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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 28, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d)of the Securities
Exchange Act of 1934 For the transition period from to .
Commission file number 1-5296
DIGITAL EQUIPMENT CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2226590
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(State or other jurisdiction of (I.R.S. Employer Ident. No.)
incorporation or organization)
111 Powdermill Road, Maynard, Massachusetts 01754-1499
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (978) 493-5111
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered (a)
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Common Stock, par value $1 New York Stock Exchange
per share Pacific Stock Exchange
Chicago Stock Exchange
Depositary shares each representing New York Stock Exchange
one-fourth of a share of 8-7/8%
Series A Cumulative Preferred Stock,
par value $1 per share
(a) In addition, shares of Common Stock of the registrant are listed on certain
stock exchanges in Switzerland and Germany.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (a) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (b) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
As of September 15, 1997, 147,773,294 shares of the registrant's Common Stock,
par value $1, were issued and outstanding. The aggregate market value of the
registrant's voting stock held by non-affiliates of the registrant as of
September 15, 1997 was approximately $6.2 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 Annual Report to Stockholders are incorporated
by reference in Part II hereof.
Portions of the registrant's Proxy Statement for its 1997 Annual Meeting of
Stockholders, scheduled to be held on November 13, 1997, are incorporated by
reference in Part III hereof.
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PART I
ITEM 1. BUSINESS.
GENERAL
Digital Equipment Corporation, a Massachusetts corporation founded in
1957, is a world leader in implementing and supporting networked business
solutions in multivendor environments based on high performance platforms and
global service and support. Digital - working with its business partners -
provides a complete range of information processing solutions from personal
computers to integrated worldwide information systems. The Corporation does
business in over 100 countries, deriving more than 65% of its revenue from
outside of the United States and developing and manufacturing products in the
Americas, Europe and Asia-Pacific.
The term "Corporation" or "DIGITAL" when used herein refers to Digital
Equipment Corporation or Digital Equipment Corporation and its subsidiaries, as
required by the context.
For the last five fiscal years, the percentage of total operating
revenues contributed by the Corporation's principal classes of products was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Product sales 55.2% 57.4% 55.1% 53.5% 52.8%
Service revenues 44.8% 42.6% 44.9% 46.5% 47.2%
----- ----- ----- ----- -----
100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
Service revenues are derived principally from DIGITAL and multivendor
hardware and software product services, network and systems integration services
and outsourcing and resource management services.
PRODUCTS
Most of the Corporation's systems are general purpose digital computers,
designed to perform, interpret and record computations on collected data or act
as servers providing computing resources across a network, the World Wide Web,
and through distributed application environments. The Corporation offers a broad
range of computer clients and servers based on DIGITAL's Alpha(TM) and VAX(R)
architectures, and the Intel(R) X86 and Pentium(R) architectures.
COMPUTER SYSTEMS: The Corporation's 64-bit, reduced instruction set
computing ("RISC") architecture known as "Alpha" is designed to support
multiple operating systems and to be the foundation for a leading high
performance computer system family. The Corporation offers a complete line of
Alpha-based products, ranging from chips and boards to high performance
workstations and servers to larger general purpose computer systems. Alpha
supports three major operating systems: Digital UNIX(R)-- the Corporation's
64-bit UNIX(R) operating system, the Corporation's OpenVMS(TM) operating system
and Microsoft Corporation's ("Microsoft") Windows NT(R) operating system. As
part of DIGITAL's strategic partnership with Microsoft, Microsoft is working
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with the Corporation to develop a 64-bit version of the Windows NT operating
system, which would support Alpha as its first 64-bit implementation.
The Corporation also offers a full range of Intel-based personal
computers, workstations and servers. These products support Microsoft's
Windows(R), Windows 95(R) and Windows NT operating systems. During fiscal 1997,
the Corporation introduced new server, desktop and mobile computer products
incorporating the most up-do-date X86-based microprocessor chips. The
Corporation's offerings include the Prioris(TM) line of server products,
Celebris(TM) high-end desktop products, Venturis(TM) low-end desktop products
and the VP HiNote(TM) line of mobile computer products.
The Corporation's 64-bit Alpha-based servers provide a high-performance
platform for a wide spectrum of business and enterprise-level applications,
including memory and transaction intensive applications in areas such as data
warehousing, transaction processing and scientific and technical computing.
64-bit database, data server and data warehousing applications from Oracle
Corporation and other database vendors implemented on the Corporation's high
performance, 64-bit Alpha-based systems process data significantly faster than
similar applications running on currently available 32-bit systems. DIGITAL's
Alpha-based systems also serve as a computing platform in the emerging Internet
and corporate Intranet environments.
In March 1997, the Corporation announced a faster, 600MHz version of its
high performance Alpha 21164 microprocessor for workstations and servers. These
top-performing chips are uniquely suited to the high performance requirements of
visual computing applications such as video conferencing, modeling, video
editing, multi-media authoring, image rendering and animation.
STORAGE SYSTEMS, MICROPROCESSORS AND NETWORK PRODUCTS: The Corporation's
offerings include its StorageWorks family of peripheral and data storage
products for use with its computer systems which are designed to provide
high-performance, flexible and scaleable enterprise-wide storage solutions in
multivendor environments.
The Corporation has developed, and manufactures and sells a family of
high performance, 64-bit Alpha microprocessors which are used in sophisticated
computer applications. The Corporation has established relationships with
Samsung Electronics Co., Ltd. and Mitsubishi Corp., through which it has granted
each of Samsung and Mitsubishi the right to manufacture and market the
Corporation's Alpha microprocessors and incorporate them into their computer
systems and other products. The Corporation also manufactures and sells the
StrongARM microprocessor, a low-cost, low-power, high performance chip designed
to power network computers, set-top boxes and other Internet appliances.
The Corporation is also a manufacturer and supplier of network
components, including hubs, routers, switches and adapters. The Corporation's
enVISN (Enterprise Virtual Intelligent Switched Network) open network
architecture creates flexible virtual networks linking users in different groups
and sites by combining virtual LAN (local area network) technology, distributed
routing and high speed switching with centralized, policy-based administration.
SOFTWARE: The Corporation designs, develops or acquires from third
parties and distributes under license various software products for use on its
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computer systems and computer systems from other vendors. The Corporation,
independently and through partners, offers software products consisting of
operating systems, communication and networking software, run-time services
(such as data/information handling and graphical user interfaces), language
compilers, mail and messaging, productivity tools, production systems (including
databases and transaction processing monitors), office and workgroup software
frameworks and other application software. The Corporation's software offerings
are intended to promote open client/server computing and, to this end, are
designed to industry-standard interfaces that enable applications to work across
different platforms and operating systems and enable customers to integrate and
manage multivendor environments.
FX!32(TM), DIGITAL's translation and emulation software, allows
Alpha-based systems to run Windows NT and Windows 95 32-bit software
applications. The Corporation is developing a set of tools and utilities that
will enable customers and software developers to write applications on Windows
NT and deploy them in and across the Windows NT, DIGITAL 64-bit UNIX and OpenVMS
computing environments. The Corporation has also established partnerships with
leading independent software vendors to develop software applications for its
64-bit UNIX and OpenVMS operating systems.
The Corporation continues to make available without charge over the World
Wide Web its AltaVista Internet Search Service which helps Internet users find
information anywhere on the World Wide Web or in Internet news groups. The
Corporation believes that the AltaVista Internet Search Service is among the
fastest and most comprehensive Web indices available. The Corporation also
offers a portfolio of software products and services for the integrated
Internet/intranet environment.
SERVICES
The Corporation provides a comprehensive portfolio of technical
consulting, integration, support and maintenance services through a global
network of approximately 23,000 employees, as well as service delivery partners,
to help customers plan, implement, manage and maintain their information
technology solutions.
The Corporation's service offerings include maintenance and support
services for the Corporation's software and hardware products, as well as for
software and hardware products manufactured by other companies; information
systems consulting; technical and application design services; systems
integration and project management services; network design, integration and
support services; and outsourcing and resource management services.
The Corporation has established a number of services alliances with
companies in the information technology industry. To support customer's
migration to Windows NT-based platforms, the Corporation has trained, and
Microsoft has certified, a professional services workforce of approximately
1,600 engineers dedicated to providing comprehensive systems integration and
service solutions. Under the Corporation's alliance with MCI Communications
Corporation ("MCI") and Microsoft, MCI delivers Internet and Intranet products
and services to MCI subscribers based upon the Corporation's Alpha servers,
Microsoft's Windows NT operating system, and Microsoft Exchange(TM) and Internet
Explorer software products, and backed by the Corporation's support and systems
integration services. The Corporation is a leading provider of mail and
messaging solutions in the global enterprise environment, having announced
during the fourth quarter of fiscal 1997 that it had passed the one millionth
Microsoft Exchange seat under contract. The Corporation also has
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been designated a preferred service provider by Computer Associates
International, Inc.
SALES AND DISTRIBUTION
The Corporation directly sells, markets and supports its products and
services through multiple locations throughout the world. In the fourth quarter
of fiscal 1997, the Corporation refined its organizational structure, including
a unified worldwide sales and marketing organization focused on providing
integrated solutions to meet customers' needs.
Arrangements with third parties, including software developers, value
added resellers (VARs) and authorized distributors, are an increasingly
important part of the Corporation's focus on providing complete solutions to its
customers and expanding distribution of its products and services through
indirect channels. As more of the Corporation's products and services are
distributed through indirect channel partners ("Resellers"), the Corporation's
relationships with these parties, and their financial condition, become more
important to the Corporation's consolidated results of operations. Resellers
adjust their ordering patterns in response to market conditions. Resellers may
increase orders during times of product shortages, delay orders in anticipation
of new products or cancel orders if the channel already has sufficient product
on hand to meet projected demand.
For the fiscal year ended June 28, 1997, approximately 5.9% of the
Corporation's total operating revenues were derived directly from sales to
various agencies of the U.S. Government, and no other customer of the
Corporation accounted for more than 3% of total revenues.
The Corporation believes that the dollar amount of backlog is not a
meaningful indication of future revenues and historically has not published
such data. It has been and continues to be the Corporation's objective to
minimize the time from the receipt of a purchase order to delivery of the
product.
INTERNATIONAL OPERATIONS
Sales by the Corporation to customers outside the United States amounted
to 67%, 66% and 65% of total operating revenues for the fiscal years ended June
28, 1997, June 29, 1996 and July 1, 1995, respectively. International sales and
marketing operations are conducted through subsidiaries, by direct sales from
the parent company, by resellers and through various representative and
distributorship arrangements.
The Corporation's international business is subject to risks customarily
encountered in foreign operations, including fluctuations in monetary exchange
rates, import and export controls and the economic, political and regulatory
policies of foreign governments.
See Notes A, B, C and I of Notes to Consolidated Financial Statements,
incorporated by reference herein, for further information on the Corporation's
international operations, including financial information concerning the
Corporation's operations by major geographical area.
COMPETITION
The information technology industry is highly competitive, international
in scope and comprised of many companies. The methods of competition include
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product performance, quality and reliability, price, service and support and
marketing and distribution, among others. Present and potential competition in
the various markets served by the Corporation comes from firms of various sizes
and types, some of which are larger and have greater resources than the
Corporation. Firms not now in direct competition with the Corporation may
introduce competing products and services in the future. It is possible for
companies to be at various times competitors, customers and collaborators in
different markets.
MATERIALS
The Corporation obtains a wide variety of components, assemblies and raw
materials from a substantial number of suppliers. The Corporation has
established or has available alternate sources of supply for many of these
materials. The Corporation believes that the materials required for its
manufacturing operations are presently available in quantities sufficient to
meet demand; however, a portion of the Corporation's manufacturing operations is
dependent on the timely delivery of certain sub-assemblies and components from
significant suppliers. The failure of such suppliers to deliver such items on a
timely basis or in sufficient quantities could adversely affect the
Corporation's results of operations.
ENVIRONMENTAL AFFAIRS
The Corporation's facilities are subject to numerous laws and regulations
designed to protect human health and safety and the environment. Under
applicable state laws, the Corporation is incurring costs in connection with the
investigation and remediation of certain properties owned and/or operated by the
Corporation. Pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980 ("CERCLA"), as amended, the Corporation is sharing the
costs of cleaning up certain sites listed on the federal National Priorities
List of Superfund Sites. In the opinion of the Corporation, compliance with
these laws and regulations has not had and should not have a material effect on
the Corporation's capital expenditures, results of operations or financial
condition.
INTELLECTUAL PROPERTY
Intellectual property rights owned or licensed by the Corporation include
patents, copyrights, trade secrets, trademarks and maskwork rights that relate
to its products. While the Corporation's competitive technology position is not
determined by or dependent upon any single factor, the Corporation's portfolio
of patents and patent applications is of significant value to the Corporation.
The Corporation takes appropriate action to enforce its intellectual property
rights.
RESEARCH AND ENGINEERING
The Corporation is in an industry which is characterized by rapid
technological change. In the fiscal years ended June 28, 1997, June 29, 1996 and
July 1, 1995, the Corporation spent $1.01 billion, $1.06 billion and $1.04
billion, respectively, for research and engineering (R&E). At the end of fiscal
1997, the Corporation consolidated product development under the Products
Division to better coordinate and focus research and development efforts. The
Corporation believes that its level of R&E spending as a percentage of total
operating revenues is appropriate to support current operations and to offer
competitive, market-driven products.
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EMPLOYEES
The Corporation had approximately 54,900 employees worldwide at June 28,
1997.
EXECUTIVE OFFICERS OF THE CORPORATION
The following table sets forth the names and ages of the ten executive
officers of the Corporation and certain information relating to their positions
held with the Corporation.
<TABLE>
<CAPTION>
YEAR FIRST
BECAME AN
EXECUTIVE
NAME AGE PRESENT TITLE OFFICER
<S> <C> <C>
Robert B. Palmer 57 Director; Chairman of the 1985
Board, President and Chief
Executive Officer
Bruce L. Claflin 45 Senior Vice President, 1996
Worldwide Sales and Marketing
Harold D. Copperman 50 Senior Vice President, 1996
Digital Products Division
Ilene B. Jacobs 50 Vice President, Human Resources 1985
Alexis Makris 44 Vice President and Corporate 1997
Controller
Paul J. Milbury 49 Vice President and Treasurer 1996
Vincent J. Mullarkey 49 Vice President, Finance and 1992
Chief Financial Officer
John J. Rando 45 Senior Vice President, 1993
Digital Services Division
Thomas C. Siekman 55 Vice President and General 1993
Counsel
William D. Strecker 53 Vice President, Corporate 1985
Strategy and Technology and
Chief Technical Officer
</TABLE>
- ---------------------
Executive officers of the Corporation are elected annually and hold office until
the first meeting of the Board of Directors following the annual meeting of
stockholders and until their successors have been chosen and qualified. All of
the executive officers named have been officers or held managerial positions in
the Corporation for at least the last five years, except for Mr. Claflin and Mr.
Copperman. Prior to joining the Corporation in November 1995, Mr. Claflin held
various positions in marketing and product development during his 22-year career
at International Business Machines Corporation, most recently serving as General
Manager, Product and Brand Management for the IBM Personal Computer Company from
June 1994 to October 1995, as President, IBM Personal Computer Company -
Americas, from August 1993 to June 1994 and as General Manager, Mobile Computing
of IBM Personal Computer Company from June 1992 to August 1993. Prior to joining
the Corporation, Mr. Copperman was President and Chief Executive Officer of the
Informations Systems Group of JWP Inc., a computer reseller and services
company, from 1991 to 1993, and President and Chief Operating Officer of
Commodore Business Machines, Inc. from 1989 to 1991.
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ITEM 2. PROPERTIES
At the end of fiscal year 1997, the Corporation owned or leased
approximately 24.9 million square feet of space worldwide. The Corporation
occupied approximately 19.0 million square feet, leased or sub-leased to others
approximately 3.3 million square feet, and due to restructuring actions, had
vacant space of approximately 2.5 million square feet, most of which is
available for sale or sub-lease. The total space owned or leased decreased by
approximately 3.4 million square feet from the prior year. Approximately 51% of
the occupied space is located in the United States; approximately 60% of the
occupied space is owned. The Corporation's occupied facilities are substantially
utilized, well maintained and suitable for the products and services offered by
the Corporation.
ITEM 3. LEGAL PROCEEDINGS
During the fourth quarter of fiscal 1994, the Corporation was named as a
defendant in several purported class action lawsuits filed in the U.S. District
Court for the Southern District of New York and the U.S. District Court for the
District of Massachusetts alleging violations of the Federal securities laws
arising from alleged misrepresentations and omissions in connection with the
Corporation's issuance and sale of Series A 8-7/8% Cumulative Preferred Stock
and the Corporation's financial results for the fiscal quarter ended April 2,
1994. The Massachusetts and New York lawsuits were all effectively consolidated
into three cases, which were pending before the U.S. 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 U.S. 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.
On May 12, 1997, the Corporation filed a lawsuit in the U.S. District
Court for the District of Massachusetts against Intel Corporation ("Intel"). The
lawsuit alleges that Intel, through the manufacture and sale of its Pentium (R),
Pentium with MMX(TM) Technology, Pentium Pro and Pentium II microprocessors,
willfully infringes, and contributes to the infringement by others of, ten
Digital patents protecting inventions in the area of computer architecture and
microprocessor design. Digital's lawsuit seeks an injunction to prohibit Intel
from using Digital's patented technology in its present and future
microprocessor products, monetary damages for Intel's infringement and enhanced
damages for willful infringement. On July 2, 1997, Intel answered the
Corporation's lawsuit denying liability, and filed a counterclaim seeking a
declaratory judgment that the patents on which the Corporation sued are invalid
and unenforceable. The Corporation has replied to Intel's counterclaim stating
that the patents are valid, enforceable and infringed by Intel.
On September 3, 1997, Intel filed a motion for leave to amend its answer
and counterclaims, which Digital is opposing, requesting, among other things,
the right to assert counterclaims against Digital claiming willful infringement
by Digital of nine Intel patents through the manufacture, sale and use of
certain microprocessor and related products and seeking monetary damages and
injunctive relief. On September 3, 1997, Intel also filed a lawsuit in the U.S.
District Court for the District of Oregon claiming willful infringement by
Digital of five Intel patents through the manufacture, sale, use and service of
various computer products and seeking monetary damages and
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injunctive relief. Digital is in the process of assessing Intel's claims and
proposed counterclaims and intends to vigorously defend against them.
On May 27, 1997, Intel filed a lawsuit in the U.S District Court for the
Northern District of California against the Corporation alleging breach of
contract, misappropriation of trade secrets, unlawful competition and unfair
business practices and to recover personal property. Intel's lawsuit requests
monetary damages and an injunction seeking the return of certain Intel
proprietary information. On July 23, 1997, the Corporation answered Intel's
lawsuit, denying any and all liability to Intel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
See the section entitled "Investor information -- Information on Common
Stock," which is incorporated herein by reference, appearing on page 59 of the
Corporation's 1997 Annual Report to Stockholders.
ITEM 6. SELECTED FINANCIAL DATA.
See the section entitled "Eleven-year financial summary," which is
incorporated herein by reference, appearing on pages 26 and 27 of the
Corporation's 1997 Annual Report to Stockholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
See the section entitled "Management's discussion and analysis of
financial condition and results of operations," which is incorporated herein by
reference, appearing on pages 28 through 32 of the Corporation's 1997 Annual
Report to Stockholders.
