) Common stock, $1.00 par value; authorized 450,000,000 shares; issued 135,489,805 shares and 130,008,231 shares 135,490 130,008 Additional paid-in capital 2,851,960 2,692,444 Retained earnings 1,937,627 2,282,688 Treasury stock at cost; 497,551 shares and 2,193,014 shares (39,678) (174,206) -------------------------------------- Total stockholders' equity 4,885,399 4,930,934 -------------------------------------- Total liabilities and stockholders' equity $10,950,343 $11,284,309 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 17 Page 37 Consolidated Statements of Cash Flows
(in thousands) Year Ended - ----------------------------------------------------------------------------------------- July 3, 1993 June 27, 1992 June 29, 1991 - ----------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net loss $ (251,330) $(2,795,507) $ (617,427) -------------------------------------------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation 698,631 732,536 772,310 Amortization 139,552 100,292 56,250 Other adjustments to income 185,617 269,095 189,077 (Increase)/decrease in accounts receivable 574,016 (86,163) 105,977 (Increase)/decrease in inventories (141,106) 155,881 18,616 (Increase)/decrease in prepaid expenses (26,552) 42,908 (47,239) Increase/(decrease) in accounts payable (218,866) 277,918 (17,694) Increase/(decrease) in taxes 75,590 55,142 (105,614) Increase/(decrease) in salaries, wages, benefits and related items (49,581) 1,115,240 74,982 Increase/(decrease) in deferred revenues and customer advances (70,312) 101,421 92,222 Increase/(decrease) in restructuring reserve (807,915) 510,200 593,160 Decrease in other current liabilities (60,828) (48,259) (73,719) -------------------------------------------- Total adjustments 298,246 3,226,211 1,658,328 -------------------------------------------- Net cash flows from operating activities 46,916 430,704 1,040,901 -------------------------------------------- Cash Flows from Investing Activities Investment in property, plant, and equipment (528,691) (710,436) (737,548) Proceeds from the disposition of property, plant, and equipment 46,049 15,141 - Investment in other assets (Note J) (423,573) (139,459) (55,782) Proceeds from the disposition of other assets 22,100 - - Business acquisitions, net of cash acquired (Note J) - (146,387) (233,261) -------------------------------------------- Net cash flows from investing activities. (884,115) (981,141) (1,026,591) -------------------------------------------- Net cash flows from operating and investing activities (837,199) (550,437) 14,310 -------------------------------------------- Cash Flows from Financing Activities Proceeds from issuance of debt 984,482 25,821 14,249 Payments to retire debt (36,860) (108,472) (112,426) Purchase of treasury shares - (185,292) (240,719) Issuance of common shares and treasury shares, including tax benefits 195,600 231,502 239,653 -------------------------------------------- Net cash flows from financing activities 1,143,222 (36,441) (99,243) -------------------------------------------- Net increase/(decrease) in cash and cash equivalents 306,023 (586,878) (84,933) Cash and cash equivalents at beginning of year 1,337,172 1,924,050 2,008,983 -------------------------------------------- Cash and cash equivalents at end of year $1,643,195 $ 1,337,172 $1,924,050 - -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements. 18 Page 38 Consolidated Statements of Stockholders' Equity
Additional Total Common Paid-in Retained Treasury Stockholders' (in thousands) Stock Capital Earnings Stock Equity - ---------------------------------------------------------------------------------------------------------------------------- June 30, 1990 $130,008 $2,565,487 $6,257,199 $(770,780) $8,181,914 - ---------------------------------------------------------------------------------------------------------------------------- Purchase of 3,700,000 shares of treasury stock (240,719) (240,719) Shares issued under stock plans (294,917) 524,334 229,417 Restricted stock plans, charge to operations 60,419 60,419 Tax benefits related to stock plans 10,235 10,235 Net loss-1991 (617,427) (617,427) - ---------------------------------------------------------------------------------------------------------------------------- June 29, 1991 $130,008 $2,636,141 $5,344,855 $(487,165) $7,623,839 - ---------------------------------------------------------------------------------------------------------------------------- Purchase of 3,014,083 shares of treasury stock (185,292) (185,292) Shares issued under stock plans (266,660) 498,251 231,591 Restricted stock plans, charge to operations 56,303 56,303 Net loss-1992 (2,795,507) (2,795,507) - ---------------------------------------------------------------------------------------------------------------------------- June 27, 1992 $130,008 $2,692,444 $2,282,688 $(174,206) $4,930,934 - ---------------------------------------------------------------------------------------------------------------------------- Shares issued under stock plans 5,482 149,321 (93,731) 134,528 195,600 Restricted stock plans, charge to operations 42,038 42,038 Repurchase unexercised option shares (31,843) (31,843) Net loss-1993 (251,330) (251,330) - ---------------------------------------------------------------------------------------------------------------------------- July 3, 1993 $135,490 $2,851,960 $1,937,627 $ (39,678) $4,885,399 - ----------------------------------------------------------------------------------------------------------------------------
