-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RU7+Wy+wI2HrwqRuMqUCa3P/hZSBnvK0JvLlpjOR4dJNIdmB11e6ton/+/nNpskd kLTNiW92TJ4nt7jAXFhg5Q== 0000950135-98-002979.txt : 19980507 0000950135-98-002979.hdr.sgml : 19980507 ACCESSION NUMBER: 0000950135-98-002979 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980506 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL EQUIPMENT CORP CENTRAL INDEX KEY: 0000028887 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 042226590 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05296 FILM NUMBER: 98611321 BUSINESS ADDRESS: STREET 1: 146 MAIN ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 6178975111 MAIL ADDRESS: STREET 1: 111 POWDER MILL ROAD MS02-3/F13 CITY: MAYNARD STATE: MA ZIP: 01754 10-Q 1 DIGITAL EQUIPMENT CORPORATION 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 28, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-5296 DIGITAL EQUIPMENT CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-2226590 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 111 Powdermill Road, Maynard, Massachusetts 01754 (Address of principal executive offices) (Zip Code) (978) 493-5111 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock, par value $1, outstanding as of March 28, 1998: 147,429,061. 2 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Three-Month Period Ended ----------------------------- March 28, March 29, 1998 1997 ---------- ---------- REVENUES Product sales .................................... $1,681,618 $1,836,516 Service revenues ................................. 1,509,392 1,477,794 ---------- ---------- TOTAL OPERATING REVENUES ......................... 3,191,010 3,314,310 ---------- ---------- COSTS AND EXPENSES Cost of product sales ............................ 1,094,646 1,188,578 Service expense .................................. 1,022,201 1,019,290 Research and engineering expenses ................ 261,274 256,476 Selling, general and administrative expenses ..... 738,400 798,714 Costs attributable to the sale of assets ......... 33,000 -- ---------- ---------- Operating income ................................. 41,489 51,252 Other (income)/expense, net ...................... (337,791) (10,848) ---------- ---------- INCOME BEFORE INCOME TAXES ....................... 379,280 62,100 Provision for income taxes ....................... 37,457 11,134 ---------- ---------- NET INCOME ....................................... 341,823 50,966 Dividend on preferred stock ...................... 8,875 8,875 ---------- ---------- NET INCOME APPLICABLE TO COMMON STOCK ............ $ 332,948 $ 42,091 ========== ========== NET INCOME APPLICABLE PER COMMON SHARE (1): BASIC EARNINGS PER SHARE ......................... $ 2.27 $ 0.27 ========== ========== DILUTED EARNINGS PER SHARE ....................... $ 2.23 $ 0.27 ========== ==========
(1) Refer to page 8 of this report and Note E. Cash dividends on common stock have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. 2 3 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share data)
Nine-Month Period Ended -------------------------- March 28, March 29, 1998 1997 ---------- ---------- REVENUES Product sales .............................................. $5,080,232 $5,202,959 Service revenues ........................................... 4,395,566 4,380,739 ---------- ---------- TOTAL OPERATING REVENUES ................................... 9,475,798 9,583,698 ---------- ---------- COSTS AND EXPENSES Cost of product sales ...................................... 3,247,158 3,445,203 Service expense ............................................ 3,002,895 3,016,261 Research and engineering expenses .......................... 798,760 763,961 Selling, general and administrative expenses ............... 2,262,562 2,348,297 Costs attributable to the sale of assets ................... 33,000 -- ---------- ---------- Operating income ........................................... 131,423 9,976 Other (income)/expense, net ................................ (364,691) (27,465) ---------- ---------- INCOME BEFORE INCOME TAXES ................................. 496,114 37,441 Provision for income taxes ................................. 54,400 20,475 ---------- ---------- NET INCOME ................................................. 441,714 16,966 Dividends on preferred stock ............................... 26,625 26,625 ---------- ---------- NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ............... $ 415,089 $ (9,659) ========== ========== NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (1): BASIC EARNINGS/(LOSS) PER SHARE ............................ $ 2.81 $ (0.06) ========== ========== DILUTED EARNINGS/(LOSS) PER SHARE .......................... $ 2.77 $ (0.06) ========== ==========
(1) Refer to page 9 of this report and Note E. Cash dividends on common stock have never been paid by the Corporation. The accompanying notes are an integral part of these financial statements. 3 4 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
March 28, June 28, 1998 1997 ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents ............................. $1,498,035 $1,358,750 Short-term investments ................................ 918,855 1,160,265 Accounts receivable, net of allowances of $213,281 and $263,763 .............................. 2,704,976 2,930,014 Inventories: Raw materials ......................................... 297,976 421,984 Work-in-process ....................................... 245,074 350,421 Finished goods ........................................ 644,785 730,740 ---------- ---------- Total inventories ..................................... 1,187,835 1,503,145 Prepaid expenses, deferred income taxes and other current assets .............................. 653,417 324,122 ---------- ---------- TOTAL CURRENT ASSETS .................................. 6,963,118 7,276,296 ---------- ---------- Property, plant and equipment, at cost ................ 3,707,327 4,868,548 Less accumulated depreciation ......................... 2,235,425 2,764,901 ---------- ---------- Net property, plant and equipment ..................... 1,471,902 2,103,647 Assets held for resale ................................ 640,000 -- Other assets .......................................... 282,236 312,951 ---------- ---------- TOTAL ASSETS .......................................... $9,357,256 $9,692,894 ========== ==========
The accompanying notes are an integral part of these financial statements. 4 5 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands)
March 28, June 28, 1998 1997 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank loans and current portion of long-term debt ............ $ 28,823 $ 262,835 Accounts payable ............................................ 786,005 871,760 Income taxes payable ........................................ 153,533 101,286 Salaries, wages and related items ........................... 696,391 637,587 Deferred revenues and customer advances ..................... 1,022,252 1,079,003 Accrued restructuring costs ................................. 217,491 382,559 Other current liabilities ................................... 821,492 905,900 ---------- ---------- TOTAL CURRENT LIABILITIES ................................... 3,725,987 4,240,930 ---------- ---------- Long-term debt .............................................. 741,150 743,440 Postretirement and other postemployment benefits ............ 1,137,368 1,163,568 ---------- ---------- TOTAL LIABILITIES ........................................... 5,604,505 6,147,938 ---------- ---------- STOCKHOLDERS' EQUITY Preferred stock, $1.00 par value (liquidation preference of $100.00 per share); authorized 25,000,000 shares; 4,000,000 shares of Series A 8-7/8% Cumulative Preferred Stock issued and outstanding ...................... 4,000 4,000 Common stock, $1.00 par value; authorized 450,000,000 shares; 157,201,693 and 157,232,104 shares issued ................................... 157,202 157,232 Additional paid-in capital .................................. 3,842,957 3,835,697 Retained earnings/(deficit) ................................. 138,485 (234,841) Treasury stock at cost; 9,772,632 shares and 6,132,201 shares ........................................ (389,893) (217,132) ---------- ---------- TOTAL STOCKHOLDERS' EQUITY .................................. 3,752,751 3,544,956 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .................. $9,357,256 $9,692,894 ========== ==========
The accompanying notes are an integral part of these financial statements. 5 6 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine-Month Period Ended ----------------------------- March 28, March 29, 1998 1997 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ..................................................... $ 441,714 $ 16,966 Adjustments to reconcile net income to net cash from operating activities: Depreciation ................................................... 289,818 303,327 Amortization ................................................... 36,132 41,252 (Gain)/loss on disposition and write-downs of other assets ................................................... (338,645) 34,248 Other adjustments to net income ................................ 554,069 53,051 Decrease in accounts receivable ................................ 231,438 337,129 Decrease in inventories ........................................ 263,175 347,421 (Increase)/decrease in prepaid expenses and other current assets ................................................. (37,144) 7,672 Increase in assets held for resale (640,000) -- Decrease in accounts payable ................................... (85,755) (93,562) Increase in taxes .............................................. 60,056 9,822 Increase/(decrease) in salaries, wages, benefits and related items .............................................. 32,604 (9,205) Decrease in deferred revenues and customer advances .............................................. (56,751) (42,382) Decrease in accrued restructuring costs ........................ (165,068) (176,186) Decrease in other current liabilities .......................... (67,964) (25,283) ----------- ----------- Total adjustments .............................................. 75,965 787,304 ----------- ----------- Net cash flows from operating activities ....................... 517,679 804,270 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in property, plant and equipment .................... (340,733) (275,056) Proceeds from the disposition of property, plant and equipment .................................. 65,341 67,600 Purchases of short-term investments ............................ (1,646,963) (2,806,784) Maturities of short-term investments ........................... 1,888,373 1,745,054 Investments in other assets .................................... (31,425) (4,518) Proceeds from the disposition of other assets .................. 165,625 14,067 ----------- ----------- Net cash flows from investing activities ....................... 100,218 (1,259,637) ----------- ----------- Net cash flows from operating and investing activities ........................................... 617,897 (455,367) ----------- -----------
The accompanying notes are an integral part of these financial statements. 6 7 DIGITAL EQUIPMENT CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands)
Nine-Month Period Ended ---------------------------- March 28, March 29, 1998 1997 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of debt ................... 31,089 6,240 Payments to retire debt .............................. (268,018) (10,713) Purchase of treasury shares .......................... (326,758) (214,546) Issuance of common and treasury shares, including tax effects .......................................... 111,700 81,831 Dividends on preferred stock ......................... (26,625) (26,625) ---------- ---------- Net cash flows from financing activities ............. (478,612) (163,813) ---------- ---------- Net increase/(decrease) in cash and cash equivalents ................................. 139,285 (619,180) Cash and cash equivalents at the beginning of the year ................................ 1,358,750 1,791,754 ---------- ---------- Cash and cash equivalents at end of period ........... $1,498,035 $1,172,574 ========== ==========
The accompanying notes are an integral part of these financial statements. 7 8 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data)
Three-Month Period Ended ------------------------------ March 28, March 29, 1998 1997 ------------ ------------ Net income ....................................................... $ 341,823 $ 50,966 Less: Dividend on preferred stock ................................ 8,875 8,875 ------------ ------------ Net income applicable to common stock ............................ $ 332,948 $ 42,091 ============ ============ Weighted average number of common shares outstanding during the period .................................... 146,928,739 154,282,203 Effect of common equivalent shares from application of "treasury stock" method to unexercised and outstanding stock options .................................... 2,469,137 1,017,100 ------------ ------------ Total weighted average number of common and common equivalent shares outstanding during the period ................................................ 149,397,876 155,299,303 ============ ============ Net income applicable per common share (1): Basic earnings per share ......................................... $ 2.27 $ 0.27 ============ ============ Diluted earnings per share ....................................... $ 2.23 $ 0.27 ============ ============
(1) Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding during periods of net income. The accompanying notes are an integral part of these financial statements. 8 9 DIGITAL EQUIPMENT CORPORATION COMPUTATION OF NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE (Dollars in thousands except per share data)
Nine-Month Period Ended ------------------------------- March 28, March 29, 1998 1997 ------------ ------------- Net income ....................................................... $ 441,714 $ 16,966 Less: Dividends on preferred stock ............................... 26,625 26,625 ============ ============= Net income /(loss) applicable to common stock .................... $ 415,089 $ (9,659) ------------ ------------- Weighted average number of common shares outstanding during the period .................................... 147,574,003 154,598,774 Effect of common equivalent shares from application of "treasury stock" method to unexercised and outstanding stock options .................................... 2,043,116 -- ------------ ------------- Total weighted average number of common and common equivalent shares outstanding during the period ................................................ 149,617,119 154,598,774 ============ ============= Net income/(loss) applicable per common share (1): Basic earnings/(loss) per share .................................. $ 2.81 $ (0.06) ============ ============= Diluted earnings/(loss) per share ................................ $ 2.77 $ (0.06) ============ =============
(1) Basic earnings per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is based on the weighted average number of common and common equivalent shares outstanding during periods of net income. Diluted loss per share is based only on the weighted average number of common shares outstanding during the period. The accompanying notes are an integral part of these financial statements. 9 10 DIGITAL EQUIPMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Significant Accounting Policies Principles of consolidation: The accompanying unaudited financial statements as of and for the three-month and nine-month periods ended March 28, 1998 and March 29, 1997 have been prepared on substantially the same basis as the annual consolidated financial statements, reflecting all adjustments of a normal recurring nature. In the opinion of management, the financial statements reflect all adjustments necessary for a fair presentation of the results for those periods and the financial condition at those dates. Certain prior year's amounts have been reclassified to conform with the current year presentation.