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Note I to the consolidated financial statements, which is
incorporated herein by reference, appearing on pages 47 through 50 of the
Corporation's 1997 Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data, which are incorporated
herein by reference from the Corporation's 1997 Annual Report to Stockholders,
are indexed under Item 14(a)(1). See also the financial statement schedules
appearing herein, as indexed under Item 14(a)(2).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the section entitled "Election of Directors," which is incorporated
herein by reference from the Corporation's Proxy Statement for its 1997 Annual
Meeting of Stockholders. See also the section entitled "Executive Officers of
the Corporation" appearing in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
See the section entitled "Executive Compensation," which is incorporated
herein by reference from the Corporation's Proxy Statement for its 1997 Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the section entitled "Security Ownership of Directors and Executive
Officers" which is incorporated herein by reference from the Corporation's Proxy
Statement for its 1997 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Financial statements which are incorporated herein by
reference from the Corporation's 1997 Annual Report to
Stockholders:
Report of Independent Accountants (page 33).
Consolidated Statements of Operations for fiscal years
1997, 1996 and 1995 (page 34).
Consolidated Balance Sheets as at June 28, 1997 and June
29, 1996 (page 35).
Consolidated Statements of Cash Flows for fiscal years
1997, 1996 and 1995 (page 36).
Consolidated Statements of Stockholders' Equity for fiscal
years 1997, 1996 and 1995 (page 37).
Notes to Consolidated Financial Statements (pages 38
through 54).
Eleven-Year Financial Summary (pages 26 and 27).
Quarterly Financial Data (page 54).
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The Corporation's 1997 Annual Report to Stockholders is not to be deemed
filed as part of this report except for those parts thereof specifically
incorporated herein by reference.
(2) Financial statement schedules:
Page
S-1 Report of Independent Accountants
S-2 II - Valuation and Qualifying Accounts and Reserves
No other schedules are contained herein either because they are not
required, not applicable or the information has been included in the financial
statements or the notes thereto.
Individual financial statements of the Corporation's subsidiaries have
been omitted because it is primarily an operating company and the consolidated
subsidiaries are not indebted, in a material amount, to any person other than to
the parent or to other consolidated subsidiaries.
(3) Exhibits:
3(a) - Restated Articles of Organization of the Corporation dated March
11, 1991 (filed under cover of Form SE as Exhibit 3(a) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
June 29, 1991 and incorporated herein by reference).
(b) - Articles of Amendment filed with the Secretary of State of the
Commonwealth of Massachusetts on November 4, 1993 (filed as
Exhibit 4.3 to the Corporation's Registration Statement on Form
S-3, No. 33-51987 and incorporated herein by reference).
(c) - Certificate of Designation filed with the Secretary of State of
the Commonwealth of Massachusetts on March 21, 1994 (filed as
Exhibit 4.1 to the Corporation's Current Report on Form 8-K filed
on March 23, 1994 and incorporated herein by reference).
(d) - By-laws of the Corporation, as amended (filed as Exhibit 3(d) to
the Corporation's Annual Report on Form 10-K for the fiscal year
ended July 1, 1995 and incorporated herein by reference).
4(a) - Rights Agreement dated as of December 11, 1989 between the
Corporation and First Chicago Trust Company of New York, as Rights
Agent (filed under cover of Form SE as Exhibit 4.1 to the
Corporation's Current Report on Form 8-K dated December 12, 1989
and incorporated herein by reference).
(b) - Indenture dated as of September 15, 1992 between Citibank, N.A.
as Trustee, and the Corporation ("Indenture") (filed as Exhibit 4
to the Corporation's Registration Statement on Form S-3, No.
33-51378 and incorporated herein by reference).
(c) - Form of 7 1/8% Note Due 2002, issued under the Indenture (filed
as Exhibit 4.2 to the Corporation's Quarterly Report on Form 10-Q
for the quarter ended December 26, 1992 and incorporated herein by
reference).
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(d) - Form of 8 5/8% Debenture due November 1, 2012, issued under the
Indenture (filed as Exhibit 4.3 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended December 26, 1992 and
incorporated herein by reference).
(e) - Form of 7% Note Due 1997, issued under the Indenture (filed as
Exhibit 4.4 to the Corporation's Quarterly Report on Form 10-Q for
the quarter ended December 26, 1992 and incorporated herein by
reference).
(f) - Form of 7 3/4% Debenture due April 1, 2023, issued under the
Indenture (filed as Exhibit 4.2 to the Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 27, 1993 and
incorporated herein by reference).
10(a) - 1968 Employee Stock Purchase Plan (filed as Exhibit 99.1 to the
Corporation's Registration Statement on Form S-8, No. 333-17049
and incorporated herein by reference).*
(b) - 1981 International Employee Stock Purchase Plan (filed as
Exhibit 99.2 to the Corporation's Registration Statement on Form
S-8, No. 333-17049 and incorporated herein by reference.)*
(c) - 1985 Restricted Stock Option Plan, as amended (filed under cover
of Form SE as Exhibit 10(d) to the Corporation's Annual Report on
Form 10-K for the fiscal year ended July 1, 1989 and incorporated
herein by reference).*
(d) - 1990 Equity Plan, as amended (filed as Exhibit 10(a) to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended
December 30, 1995).*
(e) - 1990 Stock Option Plan for Nonemployee Directors, as amended
(filed as Exhibit 10(f) to the Corporation's Annual Report on Form
10-K for the fiscal year ended July 1, 1995 and incorporated
herein by reference).*
(f) - 1995 Equity Plan, as amended.*
(g) - 1995 Stock Option Plan for Nonemployee Directors, as amended.*
(h) - Deferred Compensation Plan for Non-Employee Directors as Amended
and Restated Effective 18 May 1987, and as further amended on
April 22, 1991 and on June 17, 1996 (filed as Exhibit 10(g) to the
Corporation's Annual Report on Form 10-K for the fiscal year ended
June 29, 1996 and incorporated herein by reference).*
(i) - Deferred Compensation Plan for Executives (filed as Exhibit
10(h) to the Corporation's Annual Report on Form 10-K for the
fiscal year ended June 29, 1996 and incorporated herein by
reference).*
(j) - Retirement Arrangement for Non-Employee Directors, as amended.*
(k) - Form of Indemnification Agreement in effect between the
Corporation and each of its officers and directors (filed as
Exhibit 10(g) to the Corporation's Annual Report on Form 10-K for
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the fiscal year ended July 2, 1988 and incorporated herein by
reference).*
(l) - Digital Equipment Corporation SAVE Restoration Plan (as
established effective as of July 1, 1995) (filed as Exhibit 10(b)
to the Corporation's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 and incorporated herein by reference).*
(m) - Letter Agreement from the Corporation to Bruce L. Claflin dated
October 19, 1995.*
(n) - Digital Equipment Corporation Cash Account Pension Restoration
Plan (filed as Exhibit 10 to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended December 28, 1996 and incorporated
herein by reference).*
11 - Computation of net income/(loss) per common share and common
share equivalent.
13 - The Corporation's 1997 Annual Report to Stockholders, certain
portions of which have been incorporated herein by reference.
21 - List of Subsidiaries.
23 - Consent of Independent Accountants.
27 - Financial Data Schedule.
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K:
The Corporation filed with the Securities and Exchange Commission a
Current Report on Form 8-K on May 13, 1997 which reported the filing of a
lawsuit against Intel Corporation as described in Item 2, Legal Proceedings, of
this Annual Report on Form 10-K.
13
<PAGE> 14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
DIGITAL EQUIPMENT CORPORATION
(Registrant)
Date: September 16, 1997 By /s/ Robert B. Palmer
-------------------------------------
ROBERT B. PALMER
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Signature Title Date
- --------- ----- ----
/s/ Robert B. Palmer Chairman of the Board, September 16, 1997
- ------------------------- President and Chief
ROBERT B. PALMER Executive Officer
(Principal Executive
Officer) and Director
/s/ Vincent J. Mullarkey Vice President, Finance September 16, 1997
- ------------------------- and Chief Financial Officer
VINCENT J. MULLARKEY (Principal Financial Officer)
/s/ Alexis Makris Vice President and September 16, 1997
- ------------------------- Corporate Controller
ALEXIS MAKRIS (Principal Accounting Officer)
/s/ Vernon R. Alden Director September 16, 1997
- -------------------------
VERNON R. ALDEN
/s/ Colby H. Chandler Director September 16, 1997
- -------------------------
COLBY H. CHANDLER
/s/ Arnaud de Vitry Director September 16, 1997
- -------------------------
ARNAUD DE VITRY
/s/ Frank P. Doyle Director September 16, 1997
- -------------------------
FRANK P. DOYLE
/s/ Kathleen F. Feldstein Director September 16, 1997
- -------------------------
KATHLEEN F. FELDSTEIN
14
<PAGE> 15
/s/ Thomas P. Gerrity Director September 16, 1997
- -------------------------
THOMAS P. GERRITY
/s/ Thomas L. Phillips Director September 16, 1997
- ----------------------
THOMAS L. PHILLIPS
/s/ Delbert C. Staley Director September 16, 1997
- ---------------------
DELBERT C. STALEY
15
<PAGE> 16
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Digital Equipment
Corporation has been incorporated by reference in this Form 10-K from page 33 of
the 1997 Annual Report to Stockholders of Digital Equipment Corporation. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page 11 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand L.L.P.
-------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
July 24, 1997
S-1
<PAGE> 17
SCHEDULE II
DIGITAL EQUIPMENT CORPORATION
Valuation and Qualifying Accounts and Reserves
(In Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- -------- -------- -------- -------- --------
Balance at Charged Charged to Deductions Balance
beginning to other from at end of
Description of period operations accounts reserves(a) period
- ----------- --------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Possible Losses
on Accounts Receivable
Year ended:
June 28, 1997 $182,033 112,117 -- 30,387 $263,763
June 29, 1996 $150,655 61,140 -- 29,762 $182,033
July 01, 1995 $111,925 55,307 29,886(b) 46,463 $150,655
</TABLE>
(a) Uncollectible accounts and adjustments.
(b) Includes recovery of accounts previously written-off.
S-2
<PAGE> 1
EXHIBIT 10(f)
DIGITAL EQUIPMENT CORPORATION
1995 EQUITY PLAN
SECTION 1 -- PURPOSE
The Digital Equipment Corporation 1995 Equity Plan (the "Plan") is
intended to advance the interests of Digital Equipment Corporation (the
"Corporation") and its stockholders by providing equity-based incentives to
better align the interests of key employees with those of stockholders, and to
attract, retain and motivate such employees.
SECTION 2 -- ADMINISTRATION
The Plan shall be administered by a committee appointed by the Board of
Directors of the Corporation (the "Committee"), which shall consist of not fewer
than two members of the Corporation's Board of Directors. All members of the
Committee must be "disinterested administrators" within the meaning of Rule
16b-3 or any successor provision ("Rule 16b-3") under the Securities Exchange
Act of 1934, as amended (the "1934 Act") and "outside directors" within the
meaning of Section 162(m) or any successor provision of the Internal Revenue
Code of 1986, as amended (the "Code"), if required for compliance with Rule
16b-3 or Section 162(m) of the Code, as the case may be. Any authority or power
granted in the Plan to the Committee 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 Committee may also be taken or made by the Board of
Directors; provided, however, that to the extent required by Rule 16b-3 and/or
Section 162(m) of the Code with respect to specific grants of Awards, such power
or authority shall only reside in and such actions or determinations shall only
be made by an administrator or administrators in compliance with Rule 16b-3 or
Section 162(m) of the Code, as the case may be. The Board of Directors may also
establish a committee of one or more members of the Corporation's Board of
Directors who are also officers of the Corporation for the purposes of
administering grants of Awards under the Plan to Employees who are not subject
to the provisions of Section 16 of the 1934 Act. If such a committee is
established, it shall have all the power and authority of the Committee under
the Plan with respect to such Awards.
Subject to the provisions of the Plan, the Committee shall have the
authority to select the Employees who are eligible to participate in the Plan,
to determine the Awards to be granted to each Employee, to determine the time or
times when Awards shall be exercisable or when re- strictions, conditions and
contingencies shall lapse, to establish any other restrictions, conditions and
contingencies on Awards in addition to those prescribed by the Plan and to
determine whether any Option granted shall be an ISO or a Non-Qualified Option.
The Committee shall also prescribe the form of agreements or other instruments
under the Plan and the legends, if any, to be affixed to the certificates
representing shares of Stock to be issued.
The Committee shall have full authority to interpret the Plan, to grant
waivers of Plan restrictions, to amend the provisions of Award instruments and
to adopt such rules, regulations and guidelines for carrying out the Plan as it
may deem necessary or proper, all of which powers shall be executed in the best
interests of the Corporation and in keeping with the purposes of the Plan. Such
powers shall include, but shall not be limited to, the power to modify or amend
the Plan and to adopt such procedures, subplans and the like as may be necessary
to comply with provisions of the laws of other countries in which the
Corporation or any subsidiary of the Corporation may operate in order to assure
the viability of Awards granted under the Plan and to enable Employees employed
in such other countries to receive advantages and benefits under the Plan and
consistent with such laws.
<PAGE> 2
The determinations of the Committee in the administration of the Plan
shall be final and conclusive unless otherwise determined by the Board of
Directors.
SECTION 3 -- SHARES OF STOCK SUBJECT TO THE PLAN
(a) Shares Available for Issuance. The shares of stock available for
issuance under the Plan shall be authorized but unissued shares of the
Corporation's Common Stock or previously issued shares of the Corporation's
Common Stock reacquired by the Corporation in any manner and held in its
treasury ("Stock"). No fractional shares of Stock shall be delivered under the
Plan.
(b) Maximum Number of Shares Available for Issuance. Subject to
adjustment as provided in Section 7.7 below, the maximum number of shares of
Stock available for the grant of Awards under the Plan from the date of its
adoption by the Board of Directors until June 29, 1996, shall be the maximum
number of shares of Stock available for issuance under the Corporation's 1990
Equity Plan (the "1990 Plan") as of the date of approval of the Plan by the
Corporation's stockholders, plus any shares of Stock subject to Awards under the
1990 Plan that expire unexercised or are forfeited, terminated, canceled (in
whole or in part) or in any other manner are not issued to an Employee at any
time. Subject to adjustment as provided in Section 7.7 below, the maximum number
of shares of Stock available for the grant of Awards under the Plan for each
fiscal year subsequent to the fiscal year ending on June 29, 1996, but prior to
the beginning of the fiscal year commencing on June 28, 1998, shall be two
percent (2%) of the total number of issued shares of the Corporation's Common
Stock (including treasury shares) as of the first day of such fiscal year. Such
maximum number of shares shall be increased in any fiscal year by the number of
shares of Stock available for the grant of Awards hereunder in the previous
fiscal year or years but not covered by Awards granted hereunder in such fiscal
year or years since the adoption of the Plan, plus any shares of Stock subject
to Awards under the 1990 Plan or the Plan that expire unexercised or are
forfeited, terminated, canceled (in whole or in part), or in any other manner
are not issued to an Employee, plus any shares of Stock tendered to the
Corporation as full or partial payment for the exercise of any Option under the
1990 Plan or the Plan and the payment of any withholding taxes arising
therefrom.
(c) Limitations on Issuance. Notwithstanding any other provision of the
Plan, in no event shall more than 5,000,000 shares of Stock be cumulatively
available for the issuance of Stock pursuant to ISO's granted under the Plan,
nor shall more than 1,000,000 shares of Stock be cumulatively available for
grant pursuant to Restricted Stock Awards, Unrestricted Stock Awards and Stock
Unit Awards. Notwithstanding any other provision of the Plan, no Employee may be
granted in any fiscal year beginning with the fiscal year commencing July 2,
1995, in the aggregate, Awards relating to, in the aggregate, more than one
million (1,000,000) shares of Stock. In all events, determinations under the
preceding sentence shall be made in a manner that is consistent with Section
162(m) of the Code and the regulations promulgated thereunder.
(d) Dividends. Notwithstanding the foregoing, any dividend or dividend
equivalent paid or credited to an Employee in shares of Stock or Stock Units
pursuant to Sections 5.4(b) or 5.5 below shall not be subtracted from the
maximum number of shares available for the grant of Awards under the Plan or the
cumulative aggregate number of shares available for grant pursuant to Restricted
Stock Awards, Unrestricted Stock Awards and Stock Unit Awards.
(e) Expiration, Forfeiture, Cancellation or Settlement in Cash. Shares of
Stock subject to Awards that expire unexercised or are forfeited, terminated,
canceled (in whole or in part), or in any other manner are not issued to an
Employee (including shares of Stock that are not issued to an Employee pursuant
to Awards settled in cash in lieu thereof), shall become available immediately
for the future grant of Awards under the Plan.
<PAGE> 3
SECTION 4 -- ELIGIBILITY
Awards may be granted under the Plan only to Employees of the Corporation
or of a subsidiary of the Corporation. The term "Employees" shall include
officers as well as all other employees of the Corporation or of a subsidiary of
the Corporation. Members of the Committee and members of the Board of Directors
who are not Employees of the Corporation or of a subsidiary of the Corporation
shall not be eligible to participate in the Plan. Awards may be granted to the
same Employee on more than one occasion.
SECTION 5 -- TYPES OF AWARDS
5.1 AUTHORITY.
The Committee shall have the authority to grant Awards singly, in
combination or in tandem. The term "Awards" includes options, stock appreciation
rights, awards of Stock of the Corporation and awards of stock units or phantom
shares of stock, all on the terms and conditions hereinafter established.
5.2 OPTIONS.
(a) Definition of Options. An "Option" is an Award entitling the
recipient upon exercise of the Option to purchase Stock at a specified price for
a specified period of time. Both "incentive stock options" ("ISO's"), as defined
in Section 422 of the Code, or any successor provision, and Options that are not
incentive stock options ("Non-Qualified Options"), may be granted under the
Plan. Instruments evidencing ISO's shall contain such terms and conditions as
are required under applicable provisions of the Code.
(b) Exercise Price. The Committee shall determine the exercise price of
an Option which shall not be less than 100% of the Fair Market Value per share
of the Stock on the date the Option is granted. For purposes of the Plan, "Fair
Market Value" of a share of Stock on a given date will be the average of the
high and low selling prices of the Corporation's Common Stock in the New York
Stock Exchange Composite Transactions Index on such date, or if not a business
day, as of the last business day for which prices are available prior to such
date.
(c) Duration of Options. The Committee shall determine the latest date on
which an Option may be exercised which shall be no later than the date that is
ten years after the date the Option was granted; provided, however, the
Committee shall have the power and authority to provide that the date on which
any Option (except for an ISO) may be exercised be later than such date if it
determines that such a longer term may be necessary to comply with provisions of
the laws of countries in which the Corporation or any subsidiary of the
Corporation may operate in order to assure the viability of Awards granted under
the Plan and to enable Employees to receive the intended advantages and benefits
of Awards granted under the Plan and consistent with such laws.
(d) Exercise of Options. Subject to the applicability of Section 7.3
below, an Option shall become exercisable at such time or times, and on such
conditions, as the Committee may specify. The Committee may at any time
accelerate the time at which all or any part of an Option may be exercised.
An Employee electing to exercise an Option shall give written or
electronic notice to the Corporation or its agent of the election and of the
number of shares of Stock that the Employee elects to acquire, accompanied by
any documents or instruments required by the Corporation or its agent and
payment in full for the Stock purchased, together with provision for the amount
of any taxes due in respect of the sale and issue thereof.