See Notes K, L and M in the Notes to Consolidated Financial Statements. Cash dividends have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. 19 Page 39 Notes to Consolidated Financial Statements Note A - Significant Accounting Policies Principles of Consolidation - The consolidated financial statements of the Corporation include the financial statements of the parent and its U.S. and non-U.S. subsidiaries. All intercompany accounts and profits have been eliminated. Certain prior years' amounts have been 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 year ended July 3, 1993 includes 53 weeks. The fiscal years ended June 27, 1992 and June 29, 1991 include 52 weeks. Translation of Foreign Currencies - For non-U.S. operations, the U.S. dollar is the functional currency. Monetary assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates. Nonmonetary assets such as inventories and property, plant and equipment are translated at historical rates. Income and expense items are translated at average exchange rates prevailing during the year, except that inventories and depreciation charged to operations are translated at historical rates. Exchange gains and losses arising from translation are included in current income. The Corporation enters into forward foreign exchange contracts to delay the short-term impact of foreign currency fluctuations on operations and the asset and liability positions of non-U.S. subsidiaries. The gains and losses on these contracts are included in income when the operating revenues and expenses are recognized and, for assets and liabilities, in the period in which the exchange rates change. The cash flows related to these gains and losses are classified in the statement of cash flows, as part of cash flows from operating activities. See Note I for information on the Corporation's other financial instruments. Revenue Recognition - Revenues from product sales are recognized at the time the product is shipped. Service and other revenues are recognized ratably over the contractual period or as the services are performed. Warranty - Warranty revenues are recognized ratably over the warranty period; warranty related costs are recognized as service expense 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) per Share - Per share amounts are calculated based on the weighted average number of common shares and common share equivalents outstanding during periods of net income. Common share equivalents are attributable to stock options. Per share amounts are calculated based only on the weighted average number of common shares during periods of net loss. 20 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. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation expense is computed principally on the following bases:
Classification Depreciation Lives and Methods - ------------------------------------------------------------------------------ Buildings 33 years (straight-line) Leasehold Life of assets or term of lease, Improvements whichever is shorter (straight-line) Machinery and Equipment 3 to 10 years (accelerated methods) - ------------------------------------------------------------------------------
Other Assets - Other assets includes equity investments, capitalized software development costs, goodwill, deferred taxes and other intangible assets. Goodwill and other intangible assets are amortized on the straight-line method over their estimated lives, but not in excess of 15 years. Software development costs are capitalized beginning at the time that technical feasibility is established. These costs are amortized over three years from the date the products are available for general use. 21 Page 40 Note B - Geographic Operations
(in thousands) Year Ended - ----------------------------------------------------------------------------------- July 3, 1993 June 27, 1992 June 29, 1991 - ----------------------------------------------------------------------------------- Net Revenues United States: Unaffiliated customer sales $ 5,219,276 $ 5,154,159 $ 5,586,492 Inter-area transfers 1,793,832 1,900,455 2,200,684 ---------------------------------------------- 7,013,108 7,054,614 7,787,176 ---------------------------------------------- Europe: Unaffiliated customer sales 6,973,709 6,751,222 6,216,746 Inter-area transfers 633,935 520,953 278,544 ---------------------------------------------- 7,607,644 7,272,175 6,495,290 ---------------------------------------------- Canada, Asia, Americas, Pacific