Other (income)/expense, net Nine-Month Period Ended Three-Month Period Ended - --------------------------------------------------------------------------------------------------- (in thousands) March 28, March 29, March 28, March 29, 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------- Interest income $ (84,689) $(82,706) $ (25,341) $(30,207) Interest expense 58,643 64,311 17,387 21,542 Net (gain)/loss on divestments (338,645) (9,070) (329,837) (2,183) - --------------------------------------------------------------------------------------------------- Other (income)/expense, net $(364,691) $(27,465) $(337,791) $(10,848) - ---------------------------------------------------------------------------------------------------
Note B - Restructuring Actions During the first nine months of fiscal 1998, the Corporation incurred costs of $61 million for approximately 915 employee separations and for separation actions taken at the end of fiscal 1997. In addition, the Corporation incurred costs of $104 million for facilities closures and other related actions. Cash expenditures for restructuring activities were $116 million for the first nine months of fiscal 1998. Note C - Litigation Several purported class action lawsuits were filed against the Corporation during the fourth quarter of fiscal 1994 alleging violations of the Federal securities laws arising from alleged misrepresentations and omissions in connection with the Corporation's issuance and sale of Series A 8-7/8% Cumulative Preferred Stock and the Corporation's financial results for the quarter ended April 2, 1994. During fiscal 1995, the lawsuits were consolidated into three cases, which were pending before the United States District Court for the District of Massachusetts. On August 8, 1995, the Massachusetts federal court granted the defendants' motion to dismiss all three cases in their entirety. On May 7, 1996, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part the dismissal of the two cases, and remanded for further proceedings. 10 11 The Corporation and Intel Corporation ("Intel") have been involved in litigation commenced in the fourth quarter of fiscal 1997 in the U.S. District Courts for the Districts of Massachusetts and Northern California, and in September 1997 in the U.S. District Court for the District of Oregon claiming, respectively, willful infringement by Intel of certain of the Corporation's patents through the manufacture, sale and use of Intel's families of Pentium microprocessors, breach of contract and various other unfair or unlawful business practices by the Corporation, and willful infringement by the Corporation of certain of Intel's patents through the manufacture, sale and use of various computer products. On October 27, 1997, the Corporation and Intel announced that they had reached agreement to settle the pending litigation between the parties and to request a stay of all pending litigation, subject to receipt of government approval necessary to finalize the transactions contemplated by the parties' agreement. At the request of the parties, all proceedings have been stayed. On April 23, 1998, the Federal Trade Commission ("FTC") notified the Corporation and Intel that it will not seek to enjoin the settlement of the legal dispute between the companies. As part of the FTC review process, the Corporation agreed to a consent order that provides for the licensing of the Corporation's Alpha technology to other semiconductor manufacturers. Accordingly, the Corporation and Intel expect to complete the transactions contemplated by the agreement prior to May 31, 1998 (see Note F). Note D - Treasury Stock During the first nine months of fiscal 1998, the Corporation purchased in the open market 7.5 million shares of its common stock for an aggregate purchase price of $327 million, or an average of $43.60 per common share. Approximately 3.9 million shares were issued under employee stock plans and the remaining shares are held in treasury. Note E - Statement of Financial Accounting Standard No. 128 - Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 - Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share (EPS) and requires a dual presentation of basic and dilutive EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997 and earlier adoption is not permitted. The financial statements presented have been prepared in accordance with SFAS 128 and prior periods amounts have been restated to conform to current year presentation. Note F - Agreement with Intel Corporation On October 27, 1997, the Corporation and Intel announced that they had reached an agreement to establish a broad-based business relationship, including the sale of the Corporation's semiconductor manufacturing operations to Intel for a purchase price equal to the net book value of the transferred assets (currently estimated to be approximately $640 million), cross-licensing of patents, supply of both Intel and Alpha microprocessors 11 12 and development of future systems based on Intel's 64-bit microprocessors. The agreement provides that Intel will make offers of employment to employees of the Corporation's semiconductor manufacturing operations, except for those employees associated with the Alpha and Alpha-related semiconductor design teams. Approximately 1,800 employees are expected to transfer to Intel. The Corporation and Intel expect to complete the transactions contemplated by the agreement prior to May 31, 1998 (see Note C). Note G - Agreement with Cabletron Systems, Inc. The Corporation and Cabletron Systems, Inc. ("Cabletron Systems") entered into an asset purchase agreement on November 24, 1997, and consummated the transaction on February 7, 1998. The Corporation received net proceeds of approximately $416 million and realized a gain of $316 million related to this transaction. The proceeds reflect $133 million of cash and product credits of $301 million before reduction for imputed interest and other adjustments totaling $18 million. The Corporation is confident the credits are fully realizable and any loss thereof is remote. Other costs associated with the sale have been reflected in two lines in the Statement of Operations, as described below. Costs attributable to the sale of assets consist of (in millions): Write-off of surplus raw material inventory $12 Severance and other employee expenses 8 Supplier/vendor cancellation costs 6 Employee retention and pension expense 5 Litigation expense 2 --- Total $33 Other (income)/expense, net includes costs directly related to this sale of $5 million for professional services and $3 million for facilities restoration costs. Note H - Debt During the quarter, the Corporation terminated its 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 $500 million. During the term of the agreement, no interests in the Receivables had been sold. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS REVENUES Total operating revenues for the first nine months of fiscal 1998 were $9.5 billion, down 1% from the comparable period a year ago. Total operating revenues include product sales of $5.1 billion and service revenues of $4.4 billion. Total operating revenues for the third quarter of fiscal 1998 were $3.2 billion, down 4% from the comparable quarter last year. Total operating revenues include product sales of $1.7 billion and service revenues of $1.5 billion.
Revenues (dollars in millions) Nine-Month Period Ended Three-Month Period Ended - -------------------------------------------------------------------------------------- March 28, March 29, March 28, March 29, 1998 1997 1998 1997 - -------------------------------------------------------------------------------------- Product sales $5,080 $5,203 $1,682 $1,836 % of total revenues 54% 54% 53% 55% - -------------------------------------------------------------------------------------- Service revenues $4,396 $4,381 $1,509 $1,478 % of total revenues 46% 46% 47% 45% - -------------------------------------------------------------------------------------- Total revenues $9,476 $9,584 $3,191 $3,314 - --------------------------------------------------------------------------------------
Product sales for the first nine months and third quarter of fiscal 1998 were down 2% and 8%, respectively, from the comparable periods last year. Product sales for the first nine months and third quarter of fiscal 1998 reflect a decrease in revenues from the sales of certain client and component products, partially offset by increased revenues from the sale of server (Intel and Alpha-based) and storage products. Revenues from the sale of servers represented 37% and 39% of product sales for the first nine months and third quarter of fiscal 1998, respectively, up from 34% and 33% for the comparable periods last year. Client sales represented 29% and 31% of product sales for the first nine months and third quarter of fiscal 1998, respectively, compared to 30% and 29% for the same periods in fiscal 1997. Revenues from the Corporation's components and other products represented 34% and 30% of product sales for the first nine months and third quarter of fiscal 1998, respectively, compared to 36% and 38% of product sales for the same periods last year. Service revenues for the first nine months and third quarter of fiscal 1998 were $4.4 billion and $1.5 billion, respectively, essentially unchanged from the first nine months and up 2% from the third quarter of fiscal 1997. Service revenues reflect growth in network and integration services, multivendor services, and client/server outsourcing services, offset by an anticipated decrease in revenues from Digital products maintenance services. 13 14 Operating revenues from customers outside of the United States were $6.2 billion and $2.1 billion for the first nine months and third quarter of fiscal 1998, respectively, in each case representing 65% of total operating revenues, compared to $6.5 billion and $2.3 billion for the first nine months and third quarter of fiscal 1997, or 68% and 69% of total operating revenues, respectively. The Corporation's operating results for the first nine months and third quarter of fiscal 1998 were adversely impacted by the continued strengthening of the U.S. dollar. Removing the effects of foreign currency exchange rate movements, the increase in total operating revenues would have been 5% and 3% for the first nine months and third quarter of fiscal 1998, respectively, when compared to the same periods last year. EXPENSES AND PROFIT MARGINS
Gross margin (dollars in millions) Nine-Month Period Ended Three-Month Period Ended - ------------------------------------------------------------------------------------------------ March 28, March 29, March 28, March 29, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------ Product sales gross margin $1,833 $1,758 $587 $648 % of related revenues 36% 34% 35% 35% - ------------------------------------------------------------------------------------------------ Service revenues gross margin $1,393 $1,364 $487 $459 % of related revenues 32% 31% 32% 31% - ------------------------------------------------------------------------------------------------
Product gross margin was 36% and 35% of product sales for the first nine months and third quarter of fiscal 1998, respectively, compared to 34% and 35% for the same periods a year ago. The improvement in product gross margin for the first nine months was due principally to manufacturing cost efficiencies and an increased proportion of higher-margin server revenues, and in the third quarter, offset by a $21 million increase in cost of product sales related to the repurchase of inventory from Cabletron Systems, Inc. (see discussion below and Note G). Service gross margin was 32% of service revenues for the first nine months and third quarter of fiscal 1998, compared to 31% for the first nine months and third quarter of fiscal 1997. Service gross margin reflects the continued focus on more profitable systems integration contracts, as well as the implementation of gross margin improvement programs, offset by the continued shift in the mix of service revenues toward lower-margin service offerings.