<PAGE> 4
(e) Payment for Stock. Stock purchased by an Employee upon exercise of an
Option may be paid for in any legal manner so specified by the Committee,
including the following methods, which may be used in combination if specified
by the Committee:
(1) In cash or by check, bank draft or money order payable to the
order of the Corporation.
(2) If permitted by applicable law, through the delivery of an
assignment to the Corporation of a sufficient amount of the proceeds from
the sale of unrestricted Stock acquired upon exercise to pay for all of
the Stock so acquired and any tax withholding obligation resulting from
such exercise; and an authorization to the broker or selling agent to pay
that amount to the Corporation.
(3) Through the delivery of an amount of previously acquired
shares of unrestricted Stock having in the aggregate a Fair Market Value
equal to the exercise price, provided that such method is consistent with
applicable tax laws, policies and eligibility criteria established by the
Committee. Employees may further apply the Stock acquired upon such
exercise to satisfy the exercise price for additional Stock.
With respect to ISO's, acceptable methods of payment for stock upon
exercise of an Option shall be set forth in the Award instrument granting the
applicable ISO.
(f) Special Rules for ISO's. The aggregate Fair Market Value (determined
as of the date of grant) of the shares of Stock covered by ISO's granted under
this Plan or any other equity plan of the Corporation and its subsidiaries, that
becomes exercisable for the first time by the Employee in any calendar year
shall not exceed $100,000. Nothing in this special rule shall be construed as
limiting the exercisability of any Option unless the Committee provides for a
limitation at the time of grant.
5.3 STOCK APPRECIATION RIGHTS.
(a) Description of Stock Appreciation Rights. A "Stock Appreciation
Right" ("SAR") is an Award entitling the recipient upon exercise of the Right to
receive an amount, in cash or Stock, or a combination thereof (at the
Committee's discretion), equal to the appreciation, if any, in the Fair Market
Value of a share of the Corporation's Common Stock from the date of the grant of
the SAR to the date of its payment or settlement.
(b) Other Terms and Conditions of Stock Appreciation Rights. The Award
price per SAR shall not be less than the Fair Market Value of a share of the
Corporation's Common Stock on the date the SAR is granted. An Employee electing
to exercise a Stock Appreciation Right must give written or electronic notice to
the Corporation or its agent of the election, accompanied by any documents or
instruments required by the Corporation or its agent, together with provision
for the amount of any taxes due with respect thereto.
5.4 RESTRICTED AND UNRESTRICTED STOCK.
(a) Definition of Restricted Stock Awards. A "Restricted Stock Award"
entitles the recipient to acquire shares of Restricted Stock subject to such
restrictions, conditions and contingencies as may be determined by the Committee
in its sole discretion.
(b) Rights as a Stockholder. At the discretion of the Committee, an
Employee who receives Restricted Stock will have all the rights of a stockholder
with respect to the Restricted Stock, including voting and dividend rights,
subject to the restrictions described in paragraph (c) below and any other
restrictions, conditions and contingencies imposed by the Committee at the
time of grant. The Committee may require that dividends be paid in additional
shares of Restricted Stock or in Stock Units.
<PAGE> 5
(c) Restrictions and Obligations of Resale. "Restricted Stock" is Stock
subject to restrictions against disposition as specified by the Committee in the
Award instrument and may not be sold, transferred, or otherwise disposed of, and
shall not be pledged or otherwise hypothecated, except as provided in the Award
instrument. Except as otherwise provided in the Award instrument, in the event
of termination of employment for any reason other than as specified in Section
6.1 or 6.2, Restricted Stock shall be forfeited to the Corporation, except that
it shall be offered for resale to the Corporation at its original acquisition
price if the Restricted Stock was issued for monetary consideration.
(d) Other Awards Settled with Restricted Stock. The Committee may, at the
time any Award described in this Section 5 is granted, provide that any or all
of the Stock delivered or issuable pursuant to the Award will be Restricted
Stock.
(e) Unrestricted Stock Awards. The Committee may, in its sole discretion,
award to any eligible Employee unrestricted shares of Stock under the Plan
("Unrestricted Stock Award"). Any Employee who receives an Unrestricted Stock
Award will have all the rights of a stockholder, including voting and dividend
rights.
(f) Price of Restricted and Unrestricted Stock. Grants of Restricted
Stock and Unrestricted Stock shall be made at such purchase price as the
Committee shall determine in its sole discretion, and may be issued for no
monetary consideration, subject to applicable state law.
5.5 STOCK UNITS.
(a) A "Stock Unit Award" entitles the recipient to receive, without
payment, "Stock Units" in the form of phantom shares of stock which are valued
at the Committee's discretion in whole or in part by reference to, or otherwise
based on, the Fair Market Value of the Corporation's Common Stock.
(b) An Employee who receives Stock Units may be given rights to dividend
equivalents, subject to any conditions imposed by the Committee at the time of
grant. The Committee may provide that any such dividend equivalents be paid in
cash, in shares of stock or in additional Stock Units.
5.6 PERFORMANCE CRITERIA.
The Committee in its discretion may grant Awards contingent on
satisfaction of performance criteria established by the Committee consistent
with Section 162(m) of the Code. Such performance criteria shall be based on
level of revenue, operating income, profit after tax, earnings per share, cash
flow, return on equity or return on assets. The Committee may select one
criterion or multiple criteria, and the measurement may be based on Corporation
or business unit performance, or on comparative performance with that of other
companies or units thereof.
The Committee in its discretion may also grant Awards contingent on
satisfaction of performance criteria other than those specified in the paragraph
above.
SECTION 6 -- TERMINATION OF EMPLOYMENT
6.1 DEATH OR DISABILITY OF EMPLOYEE.
Unless otherwise specified in the Award instrument, if an Employee (i)
dies while employed by the Corporation or any subsidiary of the Corporation (or
upon the death of an Employee after termination of employment), or (ii) ceases
to be employed by the Corporation or any subsidiary by reason of his or her
permanent and total disability ("Disability"), as determined by the Committee,
the following rules shall apply:
<PAGE> 6
(a) Each Option and Stock Appreciation Right held by the Employee
immediately prior to his or her death shall become fully exercisable and may be
exercised only until one year after his or her death (whether or not this period
ends after expiration of the exercise period specified in the Award instrument,
but in the case of an ISO, in no event later than the expiration of the ISO
under its original terms) by the Employee's executor or administrator, or if not
so exercised, by the legatees or distributees of his or her estate or by such
other person or persons to whom the Employee's rights under such Option or Stock
Appreciation Right shall pass by will or by the applicable laws of descent and
distribution.
(b) Each Option and Stock Appreciation Right held by the Employee when
his or her employment ends due to Disability shall become fully exercisable and
shall continue to be exercisable in accordance with the terms set forth in the
Award instrument relating to such Award.
(c) Each share of Restricted Stock and each Stock Unit covered by an
Award held by the Employee immediately prior to his or her death or Disability
will immediately become free of all restrictions, conditions and contingencies
thereon.
6.2 RETIREMENT.
If an Employee 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, the
Employee's rights with respect to Awards held by him or her as of such
retirement date shall be as set forth in the Award instrument relating to each
such Award. Retirement, including early retirement, under any pension plan of
the Corporation or any subsidiary of the Corporation shall not by itself
constitute retirement for purposes of the Plan.
6.3 TERMINATION OF EMPLOYMENT.
Unless otherwise provided in the Award instrument, if an Employee ceases
to be employed by the Corporation or any subsidiary of the Corporation for any
reason other than the reasons specified in Sections 6.1 and 6.2 above, the
following rules shall apply:
(a) Each Option and Stock Appreciation Right held by the Employee that is
unexercised when his or her employment ends shall expire upon such termination
of employment.
(b) Each share of Restricted Stock held by the Employee on which all
restrictions, conditions and contingencies have not lapsed shall be forfeited or
offered for resale to the Corporation in accordance with Section 5.4 above, and
each Stock Unit as to which all restrictions, conditions and contingencies have
not lapsed or been performed shall be forfeited.
6.4 COMMITTEE DETERMINATIONS.
Any question as to whether there has been a retirement, Disability or
termination of employment shall be determined by the Committee, and its
determination of such question shall be final.
SECTION 7 -- GENERAL PROVISIONS
7.1 TERM AND AMENDMENT.
Unless earlier terminated by the Board of Directors, the Plan shall
terminate on December 31, 1998, and no Awards shall be granted under the Plan
after such date; provided, however, that Awards payable or requiring exercise
which are granted on or before this date shall remain payable or exercisable in
accordance with their respective terms after the termination of the Plan; and
provided, further that the authority of the Committee to take actions with
respect to any such Awards as contemplated herein shall extend beyond
termination of the Plan.
<PAGE> 7
The Board of Directors may at any time terminate the Plan or suspend the
grant of Awards under the Plan. The Board of Directors may at any time amend the
Plan or any outstanding Award for any lawful purpose; provided, that no
amendment, without the approval of the Corporation's stockholders, shall
increase the maximum number of shares of Stock that may be issued under the Plan
or issued in the aggregate pursuant to the certain Awards listed in Section 3
above (except as permitted by the last paragraph of Section 3 above and Section
7.7 below); and provided, further, that no amendment, without the approval of
the Corporation's stockholders (where such approval is necessary to satisfy
then-applicable requirements of federal securities laws, the Code or rules of
any stock exchange on which the Corporation's Common Stock is listed), shall
extend the period during which Awards may be granted under the Plan or amend the
eligibility provisions of Section 4 above.
7.2 NON-TRANSFERABILITY OF AWARDS.
(a) Except to the extent permitted by Rule 16b-3 and as otherwise
provided in the Award instrument, no Award (other than Stock or cash transferred
to an Employee under the Plan without restrictions) may be transferred other
than by will or by the laws of descent and distribution, and during an
Employee's lifetime an Award requiring exercise may be exercised only by him or
her (or in the event of incapacity, the person or persons properly appointed to
act on his or her behalf).
(b) Notwithstanding anything contained herein to the contrary, in the
event an Employee terminates his or her employment to assume a position with a
governmental, charitable or educational institution, the Committee, in its sole
discretion and provided such arrangement is in accordance with applicable law,
may authorize a third party, including but not limited to a "blind" trust,
acceptable to the applicable governmental, charitable or educational
institution, the Employee and the Committee, to act on behalf and for the
benefit of such Employee with respect to any Awards.
7.3 DOCUMENTATION OF AWARDS.
Awards shall be evidenced by written instruments which shall describe the
Award and the terms and conditions thereof. The granting of an Award may be
subject to, and conditioned upon, the Employee's execution of any Award
instrument required by the Committee. Each Award instrument shall contain such
provisions as the Committee shall determine in its sole discretion. The
instruments may be in the form of agreements to be executed by both the Employee
and the Corporation or certificates, letters or similar instruments, which need
not be executed by the Employee but acceptance of which will evidence agreement
to the terms of the Award.
7.4 RIGHTS AS A STOCKHOLDER.
Except as specifically provided in the Plan, the receipt of an Award will
not give an Employee rights as a stockholder; the Employee will obtain such
rights, subject to any limitations imposed by the Plan or the Award instrument,
upon actual receipt of Stock.
7.5 TAX WITHHOLDING.
The Corporation will withhold from any cash payment made pursuant to an
Award an amount sufficient to satisfy all federal, state and local withholding
tax requirements (the "withholding tax requirements").
In the case of an Award delivered in Stock, the Committee will have the
right to require that the Employee or other appropriate person remit to the
Corporation an amount sufficient to satisfy the withholding tax requirements or
make other arrangements satisfactory to the Committee with regard to such
requirements prior to the event giving rise to such withholding tax requirement.
If and to the extent that withholding is required, the Committee may permit the
Employee or other appropriate person to
<PAGE> 8
elect, at the time and in the manner as the Committee provides, to have the
Corporation hold back from the Stock to be delivered, or to deliver to the
Corporation, Stock having a value calculated to satisfy the withholding tax
requirements.
7.6 DEFERRAL OF PAYMENTS.
The Committee may, in its sole discretion, either in the terms of an
Award instrument or upon the request of an Employee holding an Award, defer the
date on which any payment of cash or Stock under such an Award shall be made.
The Committee may also establish rules and procedures for the crediting of
interest on deferred cash payments and dividends or dividend equivalents for
deferred payments denominated in Stock or Stock Units. Any deferral, whether
requested by the Employee or specified in the Award instrument or otherwise by
the Committee, may be subject to forfeiture in accordance with terms
established by the Committee.
7.7 ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Corporation's capitalization, or
other distribution with respect to holders of the Corporation's Common Stock
other than normal cash dividends, the Committee shall make appropriate
adjustments to the maximum number of shares of Stock that may be delivered under
the Plan and to the maximum number of shares of Stock that may be issued
pursuant to certain Awards, all as set forth in Section 3 above.
(b) In any event referred to in paragraph (a), the Committee shall also
make any appropriate adjustments to the number and kind of shares of Stock
subject to Awards then outstanding or subsequently granted, any exercise or
purchase prices relating to Awards and any other provisions of Awards affected
by such change. The Committee may also make adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions, repurchases or similar corporate
transactions, or any other event, if it is determined by the Committee that
adjustments are appropriate to avoid distortion in the operation of the Plan.
(c) Any adjustments made pursuant to paragraphs (a) or (b) with respect
to ISO's shall be made only after the Committee, after consulting with the
Corporation's counsel, determines whether such adjustments would constitute a
"modification" of the ISO's (as that term is defined in Section 422 of the Code)
or would otherwise cause any adverse tax consequences for the holders of the
ISO's. If the Committee determines that such adjustments to be made with respect
to ISO's would constitute a modification of the ISO's, it may refrain from
making such adjustments.
7.8 EMPLOYMENT RIGHTS.
Neither the adoption of the Plan nor the grant of Awards shall confer
upon any person any right to continued employment with the Corporation or any
subsidiary of the Corporation or affect in any way the right of the Corporation
or any subsidiary of the Corporation to terminate an employment relationship at
any time. Except as specifically provided by the Committee, the Corporation
shall not be liable for the loss of existing or potential profit in Awards
granted under the Plan in the event of termination of an employment relationship
even if the termination is in violation of an obligation of the Corporation or
any subsidiary of the Corporation to the Employee.
7.9 CHANGE IN CONTROL.
(a) In order to maintain Employees' rights in the event of any Change in
Control of the Corporation, the Board of Directors (as constituted on the date
the Award is granted or as constituted immediately prior to the Change in
Control) may, in its sole discretion, as to any Award, either on the date an
Award is granted or any time thereafter, take any one or more of the following
actions:
<PAGE> 9
(1) Provide for the acceleration of any time periods relating to
the exercise or realization of or lapse of restrictions, conditions and
contingencies under any Award so that the Award may be exercised or
realized in full on or before a date fixed by the Board of Directors.
(2) Provide for the purchase of any Award, upon the Employee's
request, for an amount of cash equal to the amount that could have been
obtained upon the exercise of the Award or realization of the Employee's
rights thereunder had the Award been currently exercisable or payable.
(3) Make such adjustment to any Award then outstanding as the
Board of Directors deems appropriate to reflect the Change in Control.
(4) Cause any Award then outstanding to be assumed, or new rights
substituted therefor, by the acquiring or surviving corporation after the
Change in Control.
Subject to this Section 7.9, the Committee may, in its discretion,
include further provisions and limitations relating to the Change in Control in
any Award instrument as it may deem equitable and in the best interests of the
Corporation.
Notwithstanding anything to the contrary in this Section 7.9 (unless
otherwise specifically provided in the Award Agreement at the time an Award is
granted), upon any Change in Control of the Corporation, any time periods or
conditions or contingencies relating to the exercise or realization of, or lapse
of restrictions under, any Award shall be automatically accelerated (or waived)
so that the Award may be exercised or realized in full; provided that, in the
event of a Change in Control that is intended to qualify for pooling of
interests accounting treatment, the foregoing provisions of this paragraph shall
be of no force and effect if implementation of such provisions would preclude
the Change in Control from so qualifying and, in such event, the Committee shall
take whatever action it deems appropriate to enable holders of Awards to realize
a substantially similar economic result as would have been realized by
acceleration of Awards but without precluding the Change in Control from
qualifying as a pooling of interests.
(b) 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.
<PAGE> 10
7.10 APPROVALS.
Anything in the Plan to the contrary notwithstanding, the effectiveness
of the Plan and of the grant of all Awards is subject to, and the Plan and the
Awards granted under it shall be of no force and effect unless and until, and no
Awards granted shall in any way vest or become exercisable, unless and until the
Plan is approved by the affirmative vote of a majority of the shares of the
Corporation's Common Stock present in person or by proxy and entitled to vote at
a meeting of stockholders at which the Plan is presented for approval. The date
the Plan is approved by the stockholders of the Corporation shall be the
Effective Date of the Plan. The Effective Date must occur within one year after
approval of the Plan by the Board of Directors. Any grant of an Award prior to
the approval by the stockholders of the Corporation shall be void if such
approval is not obtained. The Corporation's obligation to sell and deliver
shares of Stock under the Plan is subject to the approval of any governmental
authority required in connection with the authorization, issuance or sale of the
Stock.
7.11 SUCCESSORS AND ASSIGNS.
The Plan shall be binding upon all successors and assigns of an Employee
receiving an Award under the Plan, including, without limitation, the estate of
any such Employee and the executors, administrators or trustees of such estate,
and any receiver, trustee in bankruptcy or representative of the creditors of
any such Employee.
7.12 1990 PLAN.
Upon approval of the Plan by the Corporation's stockholders, the
authority to grant additional Awards under the Corporation's 1990 Plan shall
expire. Awards granted pursuant to the 1990 Plan shall remain outstanding and
exercisable and subject to the Award instruments relating thereto, or in
accordance with such other terms and conditions as the Committee shall
determine.
7.13 GOVERNING LAW.
The Plan and all determinations made and related actions taken by the
Commit- tee or the Board of Directors, to the extent not otherwise governed by
the Code or the securities laws of the United States, shall be governed by the
laws of the Commonwealth of Massachusetts and shall be construed accordingly.
<PAGE> 11
7.14 DEFINITIONS.
As used in the Plan, the following terms shall have the following
meanings:
<TABLE>
<CAPTION>
SECTION IN WHICH
TERM TERM IS DEFINED
------------------- ----------------
<S> <C>
"Awards" Section 5.1
"Change in Control" Section 7.9(b)
"Code" Section 2
"Committee" Section 2
"Corporation" Section 1
"Disability" Section 6.1
"Employee" Section 4
"Fair Market Value" Section 5.2(b)
"ISO" Section 5.2(a)
"1990 Plan" Section 3(b)
"1934 Act" Section 2
"Non-Qualified Option" Section 5.2(a)
"Option" Section 5.2(a)
"Plan" Section 1
"Restricted Stock" Section 5.4(c)
"Restricted Stock Award" Section 5.4(a)
"Rule 16b-3" Section 2
"SAR" Section 5.3(a)
"Stock" Section 3(a)
"Stock Appreciation Right" Section 5.3(a)
"Stock Units" Section 5.5(a)
"Stock Unit Award" Section 5.5(a)
"Unrestricted Stock Award" Section 5.4(e)
</TABLE>
<PAGE> 1
EXHIBIT 10(g)
DIGITAL EQUIPMENT CORPORATION
1995 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
As Amended and Restated on June 12, 1997
Section 1 -- Purpose
The purpose of the 1995 Stock Option Plan for Nonemployee Directors (the
"Plan") is to increase the proprietary interest of nonemployee members of the
Board of Directors in the continued success of Digital Equipment Corporation
(the "Corporation") and to provide them with an incentive to continue to serve
as directors.