Rim: Unaffiliated customer sales 2,178,384 2,025,491 2,107,766 Inter-area transfers 1,378,870 1,168,956 1,269,327 ---------------------------------------------- 3,557,254 3,194,447 3,377,093 ---------------------------------------------- Eliminations (3,806,637) (3,590,364) (3,748,555) ---------------------------------------------- Net revenues $14,371,369 $13,930,872 $13,911,004 - -------------------------------------------------------------------------------- Income/(Loss) United States $ (363,454) $(1,971,032) $ (976,651) Europe 12,446 (184,951) 474,180 Canada, Asia, Americas, Pacific Rim 115,091 68,313 142,622 Eliminations (1,384) (48,001) (228,536) ---------------------------------------------- Operating loss (237,301) (2,135,671) (588,385) ---------------------------------------------- Interest income 63,831 96,176 113,221 Interest expense 50,837 38,517 44,556 ---------------------------------------------- Loss before income taxes and cumulative effect of change in accounting principle $ (224,307) $(2,078,012) $ (519,720) - -------------------------------------------------------------------------------- Assets United States $ 4,202,395 $ 4,766,206 $ 5,124,445 Europe 4,910,165 5,195,715 4,706,122 Canada, Asia, Americas, Pacific Rim 1,730,754 1,854,167 1,576,413 Corporate assets 1,444,259 1,183,387 1,728,959 Eliminations (1,337,230) (1,715,166) (1,261,236) ---------------------------------------------- Total assets $10,950,343 $11,284,309 $11,874,703 - --------------------------------------------------------------------------------
22 Page 41 Note B - Geographic Operations (continued) Industry - The Corporation operates in one business segment: the design, manufacture, and service of networked computer systems. Non-U.S. Operations - Sales and marketing operations outside the United States are conducted principally through sales subsidiaries in Canada, Europe, Central and South America, Asia and the Pacific Rim; by direct sales from the parent corporation and through various representative distributorship arrangements and value-added resellers. The Corporation's non-U.S. manufacturing operations include plants in the Americas, Europe and the Pacific Rim. The products of these manufacturing plants are sold to the Corporation's sales subsidiaries, the parent corporation or other manufacturing plants for further processing. Intercompany transfers between geographic areas are accounted for at prices which are intended to be representative of unaffiliated party transactions. Sales to unaffiliated customers outside the United States, including U.S. export sales, were $9.2 billion, $8.8 billion and $8.4 billion for the years ended July 3, 1993, June 27, 1992 and June 29, 1991, respectively, which represented 64%, 63% and 60%, respectively, of total operating revenues. The retained earnings of substantially all of the Corporation's international subsidiaries have been reinvested to support operations. These accumulated retained earnings, before elimination of intercompany transactions, aggregated $4.0 billion, $3.6 billion and $4.3 billion at July 3, 1993, June 27, 1992 and June 29, 1991, respectively. Note C - Income Taxes - -------------------------------------------------------------------------------- Income/(loss) before income taxes for U.S. and non-U.S. operations (in thousands)
- -------------------------------------------------------------------------------- Year Ended July 3,1993 June 27, 1992 June 29, 1991 - -------------------------------------------------------------------------------- U.S. $(383,808) $(1,934,186) $(803,205) Non-U.S. 159,501 (143,826) 283,485 Total $(224,307) $(2,078,012) $(519,720) - --------------------------------------------------------------------------------
Reconciliation of U.S. federal statutory rate to actual tax rate
- ---------------------------------------------------------------------------------------- Year Ended July 3,1993 June 27, 1992 June 29, 1991 - ---------------------------------------------------------------------------------------- U.S. federal statutory tax (benefit) rate (34.0)% (34.0)% (34.0)% Tax benefit of manufacturing operations in:(a) Puerto Rico (8.1) 1.7 (2.6) Ireland (16.0) (3.4) (15.6) Singapore (7.8) 0.0 (2.9) Taiwan (0.1) (0.1) (0.8) Benefit not recorded due to net loss carryforward position 60.5 31.5 60.4 Non-U.S. tax rates, net of foreign tax credits 20.8 16.7 19.3 Other (3.3) (1.2) (5.0) - ---------------------------------------------------------------------------------------- Effective tax rate 12.0% 11.2% 18.8% - ---------------------------------------------------------------------------------------- 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 approximately 3% through December 1993 and then at 13.5% through December 1995. The income from certain products manufactured by the Corporation's subsidiary operating in Taiwan is subject to a reduced tax rate of 20% through June 1997. During fiscal year 1993, the Corporation discontinued its manufacturing operation in Puerto Rico.