Operating expenses (dollars in millions) Nine-Month Period Ended Three-Month Period Ended - ------------------------------------------------------------------------------------------------ March 28, March 29, March 28, March 29, 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------ Research and engineering $ 799 $ 764 $261 $256 % of total revenues 8% 8% 8% 8% - ------------------------------------------------------------------------------------------------ Selling, general and administrative $2,263 $2,348 $738 $799 % of total revenues 24% 25% 23% 24% - ------------------------------------------------------------------------------------------------ Costs attributable to the sale of assets $ 33 -- $ 33 -- % of total revenues N/M -- 1% -- - ------------------------------------------------------------------------------------------------
14 15 Research and engineering (R&E) spending totaled $799 million and $261 million for the first nine months and third quarter of fiscal 1998, respectively, up from $764 million and $256 million for the same periods in fiscal 1997. The Corporation believes that this level of R&E investment is appropriate for the Corporation to continue to provide competitive products and services. Selling, general and administrative (SG&A) expenses were $2.3 billion and $738 million for the first nine months and third quarter of fiscal 1998, respectively, down 4% from the first nine months of fiscal 1997 and down 8% compared to the third quarter of fiscal 1997. The decline in SG&A expenses reflects the positive effects of currency rate movements and the Corporation's continued focus on achieving a competitive cost structure through reductions in population and facilities expenditures, partially offset by increases in investment in demand generation activities and salaries and wages. Costs attributable to the sale of assets are comprised of $33 million of costs which are solely related to the sale of certain assets to Cabletron Systems, Inc.(see Note G). At the end of fiscal 1996, the Corporation approved a restructuring plan intended to increase sales productivity, further consolidate manufacturing plants and distribution sites, improve service delivery and further reduce overhead in support areas. The number of involuntary separations is expected to be lower than originally planned due principally to a higher than anticipated level of voluntary separations. However, associated restructuring-related cost savings are expected to be offset by an increase in estimated separation costs for certain employees. The total estimated cost of restructuring actions is unchanged (see Note B). Total employee population decreased by 800 during the third quarter of fiscal 1998 to approximately 53,500, and by 1,600 from the end of the third quarter of fiscal 1997. Net other income was $365 million and $27 million for the first nine months of fiscal 1998 and 1997, respectively. Net gains on divestments were $339 million for the first nine months of fiscal 1998, compared to $9 million for the same period a year ago. The increase in net other income is principally due to increased gains on divestments, a reduction in interest expense and increased interest income in the first nine months of fiscal 1998. Net other income was $338 million and $11 million for the third quarter of fiscal 1998 and 1997, respectively. The increase was principally due to net gains on divestments of $330 million for the third quarter of fiscal 1998, compared to $2 million of net gains on divestments for the same period a year ago. In the third quarter of fiscal 1998 the Corporation recognized a $316 million gain related to the sale of certain assets of its network products business to Cabletron Systems, Inc. (see discussion below and Note G). Income tax expense for the first nine months and third quarter of fiscal 1998 was $54 million and $37 million, respectively, compared to $20 million and $11 million for the same periods last year. Income tax expense reflects several factors, including income taxes for profitable operations, benefits taken from net operating loss carryforwards and an inability to recognize currently certain tax benefits from operating losses. 15 16 AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR OPERATIONS Cash, cash equivalents and short-term investments totaled $2.4 billion at the end of the third quarter of fiscal 1998, down from $2.5 billion at the end of fiscal 1997. Net cash generated from operating activities was $518 million for the first nine months of fiscal 1998, reflecting a decrease in accounts receivable and inventories from the end of fiscal 1997, offset by an increase in prepaid expenses and a decrease in accounts payable and various other liabilities. Cash expenditures for restructuring activities were $116 million for the first nine months of fiscal 1998. Future cash expenditures for currently planned restructuring activities are estimated to be $200 million for fiscal 1998 and beyond. Net cash from investing activities was $100 million in the first nine months of fiscal 1998. The increase in cash from investing activities was due principally to proceeds from the disposition of assets and maturities of short-term investments. As investments mature, the proceeds are reinvested as cash, cash equivalents or short-term investments, as conditions warrant. Net cash used for financing activities was $479 million in the first nine months of fiscal 1998. The principal financing activities were the Corporation's purchase on the open market of 7.5 million shares of its common stock for $327 million and the retirement of $250 million of five-year notes. During the quarter, the Corporation terminated its U.S. accounts receivable securitization facility (see Note H). On October 27, 1997, the Corporation and Intel Corporation ("Intel") announced that they had reached an agreement to establish a broad-based business relationship, including the sale of the Corporation's semiconductor manufacturing operations to Intel for a purchase price equal to the net book value of the transferred assets (currently estimated to be approximately $640 million), cross-licensing of patents, supply of both Intel and Alpha microprocessors and development of future systems based on Intel's 64-bit microprocessors. The agreement provides that Intel will make offers of employment to employees of the Corporation's semiconductor manufacturing operations, except for those employees associated with the Alpha and Alpha-related semiconductor design teams. On April 23, 1998, the Federal Trade Commission ("FTC") notified the Corporation and Intel that it will not seek to enjoin the settlement of the legal dispute between the companies. Accordingly, the parties expect to consummate the transactions contemplated by the settlement agreement prior to May 31, 1998. Approximately 1,800 employees are expected to transfer to Intel (see Notes C and F). On November 24, 1997, the Corporation entered into an asset purchase agreement with Cabletron Systems, Inc. ("Cabletron Systems") and Ctron Acquisition Co., Inc., a wholly- 16 17 owned subsidiary of Cabletron Systems (collectively, "Cabletron"), pursuant to which the Corporation agreed to sell certain assets of its network products business to Cabletron. The agreement was first amended on December 8, 1997 and again on February 7, 1998 to adjust the purchase price to approximately $133 million in cash and $301 million in product credits (to be applied to the Corporation's future purchase of products from Cabletron Systems), before reduction for imputed interest and other adjustments totaling $18 million. The transaction was consummated as of February 7, 1998. The Corporation has recognized a gain of $316 million related to this transaction in the third quarter of fiscal 1998. Approximately 800 employees have been or will be transferred to Cabletron Systems in connection with this transaction. The Corporation and Cabletron Systems also entered into a Reseller and Services Agreement ("Reseller Agreement") dated November 24, 1997, pursuant to which the Corporation has agreed to resell certain Cabletron Systems' products (including the products sold by the Corporation's network products business) and the Corporation is designated a services provider for certain of Cabletron Systems' products. Under the Reseller Agreement, the Corporation has committed to purchase for resale and internal use network products from Cabletron Systems during the term of the Reseller Agreement, which extends through June 30, 2001 (see Note G). On January 26, 1998, the Corporation and Compaq Computer Corporation ("Compaq") announced the completion of a definitive merger agreement. Upon consummation of the merger, common stockholders of the Corporation will receive $30 in cash and 0.945 shares of Compaq common stock for each share of the Corporation's common stock. Based on conditions at the time the merger agreement was signed, approximately $4.4 billion of cash and 139 million shares of Compaq common stock would be issued to the Corporation's common stockholders. Under the terms of the agreement, the Corporation will become a wholly owned subsidiary of Compaq upon completion of the merger. The Corporation has filed a Proxy Statement with respect to the pending transaction, and a Special Meeting of Stockholders is scheduled to be held on June 11, 1998 at which the holders of common stock of the Corporation will vote upon the approval and adoption of the merger agreement. The Corporation's need for, cost of and access to funds are dependent on future operating results, as well as conditions external to the Corporation. The Corporation historically has maintained a conservative capital structure, and believes that its cash position and its sources of and access to capital markets are adequate to support current operations. FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, information provided by the Corporation or statements made by its employees may contain "forward-looking" information, as that term is defined in the Private Securities Litigation Reform Act of 1995. The Corporation cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including but not limited to the following: 17 18 - -- The Corporation's future operating results are dependent on its ability to develop, produce and market new and innovative products and services. There are numerous risks inherent in this complex process, including rapid technological change, the Corporation's ability to access components and related technical information from other companies and the requirement that the Corporation bring to market in a timely fashion new products and services which meet customers' changing needs. - -- Historically, the Corporation has generated a disproportionate amount of its operating revenues toward the end of each quarter, making precise prediction of revenues and earnings particularly difficult and resulting in risk of variance of actual results from those forecast at any time. In addition, the Corporation's operating results historically have varied from fiscal period to fiscal period; accordingly, the Corporation's financial results in any particular fiscal period are not necessarily indicative of results for future periods. - -- The Corporation offers a broad variety of products and services to customers around the world. Changes in the mix of products and services comprising revenues could cause actual operating results to vary from those expected. - -- The Corporation's success is partly dependent on its ability to successfully predict and adjust production capacity to meet demand, which is partly dependent upon the ability of external suppliers to deliver components at reasonable prices and in a timely manner; capacity or supply constraints, or unexpected increases or decreases in the prices of components, could adversely affect future operating results. - --While the Corporation believes that the materials required for its manufacturing operations are presently available in quantities sufficient to meet demand, the failure of a significant supplier to deliver certain components or technical information on a timely basis or in sufficient quantities could adversely affect the Corporation's future results of operations. - -- The Corporation operates in a highly competitive environment which includes significant competitive pricing pressures and intense competition for skilled employees. Particular business segments may from time to time experience unanticipated intense competitive pressure, possibly causing operating results to vary from those expected. - --The Corporation offers its products and services directly and through indirect distribution channels. Changes in the financial condition of, or the Corporation's relationship with, distributors and other indirect channel partners, as well as fluctuations in end-user sales by indirect sales channel partners, could cause actual operating results to vary from those expected. - -- The Corporation does business worldwide in over 100 countries. Global and/or regional economic factors and potential changes in laws and regulations affecting the Corporation's business, including without limitation, currency fluctuations, changes in 18 19 monetary policy and tariffs, and federal, state and international laws regulating the environment, could impact the Corporation's financial condition or future results of operations. - -- Certain of the Corporation's internal computer systems are not Year 2000 ready (i.e., such systems use only two digits to represent the year in date data fields and, consequently, may not accurately distinguish between the 20th and 21st centuries or may not function properly at the turn of the century). The Corporation has been taking actions intended to either correct such systems or replace them with Year 2000 ready systems. The Corporation expects to implement successfully the systems and programming changes necessary to address Year 2000 issues and does not believe that the cost of such actions will have a material effect on the Corporation's results of operations or financial condition. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the implementation of such changes, and the Corporation's inability to implement such changes could have an adverse effect on future results of operations. - -- As the Corporation continues to implement its strategic plan and respond to external market conditions, there can be no assurance that additional restructuring actions will not be required. With regard to completion of planned restructuring actions, there can be no assurance that the estimated cost of such actions will not change. - -- The market price of the Corporation's securities could be subject to fluctuations in response to quarter to quarter variations in operating results, changes in analysts' earnings estimates, market conditions in the information technology industry, as well as general economic conditions and other factors external to the Corporation. - -- The Corporation and Compaq Computer Corporation have announced the completion of a definitive merger agreement. This announcement could have an impact on the Corporation's ability to market its products and services to its customers, possibly causing operating results to vary from those expected. 19 20 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES. On February 12, 1998, the Corporation filed a Current Report on Form 8-K reporting that effective February 3, 1998, it had amended the Rights Agreement dated as of December 11, 1989 between the Corporation and First Chicago Trust Company of New York to render the Rights (as defined in the Rights Agreement) related to the Corporation's common stock inapplicable to the Agreement and Plan of Merger dated as of January 25, 1998 between the Corporation and Compaq Computer Corporation and the transactions contemplated thereby. The Corporation's amendment to the Rights Agreement is incorporated by reference in this Form 10-Q as Exhibit 4 below. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 4. Amendment, dated as of February 3, 1998, to the Rights Agreement, originally dated as of December 11, 1989, between Digital Equipment Corporation and First Chicago Trust Company of New York (filed as Exhibit 4 to the Corporation's Current Report on Form 8-K filed on February 12, 1998 and incorporated herein by reference). 10(a). Digital Equipment Corporation 1968 Employee Stock Purchase Plan, as amended. 10(b). Digital Equipment Corporation 1981 International Employee Stock Purchase Plan, as amended. 10(c). Retirement Arrangement for Non-Employee Directors, as amended. 10(d). Deferred Compensation Plan for Non-Employee Directors, as amended. 10(e). Deferred Compensation Plan for Executives, as amended. 10(f). Digital Equipment Corporation Key Employee Severance Plan, effective as of March 19, 1998 (filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K filed on May 6, 1998 and incorporated herein by reference). 10(g) Severance Agreement, dated as of March 19, 1998, by and between Digital Equipment Corporation and Robert B. Palmer (filed as Exhibit 10.2 to the 20 21 Corporation's Current Report on Form 8-K filed on May 6, 1998 and incorporated herein by reference). 10(h) Amended and Restated Agreement and Plan of Merger dated as of January 25, 1998, among Compaq Computer Corporation, the registrant and Compaq Merger, Inc. (filed as Exhibit 2 to the Registration Statement on Form S-4/Proxy Statement of Compaq Computer Corporation and the Corporation filed on May 6, 1998 and incorporated herein by reference). 10(i) Asset Purchase Agreement dated as of March 6, 1998, by and between Digital Equipment Corporation and Intel Corporation. Confidential Treatment request as to certain portions of the Agreement (filed as Exhibit 2 to the Corporation's Current Report on Form 8-K/A filed on May 5, 1998 and incorporated herein by reference). 27. Financial Data Schedule (b) Reports on Form 8-K. - On January 29, 1998, the Corporation filed a Current Report on Form 8-K reporting that on January 25, 1998 it and Compaq Computer Corporation entered into an Agreement and Plan of Merger. - On February 12, 1998, the Corporation filed a Current Report on Form 8-K reporting that effective February 3, 1998, it had amended the Rights Agreement dated as of December 11, 1989 between the Corporation and First Chicago Trust Company of New York to render the Rights (as defined in the Rights Agreement) inapplicable to the Agreement and Plan of Merger dated as of January 25, 1998 between the Corporation and Compaq Computer Corporation and the transactions contemplated thereby. - On March 20, 1998, the Corporation filed a Current Report on Form 8-K reporting that on March 6, 1998, the Corporation and Intel Corporation ("Intel") entered into an Asset Purchase Agreement relating to the sale by the Corporation of certain assets used in its semiconductor manufacturing operations to Intel. 21 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIGITAL EQUIPMENT CORPORATION (Registrant) By: /s/ Vincent J. Mullarkey ---------------------------------------- Vincent J. Mullarkey Senior Vice President, Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) May 6, 1998 22 EX-10.A 2 1968 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10(a) DIGITAL EQUIPMENT CORPORATION 1968 EMPLOYEE STOCK PURCHASE PLAN ARTICLE 1-PURPOSE This Employee Stock Purchase Plan (the "Plan") is intended as an incentive and to encourage stock ownership by all eligible employees of Digital Equipment Corporation (the "Company") and participating subsidiaries so that they may share in the fortunes of the Company by acquiring or increasing their proprietary interest in the Company. The Plan is designed to encourage eligible employees to remain in the employ of the Company. It is intended that options issued pursuant to this Plan shall constitute options issued pursuant to an "employee stock purchase plan" within the meaning of Section 423 of the 1954 Internal Revenue Code. ARTICLE 2-ELIGIBLE EMPLOYEES All employees of the Company or any of its participating subsidiaries who have completed six months employment with the Company or any of its subsidiaries shall be eligible to receive options under this Plan to purchase the Company's Common Stock (except employees in countries whose laws make participation impractical). Persons who have been so employed for six months or more on the first day of the Payment Period shall receive their options as of such day. Persons who attain the status of employment for six months or more after the date on which the initial options are granted under this Plan shall be granted options on the next date on which options are granted to all eligible employees. In no event may an employee be granted an option if such employee is a director of the Company or if such employee, immediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the Company or of its parent corporation or subsidiary corporation, as the terms "parent corporation" and "subsidiary corporation" are defined in Section 425(e) and (f) of the 1954 Internal Revenue Code. For purposes of determining stock ownership under this paragraph, the rules of Section 425(d) of the 1954 Internal Revenue Code shall apply and stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee. ARTICLE 3-STOCK SUBJECT TO THE PLAN The stock subject to the options shall be shares of the Company's authorized but unissued shares of Common Stock or shares of Common Stock reacquired by the Company including shares purchased in the open market. 2 The aggregate number of shares which may be issued pursuant to the Plan is 52,700,000, subject to increase or decrease by reason of stock split-ups, reclassifications, stock dividends, changes in par value and the like. ARTICLE 4 -PAYMENT PERIODS AND STOCK OPTIONS The six-month periods, June 1 to November 30 and December 1 to May 31, are Payment Periods during which payroll deductions will be accumulated under the Plan. Notwithstanding the foregoing, the Payment Period scheduled to end on May 31, 1998 shall end on the earlier of May 31, 1998 or the last business day prior to the effective date ("the Effective Date") of the merger contemplated by, and provided for in, the Amended and Restated Agreement and Plan of Merger dated as of the 25th day of January, 1998 among the Company, Compaq Computer Corporation and Compaq Merger, Inc. Each Payment Period includes only regular pay days falling within it. Twice each year, on the first business day of each Payment Period, the Company will grant to each eligible employee who is then a participant in the Plan an option to purchase on the last day of such Payment Period, at the Option Price hereinafter provided for, such number of shares of the Common Stock of the Company reserved for the purpose of the Plan as does not exceed the greater of the number of shares equal in value to 10% of the employee's total compensation divided by the price determined in accordance with (i) below, or 600 shares, on condition that such employee remains eligible to participate in the Plan throughout such Payment Period. The foregoing limitation on the number of shares which may be granted in any Payment Period is subject to increase or decrease by reason of stock split-ups, reclassifications, stock dividends, changes in par value and the like. The participant shall be entitled to exercise such options so granted only to the extent of his accumulated payroll deductions on the last day of such Payment Period. The Option Price for each Payment Period shall be the lesser of (i) 85% of the average market price of the Company's Common Stock on the first business day of the Payment Period, rounded up to avoid fractions other than 1/4, 1/2 and 3/4, or (ii) 85% of the average market price of the Company's Common Stock on the last business day of the Payment Period, rounded up to avoid fractions other than 1/4, 1/2 and 3/4. In the event of an increase or decrease in the number of outstanding shares of Common Stock of the Company through stock split-ups, reclassifications, stock dividends, changes in par value and the like, an appropriate adjustment shall be made in the number of shares and Option Price per share provided for under the Plan, either by a proportionate increase in the number of shares and a proportionate decrease in the Option Price per share, or by a proportionate decrease in the number of shares and a proportionate increase in the Option Price per share, as may be required to enable an eligible employee who is then a participant in the Plan as to whom an option is exercised on the last day of any then current Payment 2 3 Period to acquire such number of full shares as his accumulated payroll deductions on such date will pay for at the adjusted Option Price. For purposes of this Plan the term "average market price" means the average of the high and low prices of the Common Stock of the Company on the New York Stock Exchange or such other national securities exchange as shall be designated by the Board of Directors. For purposes of this Plan the term "business day" as used herein means a day on which there is trading on the New York Stock Exchange or such other national securities exchange as shall be designated by the Board of Directors pursuant to the preceding paragraph. No employee shall be granted an option which permits his rights to purchase Common Stock under the Plan and any similar plans of the Company or any parent or subsidiary corporations to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. The purpose of the limitation in the preceding sentence is to comply with Section 423(b)(8) of the 1954 Internal Revenue Code. ARTICLE 5-EXERCISE OF OPTION Each eligible employee who continues to be a participant in the Plan on the last business day of a Payment Period shall be deemed to have exercised his option on such date and shall be deemed to have purchased from the Company such number of full shares of Common Stock reserved for the purpose of the Plan as his accumulated payroll deductions on such date will pay for at such Option Price. If a participant is not an employee on the last business day of a Payment Period, he shall not be entitled to exercise his option. ARTICLE 6-SUPPLEMENTARY CONTRIBUTIONS AND UNUSED PAYROLL DEDUCTIONS (a) Only full shares of Common Stock may be purchased under the Plan. Subject to the limitations set forth below, unused payroll deductions remaining in an employee's account at the end of a Payment Period will be carried forward to the succeeding Payment Period. However, in no event will the amount of unused payroll deductions carried forward from a Payment Period exceed the Option Price per share for that Payment Period. If for any Payment Period the amount of unused payroll deductions should exceed the Option Price per share of stock, the amount of the excess for any participant shall be refunded to such participant. (b) An employee who has completed a Payment Period shall have the right to make a supplementary contribution in an amount equal to the Option Price for the most recently completed Payment Period less the unused payroll 3 4 deductions being carried forward. Such supplementary contributions will be made by additional payroll deductions. The election to make a supplementary contribution shall be made by written notice received by the Investor Services Department no later than 10 days after the beginning of the Payment Period in which the supplementary contribution is to be made and shall remain in effect through all succeeding Payment Periods until revoked by written notice received by the Investor Services Department no later than 10 days after the beginning of the Payment Period to which such notice applies. (c) An employee initially entering the Plan will be permitted to make a supplementary contribution in an amount equal to the Option Price for the most recently completed Payment Period. An election to make such supplementary contribution shall be made by written notice received by the Investor Services Department no later than 10 days after the beginning of the Payment Period in which the employee's supplementary contribution is to be made. An election under this paragraph by an employee initially entering the Plan shall constitute an election to make supplementary contributions for succeeding Payment Periods, subject to the terms and conditions of paragraph (b) above. ARTICLE 7-AUTHORIZATION FOR ENTERING PLAN An employee may enter the Plan by filling out, signing and delivering to the Investor Services Department an Authorization: (a) stating the amount to be deducted regularly from his pay; (b) authorizing the purchase of stock for him in each Payment Period in accordance with the terms of the Plan; and (c) specifying the exact name in which stock purchased for him is to be issued as provided under Article 11 hereof. Such Authorization must be received by the Investor Services Department at least 10 days before the beginning date of such next succeeding Payment Period. Unless an employee files a new Authorization or withdraws from the Plan, his deductions and purchases under the Authorization he has on file under the Plan will continue as long as the Plan remains in effect. The Company will accumulate and hold for the employee's account the amounts deducted from his pay. No interest will be paid on it. ARTICLE 8-MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS An employee may authorize payroll deductions in an amount not less than 2% but not more than 10% of total compensation. In addition, an employee shall be entitled to make supplementary contributions pursuant to Article 6 hereof. 4 5 ARTICLE 9-CHANGE IN PAYROLL DEDUCTIONS Deductions may be increased or decreased only once in a Payment Period. A new Authorization will be required and must be received by the Investor Services Department. ARTICLE 10-WITHDRAWAL FROM THE PLAN An employee may withdraw from the Plan, in whole but not in part, at any time prior to the last business day of each Payment Period by delivering a Withdrawal Notice to the Investor Services Department, in which event the Company will promptly refund the entire balance of his deductions not theretofore used to purchase stock under the Plan. An employee who withdraws from the Plan is like an employee who has never entered the Plan. To re-enter, he must file a new Authorization at least 10 days before the beginning date of the next Payment Period which cannot, however, become effective before the beginning of the next Payment Period following his withdrawal. ARTICLE 11-ISSUANCE OF STOCK A participant will receive Statements of Ownership for stock purchased under the Plan, or may elect to receive stock certificates instead of Statements of Ownership. Stock purchased under the Plan will be issued only in the name of the employee, or if his Authorization so specifies, in the name of the employee and another person of legal age as joint tenants with rights of survivorship. ARTICLE 12-NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS An employee's rights under the Plan are his alone and may not be transferred or assigned to, or availed of by, any other person. Any option granted to an employee may be exercised only by him. ARTICLE 13-TERMINATION OF EMPLOYEE'S RIGHTS An employee's rights under the Plan will terminate when he ceases to be an employee because of retirement, resignation, lay-off, discharge, death, change of status, or for any other reason. A Withdrawal Notice will be considered as having been received from the employee on the day his employment ceases, and all payroll deductions not used to purchase stock will be refunded. If an employee's payroll deductions are interrupted by any legal process, a Withdrawal Notice will be considered as having been received 5 6 from him on the day the interruption occurs. ARTICLE 14-TERMINATION AND AMENDMENTS TO PLAN The Plan may be terminated at any time by the Company's Board of Directors. It will terminate in any case when all or substantially all of the unissued shares of stock reserved for the purposes of the Plan have been purchased. If at any time shares of stock reserved for the purpose of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to their options and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase stock will be refunded. The Board of Directors also reserves the right to amend the Plan from time to time in any respect provided, however, that no amendment shall be effective without prior approval of the stockholders, which would (a) except as provided in Articles 3 and 4, increase the number of shares of Common Stock to be offered above or (b) change the class of employees eligible to receive options under the Plan. ARTICLE 15-LIMITATIONS ON SALE OF STOCK PURCHASED UNDER THE PLAN The Plan is intended to provide common stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his own affairs. An employee may, therefore, sell stock purchased under the Plan at any time he chooses, provided, however, that because of certain Federal tax requirements, each employee will agree by entering the Plan, promptly to give the Company notice of any such stock disposed of within two years after the date of grant of the applicable option showing the number of such shares disposed of. The employee assumes the risk of any market fluctuations in the price of such stock. ARTICLE 16-COMPANY'S PAYMENT OF EXPENSES RELATED TO PLAN The Company will bear all costs of administering and carrying out the Plan. ARTICLE 17-PARTICIPATING SUBSIDIARIES The term "participating subsidiaries" shall mean any subsidiary of the Company which is designated by the Board of Directors to participate in the Plan. The Board of Directors shall have the power to make such designation before or after the Plan is approved by the stockholders. 