Section 2 -- Administration
The Plan shall be administered by the Compensation and Stock Option
Committee of the Board of Directors of the Corporation, or any successor
committee thereto. The Committee shall have responsibility finally and
conclusively to interpret the provisions of the Plan and to decide all questions
of fact arising in its application. No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan.
Section 3 -- Type of Options
Options granted pursuant to the Plan shall be nonstatutory options which
are not intended to meet the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code").
Section 4 -- Eligibility
Directors of the Corporation who are not employees of the Corporation or
any subsidiary or affiliate thereof ("Nonemployee Directors") shall be eligible
to participate in the Plan. Each Nonemployee Director to whom options are
granted hereunder shall be a participant ("Participant") under the Plan.
Nonemployee Directors who were serving as directors of the Corporation on
January 1, 1995 are referred to herein as "Existing Nonemployee Directors."
Nonemployee Directors who commence service as directors of the Corporation after
January 1, 1995 are referred to herein as "New Nonemployee Directors."
Section 5 -- Stock Available under the Plan
Subject to adjustment as provided in Section 9 below, an aggregate of
50,000 shares of the Corporation's Common Stock, plus the number of shares of
Common Stock available for issuance under the Corporation's 1990 Stock Option
Plan for Nonemployee Directors as of the date of approval of the Plan by the
Corporation's stockholders, shall be available for issuance pursuant to the
provisions of the Plan. Such shares may be authorized and unissued shares or may
be shares issued and thereafter acquired by the Corporation. If an option
granted under the Plan or under the 1990 Plan shall expire or terminate for any
reason without having been exercised in whole or in part, the unpurchased shares
subject to such option shall again be available for subsequent option grants
under the Plan.
<PAGE> 2
Section 6 -- Automatic Grant of Options
(a) In each year prior to 1997, on the date of the Corporation's Annual
Meeting of Stockholders, each Existing Nonemployee Director who continues in
office after said Annual Meeting, shall receive automatically and without
further action by the Board of Directors or the Committee, a grant of an option
to purchase 1,000 shares of Common Stock of the Corporation in accordance with
the provisions of Section 7, and subject to adjustment as provided in Section 9.
(b) In each year prior to 1997, on the date of the Corporation's Annual
Meeting of Stockholders, each New Nonemployee Director who continues in office
after said Annual Meeting, shall receive automatically and without further
action by the Board of Directors or the Committee, a grant of an option to
purchase 2,500 shares of Common Stock of the Corporation in accordance with the
provisions of Section 7, and subject to adjustment as provided in Section 9.
(c) Commencing with the date of the Corporation's Annual Meeting of
Stockholders in 1997, each year, on the date of the Corporation's Annual Meeting
of Stockholders, each Existing Nonemployee Director who is 65 years of age or
older as of the date of the Corporation's Annual Meeting of Stockholders in 1997
and who continues in office after said Annual Meeting, shall receive
automatically and without further action by the Board of Directors or the
Committee, a grant of an option to purchase 3,500 shares of Common Stock of the
Corporation in accordance with the provisions of Section 7, and subject to
adjustment as provided in Section 9.
(d) Commencing with the date of the Corporation's Annual Meeting of
Stockholders in 1997, each year, on the date of the Corporation's Annual Meeting
of Stockholders, each (a) New Nonemployee Director who continues in office after
said Annual Meeting and (b) Existing Nonemployee Director who is less than 65
years of age as of the date of the Corporation's Annual Meeting of Stockholders
in 1997 and who continues in office after said Annual Meeting, shall receive
automatically and without further action by the Board of Directors or the
Committee, a grant of an option to purchase 6,000 shares of Common Stock of the
Corporation in accordance with the provisions of Section 7, and subject to
adjustment as provided in Section 9.
Section 7 -- Terms and Conditions of Options
7.1 Exercise of Options.
(a) Each option granted under the Plan shall be exercisable at the rate
of 33% on the first and second anniversaries of the date such option was granted
and 34% on the third anniversary of the date such option was granted, subject to
the provisions of Section 8 hereof.
(b) Notwithstanding the provisions of paragraph (a) above, an option
granted to any Participant shall become immediately exercisable in full upon the
first to occur of:
(1) The death of any Participant, in which case the option may be
exercised by the Participant's executor or administrator, or if not so
exercised, by the legatees or distributees of his or her estate or by
such other person or persons to whom the Participant's rights under the
option shall pass by will or by the applicable laws of descent and
distribution;
2
<PAGE> 3
(2) Such time as the Participant ceases to be a director of the
Corporation by reason of his or her permanent disability; or
(3) Such time as the Participant retires from the Board of
Directors so long as he or she is at least 70 years of age and has
completed at least five years of service as a Director at the time of
such retirement.
(c) In the event that the Participant ceases to be a director of the
Corporation for any reason other than those specified in paragraph (b) above
prior to the time a Participant's option becomes fully exercisable, the option
will terminate with respect to the shares as to which the option is not then
exercisable and all rights of the Participant to such shares shall terminate
without further obligation on the part of the Corporation.
(d) In the event that the Participant ceases to be a director of the
Corporation after his or her option has become exercisable in whole or in part,
such option shall remain exercisable in whole or in part, as the case may be, in
accordance with the terms hereof.
(e) Options granted under the Plan shall expire ten years from the date
on which the option is granted, unless terminated earlier in accordance with the
Plan; provided, however, that in the event a Participant ceases to be a director
of the Corporation by reason of death, including without limitation in the event
that a Participant dies after ceasing to be a director of the Corporation by
reason of disability or retirement, any option granted to such Participant
hereunder shall expire one year from the date of the Participant's death
(whether or not this period ends after expiration of the exercise period).
7.2 Exercise Price.
The exercise price of an option shall be 100% of the fair market value
per share of Common Stock of the Corporation on the date the option is granted.
For purposes of the Plan, "fair market value" of a share of stock on any date
shall mean the average of the high and low selling prices of the Corporation's
Common Stock on the New York Stock Exchange Composite Transactions Index as of
the date of grant, or if the date of grant is not a business day, as of the last
business day for which prices are available prior to the date of grant.
7.3 Payment of Exercise Price.
(a) Subject to the terms and conditions of the Plan and the documentation
of the options pursuant to Section 7.5 hereof, an option granted hereunder
shall, to the extent then exercisable, be exercisable in whole or in part by
giving written notice to the Corporation stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares; provided, however, that there shall be no such exercise at any
one time as to fewer than one hundred (100) shares or all of the remaining
shares then purchasable by the person or persons exercising the option, if fewer
than one hundred (100) shares.
(b) Options granted under the Plan may be paid for by (i) delivery of
cash, bank draft, money order or a check to the order of the Corporation in an
amount equal to the exercise price of such options, (ii) by delivery to the
3
<PAGE> 4
Corporation of shares of Common Stock of the Corporation already owned by the
Participant having a fair market value equal in amount to the exercise price of
the option being exercised, provided that such method is consistent with
applicable tax laws, (iii) if permitted by applicable law, through the delivery
of an assignment to the Corporation of a sufficient amount of the proceeds from
the sale of Common Stock of the Corporation acquired upon exercise to pay for
all of the Common Stock so acquired and an authorization to the broker or
selling agent to pay that to the Corporation, or (iv) by any combination of such
methods of payment.
7.4 Rights as a Stockholder.
Except as specifically provided by the Plan, the grant of an option will
not give a Participant rights as a stockholder; the Participant will obtain such
rights, subject to any limitations imposed by the Plan, upon actual receipt of
Common Stock of the Corporation.
7.5 Documentation of Option Grants.
Option grants shall be evidenced by written instruments prescribed by the
Committee from time to time. The instruments may be in the form of agreements to
be executed by both the Participant and the Corporation or certificates, letters
or similar instruments, which need not be executed by the Participant but
acceptance of which will evidence agreement to the terms of the grant.
7.6 Nontransferability of Options.
No option granted under the Plan shall be assignable or transferable by
the Participant to whom it is granted, either voluntarily or by operation of
law, except by will or the laws of descent and distribution. During the life of
the Participant, the option shall be exercisable only by such person (or in the
event of incapacity, by the person or persons properly appointed to act on his
or her behalf).
7.7 Approvals.
The effectiveness of the Plan and of the grant of all options is subject
to the approval of the Plan by the affirmative vote of a majority of the shares
of the Corporation's Common Stock present in person or by proxy and entitled to
vote at a meeting of the stockholders at which the Plan is presented for
approval. Notwithstanding anything to the contrary in the Plan, no Options
granted hereunder shall become exercisable until such approval has been
received.
The Corporation's obligation to sell and deliver shares of stock under
the Plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of the stock.
Section 8 -- Regulatory Compliance and Listing
(a) The issuance or delivery of any shares of stock subject to
exercisable Options hereunder may be postponed by the Committee for such period
as may be required to comply with any applicable requirements under the Federal
securities laws, any applicable listing requirements of any national securities
exchange or any requirements under any law or regulation applicable to the
issuance or delivery of such shares. The Corporation shall not be
4
<PAGE> 5
obligated to issue or deliver any such shares if the issuance or delivery
thereof would constitute a violation of any provision of any law or of any
regulation of any governmental authority or any national securities exchange.
(b) Should any provision of this Plan require modification or be
unnecessary to comply with the requirements of Section 16 of and Rule 16b-3
under the Securities Exchange Act of 1934, as amended ("1934 Act"), the
Committee may waive such provision and/or amend this Plan to add to or modify
the provisions hereof accordingly.
(c) It is the Corporation's intent that the Plan comply in all respects
with Rule 16b-3 of the 1934 Act (or any successor or amended provisions thereof)
and any applicable Securities and Exchange Commission interpretations thereof.
If any provision of this Plan is deemed not to be in compliance with Rule 16b-3,
the provision shall be null and void.
Section 9 -- Adjustment in Event of Changes in Capitalization
In the event of a stock dividend, stock split or combination of shares,
recapitalization or other change in the Corporation's capitalization, or other
distribution with respect to holders of the Corporation's Common Stock other
than normal cash dividends, automatic adjustment shall be made in the number and
kind of shares as to which outstanding options or portions thereof then
unexercised shall be exercisable and in the available shares set forth in
Section 5 hereof, to the end that the proportionate interest of the option
holder shall be maintained as before the occurrence of such event. Such
adjustment in outstanding options shall be made without change in the total
price applicable to the unexercised portion of such options and with a
corresponding adjustment in the option price per share. Automatic adjustment
shall also be made in the number and kind of shares subject to options
subsequently granted under the Plan.
Section 10 -- No Right to Reelection
Nothing in the Plan shall be deemed to create any obligation on the part
of the Board of Directors or standing Committee thereof to nominate any
Nonemployee Director for reelection by the Corporation's stockholders, nor
confer upon any Nonemployee Director the right to remain a member of the Board
of Directors for any period of time, or at any particular rate of compensation.
Section 11 -- Amendment and Termination
(a) The Board of Directors shall have the right to amend, modify or
terminate the Plan at any time and from time to time; provided, however, that
unless required by law, no such amendment or modification shall (a) affect any
right or obligation with respect to any grant theretofore made; or (b) unless
previously approved by the stockholders, increase the number of shares of Common
Stock available for grants as provided in Section 5 hereof (as adjusted pursuant
to Section 9 hereof). In addition, no such amendment shall, unless previously
approved by the stockholders (where such approval is necessary to satisfy then
applicable requirements of federal securities laws, the Code or rules of any
stock exchange on which the Corporation's Common Stock is listed), (i) in any
manner affect the eligibility requirements set forth in Section 4 hereof, (ii)
except to the extent provided for in Section 9 hereof, increase the number of
shares of Common Stock subject to any option, (iii)
5
<PAGE> 6
except to the extent provided for in Section 9 hereof, change the purchase price
of the shares of Common Stock subject to any option, (iv) extend the period
during which options may be granted under the Plan, (v) materially increase the
benefits to Participants under the Plan, (vi) in any manner cause Rule 16b-3
under the 1934 Act (or any successor provision thereof) to become inapplicable
to this Plan; and provided further that, except to the extent permitted by Rule
16b-3, the provisions of this Plan specified in Rule 16b-3(c)(2)(ii)(A) (or any
successor or amended provision thereof) under the 1934 Act (including without
limitation, provisions of eligibility, amount, price and timing of awards) may
not be amended more than once every six months, other than to comport with
changes in the Code, the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
(b) Unless earlier terminated by the Board of Directors, the Plan shall
terminate on December 31, 2000; provided, however, that options which are
granted on or before this date shall remain exercisable in accordance with their
respective terms after the termination of the Plan.
Section 12 -- 1990 Plan
Upon approval of the Plan by the Corporation's stockholders, the
authority to grant options under the 1990 Stock Option Plan for Nonemployee
Directors shall expire. Options granted pursuant to the 1990 Stock Option Plan
for Nonemployee Directors shall remain outstanding and exercisable and subject
to the option agreement related thereto, or in accordance with such other terms
and conditions as the Committee shall determine.
Section 13 -- Governing Law
The Plan shall be governed by and construed in accordance with the laws
of the Commonwealth of Massachusetts.
6
<PAGE> 1
EXHIBIT 10(j)
- --------------------------------------------------------------------------------
Digital Equipment Corporation
- --------------------------------------------------------------------------------
Retirement Arrangement for Non-Employee Directors
(as amended on June 12, 1997)
- --------------------------------------------------------------------------------
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 the
date of such Annual Meeting.
1
<PAGE> 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. For purposes of determining years of service for purposes
of this Section IV., time for which a Participant receives a disability benefit
under Section VI. of this Plan shall be considered time included in years of
service. Furthermore, termination of service for purposes of this Section IV.
shall mean the later of actual termination of service and cessation of
disability benefits under Section VI. hereof, if applicable.
V. Payment of Retirement Benefit
The benefit due to a Participant under this Plan shall be paid as quarterly
installments, each equal to one-fourth of the annual benefit provided for in IV.
above. Installments shall become due and payable as of the first day of each
calendar quarter. The first such payment shall become due and payable as of the
first day of the calendar quarter next following the date on which the
Participant terminates service as a director of Digital Equipment Corporation.
The last such payment shall become due and payable as of the first day of the
calendar quarter in which the Participant dies. Payment shall be mailed to the
last known address of the Participant. It shall be the responsibility of the
Participant to ensure that Digital Equipment Corporation is provided his or her
correct address. There shall be no death benefit hereunder.
VI. Entitlement to Disability Benefit
Any Participant in the Plan who terminates service on the Board as a result of a
total disability on or after 18 May 1987 at a time when he or she does not
qualify for a retirement benefit under Section IV. above shall be entitled to an
annual benefit for the period of time during which he or she is disabled or
until he or she attains the age and service requirements for a retirement
benefit under IV. above, whichever is shorter, which is equal in amount to the
annual retainer in effect for non-employee directors as of his or her date of
termination of service on the Board. Total disability shall mean a physical or
mental condition which, in the
2
<PAGE> 3
sole and unfettered discretion of the Board, makes continued service on the
Board impossible or undesirable.
VII. Payment of Disability Benefit
Any payments under Section VI. hereof shall be paid according to the provisions
of Section V. hereof as if such disability benefit were a retirement benefit and
as if the termination of the Participant's service on the Board as a result of
total disability were termination of service after age seventy (70) with five
(5) full years of service on the Board. The disability benefit hereunder shall
cease on ending of the disability or on the attainment of the age and service
requirements for a retirement benefit and no disability payment shall be made
after the date on which the disability ends or the said requirements have been
met. No duplication of benefits between disability benefits and retirement
benefits shall be permitted.
VIII. Participant's Rights in Benefit
A Participant shall not have any interest in the benefits under this Plan until
they are distributed in accordance with the Plan. Until paid, all amounts
payable under the Plan shall remain the sole property of the Corporation,
subject to the claims of its general creditors and available for its use for
whatever purposes are desired. With respect to unpaid benefits, a Participant is
merely a general creditor of the Corporation, and the obligation of the
Corporation hereunder is purely contractual and shall not be funded or secured
in any way. This Plan is not, and is not intended to be, for employees of
Digital Equipment Corporation and is not a plan subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA).
IX. Non-Assignability
The right of a Participant to the payment of benefits as provided in the Plan
shall not be assigned, transferred, pledged or encumbered or be subject in any
manner to alienation or anticipation.
X. Administration
The Administrator of this Plan shall be the Office of the President of the
Corporation. The Administrator shall have authority to adopt rules and
regulations for carrying out the Plan and to interpret, construe and implement
the provisions hereof, and may delegate the authority to administer the Plan to
such delegee as
3
<PAGE> 4
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.
4
<PAGE> 1
EXHIBIT 10(m)
19 October 1995
Bruce Claflin
786 Ridgebury Road
Ridgefield, Connecticut 06877
Re: Offer of Employment
Dear Bruce,
I am pleased to offer you the position of Vice President and General Manager,
Personal Computer Business Unit, reporting to me. Your base salary will be at
the annual rate of $350,000. Also, if you leave your current employer before 31
December 1995 and lose your bonus, Digital will offset that loss up to $225,000.
Your date of hire will be mutually agreed upon should you accept this offer.
EXECUTIVE INCENTIVE PLAN
You will participate in Digital's Executive Incentive Plan. Any payment
thereunder will be made solely at the discretion of Digital's Board of
Directors, subject to Company, Business Unit, and individual performance and
subject to all other terms and conditions of the Plan, which may be revised from
time to time at the discretion of the Company. Your recommended target
participation will be $200,000 for on-plan performance for Fiscal Year 1996
provided you are employed by Digital on the payment date.
Under the current terms of the 1996 Executive Incentive Plan, you have the
potential to earn an award that may exceed your target participation by as much
as two to three times for exceptional individual performance, and the
exceptional performance of the Company and the Personal Computer Business Unit,
all as determined in accordance with the Executive Incentive Plan.
STOCK AWARDS
I will recommend to the Compensation and Stock Option Committee of Digital's
Board of Directors ("CSOC") to grant you a stock award of 20,000 shares of
Digital Common Stock
<PAGE> 2
under the 1990 Equity Plan. Your stock award will be granted on the date that
the CSOC approves such award, and is subject to restrictions on your ability to
sell, transfer, pledge, or dispose of the stock for a period of time. In
addition, if you leave Digital for reasons other than death, permanent
disability, or as otherwise specified in your stock award agreement, you will
forfeit all the shares for which restrictions have not lapsed; provided,
however, if your employment is terminated by Digital other than for Cause (as
defined below) within one year of your hire date, the restrictions with respect
to 40% of your shares will lapse on the first anniversary of your hire date.
These restrictions will lapse with respect to 40% of your shares one year from
your date of hire, with respect to 30% of your shares two years from your date
of hire, and with respect to 30% of your shares three years from your date of
hire.
I will also recommend to the CSOC to grant you a non-qualified stock option to
purchase 75,000 shares (the "Option Shares") of Digital Common Stock under the
1990 Equity Plan. The exercise price of this stock option will be equal to the
fair market value of Digital Common Stock on the date the option is granted by
the CSOC. The option will become exercisable with respect to 33% of the Option
Shares one year from your date of hire, an additional 33% of the Option Shares
two years from the date of hire, and the remaining 34% of the Option Shares
three years from your date of hire.