23 Page 42 Note C - Income Taxes (continued) At July 3, 1993, the Corporation had net operating loss carryforwards of approximately $4.8 billion for financial reporting purposes which generally will begin to expire in 2007. In addition, the Corporation has not recognized income tax credits of approximately $100,000,000 which will begin to expire in 2001. Included in prepaid expenses and deferred income taxes on the consolidated balance sheets are current net deferred tax assets of $84,806,000 and $222,794,000 for fiscal years 1993 and 1992, respectively. Included in other assets on the consolidated balance sheet for fiscal 1993 are long-term net deferred tax assets of $33,254,000. Components of provisions for (benefits from) U.S. federal and non-U.S. income taxes (in thousands)
Year Ended - ----------------------------------------------------------------------------------- July 3, 1993 June 27, 1992 June 29, 1991 - ----------------------------------------------------------------------------------- U.S. federal: Current $ (5,023) $(155,883) $(234,968) Deferred (19,871) 107,249 205,905 ------------------------------------------------- Total (24,894) (48,634) (29,063) ------------------------------------------------- Non-U.S.: Current (57,525) 92,794 262,803 Deferred 103,497 183,998 (124,642) ------------------------------------------------- Total 45,972 276,792 138,161 ------------------------------------------------- State income taxes 5,945 3,842 (11,391) ------------------------------------------------- Total income taxes $ 27,023 $232,000 $ 97,707 - -----------------------------------------------------------------------------------
Deferred tax expense - sources of timing differences and their tax effect
(in thousands) Year Ended - ----------------------------------------------------------------------------------- July 3, 1993 June 27, 1992 June 29, 1991 - ----------------------------------------------------------------------------------- Inventory related transactions $ 211,972 $ 81,840 $ (39,004) Deferred warranty revenue 3,438 12,882 1,966 Depreciation (151,722) 90,269 7,014 Postretirement benefits (122,633) (26,151) 19,977 Restructuring 320,337 (193,834) (233,539) Benefit not recorded due to net loss carryforward position (130,550) 246,872 347,080 Other (47,216) 79,369 (22,231) -------------------------------------------- Total deferred tax expense $ 83,626 $291,247 $ 81,263 - -----------------------------------------------------------------------------------
24 In connection with its normal examination of the Corporation's 1989, 1990 and 1991 tax returns, the Internal Revenue Service has proposed adjustments. The Corporation believes its judgments in these matters have been appropriate and any adjustments which might result would not have a material effect on the financial statements. In fiscal years 1993, 1992 and 1991, income taxes paid were $53,889,000, $144,620,000 and $186,090,000, respectively. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 109 - Accounting for Income Taxes. The Corporation will adopt SFAS No. 109 in the first quarter of fiscal 1994. SFAS No. 109 requires, among other things, the recognition of a deferred tax asset or liability for estimated future tax effects attributable to temporary differences and carryforwards. Upon adoption, the Corporation expects to recognize additional gross deferred tax assets of approximately $1.9 billion, which will consist primarily of tax benefits associated with net operating loss carryforwards, postretirement benefits and restructuring charges of approximately $1 billion, $360,000,000 and $230,000,000, respectively. The additional gross assets will be almost entirely offset by valuation allowances, resulting in a one-time benefit of approximately $20,000,000 to the consolidated statement of operations. The adoption of SFAS No. 109 will have no cash flow impact on the Corporation. See Note A for further explanation of the Corporation's income tax accounting policies. 25 Page 43 Note D - Capitalized Computer Software Development Costs Unamortized computer software development costs were $138,024,000 and $133,800,000 at July 3, 1993 and June 27, 1992, respectively. Amortization expense was $68,978,000, $63,956,000 and $44,424,000 for the years ended July 3, 1993, June 27, 1992 and June 29, 1991, respectively. Accumulated amortization was $168,845,000 and $186,051,000 at July 3, 1993 and June 27, 1992, respectively. Note E - Restructuring Actions Since fiscal year 1990, the Corporation has recorded restructuring charges of $3.15 billion. During fiscal year 1993, the Corporation took a number of actions consistent with the previously recorded reserves, including employee separations, and the sale or closing of facilities. Other operations continue to be moved from leased to owned facilities, and consolidated where appropriate. Note F - Debt Long-term debt, exclusive of current maturities (in thousands):
- ------------------------------------------------------------------------------------------------------------- Maturity Date (Calendar Year) Interest Rate July 3, 1993 June 27, 1992 - ------------------------------------------------------------------------------------------------------------- Lease obligations 1994-2002 6.81%-19% (a) $ 24,578 $27,405 Notes (b) 1997 7% 250,000 - Notes (b) 2002 7 1/8% 250,000 - Debentures (b) 2012 8 5/8% 250,000 - Debentures (b) 2023 7 3/4% 250,000 - Unamortized discount and commissions (b) (16,183) - Other debt obligations 9,182 14,231 ------------------------------------------------------------- Total long-term debt, exclusive of current maturities. $1,017,577 $41,636 - ------------------------------------------------------------------------------------------------------------- Note (a) Weighted average interest rate at July 3, 1993 and June 27, 1992 of 8.7% and 10.7%, respectively. Note (b) The Notes and Debentures are not redeemable prior to maturity and are not entitled to any sinking fund. The unamortized discount and commissions relate to these Notes and Debentures.