6 7 ARTICLE 18-ADMINISTRATION OF THE PLAN The Plan shall be administered by a committee appointed by the Board of Directors of the Company (the "Committee"). The Committee shall consist of not less than three members of the Company's Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board of Directors. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. The interpretation and construction by the Committee of any provisions of the Plan or of any option granted under it shall be final unless otherwise determined by the Board of Directors. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. ARTICLE 19-OPTIONEES NOT STOCKHOLDERS Neither the granting of an option to any employee nor the deductions from his pay shall constitute such employee a stockholder of the shares covered by an option until such shares have been purchased by and issued to him. ARTICLE 20-APPLICATION OF FUNDS The proceeds received by the Company from the sale of Common Stock pursuant to options granted under the Plan will be used for general corporate purposes. ARTICLE 21-GOVERNMENTAL REGULATION The Company's obligation to sell and deliver shares of the Company's Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such stock. ARTICLE 22-WITHHOLDING OF ADDITIONAL FEDERAL INCOME TAX The Company, in accordance with Section 3402(a) of the 1954 Internal Revenue Code and the Regulations and Rulings promulgated thereunder, will withhold from the wages of participating employees, in all payroll periods 7 8 following and in the same calendar year as the date on which compensation is deemed received by the employee, additional income taxes in respect of the amount that is considered compensation includible in the employee's gross income. ARTICLE 23-APPROVAL OF STOCKHOLDERS The Plan shall not take effect until approved by the holders of a majority of the outstanding shares of Common Stock of the Company, which approval must occur within the period beginning twelve months before and ending twelve months after the date the Plan is adopted by the Board of Directors. The Plan was adopted by the Board of Directors on May 13, 1968. The Plan was approved by the stockholders on October 29, 1968. 8 EX-10.B 3 1981 INTERNATIONAL EMPLOYEE STOCK PURCHASE 1 Exhibit 10(b) Digital Equipment Corporation 1981 International Employee Stock Purchase Plan ARTICLE 1-PURPOSE This 1981 International Employee Stock Purchase Plan (the "Plan") is intended as an incentive and to encourage stock ownership by all eligible employees of the Participating Subsidiaries of Digital Equipment Corporation (the "Company") so that they may share in the fortunes of the Company by acquiring or increasing their proprietary interest in the Company. The Plan is designed to encourage eligible employees to remain in the employ of the Company or its subsidiaries. ARTICLE 2-ELIGIBLE EMPLOYEES In general, all employees of any of the Participating Subsidiaries of the Company who have completed six months employment with the Company or any of its subsidiaries shall be eligible to receive options under this Plan to purchase the Company's Common Stock. In certain instances, a Participating Subsidiary which has branches in more than one country may desire to implement the Plan in fewer than all countries in which its branches are located. In such an instance, upon approval by the Company's Board of Directors or the Committee (as defined in Article 18), only participating eligible employees of the branches located within the country or countries where implementation is desired will be granted options under this Plan. Participating eligible employees who have been so employed for six months or more on the first day of the Payment Period shall receive their options as of such day. Persons who attain the status of employment for six months or more after the date on which the initial options are granted under this Plan shall be granted options, if they elect to participate in the Plan, on the next date on which options are granted to all participating eligible employees. In no event may an employee be granted an option if such employee is a director of the Company. ARTICLE 3-STOCK SUBJECT TO THE PLAN The stock subject to the options shall be shares of the Company's authorized but unissued Common Stock or shares of Common Stock reacquired by the Company including shares purchased in the open market. The aggregate number of shares which may be issued pursuant to the Plan is 19,700,000. subject to increase or decrease by reason of stock split-ups, 1 2 reclassifications, stock dividends, changes in par value and the like. ARTICLE 4-PAYMENT PERIODS AND STOCK OPTIONS The six-month periods, June 1 to November 30 and December 1 to May 31, are Payment Periods during which payroll deductions will be accumulated under the Plan. Notwithstanding the foregoing, the Payment Period scheduled to end on May 31, 1998 shall end on the earlier of May 31, 1998 or the last business day prior to the effective date ("the Effective Date") of the merger contemplated by, and provided for in, the Amended and Restated Agreement and Plan of Merger dated as of the 25th day of January, 1998 among the Company, Compaq Computer Corporation and Compaq Merger, Inc. Each Payment Period includes only regular pay days falling within it. Twice each year, on the first business day of each Payment Period, each Participating Subsidiary will grant to each eligible employee who is then a participant in the Plan an option to purchase on the last day of such Payment Period, at the Option Price hereinafter provided for, such number of shares of the Common Stock of the Company reserved for the purpose of the Plan as does not exceed the greater of the number of shares equal in value to 10% of the employee's total earned cash compensation divided by the price determined in accordance with (i) below, or 600 shares, on condition that such employee remains eligible to participate in the Plan throughout such Payment Period. The foregoing limitation on the number of shares which may be granted in any Payment Period is subject to increase or decrease by reason of stock split-ups, reclassifications, stock dividends, changes in par value and the like. The participant shall be entitled to exercise such options so granted only to the extent of his accumulated payroll deductions on the last day of such Payment Period. The Option Price for each Payment Period shall be the lesser of (i) 85% of the average market price of the Company's Common Stock on the first business day of the Payment Period, rounded up to avoid fractions other than 1/4, 1/2 and 3/4, or (ii) 85% of the average market price of the Company's Common Stock on the last business day of the Payment Period, rounded up to avoid fractions other than 1/4, 1/2 and 3/4. In the event of an increase or decrease in the number of outstanding shares of Common Stock of the Company through stock split-ups, reclassifications, stock dividends, changes in par value and the like, an appropriate adjustment shall be made in the number of shares and Option Price per share provided for under the Plan, either by a proportionate increase in the number of shares and a proportionate decrease in the Option Price per share, or by a proportionate decrease in the number of shares and a proportionate increase in the Option Price per share, as may be required to enable an eligible employee who is then a participant in the Plan as to whom an option is exercised on the last day of any then current Payment Period to acquire such number of full shares as his accumulated payroll deductions on such date will pay for at the adjusted Option Price. 2 3 For purposes of this Plan the term "average market price" means the average of the high and low prices of the Common Stock of the Company on the New York Stock Exchange or such other national securities exchange as shall be designated by the Board of Directors. For purposes of this Plan the term "business day" as used herein means a day on which there is trading on the New York Stock Exchange or such other national securities exchange as shall be designated by the Board of Directors pursuant to the preceding paragraph. No employee shall be granted an option which permits his rights to purchase Common Stock under the Plan and any similar plans of the Company or any parent or subsidiary corporations to accrue at a rate which exceeds $25,000 of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. ARTICLE 5-EXERCISE OF OPTION Each eligible employee who continues to be a participant in the Plan on the last business day of a Payment Period shall be deemed to have exercised his option on such date and shall be deemed to have acquired the number of full shares of Common Stock reserved for the purpose of the Plan as his accumulated payroll deductions on such date will pay for at such Option Price. If a participant is not an employee on the last business day of a Payment Period, he shall not be entitled to exercise his option. ARTICLE 6-SUPPLEMENTARY CONTRIBUTIONS AND UNUSED PAYROLL DEDUCTIONS (a) Only full shares of Common Stock may be purchased under the Plan. Subject to the limitations set forth below, unused payroll deductions remaining in an employee's account at the end of a Payment Period will be carried forward to the succeeding Payment Period. However, in no event will the amount of unused payroll deductions carried forward from a Payment Period exceed the Option Price per share for that Payment Period. If for any Payment Period the amount of unused payroll deductions should exceed the Option Price per share of stock, the amount of the excess for any participant shall be refunded to such participant. (b) An employee who has completed a Payment Period shall have the right to make a supplementary contribution in an amount equal to the Option Price for the most recently completed Payment Period less the unused payroll deductions being carried forward. The election to make a supplementary contribution shall be made by written notice 3 4 received by the Participating Subsidiary's personnel office (the "Personnel Office") no later than 10 days after the beginning of the Payment Period in which the supplementary contribution is to be made and shall remain in effect through all succeeding Payment Periods until revoked by written notice received by the Personnel Office no later than 10 days after the beginning of the Payment Period to which such notice applies. (c) An employee initially entering the Plan will be permitted to make a supplementary contribution in an amount equal to the Option Price for the most recently completed Payment Period. An election to make such supplementary contribution shall be made by written notice received by the Personnel Office no later than 10 days after the beginning of the Payment Period in which the employee's supplementary contribution is to be made. An election under this paragraph by an employee initially entering the Plan shall constitute an election to make supplementary contributions for succeeding Payment Periods, subject to the terms and conditions of paragraph (b) above. ARTICLE 7-AUTHORIZATION FOR ENTERING PLAN In addition to any procedures adopted by the Participating Subsidiary, each eligible employee entering the Plan must fill out, sign and deliver to the Personnel Office an Authorization: (a) stating the percentage to be deducted regularly from his pay; (b) authorizing the purchase of stock for him in each Payment Period in accordance with the terms of the Plan; and (c) specifying the exact name in which stock purchased for him is to be issued as provided under Article 11 hereof. Such Authorization must be received by the Personnel Office at least 10 days before the beginning date of such next succeeding Payment Period. Unless an employee files a new Authorization or withdraws from the Plan, his deductions and purchases under the Authorization he has on file under the Plan will continue as long as the Plan remains in effect. The Participating Subsidiary will accumulate and hold for the employee's account the amounts deducted from his pay. No interest will be paid on it. ARTICLE 8-MAXIMUM AMOUNT OF PAYROLL DEDUCTIONS 4 5 An employee may authorize payroll deductions in an amount not less than 2% but not more than 10% of his total earned cash compensation. In addition, an employee shall be entitled to make supplementary contributions pursuant to Article 6 hereof. ARTICLE 9-CHANGE IN PAYROLL DEDUCTIONS Deductions may be increased or decreased only once in a Payment Period. A new Authorization will be required and must be received by the Personnel Office. ARTICLE 10-WITHDRAWAL FROM THE PLAN An employee may withdraw from the Plan, in whole but not in part, at any time prior to the last business day of each Payment Period by delivering a Withdrawal Notice to the Personnel Office, in which event the Participating Subsidiary will promptly refund the entire balance of his deductions not theretofore used to purchase stock under the Plan. An employee who withdraws from the Plan is like an employee who has never entered the Plan. To re-enter, he must file a new Authorization at least 10 days before the beginning date of the next Payment Period which cannot, however, become effective before the beginning of the next Payment Period following his withdrawal. ARTICLE 11-ISSUANCE OF STOCK A participant will receive Statements of Ownership for stock purchased under the Plan, or may elect to receive stock certificates instead of Statements of Ownership. Stock purchased under the Plan will be issued only in the name of the employee, or if his Authorization so specifies, in the name of the employee and another person of legal age as joint tenants with rights of survivorship. ARTICLE 12-NO TRANSFER OR ASSIGNMENT OF EMPLOYEE'S RIGHTS An employee's rights under the Plan are his alone and may not be transferred or assigned to, or availed of by, any other person. Any option granted to an employee may be exercised only by him. ARTICLE 13-TERMINATION OF EMPLOYEE'S RIGHTS An employee's rights under the Plan will terminate when he ceases to be an employee because of retirement, resignation, lay-off, discharge, death, change of status, or for any other reason. A Withdrawal Notice will be considered as having been received from the employee on the day his 5 6 employment ceases, and all payroll deductions not used to purchase stock will be refunded. If an employee's payroll deductions are interrupted by any legal process, a Withdrawal Notice will be considered as having been received from him on the day the interruption occurs. ARTICLE 14-TERMINATION AND AMENDMENTS TO PLAN The Plan may be terminated at any time by the Company's Board of Directors. It will terminate in any case when all or substantially all of the unissued shares of stock reserved for the purposes of the Plan have been purchased. If at any time shares of stock reserved for the purpose of the Plan remain available for purchase but not in sufficient number to satisfy all then unfilled purchase requirements, the available shares shall be apportioned among participants in proportion to their options and the Plan shall terminate. Upon such termination or any other termination of the Plan, all payroll deductions not used to purchase stock will be refunded. The Board of Directors also reserves the right to amend the Plan from time to time in any respect provided, however, that no amendment shall be effective without prior approval of the stockholders, which would (a) except as provided in Articles 3 and 4, increase the number of shares of Common Stock to be offered above or (b) change the class of employees eligible to receive options under the Plan. ARTICLE 15-LIMITATIONS ON SALE OF STOCK PURCHASED UNDER THE PLAN The Plan is intended to provide common stock for investment and not for resale. The Company does not, however, intend to restrict or influence any employee in the conduct of his own affairs. An employee may, therefore, sell stock purchased under the Plan at any time he chooses. The employee assumes the risk of any market fluctuations in the price of such stock. ARTICLE 16-PAYMENT OF EXPENSES RELATED TO PLAN The Company and the Participating Subsidiaries will bear all costs of administering and carrying out the Plan. ARTICLE 17-PARTICIPATING SUBSIDIARIES The term "Participating Subsidiaries" shall mean subsidiaries of the Company which are designated by the Board of Directors to participate in the Plan. The Board of Directors shall have the power to make such designation before or after the Plan is approved by the stockholders. 