Both stock and option grants are subject to approval by the CSOC and you will be
notified, upon the grant having been made, by a separate award letter for each
and a stock option agreement. You will be solely responsible for any income tax
consequences (including making a section 83(b) election) associated with your
receipt of such awards.
Pursuant to the compensation practices currently in effect at Digital, an
individual serving in the capacity of Vice President and General Manager,
Personal Computer Business Unit, would typically receive an annual stock option
to purchase between 30,000 to 40,000 shares of Digital Common Stock. However,
all grants of stock options are subject to and dependent upon the authorization
of CSOC, the Company's and the employee's performance, and the then existing
compensation practices and objectives of the Company.
"Cause" means (a) the commission of a willful act against Digital; or (b) your
willful misconduct which has caused or has a likelihood of causing harm to
Digital; or (c) the breach of one or more terms of the Confidentiality
Agreement; or (d) the material breach of your representation concerning
noncompetition contained in this letter.
INDEMNIFICATION
If during the two year period commencing on the date you exercise your stock
options to purchase 20,257 shares of IBM stock ("the IBM Shares") under the IBM
1989 Long-Term Performance Plan (the "IBM Plan"), IBM attempts to rescind the
issuance to you of the IBM Shares pursuant to Section 13 (d) of the IBM Plan for
noncompliance with Section 13(a) of the IBM Plan, or IBM seeks restitution of
any gain realized by you from the sale or transfer of the IBM Shares, Digital
agrees to indemnify you (i) for all reasonable legal costs, on a current
<PAGE> 3
basis, you incur in connection with any action commenced by IBM concerning the
IBM Shares (an "Action") (subject to Digital's right to assume the defense of
such Action, as provided below) and (ii) for the difference between the exercise
price of the IBM Shares and their sale price (the "Gain"), provided that you (a)
promptly notify Digital of the commencement of such Action and (b) do not enter
into any settlement thereof without Digital's prior written consent. Following
such notification, Digital may elect in writing to assume the defense of the
Action. Upon such election, Digital shall not be liable for any legal costs
subsequently incurred by you. Digital further agrees that it will not enter into
the settlement of an Action which adversely affects you without your prior
written consent.
EMPLOYEE BENEFITS
As a regular employee, you will be eligible to participate in Digital's U.S.
employee benefit plans under the terms separately provided for under each such
plan or arrangement, except that you will be eligible for five weeks of vacation
on an annual basis.
RELOCATION
You will be provided with the standard relocation benefit offered to employees
of Digital. In addition to Digital's Standard Relocation Program, you have been
approved for the following provisions: assistance in marketing your Stonington
CT home and reimbursement of associated closing costs; second household goods
shipment from your home in Stonington CT; extended temporary living during the
time that you have dual housing costs, not to exceed 30 June 1996. Upon
acceptance of this offer, you will be assigned a dedicated Relocation Specialist
to provide you with a thorough relocation orientation and to assist you
throughout the relocation process. Should you voluntarily terminate your
employment with Digital within a period of two years from your date of hire, per
the Digital Relocation Obligation Agreement, you will be obligated to repay the
relocation expenses that have been paid on your behalf by Digital.
SEVERANCE
If, prior to the second anniversary of your date of hire, your employment is
terminated by Digital for other than Cause, Digital will pay you an amount equal
to your annual rate of base compensation. In addition, you will continue your
medical benefits in a manner equivalent to those provided to you immediately
prior to the date your employment ends for a period of one year or until you
become eligible for such coverage from another employer, whichever comes first.
For purposes of this section and the first paragraph of the "Stock Awards"
section only, if Digital causes a material change in the nature or scope of the
responsibilities, functions, or
<PAGE> 4
duties associated with the position for which you are being hired, your
resignation under such circumstances will be considered to be a termination of
employment by Digital.
Pursuant to practices currently in effect at Digital, an individual serving in
the capacity of Vice President and General Manager, Personal Computer Business
Unit, would receive as severance if terminated by Digital without cause the
continuation of base salary for a period of four months, plus one additional
month for each year of service at the Company, payable monthly in arrears. If
such individual were to obtain employment during this period, such payments
would cease. However, Digital's practices regarding severance are subject to and
dependent on the facts and circumstances of each employment situation, the
Company's financial condition, and the then existing objectives of the Company.
NONCOMPETITION
You represent to Digital that you are not a party to, or bound by, any agreement
whether oral or written, that would prevent you from employment with Digital in
the capacity of Vice President and General Manager, Personal Computer Business
Unit.
STATUS
The position offered is as a regular employee, on an at-will basis. In addition,
this offer is contingent upon compliance with the Immigration Reform and Control
Act of 1986. In essence, the Act requires you to establish your identity and
employment eligibility. To do so, you will be required to complete Section 1 of
the attached Employment Verification Form and bring the documents identified in
the attachment to your new hire orientation. You will not be able to commence
employment with Digital until you are able to present the required documents at
your new hire orientation. Your offer is also contingent on your signing
Digital's Employee Invention and Confidential Agreement at your orientation.
Please make yourself familiar with the contents of these documents, which we
have enclosed for your review.
This agreement includes all of the agreements of the parties relative to your
offer of employment and supersedes any prior agreements or representations
between the parties as to the subjects covered.
VALIDITY OF OFFER
This offer is irrevocable and valid until November 1, 1995. If this offer has
not been accepted in writing by then, it will cease to be valid and will be
withdrawn.
If you have any questions regarding your employment, please do not hesitate to
contact Bob Mulkey at (508) 493-2112.
<PAGE> 5
Very truly yours
/s/ Enrico Pesatori
Bruce Claflin
October 19, 1995
I have read and agree to the terms as stated above and I accept the offer of
employment.
/s/ Bruce L. Claflin 10/28/95
- ------------------------------------- ------------------
Signature Date
<PAGE> 1
EXHIBIT 11
DIGITAL EQUIPMENT CORPORATION
Computation of Net Income/(Loss) Per Common and Common Equivalent Share
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------------------------------------
June 28, June 29, July 1, July 2, July 3,
1997 1996 1995 1994 1993
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In thousands except per share data)
Net income/(loss) ..................... $140,875 $(111,812) $121,818 (b) $(2,156,063)(d) $(251,330)
======== ========= ======== =========== =========
Net income/(loss) applicable to
common and common
equivalent shares .................. $105,375(a) $(147,312)(a) $ 86,318(a)(b) $(2,166,713)(c)(d) $(251,330)
======== ========= ======== =========== =========
Weighted-average number of
common shares outstanding
during the year .................... 154,352 152,052 144,907 137,090 130,409
Common stock equivalents from
application of "treasury stock"
method to unexercised and
outstanding stock options .......... 1,106 -- 1,424 -- --
Total weighted-average number of
common and common equivalent
shares used in the computation
of net income/(loss) per common
and common equivalent share ........ 155,458 152,052 146,331 137,090 130,409
======== ========= ======== =========== =========
Net income/(loss) applicable per common
and common equivalent share ........ $ 0.68 $ (0.97) $ 0.59 (b) $ (15.80)(d) $ (1.93)
======== ========= ======== =========== =========
</TABLE>
(a) Includes dividends paid and declared on Series A 8 7/8% cumulative
preferred stock totaling $35,500.
(b) Net income and net income per common and common equivalent share include
the cumulative effect of a change in accounting principle of $64,503 and
$0.44, respectively.
(c) Includes dividends paid and declared on Series A 8 7/8% cumulative
preferred stock totaling $10,650.
(d) Net loss and net loss per common share include the cumulative effect of a
changes in accounting principles of $51,026 and $0.37, respectively.
<PAGE> 1
EXHIBIT 13
[DIGITAL LOGO]
[Photograph of a globe, on which a smaller photograph of two people in front of
a workstation appears. The words "www.digital.com" appear over both
photographs.]
WWW.DIGITAL.COM
1997 ANNUAL REPORT
...and some of our customers:
www.bestwestern.com
www.firstquote.com
www.kvaerner.com
www.lmco.com
www.nymex.com
www.optus.com.au
www.psi.ch
www.siemens.co.uk
www.southernco.com/site/home.asp
www.timewarner.com
<PAGE> 2
Digital Equipment Corporation is a world leader
in implementing and supporting networked
business solutions. Building on its core
competencies in software, systems, networks and
services, DIGITAL--working with its business
partners--is addressing new market opportunities
while supporting its existing customer base.
DIGITAL networked business solutions are helping
our customers compete and win in today's global
marketplace.
CONTENTS
2 Chairman's letter
9 Building the networked world
13 Internet: changing the very definition of networking
17 Windows NT: delivering enterprise solutions
21 Digital UNIX and OpenVMS: owning the standard
for high-performance 64-bit computing
24 Delivering on the promise: the Internet, our
children and the environment
25 Financial statements
<PAGE> 3
WINNING IN A
NETWORKED WORLD
In 1969, a group of U.S. Department of Defense and academic researchers created
a new computer network--one that allowed them to share information and provide
access to computers at key government facilities and research institutions
around the country. Their requirements included speed, reliability and security.
Their platform of choice was DIGITAL.
Known as the ARPANET after its sponsor, the Advanced Research Project
Agency, this fledgling network and its visionary founders sowed the seeds
for the most important information technology paradigm shift of the
1990s--the Internet.
Today, more than a quarter century after the birth of the Internet and 40
years after Digital's own founding, we are more focused than ever on the
enormous opportunities the Internet is creating for enterprises around the
world.
Our strategy concentrates not only on the Internet, but on the other
essential building blocks of the networked enterprise--Windows NT and
high-performance computing--and the associated services needed by our
customers.
Our goal is very simple: to deliver Internet business solutions that enable
our customers and partners to win in the global, networked economy.
<TABLE>
<CAPTION>
Fiscal year 1997 1996
<S> <C> <C>
Total operating revenues $13,046,832,000 $14,562,775,000
Restructuring charge $ -- $ 492,000,000
Net income/(loss) $ 140,875,000 $ (111,812,000)
Net income/(loss) per common share $ 0.68 $ (0.97)
Total stockholders' equity $ 3,544,956,000 $ 3,606,206,000
Number of common stockholders 53,911 62,804
Stockholders' equity per common share $ 20.81 $ 20.62
Number of employees 54,900 59,100
</TABLE>
Annual meeting
The annual meeting of
stockholders will be held at
11:00 a.m., Thursday, November
13, 1997, at the World Trade
Center, Commonwealth Pier, 164
Northern Avenue, Boston,
Massachusetts, 02210.
Common stockholders of record
on September 15, 1997 will be
entitled to vote at this
meeting.
1
<PAGE> 4
[PHOTO OF ROBERT B. PALMER]
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS, EMPLOYEES, CUSTOMERS AND PARTNERS Last year was one of
transition for DIGITAL--a year that began with a temporary setback and ended
with improving results and increasing momentum for our company. It was also a
year in which we took several actions that will have a positive impact on
Digital's performance going forward.
For fiscal 1997, DIGITAL reported net income of $141 million, or $.68 per
common share. Total operating revenue was $13 billion, a 10 percent decline
from the previous year. I am certainly not satisfied with that performance
because I know that we can--and will--do much better. But I am pleased with
the way the company responded after a disappointing loss in our first
quarter. We showed continuous improvement in profitability throughout the
rest of the year.
For DIGITAL, the key to achieving and sustaining competitive levels of
profitability--and to increasing shareholder value--is growth, and that is
our top priority. I am confident that we will begin to grow again during the
current fiscal year. My confidence is based on the continued progress we made
during fiscal 1997 in strengthening our foundation for both growth and
profitability. For example:
o We further evolved our corporate strategy, sharpened our focus on targeted
growth markets and increased our emphasis on Internet-based solutions.
o We created a single, worldwide sales and marketing organization to improve
our marketing, revitalize the DIGITAL brand and generate more demand for our
products and services.
o We brought our product businesses together in a new division that provides
the increased coordination we need to build on our product leadership and to
exploit emerging technologies.
o And we continued to build on our leadership in providing the global service
and support that are essential to deliver comprehensive information
technology solutions.
2
<PAGE> 5
Last year was also noteworthy for the action we took to protect DIGITAL's
intellectual property. In May, DIGITAL filed an important lawsuit charging
Intel Corporation with willful infringement of DIGITAL patents in the
development, manufacture and sale of its Pentium, Pentium Pro and Pentium II
microprocessor families.
Our decision to file suit was praised by some and questioned by others. But
irrespective of the reactions, we believe DIGITAL has an obligation to
protect your investments in research and development by enforcing DIGITAL's
intellectual property rights.
Throughout the year the one constant was the dedication and determination of
DIGITAL employees. Everywhere I go in the DIGITAL world, I am impressed by
the talent and the skills of our employees. They are one of the most
important reasons for my confidence in our future. Our success is the direct
result of their hard work.
OPERATIONAL REVIEW Our performance during the early part of the fiscal year
was a reminder that corporate transformations do not move in a straight line.
But we are unwavering in our determination to succeed and to achieve
competitive levels of growth and profitability. While reaching that goal is a
multiyear process, we have set specific financial targets that will help mark
our progress.
At the beginning of fiscal 1997, DIGITAL outlined our plan for achieving a
competitive financial return.
Our goal for net profit margin is seven percent, and we are making progress
in that direction. A key element in achieving that goal is improving gross
margins. Total gross margin in the fourth quarter was up a full two points
year over year. The increase was even more dramatic in product gross margins,
which were up three points year over year and 11 points over the past three
years. And we met another important financial objective by stabilizing gross
margins in our services business.
Our balance sheet also remained strong. An important factor was continued
improvement in all areas of asset management. The cash and short-term
investment balance increased to $2.5 billion--an all-time high for the
company--even as we repurchased 10 million shares of common stock during the
year. Reflecting its strong confidence in our future, the Board of Directors
has authorized the company to repurchase up to 15 million additional shares.
One of the highlights of the fiscal year was the return to profitability of
our personal computer business. During the previous fiscal year, this
business was losing money, and revenue was declining. Since then there has
been a remarkable turnaround, driven by new leadership, a more focused
strategy and a greater emphasis on business controls. The PC business was
profitable for the full fiscal year, and revenues are growing.
3
<PAGE> 6
DIGITAL also made further progress in controlling expenses, managing assets
more effectively and improving the efficiency of our processes and
operations. As we grow, we will leverage our improved cost structure to
deliver significant improvements in earnings.
GROWTH STRATEGY As the information technology market and customer needs
evolve, we are more confident than ever about the strategic decisions we made
two years ago. Those decisions were based on key market trends, including the
dramatic expansion of the Internet and its increasing use as a business tool;
the rapid acceptance of Windows NT as an enterprise operating system; and
continuing strong demand for high-performance, 64-bit computing.
As our growth strategy has developed, we have increased our emphasis on the
Internet, particularly the multimedia portion of the Internet known as the
World Wide Web. This is reflected in our corporate vision: DIGITAL will be
the undisputed leader in Web-based enterprise computing.
Digital has more than two decades of experience with the Internet. But what
gives us confidence in our vision of leadership are the breadth and depth of
what we offer customers today:
o A broad range of integration and operations management services that helps
customers design, integrate and deploy Internet business solutions across the
enterprise,
o Powerful servers to run the most demanding Web-based applications,
o Innovative software like the AltaVista search engine, the most powerful
search and index service on the Internet; security firewalls that protect
corporate networks from intruders; and Millicent, a revolutionary
microcommerce system that will make Web-based transactions profitable down to
a fraction of a cent, and,
o Strategic alliances and partnerships with industry leaders like Microsoft,
MCI, British Telecom, Oracle, Computer Associates and SAP, which enable us to
deliver comprehensive Internet solutions to customers.
The growing list of companies that have chosen DIGITAL AlphaServer systems to
run their critical Web applications reads like a Who's Who of Internet
pioneers: Netscape, Amazon.com, PointCast, Lycos and Microsoft. In fact, a
Computerworld survey of the 100 premier Web sites found that nearly
three-quarters of them use DIGITAL products.
4
<PAGE> 7
Our share of key markets is growing. For example, DIGITAL had more than 14
percent of the $1.4 billion Internet Service Provider (ISP) market worldwide at
the end of 1997. Our ISP revenues were up 400 percent while that overall market
doubled. We expect our market share to increase to 20 percent by the end of
fiscal 1998.
THE EXPANDING INTERNET Businesses today are adopting Internet technology at a
very rapid pace. They are building internal networks known as "intranets" that
help unlock the valuable information stored in corporate databases and make that
information available throughout the enterprise. They are establishing virtual
networks that link their businesses with customers, partners and suppliers. They
are devising new channels to distribute their products directly to customers.
And they are creating new forms of electronic commerce, laying the foundation
for a truly global, networked economy.
DIGITAL is a leader in the intranet market. We are involved in two of the
largest intranet deployments in the world. One is for Kvaerner, a Norwegian
multinational that is building a network to link 40,000 of its employees around
the world. The other is for the American Red Cross, with the potential to link
1.4 million volunteers and staff members.
Another important trend is the emergence of a wide variety of so-called Internet
appliances like network computers, TV set-top boxes, palmtop computers, smart
telephones and Web phones. DIGITAL is a pioneer in this new market with our
StrongARM microprocessor. This very efficient chip delivers breakthrough
performance with very low power consumption and low cost--making it the ideal
engine for these new devices. More than 40 companies are already designing
Internet appliances around the StrongARM chip, and we expect dramatic growth in
this market segment.
In addition to the Internet, we also are focusing on two other major growth
opportunities: Microsoft Windows NT and high-performance 64-bit UNIX. Within
each of these markets, we are targeting segments where we expect to achieve
industry leadership.
During fiscal 1997, for example, DIGITAL established itself as the clear leader
in mail and messaging solutions based on Windows NT and Exchange--two of
Microsoft's fastest-growing enterprise offerings. Working closely with Microsoft
as part of our Alliance for Enterprise Computing, DIGITAL won more than one
million Exchange seats worldwide.
We are also integrating Windows NT with other operating environments, like
Digital's OpenVMS operating system, which is still unrivaled for
mission-critical computing. By integrating OpenVMS and Windows NT, customers can
enjoy the reliability and availability of OpenVMS and the broad applications
portfolio of Windows NT. DIGITAL will continue to invest in OpenVMS to meet the
needs of our customers.
5
<PAGE> 8
In the UNIX market, we are targeting segments such as data warehousing and
high-performance technical computing, both of which benefit from the power
and performance of DIGITAL's 64-bit systems and software.
Many companies have selected DIGITAL to provide data warehouse solutions.
They include Tele-Communications Inc., one of the nation's largest cable
operators, and HFS Incorporated, the nation's largest franchise holding
company, with brands like Century 21 and Avis. And we are gaining share in
the market for high-performance technical computing with customers like the
Los Alamos National Laboratory and Sandia National Laboratories in the U.S.,
and CERN, a research center in Switzerland. According to International Data
Corporation, a market research company, DIGITAL's share of the midrange,
high-performance market increased to 28 percent last year from 21 percent the
year before.
Across all of these growth markets, one of our most important competitive
advantages is our ability to provide service and support worldwide.
Enterprise customers are not just looking for a product supplier. They are
looking for an information technology partner who can integrate products and
applications in a multivendor environment, provide support after the project
is complete and, in many cases, take over management of critical IT
resources.