Principal payments during the next five fiscal years are as follows: 1994 - $4,764,000; 1995 - $6,046,000; 1996 - $6,376,000; 1997 - $6,446,000; 1998 - $257,004,000. In fiscal years 1993, 1992 and 1991, interest paid was $37,123,000, $43,494,000 and $42,605,000, respectively. Based primarily on dealer quotes, the fair value of long-term borrowings was approximately $1.1 billion at July 3, 1993. The Corporation had lines of credit available for short-term and medium-term financing totaling $1.2 billion and $.9 billion at fiscal years ended July 3, 1993 and June 27, 1992, respectively. Substantially all of these lines of credits were unused at the end of fiscal 1993 and 1992. Included in the above lines of credit is a three-year $750,000,000 committed credit facility, entered into by the Corporation with a syndicate of banks in May 1993. The facility may be used for general corporate purposes and is subject to satisfaction of certain financial covenants and annual facility fees of 0.175%. The commitment fees on the remaining unused lines are neither material nor significant. In connection with the long-term debt issued in fiscal year 1993, the Corporation, on occasion, may enter into interest rate swap agreements. As a result of these agreements, the effective interest rate on the Notes and Debentures would differ from the stated interest rates. There were no interest rate swaps in effect at July 3, 1993. 26 Page 44 Note G - Postretirement 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 has been 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 1993, 1992 or 1991 due to the full funding limit of the Omnibus Budget Reconciliation Act of 1987. The assets of the plans include corporate equity and debt securities, government securities and real estate. The Corporation's fiscal year 1993 pension cost, before curtailment gains, declined reflecting the positive effects of restructuring activities. The Corporation recognized a one-time charge of $161,658,000 in fiscal 1992 for special early retirement pension benefits as a component of restructuring costs. The net periodic pension cost for defined contribution pension plans was $7,944,000, $11,202,000, and $11,398,000 for the fiscal years ended July 3, 1993, June 27, 1992 and June 29, 1991, 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 3, 1993 June 27, 1992 June 29, 1991 - ------------------------------------------------------------------------------- Service cost for benefits earned during the period $ 192,546 $ 234,842 $ 239,238 Interest cost on projected benefit obligations 201,203 180,898 163,007 Actual return on plan assets (291,127) (166,055) (38,524) Net amortization and deferral 79,421 (47,927) (160,731) Curtailment gains - (138,100) (157,000) ------------------------------------------- Net periodic pension cost for defined benefit pension plans $ 182,043 $ 63,658 $ 45,990 ------------------------------------------- Total net periodic pension cost for all pension plans $ 189,293 $ 87,833 $ 67,102 - -------------------------------------------------------------------------------
Significant actuarial assumptions for pension plans
Year Ended - ------------------------------------------------------------------------------- July 3, 1993 June 27, 1992 June 29, 1991 - ------------------------------------------------------------------------------- U.S. pension plan: Discount rate 8.0% 8.5% 9.0% Expected long-term rate of return on plan assets 9.0% 9.0% 9.5% Rate of increase in future compensation levels 6.0% 6.5% 6.8% Non-U.S. pension plans: Discount rate 5.0- 9.0% 5.0- 9.0% 5.0- 9.5% 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 3.5- 7.5% 4.8- 8.0% 5.0- 8.0%
27 Page 45 Note G - Postretirement Benefits (continued) Funded status of pension plans as of the year-end measurement date
(in thousands) - ------------------------------------------------------------------------------------- Year Ended July 3, 1993 June 27, 1992 Actuarial present value of benefit obligations: Vested benefit obligation $(1,321,322) $(1,397,318) ----------------------------- Accumulated benefit obligation $(1,497,035) $(1,582,385) ----------------------------- Projected benefit obligation $(2,606,673) $(2,761,783) Plan assets at fair value 2,536,614 2,671,657 ----------------------------- Plan assets less than projected benefit obligation (70,059) (90,126) Contributions made after measurement date but before end of fiscal year 2,916 3,811 Unrecognized net gain (275,390) (130,372) Unrecognized prior service cost 67,427 47,842 Unrecognized net transition asset (78,597) (107,443) ----------------------------- Pension liability recognized on the balance sheet $ (353,703) $ (276,288) - -------------------------------------------------------------------------------------
Postretirement Benefits Other Than Pensions - The Corporation has defined benefit postretirement plans that provide medical, dental, and life insurance benefits for U.S. retirees and their eligible dependents. Substantially all of the Corporation's U.S. employees may become eligible for postretirement benefits if they reach retirement age while working for the Corporation. The majority of the Corporation's non-U.S. subsidiaries do not offer postretirement benefits other than pensions to retirees. The Corporation's postretirement benefits plans other than pensions are funded as costs are incurred. Fiscal 1993 expense reflects a reduction from the prior year resulting from cost sharing changes. Retiree contributions for the U.S. medical plan will be based on length of service for employees retiring after fiscal 1993. The Corporation adopted Statement of Financial Accounting Standards No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions in fiscal year 1992 and elected to recognize the cumulative effect immediately for its U.S. and material non- U.S. plans, which resulted in a charge of $485,495,000, net of tax benefits of $4,188,000, to fiscal 1992 results. Postretirement benefits costs totaled $6,400,000 for the year ended June 29, 1991 and were recognized as expense as claims were paid. The Corporation also recognized a one-time charge of $142,985,000 in fiscal year 1992 for special early postretirement benefits other than pensions as a component of restructuring costs.