6 7 ARTICLE 18-ADMINISTRATION OF THE PLAN The Plan shall be administered by a committee appointed by the Board of Directors of the Company (the "Committee"). The Committee shall consist of not less than three members of the Company's Board of Directors. The Board of Directors may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board of Directors. The Committee shall select one of its members as Chairman, and shall hold meetings at such times and places as it may determine. Acts by a majority of the Committee, or acts reduced to or approved in writing by a majority of the members of the Committee, shall be the valid acts of the Committee. The interpretation and construction by the Committee of any provisions of the Plan or of any option granted under it shall be final unless otherwise determined by the Board of Directors. The Committee may from time to time adopt such rules and regulations for carrying out the Plan as it may deem best. No member of the Board of Directors or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted under it. ARTICLE 19-OPTIONEES NOT STOCKHOLDERS Neither the granting of an option to an employee nor the deductions from his pay shall constitute such employee a stockholder of the shares covered by an option until such shares have been purchased by and issued to him. ARTICLE 20-APPLICATION OF FUNDS The proceeds received by the Company from the sale of Common Stock pursuant to options granted under the Plan will be used for general corporate purposes. ARTICLE 21-GOVERNMENTAL REGULATION The Company's obligation to sell and deliver shares of the Company's Common Stock under this Plan is subject to the approval of any governmental authority required in connection with the authorization, issuance or sale of such stock. ARTICLE 22-APPROVAL OF STOCKHOLDERS The Plan was adopted by the Company's Board of Directors on August 10, 1981, subject to approval by the stockholders of the Company. The Plan was approved by the stockholders on November 5, 1981. 7 EX-10.C 4 RETIREMENT ARRANGEMENT FOR NON-EMPLOYEE DIRECTORS 1 Exhibit 10(c) - -------------------------------------------------------------------------------- Digital Equipment Corporation - -------------------------------------------------------------------------------- Retirement Arrangement for Non-Employee Directors (as amended on June 12, 1997 and April 23, 1998) - -------------------------------------------------------------------------------- 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; AND FURTHER, effective as of the date of the 1997 Annual Meeting of 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 AND are 65 years of age or older as of such date. - -------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------- 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. Notwithstanding the foregoing, upon consummation of the Corporation's pending merger ("Merger") with Compaq Computer Corporation ("Compaq") pursuant to the Amended and Restated Agreement and Plan of Merger between the Corporation, Compaq and Compaq Merger Inc. dated as of January 25, 1998, any Participant in the Plan whose service is terminated in connection with the Merger 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 date of the Participant's termination of service. 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 - -------------------------------------------------------------------------------- 3 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- 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.D 5 DEFERRED COMPENSATION PLAN 1 Exhibit 10(d) DIGITAL EQUIPMENT CORPORATION DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS AS AMENDED AND RESTATED EFFECTIVE 18 MAY 1987 AND AS FURTHER AMENDED APRIL 22, 1991, JUNE 20, 1996 AND APRIL 23, 1998 I. NAME AND PURPOSE The name of this plan is the Digital Equipment Corporation Deferred Compensation Plan for Non-Employee Directors (the "Plan"). Its purpose is to provide non-employee directors of Digital Equipment Corporation (the "Corporation") with an opportunity to defer cash compensation earned as a director. II. EFFECTIVE DATE The Plan became effective on June 1, 1983. III. ELIGIBILITY FOR PARTICIPATION Any director of the Corporation who is not an employee of the Corporation or of a subsidiary of the Corporation shall be eligible to participate in the Plan. Any such person who submits an election to defer compensation under the Plan as provided for in V. below is hereinafter called a "Participant." The Plan shall establish for each Participant an unfunded deferred compensation account or accounts as appropriate. IV. PARTICIPANTS' DEFERRED COMPENSATION ACCOUNTS There shall be four types of deferred compensation accounts under this Plan as follows: A. Cash Deferred Compensation Account with Lump Sum Payment ("Cash Lump Sum Account"), B. Cash Deferred Compensation Account with Installment Payment ("Cash Installment Account"), C. Unit Deferred Compensation Account with Lump Sum Payment ("Unit Lump Sum Account"), and D. Unit Deferred Compensation Account with Installment Payment ("Unit Installment Account"). Each Participant may have Cash Lump Sum Accounts or Cash Installment Accounts or both ("Cash Accounts"). A Participant may also have Unit Lump Sum Accounts or Unit Installment Accounts or both ("Unit Accounts"). Cash Accounts shall have all allocations credited in dollar amounts and shall be credited with interest as provided below. Unit Accounts shall have all allocations credited in units as provided below. Cash Lump Sum Accounts and Unit Lump Sum Accounts (collectively "Lump Sum Accounts") shall be distributed in a lump sum payment. Cash Installment Accounts and Unit Installment Accounts (collectively "Installment Accounts") shall be distributed in a series of installment payments as elected by the Participant. 1 2 V. ELECTIONS OF DEFERRAL, ALLOCATION AND DISTRIBUTION Eligible directors or nominees to be eligible directors of the Corporation may make the following elections: A. On or before December 31 of any year, an initial election (i) to defer receipt of all or a specified portion of the compensation (exclusive of expense reimbursement) otherwise payable during the following calendar year for service on the Board of Directors of the Corporation and its Committees and for attending meetings of said Board, which election shall be irrevocable, (ii) to allocate the deferred compensation among types of accounts, which election shall be irrevocable and (iii) to elect the number of installment payments desired, if applicable, which election may be changed as provided in Section V.D below. B. Before July 1, 1987, an irrevocable election (i) to defer receipt of all or a portion of his or her compensation otherwise payable during the six-month period commencing July 1, 1987 and ending December 31, 1987, (ii) to allocate the deferred compensation among types of accounts, and (iii) to elect the number of installment payments desired, if applicable. C. If such director or nominee is a newly-elected director, an election (i) to defer receipt of all or a portion of his or her compensation otherwise payable during the remainder of the calendar year in which such director joins the Board, which election shall be irrevocable, (ii) to allocate the deferred compensation among types of accounts, which election shall be irrevocable and (iii) to elect the number of installment payments desired, if applicable, which election may be changed as provided in Section V.D below. Any such elections must be made within one month following the date on which such director is elected to the Board and shall be effective with respect to compensation allocable to the period commencing on the first day of the month next following the date on which such election is made. D. At any time after the initial elections referred to in Sections V.A. and V.C. above, a Participant may change his or her election with respect to number of installment payments desired, if applicable; provided, however, no such election shall be effective unless it is made more than six months prior to the Participant's resignation or reasonably anticipated retirement from the Board of Directors. VI. MANNER OF ELECTING DEFERRALS, ALLOCATIONS AND DISTRIBUTIONS The elections provided for in V. above must be made on a form provided by the Plan Administrator, which specifies: A. The amount of each component of the Participant's compensation for such year (annual retainer, committee fees and attendance fees) to be deferred (designated either as a percentage, a dollar amount or a combination thereof); and B. The percentage of the deferred compensation to be allocated to each of the Participant's deferred compensation accounts; and C. The number of annual installments (not to exceed 15) to be used in distributions from the Participant's Installment Accounts, if any; and D. The period of deferral (a minimum of three years or until retirement or resignation from the Board of Directors, whichever is less) (the "Deferral Period"). 2 3 Such form shall be delivered to the Corporation on or before December 31 of the year preceding the first year to which such election relates, except that the form from newly elected directors with respect to their initial election for a partial year may be delivered at any time within one month following the date of their election to the Board. Any form received prior to May 18, 1987 shall continue in effect until a new form is delivered in accordance with this Section VI. The elections set forth in the latest form filed as to the percentage of each component of the Participant's compensation for the year (or other period) to be deferred, as to the amounts to be allocated to the deferred compensation accounts and as to the number of installments, if applicable, shall be given continuing effect for subsequent years until a new notice specifying a different election shall be delivered to the Corporation. Any election for deferral received prior to May 18, 1987 shall be deemed to be an election to allocate all of such deferred compensation to the Participant's Cash Accounts until a new notice specifying a different election shall be delivered to the Corporation. Any new form shall apply only to compensation for periods subsequent to the period in which such new form is delivered; however, the number of installment payments desired, if applicable, may be changed at any time, subject to the limitations in Section V.D. VII. CREDITING PARTICIPANTS' ACCOUNTS The following method shall be used to credit a Participant's accounts: A. All Participants' deferred compensation accounts under the Plan prior to amendment were and will remain Cash Accounts and were or will be credited with deferred compensation which otherwise would have been payable before July 1, 1987 and with interest equivalents as of each June 30 and December 31 on the average daily balance credited to any such account during the period of six months ended on such date, at an annualized rate equal to the rate, on a bond-yield equivalency basis, on six-month (26-week) Treasury Bills maturing during the week in which such date falls. B. Effective with respect to the six-month period ending December 31, 1987, and for subsequent calendar years through December 31, 1996, a Participant's Cash Accounts shall be credited with the cash value of any amounts deferred by him or her subject to an election to have such amounts allocated to Cash Accounts. Any such Cash Account shall also be credited with interest equivalents as of each June 30 and December 31 on the average daily balance credited to such account during the period of six months ended on such date, at an annualized rate equal to the rate, on a bond yield equivalency basis, on six-month (26-week) Treasury Bills maturing during the week in which such date falls. Interest equivalents shall continue to be so credited until such time as the entire balance of any such account shall have been distributed. C. Effective January 1, 1997, and for subsequent calendar years, a Participant's Cash Accounts shall be credited with the cash value of any amounts deferred by him or her subject to an election to have such amounts allocated to Cash Accounts. Any such Cash Account shall also be credited with interest equivalents on a quarterly basis on the average daily balance credited to such account during such period ended on such date, at an interest rate equal to the ten-year U.S. Government Rate as reported in the Wall Street Journal, reported as an average for the one-year period prior to December 1 of the year prior to the first year of the Deferral Period, which rate shall be reset in the same manner on January 1 of each subsequent year during the Deferral Period. Interest equivalents shall continue to be so credited until such time as the entire balance of any such account shall have been distributed. D. Effective with respect to the six-month period ending December 31, 1987, and for subsequent calendar years through December 31, 1996, a Participant's Unit Accounts shall be credited with a number of units ("Units"), to be determined and valued in accordance with the fair market value of shares of the Corporation's Common Stock, $1.00 par value ("Common Stock"). The number of Units shall be adjusted as provided in 2. and 3. below until the entire balances in Unit 3 4 Accounts shall have been distributed. The method of such determination and valuation is as follows: 1. The number of Units credited to any Unit Account (including fractional Units) shall be the quotient of (i) the cash amount of deferred compensation to be credited to such account over (ii) the