The DIGITAL Services Division is widely recognized for leadership in these
areas. In fact, DIGITAL was ranked No. 1 in customer satisfaction among
systems integrators in Computerworld magazine's 1997 user survey.
EXECUTING THE STRATEGY One of our continuing objectives is to improve the
execution of our strategy. The most important step we took in that direction
last year was a major refocusing of DIGITAL's marketing and sales operations.
A single organization is now responsible for all of our marketing efforts
worldwide. This has several benefits, but the most important is that DIGITAL
will go to market as one company, with a unified marketing strategy and
common messages that support our growth strategy and brand. By revitalizing
our single brand, we will increase demand for a multitude of DIGITAL
solutions.
Part of going to market as one DIGITAL is having a sales force that is
empowered to represent the entire company, not just a single business unit or
function. To that end, we consolidated our product sales operations into the
worldwide sales and marketing organization and increased coordination among
our sales and service professionals. This enables us to
6
<PAGE> 9
do business with customers and partners in a more uniform way. By reducing
our sales complexity and redundancy, it also makes it easier for customers
and partners to do business with DIGITAL.
The other major organizational change we made was the creation of the DIGITAL
Products Division. Although we have attained product leadership in some key
segments of the market, we are not taking that leadership for granted. By
putting all of our product businesses in one division, we will increase
cooperation and coordination and leverage our technical excellence across our
product lines.
40 YEARS OF INNOVATION AND CUSTOMER SUCCESS On August 23, 1997, DIGITAL
celebrated its 40th Anniversary. That milestone was a reminder of just how
much has changed since a small group of visionaries started DIGITAL in a
19th-century woolen mill in 1957--and of how much this company has
contributed to the growth of the computer industry. We are proud of that
heritage of innovation and industry leadership.
From its inception, our company has been driven by a relentless focus on the
future and on developing innovative technologies that will help make our
customers more successful. We did these things in the past with the PDP and
VAX architectures, the VMS operating system, distributed computing and
clustering, to name a few. And we are doing them today with Alpha, StrongARM,
DIGITAL UNIX, AltaVista and our HiNote Ultra notebook computers.
But it will take more than leadership services and technology for DIGITAL to
succeed. It will take the support of our shareholders, employees, customers
and partners. We know that we must continue to earn that support. Digital is
committed to increasing value for shareholders, providing an exciting and
rewarding workplace for our employees, and offering customers and partners
nothing less than the industry's best products, services and solutions.
That is what DIGITAL has enjoyed doing for the last 40 years, and it is why
we are looking forward to the next 40.
/s/ Robert B. Palmer
--------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
7
<PAGE> 10
[Photograph of the trading floor of the New York Mercantile Exchange]
NEW YORK MERCANTILE EXCHANGE
WINDOWS NT, OPEN VMS AND DIGITAL UNIX INTEGRATED IN A
DISASTER-TOLERANT ENTERPRISE SOLUTION
www.nymex.com
The world's largest petroleum and precious metals exchange is moving its core
trading, settlement and compliance applications from fault-tolerant Tandem
systems to mirrored disaster-tolerant Alpha clusters in separate locations as
part of a DIGITAL/Microsoft solution.
Traders will now get realtime trading information rather than having to depend
on written reports prepared after the market closes. At the same time, the
trading floors and computer rooms in the Exchange's new building will be linked
through a high-speed DIGITAL GIGAswitch system and fiberoptic cable to a second
building that will serve as a backup center for both the trading floor and back
office applications.
This enterprise network will include 1,100 DIGITAL PCs, 50 DIGITAL x86-based
servers running Windows NT and ten AlphaServer systems in two different
buildings running OpenVMS and DIGITAL UNIX operating systems. The network
provides a dramatic demonstration of the interoperability of these three
operating systems. Through the DIGITAL Windows NT integration program, Affinity
for OpenVMS and AllConnect for UNIX provide the tools to integrate legacy
systems with new applications.
<PAGE> 11
BUILDING THE
NETWORKED WORLD
THE INTERNET IS NOT JUST ABOUT THE FUTURE OF TECHNOLOGY--THE INTERNET IS NOW. IT
PROVIDES THE INFRASTRUCTURE NEEDED TO ACQUIRE, SHARE AND PUBLISH INFORMATION. IT
IS THE PLATFORM WHERE VOICE, DATA AND VIDEO TECHNOLOGIES CONVERGE. IT IS THE
HEART OF A NEW GLOBAL, NETWORKED ECONOMY.
DIGITAL customers are showing the way. Netscape is operating the busiest site
on the Web, handling 140 million requests per day. Best Western's reservation
system supports 3,700 hotels in 73 countries. And Lockheed Martin is building
a mail system to support 120,000 users. These are just three of thousands of
customers who rely on DIGITAL to meet their information technology needs.
These customers recognize DIGITAL as the premier network solutions company.
Network solutions were the key to our prosperity in the 1980s. They remain
the foundation of our strategy today. The only difference is that now,
instead of proprietary solutions, DIGITAL is using Internet technology to
deliver some of the most open solutions in the industry.
As we celebrate our 40th Anniversary, we have an opportunity to capitalize on
communications paradigm shifts--like the telephone, the radio and
television--which can change the way we all live and work. That opportunity
is the Internet. We intend to seize this opportunity.
As Internet standards and technology become more robust and pervasive...as
issues surrounding bandwidth and security are resolved...and as new kinds of
Internet access devices are developed and deployed...the Internet will
undoubtedly become the universal computing platform of choice. There are
three operating environments where, today, DIGITAL is the leader in
delivering enterprise-class Internet solutions:
o Windows NT for general-purpose enterprise computing
o 64-bit UNIX for planetary-scale computing
o OpenVMS for very-high-availability computing
But having the right platforms means little unless you have the service and
support to apply those platforms to the task at hand. DIGITAL provides
integration, product support and operations management services in more than
100 countries through its 23,000-person Services Division.
9
<PAGE> 12
DIGITAL's two-pronged, go-to-market strategy builds on these technological and
service strengths to deliver both infrastructure and industry-focused solutions
targeted at nine key markets. These solutions leverage DIGITAL's core
competencies--multivendor integration, Internet security, continuous computing,
high-availability data and high-performance networked platforms--to clearly
differentiate us from our competitors.
INFRASTRUCTURE SOLUTIONS As customers incorporate the Internet paradigm into
their corporate computing environment, they face infrastructure problems shared
by companies in almost every industry. DIGITAL has developed solutions targeted
at four key infrastructure markets. We are helping customers plan, design and
implement intranets, deploy Internet Commerce solutions, integrate Windows NT
into the enterprise, and modernize their mail and messaging systems.
INDUSTRY-FOCUSED SOLUTIONS DIGITAL also is focusing on select business solutions
customized for specific industries. Four targeted market segments--data
warehousing, enterprise applications, high-performance technical computing and
visual computing--address specific customer needs in key industries including
finance, manufacturing and telecommunications. In these markets, DIGITAL is
tightly tying solutions to industry-specific requirements.
- --------------------------------------------------------------------------------
1997 MILESTONES
Forty years ago, DIGITAL opened for business with three employees and
8,500 square feet of production space in an old woolen mill. Today, as
DIGITAL celebrates its 40th Anniversary, the company is a leading
worldwide supplier of networked computer systems, software and services,
developing and manufacturing products and providing customer services in
the Americas, Europe and Asia-Pacific.
DIGITAL won the UNITED STATES POSTAL SERVICE 1997 Quality Service Award. DIGITAL
provides information technology solutions to Postal Service locations
nationwide, including computer hardware and software, maintenance and support
services. Since 1995, DIGITAL has provided the Postal Service with more than
82,000 PCs and servers.
MICRON ELECTRONICS, INC. presented DIGITAL Worldwide Services with an Award of
Excellence at its 1997 Supplier Conference. DIGITAL provides multivendor
desktop, server and notebook service and support for Micron customers
worldwide.
DIGITAL'S X86-BASED PRIORIS servers broke the performance record for Windows NT,
processing 8,145 transactions per minute at $48.67 per transaction.
DIGITAL announced that the STRONGARM MICROPROCESSOR will support Windows CE, the
Microsoft software platform developed for consumer electronic products and
Internet appliances such as hand-held personal computers, smart phones and DVD
players.
AIM TECHNOLOGY awarded DIGITAL 15 "Hot Iron" awards in the UNIX and Windows NT
categories at Networld+Interop.
FX!32, DIGITAL's Windows compatibility software for Alpha systems, was named
one of the five best Windows NT software products by Windows Magazine. It was
also named "Technology of the Year" by Windows Sources.
More than 400 companies joined DIGITAL's INTERNET INNOVATORS PROGRAM designed to
help software companies increase their success throughout the product
development cycle.
10
<PAGE> 13
For example, we have delivered specific data warehousing solutions customized
for different industry needs. Sumitomo Bank of Japan and other money market
banks are using DIGITAL solutions to evaluate their credit card and publicly
held mortgage-backed securities portfolios. Consumer packaged goods
manufacturers and retailers like Schering-Plough have chosen DIGITAL
micro-marketing and consumer brand management solutions that help them identify
and target their best prospects. Telecommunication companies like Australia's
Optus Communications rely on DIGITAL solutions for billing and customer care so
they can provide better service to their subscribers.
INTERNET SERVICE PROVIDERS DIGITAL Internet Infrastructure Services play a key
role in the ninth target market--Internet Service Providers. Many of these
service providers look to DIGITAL for assistance in planning, designing and
implementing scalable facilities to keep pace with growing Internet traffic and
an expanding customer base.
PARTNERING TO PROVIDE TOTAL SOLUTIONS DIGITAL's global alliances with Computer
Associates, MCI, Microsoft, Oracle and SAP play an important role in building
solution sets for each of our nine targeted market segments. In addition, we
have established Centers of Expertise for each market segment and we're
integrating the entire value chain--aligning and teaming products, services and
business partners--to provide customers with highly reliable, scalable and fully
supported solutions tailored to their needs.
- --------------------------------------------------------------------------------
DIGITAL's semiconductor manufacturing facility was named a "TOP FAB OF THE YEAR"
by Semiconductor International magazine.
At the 35th Anniversary meeting of DECUS, the DIGITAL EQUIPMENT COMPUTER USERS
SOCIETY, 3,000 customers were present to see significant expansions to the
Windows NT integration program. This is comprised of Affinity for OpenVMS and
AllConnect for DIGITAL UNIX and provides the technology, tools, services,
systems integration and support needed to integrate Windows NT into the
enterprise.
DIGITAL introduced ENTERPRISE INTEGRATION PACKAGES to extend OpenVMS application
and enterprise capabilities to the Windows NT environment.
DIGITAL opened a new CUSTOMER CALL CENTER. By dialing 1-800- DIGITAL, customers
and business partners can speak directly with a highly trained Customer Care
representative who will connect them with someone to address their needs.
DIGITAL announced 11 service offerings for enterprises adopting and migrating to
Microsoft technology, reinforcing DIGITAL's position as MICROSOFT'S PREMIER
SERVICE AND SUPPORT PARTNER.
Readers of Data Communications voted DIGITAL the "BEST OVERALL SERVICES AND
SUPPORT" provider in the magazine's annual user survey, prompting the
publication to give DIGITAL the top "Users' Choice" award.
For the third consecutive year, Datamation magazine readers named DIGITAL's
AlphaServer "SERVER OF THE YEAR."
11
<PAGE> 14
[Photograph of a man at a newsdesk, over which the image of the Road Runner
and the words "Road Runner High Speed Online" appear.]
- --------------------------------------------------------------------------------
TIME WARNER
"Road Runner" is bringing online news and entertainment to Hawaii
www.timewarner.com
Building on the technological expertise of the DIGITAL/Microsoft Alliance, the
Oceanic Division of Time Warner Cable is introducing a new high-speed, online
news and entertainment service to the island of Oahu, Hawaii. Named for the
famous Warner Bros. Looney Tunes character, Road Runner is super-fast, using
fiberoptic cable to provide customers with a unique user-friendly online service
and connectivity to the Internet at unparalleled speeds.
Road Runner seamlessly integrates local programming with national and
international content. Subscribers will have connectionless, permanent access to
a wealth of daily news sources from local media outlets, schools, libraries,
government offices, museums, zoos and shopping services. Still photos that would
choke a dial-up network will appear instantly over the broadband Internet.
The network is based on Microsoft's Internet Explorer browser and the Microsoft
Commercial Internet System (MCIS). DIGITAL is providing planning, design and
integration services, as well as DIGITALx86 Prioris servers and custom code to
interface with Oceanic's customer care system. The result is a cost-effective,
easily scalable, broadband Internet service that can support an exciting
combination of news, entertainment and information.
Oceanic is one of Time Warner Cable's larger operations reaching 332,000 homes.
According to Division President, Don Carroll, Oceanic's goal is "...to build
real communities, not just ethereal cyber-communities. The day will come when
the first thing you see when you go online with Road Runner will be news and
information about your own neighborhood. You'll be able to check your children's
school calendar, review proceedings of neighborhood board meetings and check for
promotions and sales at the stores nearest your home.
The possibilities are limitless."
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<PAGE> 15
INTERNET:
CHANGING THE VERY DEFINITION
OF NETWORKING
THE INTERNET IS CHANGING EVERYTHING--EVEN THE VERY DEFINITION OF NETWORKING.
MANY COMPANIES CLAIM TO BE "THE INTERNET COMPANY" OR EVEN THE INVENTOR OF
NETWORKED COMPUTING.
While many of these companies have made significant contributions to Internet
technology, DIGITAL was and is the leader in developing Internet solutions. We
were the first computer company on the ARPANET, the forerunner of the Internet,
and--as one of the original sponsors of Ethernet--we brought the network to the
desktop. Today, DIGITAL has all the components--from implementation and
integration services to high-capacity, high-performance servers--needed to
support large-scale Internet and intranet applications. This leadership can't be
challenged: of the Computerworld Premier 100 Internet sites, 73 use DIGITAL
products.
The experience we've gained in working with companies who have built world-class
Internet sites is one reason we can help other customers understand the
implications of Internet technology. We're helping them apply this technology to
their business needs and build intranets--private networks using Internet
technology and communications.
We're helping customers build Web infrastructures with the capacity, reliability
and security needed to conduct financial transactions and buy and sell
everything from new homes and cars to personalized news reports. And, as new
applications fuel the explosive growth of the Internet, we're working closely
with Internet Service Providers and telecommunication companies to help them
build and maintain the network.
INTERNET INTEGRATION, INFRASTRUCTURE AND OPERATIONS MANAGEMENT SERVICES As more
and more businesses evolve into networked enterprises where employees,
customers, business partners and suppliers share ideas and work together over
the Internet and intranets, the need to reduce network support costs and ensure
round-the-clock, 24x365 availability has become a priority.
DIGITAL Worldwide Services provide Internet Infrastructure Services, Network and
Application Integration Services and Internet Operation Management Services to
help customers plan, design, implement and manage intranet applications and
Internet communications and commerce.
13
<PAGE> 16
HIGH-PERFORMANCE, HIGH-AVAILABILITY INTERNET SERVERS No business wants its
customers, partners or employees to experience repeated busy signals and "server
not available" messages. The need for high-performance, high-availability
Windows NT and UNIX servers is particularly critical for Internet Service
Providers and companies building intranets or engaged in Internet Commerce.
To demonstrate the power and scalability of our Internet business solutions,
DIGITAL established the AltaVista search service
(http://www.altavista.digital.com). AltaVista has become one of the most popular
sites on the World Wide Web. Each day, more than 30 million Internet users rely
on AltaVista to quickly and easily find the information they're looking for.
Driven by DIGITAL's powerful 64-bit AlphaServer technology, AltaVista gives
users access to more than 31 million pages of information. This past year,
AltaVista was enhanced with a new user interface that includes simple
customization tools and a "refine" function, enabling users to focus their
searches and obtain relevant results within seconds. A unique multilingual
search feature was also added. Now users can search for Web pages written in any
one of 25 languages--from Chinese to Swedish.
[Photograph of DIGITAL Prioris HX6000 series of x86 servers]
The DIGITAL Prioris HX6000 series of x86 servers delivers
exceptional value in a "no compromise" package, combining
state-of-the-art manageability, availability, performance,
scalability and service. Data integrity and reliability are assured
with high-availability system design including ECC EDO memory,
redundant cooling, optional redundant power, integrated Hot-Swap
drives and dual redundant backplane capabilities.
INFORMATION ACCESS, SECURITY AND INTERNET COMMERCE SOFTWARE Internet
applications require specialized software. Without this software,
the Internet becomes a tangled web where it is difficult to find the information
you're looking for, where transactions can go astray and where hackers and
viruses can bring your systems to a halt.
DIGITAL has addressed these issues. Our AltaVista family includes firewall,
tunneling, indexing and desktop-to-Web search software for x86 Windows, Windows
NT and Sun Solaris desktops and servers as well as Alpha systems running Windows
NT and DIGITAL UNIX.
With DIGITAL Internet transaction processing software and the recent
introduction of the advanced Millicent technology showcase, DIGITAL has the
specialized software and associated services needed to support Internet
Commerce. Millicent is the first cyber-commerce program that demonstrates how
users can buy and sell information over the World Wide
- --------------------------------------------------------------------------------
KVAERNER
BUILDING AN INTRANET TO LINK 40,000 EMPLOYEES AND 400 OFFICES
WORLDWIDE
www.kvaerner.com
When Kvaerner--a multinational shipping and construction company with its roots
in Norway and its international headquarters in London--wanted to link its
worldwide subsidiaries, they named DIGITAL and Microsoft as their preferred
vendors for Internet/intranet solutions throughout the enterprise.
Service and support were critical issues. Kvaerner wanted to deal with a service
organization that had first-hand experience establishing and operating its own
enterprise-wide intranet. They looked for a service organization that could
demonstrate its ability to support a global enterprise and a user base
comparable in size to their own.
With facilities thoroughout the world, DIGITAL Worldwide Services is positioned
to work with Kvaerner subsidiaries on a one-to-one basis, while at the same time
providing the coordination necessary to build a highly reliable and functional
worldwide intranet based on Windows NT, Microsoft Internet Explorer and
high-performance DIGITAL servers.
14
<PAGE> 17
[Photograph of 64-bit AlphaServer 4000 system]
The 64-bit AlphaServer 4000 system is part of DIGITAL's complete
family of ready-to-run Alpha and x86 Internet and intranet servers.
Designed for round-the-clock, 24x365 operation, AlphaServer systems
provide the high availability, data integrity and flexible
scalability needed to support growing Internet applications.
Web at prices as low as a tenth of a cent. It makes "pay-per-click" surfing
affordable for the user and opens a profitable new revenue stream for publishers
who can now sell news and sports stories, fiction, features, financial reports
and other information on a page-by-page basis.
To understand the potential of selling products and publishing information over
the Internet, you only have to look at Amazon.com and PointCast. Amazon.com, the
"electronic bookstore," has been growing 2,000 percent a year. Fortunately,
Amazon.com uses AlphaServer systems that have the scalability to handle this
growth for another 20 years.
PointCast is the leader in "push" technology, using the Internet to provide
customized news and information services to millions of individual users, 24
hours a day. Like Amazon.com, PointCast depends on highly scalable AlphaServer
systems to keep pace with its aggressive growth.
- --------------------------------------------------------------------------------
VIRTUAL TELECOM, INC.
Providing Internet access in Switzerland and realtime financial
information services across Europe
www.firstquote.com
Virtual Telecom recognized that its core business is providing value-added
services over the Internet. The Swiss company wanted to provide Internet Service
Providers instant access to the network through multiple high-speed
communications links through a major Internet hub.