Components of net periodic postretirement benefits costs (in thousands) - -------------------------------------------------------------------------------- Year Ended July 3, 1993 June 27, 1992 - -------------------------------------------------------------------------------- Service cost for benefit earned during the period $ 25,560 $37,543 Interest cost on accumulated postretirement benefits obligations 50,915 42,525 Actual return on plan assets - - Net amortization and deferral (8,538) - Curtailment gains (30,000) - ---------------------------------- Net periodic postretirement benefits cost$ 37,937 $80,068 - --------------------------------------------------------------------------------
28 Page 46 Note G - Postretirement Benefits (continued) Significant actuarial assumptions for other postretirement benefits plans
(dollars in thousands) - ------------------------------------------------------------------------------------------------ Year Ended July 3, 1993 June 27, 1992 - ------------------------------------------------------------------------------------------------ U.S. plans: Discount rate 8.0% 8.5% Health care cost trend rate, current year 10.6% 13.8% Health care cost trend rate, ultimate year 6.0% 6.0% Trend rate decreases to the ultimate rate in the year 2005 2005 Effect of a 1% increase in the trend rate: Increase in accumulated postretirement benefits obligation $137,913 $148,386 Increase in net periodic postretirement benefits cost $ 17,598 $ 19,674 Non-U.S. plans: Discount rate 5.0- 8.5% 5.0- 8.5% Health care cost trend rate, current year 5.0-13.0% 5.0-14.0% Health care cost trend rate, ultimate year 5.0- 7.0% 5.0- 7.0% Trend rates decrease to the ultimate rates in the years 1993-2050 1992-2050 Effect of a 1% increase in the trend rate: Increase in accumulated postretirement benefit obligation $ 5,861 $ 4,280 Increase in net periodic postretirement benefit cost $ 564 $ 578 - --------------------------------------------------------------------------------
Funded status of other postretirement benefits plans as of the year-end measurement date
(in thousands) - --------------------------------------------------------------------------------- Year Ended July 3, 1993 June 27, 1992 - --------------------------------------------------------------------------------- Accumulated postretirement benefit obligations: Retirees $(413,887) $(351,489) Fully eligible plan participants (20,572) (25,383) Other active plan participants (298,154) (371,956) ------------------------ Unfunded accumulated postretirement benefit obligation (732,613) (748,828) Unrecognized actuarial net loss 149,482 46,311 Unrecognized prior service credit (139,610) - ------------------------ Other postretirement benefits liability recognized on the balance sheet $(722,741) $(702,517) - --------------------------------------------------------------------------------
Note H - 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) - ---------------------------------------------------- 1994 $ 334,642 1995 272,909 1996 230,166 1997 170,578 1998 164,397 Later years 618,274 - --------------------------------------------------- Total minimum lease payments $1,790,966 - ----------------------------------------------------
Total rental expense for the years ended July 3, 1993, June 27, 1992 and June 29, 1991 amounted to $503,094,000, $544,811,000 and $535,159,000, respectively. 29 Page 47 Note I - Other Financial Instruments Off-Balance-Sheet Risk - The Corporation enters into forward foreign exchange contracts to hedge foreign currency transactions on a continuing basis for periods consistent with its committed exposures. It does not engage in speculation. The foreign exchange contracts generally have maturities which do not exceed six months. Gains and losses on foreign exchange contracts offset losses and gains on assets, liabilities, and transactions being hedged; therefore, the Corporation does not anticipate any material adverse effect due to exchange rate movements over the short-term period covered by these contracts. See Note A for information on the Corporation's accounting policy on foreign exchange contracts. As of July 3, 1993 and June 27, 1992, the net face amount of foreign exchange contracts outstanding, substantially all of which were in European currencies, was $1.1 billion and $1.3 billion, respectively. The fair value of such contracts which represents the replacement value, is a net gain of $14,400,000 as of July 3, 1993, based on dealer quotes. Concentration of Credit Risk - Financial instruments which potentially subject the Corporation to concentrations of credit risk consist principally of temporary cash investments and trade receivables. The Corporation places its temporary cash investments with high credit qualified financial institutions and, by policy, limits the amount of credit exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Corporation's customer base, and their dispersion across many different industries and geographies. As of July 3, 1993, the Corporation had no significant concentrations of credit risk. Fair Value - In fiscal year 1993, the Corporation adopted Statement of Financial Accounting Standards No. 107 - Disclosures about Fair Value of Financial Instruments. The fair value of cash equivalents, debt, and foreign exchange contracts is disclosed in relevant notes to the financial statements. For all other financial instruments, the carrying amount approximates fair value. Note J - Investing Activities In June 1992, the