mean between the highest and lowest selling prices of the Common Stock on the date on which the deferred compensation would have otherwise been payable, as reported on the New York Stock Exchange Composite Tape. If there are no sales on such date, the fair market value of the Common Stock shall be an average of the mean between the highest and lowest selling prices of the Common Stock on the nearest day before and the nearest day after such date, as reported on the New York Stock Exchange Composite Tape. 2. Additional Units shall be credited to a Participant's Unit Accounts as of each payment date for cash dividends, if any, on the Common Stock, on the basis of the number of Units credited to each account on the record date for such dividends. The number of Units (including fractional Units) to be credited to each such account as of any cash dividend payment date shall be the quotient of (i) the product of the number of Units credited to such account on the dividend record date for such dividend and the dividend per share on the Common Stock over (ii) the fair market value of the Common Stock on the dividend payment date. The fair market value of the Common Stock on the dividend payment date shall be the mean between the highest and lowest selling prices of the Common Stock on the dividend payment date, as reported on the New York Stock Exchange Composite Tape. If there are no sales on the dividend payment date, the fair market value of the Common Stock shall be an average of the mean between the highest and lowest selling prices of the Common Stock on the nearest day before and the nearest day after the dividend payment date, as reported on the New York Stock Exchange Composite Tape. 3. If at any time the number of outstanding shares of Common Stock shall be increased or decreased as the result of any stock dividend, subdivision, stock split, combination or reclassification of shares, the number of Units in a Participant's Unit Accounts shall be increased or decreased, as the case may be, in the same proportion as the outstanding number of shares of Common Stock is increased or decreased. E. Effective January 1, 1997, and for subsequent calendar years, a Participant's Unit Accounts shall be credited with a number of units ("Units"), to be determined and valued in accordance with the fair market value of shares of the Corporation's Common Stock, $1.00 par value ("Common Stock"). The number of Units shall be adjusted as provided in 2. and 3. below until the entire balances in Unit Accounts shall have been distributed. The method of such determination and valuation is as follows: 1. The number of Units credited to any Unit Account (including fractional Units) shall be the quotient of (i) the cash amount of deferred compensation to be credited to such account over (ii) the mean between the highest and lowest selling prices of the Common Stock on the ten trading days prior to the date on which the deferred compensation would have otherwise been payable, as reported on the New York Stock Exchange Composite Tape. 2. Additional Units shall be credited to a Participant's Unit Accounts as of each payment date for cash dividends, if any, on the Common Stock, on the basis of the number of Units credited to each Unit Account on the record date for any such dividend. The number of Units (including fractional Units) to be credited to each such account as of any cash dividend payment date shall be the quotient of (i) the product of the number of Units credited to such account on the dividend record date for such dividend and the dividend per share on the Common Stock over (ii) the fair market value of the Common Stock on the dividend payment date. The fair market value of the Common Stock on the dividend payment date shall be the 4 5 mean between the highest and lowest selling prices of the Common Stock on the dividend payment date, as reported on the New York Stock Exchange Composite Tape. If there are no sales on the dividend payment date, the fair market value of the Common Stock shall be an average of the mean between the highest and lowest selling prices of the Common Stock on the nearest day before and the nearest day after the dividend payment date, as reported on the New York Stock Exchange Composite Tape. 3. If at any time the number of outstanding shares of Common Stock shall be increased or decreased as the result of any stock dividend, subdivision, stock split, combination or reclassification of shares, the number of Units in a Participant's Unit Accounts shall be increased or decreased, as the case may be, in the same proportion as the outstanding number of shares of Common Stock is increased or decreased. VIII. METHOD OF DISTRIBUTION OF DEFERRED COMPENSATION Distributions of the amounts in a Participant's deferred compensation accounts shall be made as follows: A. No distribution of deferred compensation may be made except as provided in this Section VIII. B. The amounts credited to a Participant's Lump Sum Accounts shall be payable in cash in a lump sum in January of the year following the last year of the Deferral Period. The amounts credited to a Participant's Installment Accounts shall be paid in up to fifteen annual installments according to the Participant's election or elections commencing in January of the year following the last year of the Deferral Period. The amount of the first payment shall be a fraction of the amount of the Participant's deferred compensation accounts as of December 31 of the year preceding payment, the numerator of which is one and the denominator of which is the total number of installments elected. The amount of each subsequent payment shall be a fraction of the amount as of December 31 of the year preceding such subsequent payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid. C. Each amount shall be debited for the amount of any distribution made from it, either in a lump sum or in annual installments. D. Distribution of a Participant's Cash and Unit Accounts shall be made in cash. With respect to any Unit Account, the cash amount for any payment from such account shall be determined by multiplying the number of Units in the Account on December 31 of the year immediately preceding the payment date by the average of the mean between the highest and lowest selling prices of the Common Stock, as reported on the New York Stock Exchange Composite Tape, for each of the ten (10) trading days immediately prior to said December 31. The amount to be distributed in January of any year shall be determined as of December 31 of the immediately preceding year. IX. DISTRIBUTION UPON DEATH If any Participant dies while a director, or thereafter, before receiving all funds deferred for his or her accounts, the unpaid amount in the Participant's deferred compensation accounts shall be paid in one lump sum in January of the year following the year of death to any beneficiary or beneficiaries designated by the Participant by written notice to the Corporation or, in the absence of such designation, to such Participant's estate. 5 6 X. PARTICIPANT'S RIGHTS IN ACCOUNTS A Participant shall have only the interest of an unsecured general creditor in the deferred compensation, interest equivalents or Units credited to his or her accounts. All amounts deferred 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 until actually paid. With respect to amounts deferred, the obligation of the Corporation hereunder is purely contractual and shall not be funded or secured in any way. XI. NON-ASSIGNABILITY The right of a Participant to the payment of deferred compensation as provided in the Plan shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation. XII. STATEMENT OF ACCOUNT Statements will be sent to Participants during February of each year as to the balance of their deferred compensation accounts as of the end of the previous calendar year. XIII. 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. XIV. 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 amounts accrued in his or her deferred compensation accounts. XV. NOTICES All notices and elections to be delivered to the Corporation hereunder shall be delivered to the attention of the Secretary of the Corporation. XVI. EARLY WITHDRAWAL PENALTY; HARDSHIP A. EARLY WITHDRAWAL. A Participant may, upon prior written notice to the Corporation, accelerate the distribution of all or any part of the amounts deferred, including any accrued interest, subject to an early withdrawal penalty equal to 10% of the amount withdrawn and provided such amounts have been deferred for at least three years. This penalty shall be withheld by the Corporation upon the distribution of any amounts pursuant to this Section XVI.A. B. HARDSHIP. Upon receipt of a request from a Participant or a Participant's designated beneficiary, delivered in writing to the Corporation, the Compensation and Management Development Committee (the "CMDC") of the Board of Directors may cause the Corporation to accelerate payment of all or any part of the Participant's deferred compensation including any accrued interest, if it finds in its sole discretion that payment of such amounts in accordance with Participant's prior election under Section V would result in hardship to the Participant or 6 7 beneficiary and such hardship is the result of an unforeseeable emergency caused by circumstances beyond the control of the Participant or beneficiary. Acceleration of payment may not be made under this Section XVI to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise or (ii) by liquidation of the Participant's assets, to the extent the liquidation of assets would not itself cause severe financial hardship. XVII. CHANGE IN CONTROL A. INITIAL LUMP SUM ELECTION. Notwithstanding any election made pursuant to Section V, a Participant may file a written election with the Corporation to have the deferred amounts, including accrued interest, paid in one lump-sum payment as soon as practicable following a Change in Control, but in no event later than 60 days after such Change in Control. B. REVOCATION OF LUMP-SUM ELECTION. A Participant may revoke an election made pursuant to Section XVII (a) by filing an appropriate written notice with the Corporation. A revocation notice filed pursuant to this Section XVII (b) shall be effective with respect to deferred amounts, including accrued interest, which are credited thereafter to the Participant's Account. C. LIMITATION ON ELECTIONS. Any election made pursuant to Section XVII (A) or (B) shall not be effective unless filed with the Corporation at least 90 days prior to a Change in Control. D. DEFINITION OF CHANGE IN CONTROL. A "Change in Control" is defined to mean any of the following events: 1. The acquisition by any person (including a group, within the meaning of Sections 13(d)(3) or 14(d)(2) of the 1934 Act), other than the Corporation or any subsidiary of the Corporation, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Corporation's outstanding voting securities. 2. The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any subsidiary of the Corporation, pursuant to which shares of the Corporation's Common Stock have been purchased. 3. During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason (other than death or disability) to constitute at least a majority thereof, unless the election or the nomination for election by stockholders of the Corporation of each new Director was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of the period. 4. Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. 7 EX-10.E 6 DEFERRED COMPENSATION PLAN FOR EXECUTIVES 1 Exhibit 10(e) DIGITAL EQUIPMENT CORPORATION DEFERRED COMPENSATION PLAN FOR EXECUTIVES I. NAME AND PURPOSE The name of this plan is the Digital Equipment Corporation Deferred Compensation Plan for Executives (the "Plan"). Its purpose is to provide a select group of management or highly compensated employees ("Executives") within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, of Digital Equipment Corporation or its subsidiaries (the "Corporation") with an opportunity to defer cash compensation earned through the Corporation's Executive Incentive Plan and its successors ("Eligible Compensation"). II. EFFECTIVE DATE The Plan was approved by the Board of Directors on June 20, 1996 and first became effective with respect to Eligible Compensation paid for services rendered in fiscal year 1997. III. ELIGIBILITY FOR PARTICIPATION Any Executive of the Corporation designated by the Compensation and Management Development Committee or its successor (the "CMDC") of the Board of Directors shall be eligible to participate in the Plan. The CMDC may delegate its authority to designate Participants under this Plan to any officer or officer(s) of the Corporation and subject to whatever limitations the CMDC may define in its sole discretion. Any such person who submits an election to defer Eligible Compensation under the Plan as provided for in Section V below is hereinafter called a "Participant." The Plan shall establish for each Participant an unfunded deferred compensation account or accounts as appropriate. Any authority or power granted in the Plan to the CMDC shall also be deemed to be granted to the Board of Directors, and any action permitted to be taken or determination permitted to be made by the CMDC may also be taken or made by the Board of Directors. IV. PARTICIPANTS' DEFERRED COMPENSATION ACCOUNTS There shall be four types of deferred compensation accounts under this Plan as follows: A. Cash Deferred Compensation Account with Lump Sum Payment ("Cash Lump Sum Account"), B. Cash Deferred Compensation Account with Installment Payment ("Cash Installment Account"), C. Unit Deferred Compensation Account with Lump Sum Payment ("Unit Lump Sum Account"), and D. Unit Deferred Compensation Account with Installment Payment ("Unit Installment Account"). Each Participant may have Cash Lump Sum Accounts or Cash Installment Accounts or both ("Cash Accounts"). A Participant may also have Unit Lump Sum Accounts or Unit Installment Accounts or both ("Unit Accounts"). Cash Accounts shall have all allocations credited in dollar amounts and shall be credited with interest as provided below. Unit Accounts shall have all allocations credited in units as provided below. Cash Lump Sum Accounts and Unit Lump Sum Accounts (collectively "Lump Sum Accounts") shall be distributed in a lump sum payment. Cash Installment Accounts and 1 2 Unit Installment Accounts (collectively "Installment Accounts") shall be distributed in a series of installment payments as elected by the Participant. V. ELECTIONS OF DEFERRAL, ALLOCATION AND DISTRIBUTION Executives may make the following elections: A. On or before December 31 of any year, an initial election (i) to defer receipt of all or a specified portion of the Eligible Compensation otherwise payable during the following calendar year, which election shall be irrevocable, (ii) to allocate the deferred compensation among types of accounts, which election shall be irrevocable, and (iii) to elect the number of installment payments desired, if applicable, which election may be changed as provided in Section V.C. below. B. If such individual has become employed by the Corporation after December 31 of any year, an initial election (i) to defer receipt of all or a portion of his or her Eligible Compensation, which election shall be irrevocable, (ii) to allocate the deferred compensation among types of accounts, which election shall be irrevocable, and (iii) to elect the number of installment payments desired, if applicable, which election may be changed as provided in Section V.C below. Any such elections must be made within one month following the date on which such Executive becomes employed by the Corporation and shall be effective with respect to compensation allocable to the period commencing on the first day of the month next following the date on which such election is made. C. At any time after the initial election referred to in Sections