Under a multiyear, multimillion-dollar Operations Management Services contract,
DIGITAL designed, implemented and is managing the Virtual Telecom network.
In addition to Internet access, Virtual Telecom's FirstSwiss service includes
Web hosting, Web development, publishing and online catalog services. Virtual
Telecom also provides 1stQuote, a comprehensive range of realtime financial data
services over the Internet to banks, investment companies and brokerage houses
throughout Europe.
The Virtual Telecom network features DIGITAL AltaVista firewall software at each
point of presence to protect against unauthorized access and capitalizes on
alliances with Swiss Telecom PTT and British Telecom for high-speed
telecommunications services.
15
<PAGE> 18
[Photograph of workers in a factory engaged in a manufacturing process]
SIEMENS (U.K.)
Building a scalable manufacturing control and management information
system
www.siemens.co.uk
Service, support for both Windows NT and UNIX, solutions that are scalable from
x86 desktops to Alpha clusters, strategic alliances with key software
companies--these are reasons customers give for partnering with DIGITAL.
Siemens is no exception. When they set up a new semiconductor wafer
manufacturing plant in the U.K., they needed a manufacturing system to control
production processes, improve product quality, lower costs and reduce
time-to-market. At the same time, they wanted a scalable mail and messaging
system that would initially support up to 1,200 users and link their U.K.
plant to other Siemens facilities in both Europe and North America.
In the DIGITAL solution, x86-based Prioris servers and UNIX-based AlphaServer
systems work together to support CELLworks, Microsoft Exchange and Oracle
database software. The DIGITAL solution enables Siemens to track work in
progress to control inventories and ensure just-in-time delivery to its
customers.
DIGITAL Worldwide Services played a key role in developing and implementing a
scalable solution that would allow Siemens to add new users and applications to
the network without interrupting work or replacing existing equipment.
<PAGE> 19
WINDOWS NT:
DELIVERING ENTERPRISE
SOLUTIONS
AS CUSTOMERS LIKE THE NEW YORK MERCANTILE EXCHANGE, LOCKHEED MARTIN AND THE
SOUTHERN COMPANY IMPLEMENT CLIENT/SERVER APPLICATIONS AND BUILD MAIL AND
MESSAGING SYSTEMS TO SUPPORT TENS OF THOUSANDS OF USERS, THE CHALLENGE IS
INTEGRATING THESE APPLICATIONS INTO EXISTING COMPUTING ENVIRONMENTS.
Integration is DIGITAL's strength. In fact, DIGITAL was ranked as the industry's
top systems integrator by readers of Computerworld in its annual Customer
Satisfaction Survey.
It is the need to integrate computing resources around a platform optimized for
client/server and network computing that drives the rapid deployment of Windows
NT. The trend is accelerating. According to International Data Corporation, the
market for Windows NT systems, software and services will be an estimated $20.7
billion in the year 2000. DIGITAL intends to capture a significant share of this
growing market.
THE ALLIANCE FOR ENTERPRISE COMPUTING Windows NT was designed for client/server
environments. Under the Alliance for Enterprise Computing, DIGITAL and Microsoft
are working together to provide products and services to support a single,
integrated client/ server environment that extends from the desktop, across the
enterprise and out over the whole world through Internet communications.
DIGITAL has built the largest Windows NT service and support organization in the
world. We now have approximately 1,600 Microsoft certified systems engineers and
solution developers--a number that soon will grow to 2,500. We developed
software that supports the development of applications that will run across
Windows NT, DIGITAL UNIX and OpenVMS systems. We introduced the first Windows NT
clusters. And our x86 and AlphaServer systems own the benchmarks for Windows NT
performance. In tests conducted by Pro/E: The Magazine, a DIGITAL Personal
Workstation running Windows NT outperformed all workstations tested, regardless
of Central Processing Unit architecture or operating system. In fact, it
outperformed a similarly priced Sun system running UNIX by 171 percent.
17
<PAGE> 20
Microsoft, for its part, is developing a 64-bit version of Windows NT for
initial release on Alpha. But the relationship between the two companies extends
beyond technology. It includes joint engineering, marketing, sales and service
programs. Working in partnership, we've helped customers build user-focused
enterprise systems and networks, and we have installed more than 500,000
Microsoft Exchange seats and have another 500,000 under contract.
[Photograph of DIGITAL HiNote VP laptop computer]
Winner of PC/Computing magazine's "Annual Torture Test"
and designated the "Best Windows NT Hardware Product of the Year"
by Windows Magazine, the DIGITAL HiNote VP family of laptop
computers features the latest in MMX processor, graphics and
removable media technologies.
"THIN CLIENTS"--REDUCING DESKTOP SUPPORT COSTS A whole new class of Internet
devices is emerging that will enable people to access the Internet--anywhere,
anytime. Collectively called "thin clients," these devices often combine
cellular telephone, pager, fax, handwriting recognition and computing functions
in a single unit. It would never have been possible to develop many of these new
devices without high-performance microprocessors that will run on a battery.
DIGITAL is leading the way. Our StrongARM microprocessor operates at speeds up
to 250 million instructions per second while running on AA batteries. This is a
two-to-one advantage in both absolute performance and price/ performance over
competing microprocessors.
The concept of the "thin client" also addresses the cost of purchasing and
supporting desktop and mobile systems in client/server networks where
applications and/or data reside on a central server rather than on the client.
Because data processing controls the server, it can control software used by
thin clients throughout select workgroups or the entire enterprise. There is no
longer the problem of individual users running different versions of the same
application. New software releases no longer have to be installed one desktop at
a time. Data is centralized so it can be easily secured and backed up. The
potential savings are significant.
WINDOWS NT SERVICE AND SUPPORT DIGITAL is the first computer company to offer a
comprehensive set of life-cycle services focused on the growing demand for
Windows NT and Microsoft Exchange migration, Internet and intranet solutions,
and data warehousing using Microsoft SQL Server. In providing these services,
DIGITAL intends to help customers decrease implementation time and lower costs.
- --------------------------------------------------------------------------------
LOCKHEED MARTIN
Helping 120,000 users in 630 locations worldwide get the message
www.lmco.com
When Lockheed and Martin-Marietta merged to become one of America's largest
civilian and military aerospace manufacturing and contracting companies, they
needed a mail and messaging system with the muscle to support 120,000 users in
630 locations. They selected DIGITAL through a competitive process for an
enterprise-wide Windows NT solution that is expected to reduce long-term costs
by simplifying their messaging infrastructure and improving productivity.
Working with Microsoft, its partner in the Alliance for Enterprise Computing,
DIGITAL is implementing the largest Microsoft Exchange network in the world.
Running under Windows 95 and Windows NT, Microsoft Exchange provides a complete,
highly functional mail and messaging system that includes address book, auto
signature, remote mail and public folder functions. This last provides a forum
where authorized members of a workgroup or product team can share information
and ideas.
The DIGITAL/Microsoft solution for Lockheed Martin includes AlphaServer systems
with DIGITAL's X.500 directory services software, Microsoft Windows NT and
Exchange software, and DIGITAL program management, network design,
implementation and ongoing support services.
18
<PAGE> 21
[Photograph of DIGITAL Venturis FX-2 PC client]
DIGITAL's Venturis FX-2 PC client provides breakthrough performance at
industry-standard prices with leading-edge features, including x86 MMX
technology and DIGITAL ClientWORKS systems management and control software.
This software provides powerful desktop management, asset management and
configuration utilities.
We provide Internet/intranet enterprise services to help organizations
understand the impact the Microsoft Merchant Server and the Microsoft Commercial
Internet System will have on their businesses and help them successfully deploy
and manage solutions for Internet Commerce.
SQL DATA WAREHOUSING As businesses migrate users and applications to
client/server environments, they often find themselves with disparate data
sources. DIGITAL is addressing this problem with the DIGITAL DataMart. This
innovative combination of Microsoft SQL Server with products from Informatica
Corporation and Business Objects SA provides the software and services needed to
map Microsoft SQL server to industry-standard databases from Oracle, Informix
and Sybase.
WINDOWS NT, FX!32 AND ALPHA Performance and scalability are critical issues in
many enterprise networks and applications. DIGITAL supports Windows NT on both
its x86 and Alpha platforms to provide the most extensive scalability in the
industry. In addition, with DIGITAL FX!32 translation and emulation software,
Alpha systems can run the entire library of Windows NT and Windows 95
applications.
- --------------------------------------------------------------------------------
SOUTHERN COMPANY
America's largest electric utility powers up with Windows NT on
DIGITAL server systems
www.southernco.com/site/home.asp
Deregulation is coming to the U.S. electric utility industry. That puts a
premium on finding ways to improve customer service and cut costs. The Southern
Company is responding to this changing marketplace by standardizing on Windows
NT to gain a cost-effective solution.
The Southern Company network currently has more than 17,000 users and 500
NetWare servers from many different vendors. These are being replaced by DIGITAL
Alpha and Prioris systems running Windows NT, Microsoft Exchange and SMS in a
BackOffice environment.
As in many projects of this size, DIGITAL is working closely with Microsoft and
its other business partners. Universal Data Consultants provided systems and
network integration services for the Southern Company, while Wyle Electronics, a
billion-dollar DIGITAL distribution partner, is delivering the DIGITAL systems
on a "just-in-time" schedule.
19
<PAGE> 22
[Photograph of a man on a telephone and another man viewing a screen in a room
with multiple computer and television screens]
- --------------------------------------------------------------------------------
- --------------------
OPTUS COMMUNICATIONS
- --------------------
------------------------------------------
Caring for customers across the Australian
continent while introducing new wireline,
mobile, broadband and satellite services
------------------------------------------
----------------
www.optus.com.au
----------------
"Convergence billing" --providing a single bill for local, long distance, mobile
and cable-based local-loop telephone service, Internet access and cable TV--is
the major customer care issue facing telecommunications companies as they
introduce new services.
Using software developed by Kenan Systems, Optus Communications is one of the
first telecommunications companies to deploy a UNIX-based billing system to
support multiple communications services on an enterprise-wide basis. This
high-performance hardware/software solution is capable of supporting 15 million
residential subscribers in a production environment.
Running on DIGITAL Alpha systems, Kenan's Arbor/BP software owns the benchmark
for online telecommunications billing and customer care, processing four million
call details per hour.
Optus has been a major customer since 1992, when DIGITAL was initially selected
as the prime contractor and system integrator for building the Operational
Support Systems--the network operating, billing and administrative
systems--needed to control and manage the Australia-wide telecommunications
network.
20
<PAGE> 23
DIGITAL UNIX AND OPENVMS:
OWNING THE STANDARD FOR HIGH-
PERFORMANCE 64-BIT COMPUTING
PERFORMANCE AND AVAILABILITY ARE ISSUES WHENEVER YOU HAVE LARGE
OR COMPLEX APPLICATIONS, MASSIVE AMOUNTS OF DATA OR A NETWORK
THAT SUPPORTS HUNDREDS OR EVEN THOUSANDS OF USERS. THESE ARE
ISSUES THAT DIRECTLY AFFECT SOFTWARE DEVELOPERS AND SYSTEMS
INTEGRATORS AS WELL AS USERS. CUSTOMERS ARE LOOKING FOR FULLY
SUPPORTED HARDWARE/SOFTWARE SOLUTIONS THAT DELIVER THE
PERFORMANCE, AVAILABILITY AND SCALABILITY TO MEET THEIR GROWING
NEEDS.
That's why systems integrators like Ernst & Young and Andersen
Consulting and leading application developers like SAS, Platinum
and Baan work in partnership with DIGITAL.
These companies recognize the need for 64-bit UNIX systems that
can handle massive applications. DIGITAL UNIX systems enabled
Schering-Plough's Health Products unit to implement a logistics
program that saved the company two million dollars in inventory,
transportation and accounts receivable costs. Alpha systems
running Digital UNIX and SAP R/3 software enabled Danish Railways
to implement a corporate-wide accounting and finance system.
Our partners also recognize the need for systems that deliver the
very highest levels of reliability and availability. This is the
strength of DIGITAL's OpenVMS operating system.
With 64-bit DIGITAL UNIX and OpenVMS systems, customers have a
choice. And they have the opportunity to run their applications
on the system that sets the standard for 64-bit
computing--DIGITAL's Alpha platform.
ALPHA PERFORMANCE: TWO BILLION INSTRUCTIONS PER SECOND
High-performance computing starts with high-performance
processors. Here DIGITAL has a clear-cut advantage.
"AlphaPowered" systems push the envelope for high-performance
technical computing, data warehousing, transaction processing and
visual computing applications, including videoconferencing, 3-D
modeling, video editing, multimedia authoring, image rendering
and animation. With patented cache management, branch prediction
and superscalar instruction execution technology, high-end Alpha
microprocessors run at speeds of more than 600 MHz to execute
more than two billion instructions per second.
21
<PAGE> 24
[Photograph of Digital AlphaServer 8000 system]
AlphaServer 8000 systems support up to 14 symmetric multiprocessors, DIGITAL
UNIX TruClusters, 28 gigabytes of memory and 39 terabytes of storage to provide
better-than-mainframe and supercomputer performance. Business-critical
applications include data warehousing, high-performance technical computing,
sophisticated telecommunications applications and large-scale database
management.
Alpha microprocessors are now available from both DIGITAL and its
semiconductor partners. Mitsubishi and Samsung have joined
DIGITAL in developing, manufacturing and marketing Alpha
microprocessors to deliver performance leadership where
performance counts.
DIGITAL UNIX, THE HIGH-PERFORMANCE OPERATING SYSTEM More than 50
percent of all DIGITAL UNIX customers are new customers because
this 64-bit operating system--paired with AlphaServer
systems--supports large-scale data warehousing, visual computing
and other high-performance business, scientific and networking
applications that could not be cost-effectively addressed by
competitive systems. DIGITAL leads the industry in UNIX cluster
performance. The transaction processing benchmark set in April
1996 on a four-node DIGITAL TruCluster system has not been
matched by any other four-node cluster on the market.
HIGH-AVAILABILITY OPENVMS CLUSTERS FOR BUSINESS-CRITICAL
APPLICATIONS DIGITAL pioneered the cluster concept in 1983 and
continues to set the standard by which clustering and continuous
computing solutions are measured. DIGITAL cluster technology
provides bulletproof, round-the-clock, 24x365 disaster tolerance.
It supports VAX and Alpha systems in mixed clusters, Windows NT
clusters, multisite configurations within a 500-mile radius and
online backup. In addition, DIGITAL cluster technology allows you
to add processors, memory, storage and other devices to a DIGITAL
server without interrupting ongoing processes.
In a recent review of cluster computing, an independent research
organization, Technology Business Research, examined various
features including scalability, availability, configuration
flexibility, connectivity and applications support. The survey
concluded that DIGITAL OpenVMS clusters continue to lead over
Hewlett-Packard, IBM, NCR and Sun Microsystem clusters.
VERY LARGE MEMORY, VERY LARGE DATABASE APPLICATIONS As corporate
networks embrace desktop systems throughout the enterprise and
link to the worldwide Internet, there is an explosive growth in
the forest of data residing within the enterprise. Unfortunately,
growth in raw data is not always matched by growth in
information. It becomes a case of not being able to see the trees
(information) for the forest.
- --------------------------------------------------------------------------------
- ---------------------------
THE PAUL SCHERRER INSTITUTE
- ---------------------------
--------------------------------------------------------
Supporting 70 to 80 concurrent research programs that
reach beyond the capabilities of a university department
--------------------------------------------------------
----------
www.psi.ch
----------
Under the auspices of the Board of Swiss Federal Institutes of Technology, the
Paul Scherrer Institute in Villigen, Switzerland provides the computer
infrastructure to support the research activities of its 1,100-person staff,
including 370 scientists plus 500 to 800 guest scientists each year.
Unlike many commercial environments where applications and workloads are
constant, research calls for maximum flexibility. Systems are constantly
reconfigured and reprogrammed. This places a premium on systems that are
modular, scalable and easy to program and configure.
Research also places a premium on high-capacity, flexible data storage. For
example, the data generated from the Institute's proton therapy facility for
cancer treatment must be retained and protected for at least a decade--as one
program may open an avenue that spurs further research in a never-ending cycle.
Realtime data collection for nuclear physics and material science investigations
conducted on the Institute's particle accelerator also produce massive volumes
of raw data that require online storage.
The Paul Scherrer Institute's DIGITAL UNIX, OpenVMS Cluster and DIGITAL
StorageWorks systems provide the capacity and flexibility needed in a scientific
environment. This type of interoperability, high-availability and raw
performance is critical in realtime and large-scale research programs.
22
<PAGE> 25
[Photograph of Digital Personal Workstation]
DIGITAL Personal Workstations offer outstanding performance, a choice of
operating systems, leading 3-D graphics and the industry's only
CISC-to-RISC upgrade. For Windows NT users, DIGITAL offers the i-Series, which
features Intel Pentium Pro processors, or the a-Series, which is built on the
super-powerful DIGITAL Alpha processors. For the most demanding UNIX
applications, the au-Series features DIGITAL Alpha processors running DIGITAL
UNIX.
Our business partners are addressing this problem. Oracle, Sybase, Informix,
Software AG and other database software companies have developed database
solutions that capitalize on DIGITAL 64-bit Very Large Memory (VLM) and Very
Large Database (VLDB) technology. These applications run at blinding speed. For
example, with Oracle 64-bit database software, some applications will run up to
200 times faster on an AlphaServer system than they can on the fastest 32-bit
systems.
WINDOWS NT INTEGRATION Through the DIGITAL Windows NT integration program,
corporate customers and software developers can converge on a source code base,
an interoperable middleware base and a single developmental tool set for all
DIGITAL UNIX, OpenVMS and Windows NT applications.
WORLDWIDE SERVICE AND SUPPORT Planning, designing, implementing, managing and
maintaining high-performance enterprise systems and networks can be a daunting
task requiring the ability and patience to deal with multiple systems, software
and communications vendors.
In many cases, business solutions must be deployed around the world. This
requires sophisticated software and worldwide support services. DIGITAL and
Computer Associates formed the Alliance for Enterprise Management to create a
standard, unified, enterprise management environment across DIGITAL UNIX,
OpenVMS, Windows NT and legacy mainframe systems.
DIGITAL and MCI formed a formal alliance to help businesses utilize Internet
technology and communications and build corporate intranets.
Like a growing number of customers, our business partners recognize that
DIGITAL's strengths in Internet connectivity, Windows NT integration and
high-performance computing are key to "Winning in a Networked World."
- --------------------------------------------------------------------------------
- -------------------
BEST WESTERN HOTELS
- -------------------
----------------------------------------
Building a reservation system that knows
your personal preferences
----------------------------------------
-------------------
www.bestwestern.com
-------------------
Best Western International, Inc. knows how personal service can attract and keep
customers. They've built a reservation system that knows your personal
preferences and keeps track of every reservation and every one of the nearly
300,000 rooms throughout the Brand. This is a big job. Best Western
International, Inc. operates almost 3,700 hotels in 73 countries and territories
throughout the world.
The reservation system is based on DIGITAL AlphaServer systems using VLM (Very
Large Memory) technology and an Oracle7 database.
With this new system, any desk clerk or travel agent can instantly book and
confirm room reservations at any Best Western Hotel.