Corporation entered into agreements to purchase common stock of Ing. Olivetti & C. S.p.A. ("Olivetti") and to form a strategic alliance with Olivetti. Pursuant to these agreements, as amended, the Corporation purchased a total of 98,533,000 shares of Olivetti common stock in fiscal year 1993 for a total investment of approximately $287,800,000. As part of the alliance agreement, as amended, Olivetti has agreed to purchase a minimum level of Alpha AXP products from the Corporation over a specified period of time. The Olivetti stock is recorded at $83,800,000. The remainder of the purchase price is recorded as an intangible asset which is being amortized over a period not to exceed ten years. On November 11, 1991, the Corporation signed an agreement with Philips Electronics N.V. of The Netherlands to acquire most of the Philips Information Systems Division ("Division"). The purchase price for the acquired business was equal to the net asset value of the business as at October 27, 1991, and was $146,387,000, net of cash acquired in the purchase. The fiscal year 1992 operating results and statement of financial position reflect the full consolidation of the acquired business as from October 28, 1991, including purchase price adjustments made in the fourth quarter of fiscal 1992. The acquisition included the Division's activities for financial institutions, small and medium enterprises, image and document management systems, and all related customer service activities. The acquisition has been accounted for as a purchase, and accordingly, the assets and liabilities have been recorded at their estimated fair value at the date of acquisition. As of January 1, 1991, the Corporation's results reflect the full consolidation of Digital-Kienzle Computersysteme GmbH & Co. KG ("Digital-Kienzle"), a German entity in which Digital acquired a 65% interest from Mannesmann AG for $233,261,000. On December 20, 1991, the Corporation acquired the remaining 35% interest in Digital-Kienzle through the exercise of rights related to an obligation payable to Mannesmann AG. The acquisition has been accounted for as a purchase. The acquisitions had no material effect on the total operating results for the fiscal years in which they were acquired, fiscal 1992 and 1991. 30 Page 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 which are exercisable upon grant, to purchase common stock at a price determined by the Board of Directors. Shares purchased under the plans are generally subject to repurchase options and restrictions on sales which lapse over an extended time period not exceeding 10 years. In fiscal year 1992, certain options were granted under such Equity Plan which become exercisable ratably over five years, but only if the common stock achieves certain price performance criteria. Information concerning activity during the three years ended July 3, 1993 was as follows:
Options Outstanding - -------------------------------------------------------------------------------- Shares Reserved for Average Future Price Grants Shares per Share - -------------------------------------------------------------------------------- June 30, 1990 5,483,685 18,611,006 $ 70.24 Options Granted (2,130,860) 2,130,860 $ 77.62 Shares Awarded (316,830) - - Options Exercised - (838,391) $ 29.71 Options Cancelled 597,652 (597,652) $ 83.11 Options Terminated (351,837) - - - -------------------------------------------------------------------------------- June 29, 1991 3,281,810 19,305,823 $ 72.42 Additional Shares Available for Grant 1,950,123 - - Options Granted (2,901,830) 2,901,830 $ 58.00 Shares Awarded (623,490) - - Options Exercised - (795,879) $ 29.73 Options Cancelled 493,879 (493,879) $ 82.47 Options Terminated (428,994) - - - -------------------------------------------------------------------------------- June 27, 1992 1,771,498 20,917,895 $ 71.81 Additional Shares Available for Grant 1,950,123 - - Options Granted (3,737,045) 3,737,045 $ 41.41 Shares Awarded (277,650) - $ - Options Exercised - (553,486) $ 38.49 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 $ 56.58 - --------------------------------------------------------------------------------
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. 31 In April 1993, the Board of Directors approved the repurchase of outstanding options to purchase up to 2.8 million shares of common stock granted to certain employees in fiscal 1988 at an exercise price of $153.00 per share, which represented a discount of $30.00 per share from the fair market value of the common stock on the date of grant. The original options to purchase 3.2 million shares were subject to restrictions lapsing and amortizing ratably over ten years. Optionholders were offered $3.00 per unexercised option share in return for the cancellation of the option. The repurchase price was determined after taking into account option pricing models, the opinion of an independent financial advisor and the financial and compensation objectives of the program. The Corporation repurchased approximately 2.7 million shares at a cost of approximately $8,000,000 which was charged to operations in fiscal year 1993. In addition, in the current year, 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 2,571,786 shares at July 3, 1993. There were 6,404,574 shares issued at an average price of $28.38 per share during the year ended July 3, 1993; 4,788,819 shares issued at an average price of $43.21 per share during the year ended June 27, 1992; and 4,619,793 shares at $44.34 per share during the year ended June 29, 1991. 