V.A and V.B above, a Participant may change his or her election with respect to the number of installment payments desired by delivering to the Corporation written notice of such change; provided, however, no such subsequent election shall be effective unless such notice is delivered to the Corporation more than six months prior to a Participant's (i) reasonably anticipated retirement from the Corporation or (ii) termination of employment. VI. MANNER OF ELECTING DEFERRALS, ALLOCATIONS AND DISTRIBUTIONS The elections provided for in Section V above must be made on a form provided by the Plan Administrator, which specifies: A. The amount of the Participant's Eligible Compensation for such year to be deferred (designated either as a percentage, a dollar amount or a combination thereof); B. The percentage of the deferred compensation to be allocated to each of the Participant's deferred compensation accounts; C. The number of annual installments (not to exceed 15) to be used in distributions from the Participant's Installment Accounts, if any; and D. The period of deferral (a minimum of three years from the year in which the Eligible Compensation is credited to a Participant's account(s), subject to Section IX below) (the "Deferral Period"). Such form shall be delivered to the Corporation on or before December 31 of the year preceding the first year to which such election relates, and the form from newly hired Eligible Employees with respect to their initial election for a partial year may be delivered at any time within one month following the date of the commencement of their employment. The elections set forth in the latest form filed as to the amount of the Participant's Eligible Compensation for the year (or other period) 2 3 to be deferred, as to the allocations among deferred compensation accounts and as to the number of installments, if applicable, shall be given continuing effect for subsequent years until a new notice specifying a different election shall be delivered to the Corporation. Any new form shall apply only to the decision to defer compensation for periods subsequent to the period in which such new form is delivered; however, the number of installment payments desired, if applicable, may be changed at any time, subject to the limitation in Section V.C. VII. CREDITING PARTICIPANTS' ACCOUNTS The following method shall be used to credit a Participant's accounts: A. A Participant's Cash Accounts shall be credited with the cash value of any amounts deferred by him or her subject to an election to have such amounts allocated to Cash Accounts. Any such Cash Account shall also be credited with interest equivalents on a quarterly basis on the average daily balance credited to such account during such period ended on such date, at an interest rate equal to the ten-year U.S. Government Rate as reported in the Wall Street Journal, reported as an average for the one-year period prior to December 1 of the year prior to the first year of the Deferral Period, which rate shall be reset in the same manner on January 1 of each subsequent year during the Deferral Period. Interest equivalents shall continue to be so credited until such time as the entire balance of any such account shall have been distributed. B. A Participant's Unit Accounts shall be credited with a number of units ("Units"), to be determined and valued in accordance with the fair market value of shares of the Corporation's Common Stock, $1.00 par value ("Common Stock"). The number of Units shall be adjusted as provided in 2. and 3. below until the entire balances in Unit Accounts shall have been distributed. The method of such determination and valuation is as follows: 1. The number of Units credited to any Unit Account (including fractional Units) shall be the quotient of (i) the cash amount of deferred compensation to be credited to such account over (ii) the mean between the highest and lowest selling prices of the Common Stock on the ten trading days prior to the date on which the deferred compensation would have otherwise been payable, as reported on the New York Stock Exchange Composite Tape. 2. Additional Units shall be credited to a Participant's Unit Accounts as of each payment date for cash dividends, if any, on the Common Stock, on the basis of the number of Units credited to each Unit Account on the record date for any such dividend. The number of Units (including fractional Units) to be credited to each such account as of any cash dividend payment date shall be the quotient of (i) the product of the number of Units credited to such account on the dividend record date for such dividend and the dividend per share on the Common Stock over (ii) the fair market value of the Common Stock on the dividend payment date. The fair market value of the Common Stock on the dividend payment date shall be the mean between the highest and lowest selling prices of the Common Stock on the dividend payment date, as reported on the New York Stock Exchange Composite Tape. If there are no sales on the dividend payment date, the fair market value of the Common Stock shall be an average of the mean between the highest and lowest selling prices of the Common Stock on the nearest day before and the nearest day after the dividend payment date, as reported on the New York Stock Exchange Composite Tape. 3. If at any time the number of outstanding shares of Common Stock shall be increased or decreased as the result of any stock dividend, subdivision, stock split, combination or reclassification of shares, the number of Units in a Participant's Unit Accounts shall be increased or decreased, as the case may be, in the same proportion as the outstanding number of shares of Common Stock is increased or decreased. 3 4 4. When Eligible Compensation is paid in currency other than U.S. dollars, the number of Units to be deferred shall be determined by converting the Eligible Compensation into U.S. dollars at the same exchange rate at which such Compensation was converted into the applicable foreign currency at the time the Compensation was paid and then calculating the number of Units in accordance with Section VII B. VIII. METHOD OF DISTRIBUTION OF DEFERRED COMPENSATION Subject to Section IX hereof, distributions of the amounts in a Participant's deferred compensation accounts shall be made as follows: A. No distribution of deferred compensation may be made except as provided in this Section VIII. B. The amounts credited to a Participant's Lump Sum Accounts shall be payable in cash in a lump sum in January of the year following the last year of the Deferral Period. The amounts credited to a Participant's Installment Accounts shall be paid in up to fifteen annual installments according to the Participant's election or elections commencing in January of the year following the last year of the Deferral Period. The amount of the first payment shall be a fraction of the amount of the Participant's deferred compensation accounts as of December 31 of the year preceding payment, the numerator of which is one and the denominator of which is the total number of installments elected. The amount of each subsequent payment shall be a fraction of the amount as of December 31 of the year preceding such subsequent payment, the numerator of which is one and the denominator of which is the total number of installments elected minus the number of installments previously paid. C. Each account shall be debited for the amount of any distribution made from it, either in a lump sum or in annual installments. D. Distribution of a Participant's Cash and Unit Accounts shall be made in cash. With respect to any Unit Account, the cash amount for any payment from such account shall be determined by multiplying the number of Units in the Account on December 31 of the year immediately preceding the payment date by the average of the mean between the highest and lowest selling prices of the Common Stock, as reported on the New York Stock Exchange Composite Tape, for each of the ten (10) trading days immediately prior to said December 31. The amount to be distributed in January of any year shall be determined as of December 31 of the immediately preceding year. E. At the time of distribution, the amount of cash payable from a Unit Account will be determined in U.S. dollars in accordance with Section VIII.D, and then converted into the applicable foreign currency at the average exchange rate for the ten business days prior to December 31 of the year prior to the year of any distribution. IX. DISTRIBUTION UPON DEATH, RETIREMENT OR TERMINATION OF EMPLOYMENT A. DEATH. If any Participant dies while an employee and, before distribution of all amounts remaining in his or her deferred compensation accounts, the undistributed balance remaining in the Participant's deferred compensation accounts shall be calculated and paid in one lump sum in January of the year following the year of death to the beneficiary or beneficiaries designated by the Participant by written notice to the Corporation or, in the absence of such designation, to such Participant's estate. 4 5 B. RETIREMENT. If a Participant ceases to be employed by the Corporation or any subsidiary of the Corporation by reason of his or her retirement at or after age 55 before distribution of all amounts remaining in his or her deferred compensation accounts, the unpaid amount in the Participant's deferred compensation accounts shall either continue to be paid as designated by the Participant in accordance with Sections V and VI, or, if no payments have been made as of the retirement date, shall commence in January of the year following the year of retirement, in the manner designated by the Participant. C. TERMINATION OF EMPLOYMENT. If a Participant ceases to be employed by the Corporation or any subsidiary of the Corporation for any other reason than death or retirement and before distribution of all amounts remaining in his or her deferred compensation accounts, the unpaid amount in the Participant's deferred compensation accounts shall be calculated and paid in one lump sum in January of the year following the year in which employment was terminated. X. PARTICIPANT'S RIGHTS IN ACCOUNTS A Participant shall have only the interest of an unsecured general creditor in the deferred compensation, interest equivalents or Units credited to his or her accounts. All amounts deferred 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 until actually paid. With respect to amounts deferred, the obligation of the Corporation hereunder is purely contractual and shall not be funded or secured in any way. XI. NON-ASSIGNABILITY The right of a Participant to the payment of deferred compensation as provided in the Plan shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation. XII. STATEMENT OF ACCOUNT Statements will be sent to Participants during February of each year as to the balance of their deferred compensation accounts as of the end of the previous calendar year. XIII. ADMINISTRATION The Administrator of the Plan shall be the CMDC or its designee. The CMDC shall have the authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions thereof. Appropriate income tax withholding will be applied by the Corporation. XIV. AMENDMENT AND TERMINATION The Plan may at any time be amended, modified or terminated by the Board of Directors of the Corporation or the CMDC thereof. No amendment, modification or termination shall, without the consent of a Participant, will reduce any Participant's deferred compensation account balances as of the effective date of such amendment or termination. 5 6 XV. NOTICES All notices and elections to be delivered to the Corporation hereunder shall be delivered to the attention of the Corporate Executive Compensation Manager. XVI. EARLY WITHDRAWAL PENALTY AND HARDSHIP A. EARLY WITHDRAWAL. A Participant may, upon prior written notice to the Corporation, accelerate payment of all or any part of the amounts deferred, including any accrued interest, subject to an early withdrawal penalty equal to 10% of the amount withdrawn, provided such compensation has been deferred for at least three years. This penalty shall be withheld by the Corporation upon distribution of any amounts pursuant to this Section XVI.A. A Participant who elects to withdraw deferred amounts in advance of the scheduled distribution thereof will not be able to elect further deferrals of compensation for a period of 12 months from the date of early withdrawal. B. HARDSHIP. Upon receipt of a request from a Participant or a Participant's designated beneficiary, delivered in writing to the Corporation, the CMDC or its designee may cause the Corporation to accelerate payment of all or any part of the Participant's deferred compensation including any accrued interest, if it finds in its sole discretion that payment of such amounts in accordance with Participant's prior election under Section V would result in hardship to the Participant or beneficiary and such hardship is the result of an unforeseeable emergency caused by circumstances beyond the control of the Participant or beneficiary. Acceleration of payment may not be made under this Section XVI to the extent that such hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise, (ii) by liquidation of the Participant's assets, to the extent the liquidation of assets would not itself cause severe financial hardship or (iii) by cessation of deferrals under this Plan of any tax-qualified savings plan of the Corporation. XVII. CHANGE IN CONTROL A. INITIAL LUMP SUM ELECTION. Notwithstanding any election made pursuant to Section V, a Participant may file a written election with the Corporation to have the deferred amounts, including accrued interest, paid in one lump-sum payment as soon as practicable following a Change in Control, but in no event later than 60 days after such Change in Control. B. REVOCATION OF LUMP-SUM ELECTION. A Participant may revoke an election made pursuant to Section XVII (a) by filing an appropriate written notice with the Corporation. A revocation notice filed pursuant to this Section XVII (b) shall be effective with respect to deferred amounts, including accrued interest, which are credited thereafter to the Participant's Account. C. LIMITATION ON ELECTIONS. Any election made pursuant to Section XVII (A) or (B) shall not be effective unless filed with the Corporation at least 90 days prior to a Change in Control. D. DEFINITION OF CHANGE IN CONTROL. A "Change in Control" is defined to mean any of the following events: 1. The acquisition by any person (including a group, within the meaning of Sections 13(d)(3) or 14(d)(2) of the 1934 Act), other than the Corporation or any subsidiary of the Corporation, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of 20% or more of the combined voting power of the Corporation's outstanding voting securities. 6 7 2. The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any subsidiary of the Corporation, pursuant to which shares of the Corporation's Common Stock have been purchased. 3. During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason (other than death or disability) to constitute at least a majority thereof, unless the election or the nomination for election by stockholders of the Corporation of each new Director was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of the period. 4. Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. 7 EX-27 7 FINANCIAL DATA SCHEDULES
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF DIGITAL EQUIPMENT CORPORATION FOR THE NINE MONTHS ENDED MARCH 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT FOR THE PERIOD ENDED MARCH 28, 1998. 1,000 9-MOS JUN-27-1998 JUN-29-1997 MAR-28-1998 1,498,035 918,855 2,918,257 213,281 1,187,835 6,963,118 3,707,327 2,235,425 9,357,256 3,725,987 741,150 0 4,000 157,202 3,591,549 9,357,256 5,080,232 9,475,798 3,247,158 6,250,053 3,094,322 0 84,689 496,114 54,400 441,714 0 0 0 441,714 2.81 2.77
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