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 45,000 have been granted at an average purchase price of $50.18 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 3, 1993. Page 49 Note L - Treasury Stock The Corporation did not purchase any shares of its own common stock during fiscal year 1993. The Corporation purchased on the open market 3,014,083 shares of its common stock at an aggregate purchase price of $185,292,000, or $61.48 per share, during the year ended June 27, 1992, and 3,700,000 shares at an aggregate purchase price of $240,719,000, or $65.06 per share, during the year ended June 29, 1991. All of the acquired shares are held as common stock in treasury, less shares issued to employees under the Stock Plans. The difference between the average acquisition cost of the shares and the proceeds from issuance is charged to retained earnings. Note M - Stockholder Rights Plan The Corporation adopted a Stockholder Rights Plan in December 1989 pursuant to which the Corporation authorized the distribution of one Common Stock Purchase Right for each share of outstanding Common Stock. Under certain conditions, each Right may be exercised for one share of Common Stock at an exercise price of $400, subject to adjustment. Under circumstances defined in the Plan, the Rights entitle holders to purchase stock having a value of twice the exercise price of the Rights. Until they become exercisable, the Rights are not transferable apart from the Common Stock. The Rights may be redeemed by the Corporation at any time prior to the occurrence of certain events at $.01 per Right. The Plan will expire on December 21, 1999, unless the Rights are earlier redeemed by the Corporation. 32 Page 50 Supplementary Information Quarterly Financial Data (unaudited)
Income/ Income/ (Loss) (Loss) Total Before After Net Income/ Operating Gross Income Income Income/ (Loss) (in millions except per share data) Revenues Profit Taxes Taxes1 (Loss) per Share2 - ------------------------------------------------------------------------------------------------ For the year ended July 3, 1993 Fourth Quarter $ 3,914 $1,576 $ 120 $ 113 $ 113 $ .85 Third Quarter 3,454 1,373 (28) (30) (30) (.23) Second Quarter 3,689 1,514 (66) (74) (74) (.57) First Quarter 3,314 1,277 (250) (260) (260) (2.04) - ------------------------------------------------------------------------------------------------ Total Year $14,371 $5,740 $ (224) $ (251) $ (251) $(1.93) - ------------------------------------------------------------------------------------------------ For the year ended June 27, 1992 Fourth Quarter3 $ 3,906 $1,600 $(1,674) $(1,855) $(1,855) $(14.76) Third Quarter4 3,253 1,268 (291) (312) (312) (2.50) Second Quarter4 3,479 1,441 (153) (155) (155) (1.25) First Quarter4 3,293 1,490 40 12 (474) (3.80) - ------------------------------------------------------------------------------------------------ Total Year $13,931 $5,799 $(2,078) $(2,310) $(2,796) $(22.39) - ------------------------------------------------------------------------------------------------ 1 Before cumulative effect of change in accounting principle. 2 Income/(loss) per share is computed independently for each of the quarters presented and therefore does not sum to the total for the year. 3 Includes restructuring charges of $1,500 million in fiscal year 1992. 4 Restated to reflect the adoption of SFAS No. 106 - Employers' Accounting for Postretirement Benefits Other Than Pensions.
33 Common Stock Information The Corporation's common stock is listed and traded on the Midwest Stock Exchange, New York Stock Exchange, Pacific Stock Exchange, Montreal Exchange and several European stock exchanges. There were 86,611 shareholders of record as of July 3, 1993. The high and low quarterly sales prices for the past three fiscal years are presented below:
1993 - --------------------------------------------------------------- Fiscal Quarter High Low - --------------------------------------------------------------- Fourth $ 48 1/4 $ 38 1/4 Third 49 1/4 32 3/4 Second 40 5/8 30 3/8 First 44 33 1/4 - ---------------------------------------------------------------
1992 - --------------------------------------------------------------- Fiscal Quarter High Low - --------------------------------------------------------------- Fourth $ 54 7/8 $ 33 1/4 Third 65 1/2 49 1/4 Second 65 48 1/2 First 71 3/4 53 7/8 - ---------------------------------------------------------------
1991 - --------------------------------------------------------------- Fiscal Quarter High Low - --------------------------------------------------------------- Fourth $ 74 1/4 $ 58 3/4 Third 83 50 3/8 Second 59 1/2 45 1/2 First 86 7/8 49 7/8
34 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a)(3) Exhibits: 24 - Consent of Independent Accountants. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. DIGITAL EQUIPMENT CORPORATION (Registrant) Date: March 10, 1994 By: /s/ William M. Steul William M. Steul Vice President, Finance and Chief Financial Officer (Principal Financial Officer) EX-24 2 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS 1 EXHIBIT 24 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS We consent to the inclusion in this Form 10-K/A of our reports dated July 28, 1993, on our audits of the financial statements and financial statement schedules of Digital Equipment Corporation. /s/ Coopers & Lybrand Coopers & Lybrand Boston, Massachusetts March 10, 1994 -----END PRIVACY-ENHANCED MESSAGE-----