The system provides business and leisure travelers with the kind of personal
service that translates into a higher occupancy rate--and high occupancy means
higher revenue. In fact, Best Western International, Inc. expects that their new
reservation system will generate $50 million in additional revenue.
23
<PAGE> 26
DELIVERING ON THE PROMISE:
THE INTERNET, OUR CHILDREN AND
THE ENVIRONMENT
AS A LEADER IN THE DEVELOPMENT OF THE INTERNET, DIGITAL HAS A
RESPONSIBILITY TO HELP CREATE A WORLD WHERE INFORMATION AND IDEAS
CAN BE FREELY EXCHANGED.
This past year, we took a leadership role in NetDay, an
innovative program to provide students and teachers with access
to the Internet. We donated servers, PCs and networking packages
to schools where DIGITAL volunteers invested their own time and
energy wiring and installing systems.
This kind of involvement is not new. As we celebrate our 40th
Anniversary, we continue to support innovative programs designed
to make this a better world for the next generation. This past
year, through our Worldwide Children and Youth Initiative, we
awarded cash grants to 70 local children's charities in 27
countries.
But our responsibility goes beyond helping children achieve their
potential. We want every child to enjoy a healthy environment.
DIGITAL's corporate Environment, Health and Safety (EHS) policy
statement, "Earth Vision," provides the framework for action. For
example, we operate Materials Recovery facilities in Contoocook,
New Hampshire and Nijmegen, the Netherlands to demanufacture 28
million pounds of discarded electronic equipment every year.
Intact parts are removed, tested and stocked as spares. Gold,
platinum and silver are extracted and resold. Plastic, glass and
other materials are recycled. Less than one-tenth of one percent
of the material ends up in landfills. The Contoocook facility is
one of the first 20 organizations in the U.S. to win ISO 14001
certification for demanufacturing.
Another example of DIGITAL's commitment to the environment was
our part in establishing a unique, free-access educational Web
site (http://www.endangeredzone.com) with high-quality images and
searchable information about endangered species around the world.
Developed in partnership with Oracle and Virage Inc., the Web
site incorporates an Oracle8 database to create dynamic pages so
children can build a personalized field journal of information
for research reports, study guides or extracurricular projects.
Programs like these demonstrate our belief that we can make a
difference; that as individuals and as a company we can use our
talents and technology to make this a better world.
[Photograph of several people who volunteered for the City Year service
project.]
DIGITAL is a national founder of City Year, a service corps that brings young
adults from diverse cultural, educational and socioeconomic backgrounds together
for full-time community service. During its annual conference held in Boston,
DIGITAL employees (in maroon shirts, left to right: Kathy Coyle, Kate Seibert,
Lew Karabatsos and Jim Gray) joined City Year corps members to help landscape
the grounds of an inner-city school.
(Photo credit: Chris Johnson)
24
<PAGE> 27
FINANCIAL STATEMENTS
26 Eleven-year financial summary
28 Management's discussion and analysis of
financial condition and results of operations
33 Report of management
33 Report of independent accountants
CONSOLIDATED FINANCIAL STATEMENTS
34 Consolidated statements of operations
35 Consolidated balance sheets
36 Consolidated statements of cash flows
37 Consolidated statements of stockholders' equity
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38 Note A: Significant accounting policies
39 Note B: Geographic operations
41 Note C: Income taxes
42 Note D: Capitalized computer software development
costs
43 Note E: Restructuring actions
44 Note F: Debt
45 Note G: Postretirement and other postemployment
benefits
48 Note H: Commitments, contingencies and risk factors
48 Note I: Financial instruments
50 Note J: Investing and divesting activities
51 Note K: Stock plans
53 Note L: Stockholders' equity
54 Note M: Subsequent event
SUPPLEMENTARY INFORMATION
54 Quarterly financial data
55 Operating Management and Staff Officers
56 Directors
57 Committees of the Board
58 Corporate Consulting Engineers
59 Investor information
Digital Equipment Corporation 25
<PAGE> 28
ELEVEN-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(dollars in millions except per share data and stock prices) 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS(1)
Product sales $ 7,197 $ 8,362 $ 7,616 $ 7,191
Service revenues 5,850 6,200 6,197 6,260
- ---------------------------------------------------------------------------------------------------------------------------
Total operating revenues 13,047 14,563 13,813 13,451
- ---------------------------------------------------------------------------------------------------------------------------
Cost of product sales and service expense 8,725 9,756 9,392 8,912
Research and engineering expenses 1,014 1,062 1,040 1,301
Selling, general and administrative expenses(2) 3,177 3,859 3,266 5,234
- ---------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 130 (115) 115 (1,996)
- ---------------------------------------------------------------------------------------------------------------------------
Other (income)/expense, net(3) (48) (48) 40 24
- ---------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative
effect of changes in accounting principles 178 (68) 76 (2,020)
- ---------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 37 44 18 85
- ---------------------------------------------------------------------------------------------------------------------------
Net income/(loss)(4) $ 141 $ (112) $ 122 $ (2,156)
- ---------------------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable per common share(4) $ .68 $ (.97) $ .59 $ (15.80)
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (in millions) 155 152 146 137
- ---------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Inventories $ 1,503 $ 1,821 $ 2,054 $ 2,064
Accounts receivable, net of allowances 2,930 3,223 3,219 3,319
Working capital 3,035 3,188 3,026 1,832
Net property, plant and equipment 2,104 2,223 2,269 3,129
Total assets 9,693 10,075 9,947 10,580
Long-term debt 743 999 1,013 1,011
Stockholders' equity 3,545 3,606 3,528 3,280
Stockholders' equity per common share 20.81 20.62 20.89 20.24
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS AND OTHER INFORMATION
Current ratio 1.7:1 1.8:1 1.7:1 1.4:1
Quick ratio 1.3:1 1.2:1 1.1:1 .9:1
Debt/debt plus equity 22.1% 22.0% 22.5% 24.1%
Operating income/(loss) as a percentage of revenues 1.0% (.3)% .8% (14.8)%
Net income/(loss) as a percentage of revenues 1.1% (.8)% .9% (16.0)%
Return on equity 3.9% (3.1)% 3.6% (52.8)%
Return on assets 1.4% (1.1)% 1.2% (20.0)%
Non-U.S. revenues as a percentage of total revenues 67% 66% 65% 62%
Days sales outstanding 76 78 77 76
Number of employees at year-end 54,900 59,100 61,700 77,800
Number of shares outstanding at year-end (in millions) 151 156 150 142
Common stock yearly high and low sales prices $ 47-25 $ 76-35 $ 49-18 $ 43-18
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts may not be additive due to rounding.
(2) Includes restructuring charges of $492M in 1996, $1,206M in 1994, $1,500M
in 1992, $1,100M in 1991 and $550M in 1990. Includes reduction in carrying
value of intangible assets of $310M in 1994.
26 Digital Equipment Corporation
<PAGE> 29
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 7,588 $ 7,696 $ 8,299 $ 8,146 $ 8,190 $ 7,541 $ 6,254
6,783 6,235 5,612 4,797 4,552 3,934 3,135
- -------------------------------------------------------------------------------------------------------------------------
14,371 13,931 13,911 12,943 12,742 11,475 9,389
- -------------------------------------------------------------------------------------------------------------------------
8,631 8,132 7,278 6,795 6,242 5,468 4,514
1,530 1,754 1,649 1,614 1,525 1,306 1,010
4,447 6,181 5,572 4,521 3,639 3,066 2,253
- -------------------------------------------------------------------------------------------------------------------------
(237) (2,136) (588) 13 1,336 1,635 1,612
- -------------------------------------------------------------------------------------------------------------------------
(13) (57) (68) (111) (85) (106) (77)
- -------------------------------------------------------------------------------------------------------------------------
(224) (2,078) (520) 124 1,421 1,741 1,689
- -------------------------------------------------------------------------------------------------------------------------
27 232 97 50 348 435 552
- -------------------------------------------------------------------------------------------------------------------------
$ (251) $ (2,796) $ (617) $ 74 $ 1,073 $ 1,306 $ 1,137
- -------------------------------------------------------------------------------------------------------------------------
$ (1.93) $ (22.39) $ (5.08) $ .59 $ 8.45 $ 9.90 $ 8.53
- -------------------------------------------------------------------------------------------------------------------------
130 125 122 125 127 132 133
- -------------------------------------------------------------------------------------------------------------------------
$ 1,755 $ 1,614 $ 1,595 $ 1,538 $ 1,638 $ 1,575 $ 1,453
3,020 3,594 3,317 3,207 2,965 2,592 2,312
2,964 2,015 3,777 4,332 4,501 4,516 4,377
3,178 3,570 3,778 3,868 3,646 3,095 2,127
10,950 11,284 11,875 11,655 10,668 10,112 8,407
1,018 42 150 150 136 124 269
4,885 4,931 7,624 8,182 8,036 7,510 6,294
36.19 38.58 61.18 66.76 66.12 59.47 49.87
- -------------------------------------------------------------------------------------------------------------------------
1.8:1 1.4:1 2.0:1 2.3:1 2.9:1 2.9:1 3.4:1
1.2:1 1.0:1 1.4:1 1.6:1 1.9:1 2.0:1 2.4:1
17.5% 1.8% 2.2% 2.0% 2.0% 3.6% 4.2%
(1.7)% (15.3)% (4.2)% .1% 10.5% 14.2% 17.2%
(1.7)% (20.1)% (4.4)% .6% 8.4% 11.4% 12.1%
(5.1)% (44.5)% (7.8)% .9% 13.8% 18.9% 18.9%
(2.3)% (24.1)% (5.2)% .7% 10.3% 14.1% 14.6%
64% 63% 60% 56% 55% 50% 47%
69 83 76 86 76 75 78
89,900 107,900 115,100 116,900 118,400 113,900 103,000
135 128 125 123 122 126 126
$ 49-30 $ 72-33 $ 87-45 $ 103-70 $ 122-86 $ 199-99 $ 174-82
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(3) See Note A of Notes to consolidated financial statements.
(4) The cumulative effect of changes in accounting principles were: a one-time
benefit of $65M, or $.44 per share, on net income and net income per share
for fiscal 1995; a one-time charge of $71M, or $.51 per share, and a
one-time benefit of $20M, or $.14 per share, on net loss and net loss per
share for fiscal 1994; and a one-time charge of $485M or $3.89 per share on
net loss and net loss per share in fiscal 1992.
Digital Equipment Corporation 27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REVENUES
- --------------------------------------------------------------------------------
In fiscal 1997, total operating revenues were $13.1 billion, a decrease of $1.5
billion or 10% following an increase of $750 million or 5% and $362 million or
3% in fiscal 1996 and 1995, respectively. Non-U.S. revenues accounted for 67% of
total operating revenues in fiscal 1997, up from 66% and 65% in fiscal 1996 and
1995, respectively (see Note B).
<TABLE>
<CAPTION>
Revenues (dollars in billions)
- --------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Product sales $ 7.2 $ 8.4 $ 7.6
% of total revenues 55% 57% 55%
- --------------------------------------------------------------------------------
Service revenues $ 5.9 $ 6.2 $ 6.2
% of total revenues 45% 43% 45%
- --------------------------------------------------------------------------------
Total revenues $13.1 $14.6 $13.8
- --------------------------------------------------------------------------------
</TABLE>
Revenues from product sales for fiscal 1997 were $7.2 billion, compared with
$8.4 billion and $7.6 billion in fiscal 1996 and 1995, respectively. The decline
in product sales in fiscal 1997 reflects the adverse effects of currency rate
movements, the discontinuation of the retail personal computer and certain
component product lines, as well as an anticipated reduction in inventories in
distribution channels.
Alpha-based systems revenues represented 32% of fiscal 1997 product sales, up
from 29% in fiscal 1996 and 22% in fiscal 1995. For fiscal 1997, Alpha-based
systems revenues decreased 4%, compared with an increase of 46% and 76% in
fiscal 1996 and 1995, respectively. The decline was due principally to a
decrease in desktop product (client) sales, partially offset by an increase in
server revenues. Revenue from Intel-based computers represented 28% of fiscal
1997 product sales, up from 26% in both fiscal 1996 and 1995. The increase was
due principally to growth in server revenues. The Corporation's other product
businesses represented 40%, 45% and 52% of product sales in fiscal 1997, 1996
and 1995, respectively. These revenues continue to represent a smaller portion
of product sales, reflecting the withdrawal from certain non-strategic
businesses, the transition from VAX systems, and a decline in network products
sales in fiscal 1997 compared with fiscal 1996, partially offset by an increase
in storage subsystem revenues.
In fiscal 1997, service revenues were $5.9 billion, down from $6.2 billion for
both fiscal 1996 and 1995. The decline in service revenues was due principally
to the adverse effects of currency rate movements, an anticipated decline in the
Digital products maintenance business, as well as the strategic refocusing of
the Corporation's systems integration business, partially offset by growth in
multivendor services and operations management services.
The Corporation's operating results in fiscal 1997 were adversely impacted by
the continued strengthening of the U.S. dollar. Removing the effects of foreign
currency exchange rate movements, the decline in revenue for fiscal 1997 would
have been 7%, compared with 10% as reported. The net effect of foreign currency
exchange rate movements on revenues was insignificant in fiscal 1996 when
compared with fiscal 1995.
During fiscal 1997, the Corporation sold certain software products and other
assets. The Corporation continues to sell certain of these software products
under royalty agreements. Revenues from the software products sold by the
Corporation had an immaterial impact on consolidated operating revenues. During
fiscal 1996, the Corporation sold its learning services business and several
small businesses. During fiscal 1995, the Corporation sold portions of its
storage business, its relational database business, a software distribution
subsidiary, a contract manufacturing business and a semiconductor facility. In
addition, as part of the Corporation's restructuring actions, the Corporation
transferred part of its business in Germany to a new, independent,
employee-owned company, effective October 1, 1994. In fiscal 1994, the divested
businesses represented 8% of consolidated operating revenues and did not have a
material effect on the consolidated net loss from operations (see Note J).
- --------------------------------------------------------------------------------
DOMESTIC AND NON-U.S. REVENUES
* Domestic @ Non-U.S.
Dollars in billions
[BAR CHART]
28 Digital Equipment Corporation
<PAGE> 31
EXPENSES AND PROFIT MARGINS
- --------------------------------------------------------------------------------
The Corporation's total gross margin for fiscal 1997 was 33% of total operating
revenues, unchanged from fiscal 1996 and up from 32% in fiscal 1995.
<TABLE>
<CAPTION>
Gross margin (dollars in billions)
- --------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Product sales $ 2.5 $ 2.8 $ 2.2
% of related revenues 35% 34% 29%
- --------------------------------------------------------------------------------
Service revenues $ 1.8 $ 2.0 $ 2.2
% of related revenues 31% 32% 36%
- --------------------------------------------------------------------------------
</TABLE>
The Corporation's gross margin on fiscal 1997 product sales was 35%, compared
with 34% and 29% of product sales for fiscal 1996 and 1995, respectively. The
continued improvement in product gross margin was due principally to
manufacturing cost efficiencies and improved cycle times, an increased
proportion of higher-margin server revenues, and the effect of more competitive
product offerings.
Gross margin on service revenues was 31% in fiscal 1997, compared with 32% and
36% of service revenues for fiscal 1996 and 1995, respectively. The decline in
service gross margin in fiscal 1997 and fiscal 1996 compared with the prior year
was due principally to improved product reliability, investments in service
delivery capabilities and the continued shift in the mix of service revenues
toward lower-margin service offerings. During fiscal 1997, service gross margins
stabilized for the first time since fiscal 1994.
<TABLE>
<CAPTION>
Operating expenses (dollars in billions)
- --------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Research & engineering
expenses $ 1.0 $ 1.1 $ 1.0
% of total revenues 8% 7% 8%
- --------------------------------------------------------------------------------
Selling, general and
administrative expenses $ 3.2 $ 3.4 $ 3.3
% of total revenues 24% 23% 24%
- --------------------------------------------------------------------------------
Restructuring charges -- $ 0.5 --
% of total revenues -- 3% --
- --------------------------------------------------------------------------------
</TABLE>
Research and engineering (R&E) spending totaled $1.0 billion for fiscal 1997,
compared with $1.1 billion and $1.0 billion in fiscal 1996 and 1995,
respectively. The slight decrease in R&E expenses in fiscal 1997 was due
principally to the Corporation's withdrawal from certain non-strategic
businesses and the elimination of related development costs (see Note J). The
Corporation believes that its level of R&E spending is appropriate to support
current operations and to offer competitive, market-driven products.
Selling, general and administrative (SG&A) expenses totaled $3.2 billion, down
from $3.4 billion in fiscal 1996 and $3.3 billion in fiscal 1995. The decline in
fiscal 1997 SG&A expenses reflects reductions in population and facilities
expenditures, reduced variable costs and the positive effects of currency rate
movements, partially offset by increases in salaries and wages and investment in
demand generation activities. The Corporation's efforts to achieve a competitive
cost structure and further increase productivity are ongoing. For fiscal 1996,
SG&A expenses reflected increased variable costs associated with higher revenue
levels, increases in salaries and wages and administrative systems investments,
partially offset by the favorable effects of restructuring actions taken in the
first half of fiscal 1995.
During fiscal 1997, the Corporation amended its U.S. postretirement medical
plan, changing the eligibility requirement, and therefore the period over which
benefits are earned and accrued. As a result of the amendment, the Corporation
recognized a one-time curtailment gain of $52 million (see Note G). In addition,
the shift of employees to managed care and other factors had a significant
favorable impact on the Corporation's postretirement medical expense during
fiscal 1997. The impact of these items was substantially offset by the write-off
of certain intangible assets and other provisions.
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 planned employee separations are expected to be
substantially complete in fiscal 1998. The number of involuntary separations is
expected to be lower than originally planned due principally to a higher than
anticipated level of voluntary separations. However, associated
restructuring-related cost savings are expected to be offset by an increase in
estimated separation costs for certain non-U.S. employees. The total estimated
cost of restructuring actions is unchanged. See Note E for a further description
of the Corporation's restructuring actions and related costs.
Total employee population decreased by 4,200 during fiscal 1997 to approximately
54,900. The Corporation had approximately 59,100 and 61,700 employees at the end
of fiscal 1996 and 1995, respectively.
Digital Equipment Corporation 29
<PAGE> 32
EXPENSES AND PROFIT MARGINS (continued)
- --------------------------------------------------------------------------------
Net other income was $48 million for fiscal 1997 and 1996, respectively,
compared with net other expense of $40 million in fiscal 1995. Net gains on
divestments were $18 million for fiscal 1997, compared with $72 million in
fiscal 1996 and a net loss of $7 million in fiscal 1995. The decrease in net
gains from divestments in fiscal 1997 was offset by increased interest income
resulting from significantly higher cash and short-term investment balances and
lower interest expense.
In fiscal 1997, income tax expense was $37 million on pre-tax income of $178
million. 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.
Income tax expense was $44 million on a pre-tax loss of $68 million in fiscal
1996 and $18 million on pre-tax income of $76 million in fiscal 1995. See Note C
for a further explanation of income tax expense.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130--Reporting Comprehensive
Income. SFAS No. 130 requires the reporting and display, in a full set of
general-purpose financial statements, of all items that are required to be
recognized under accounting standards as components of comprehensive income.
SFAS No. 130 is effective for financial statements issued for periods beginning
after December 15, 1997 and reclassification of financial statements for earlier
periods for comparative purposes is required. The adoption of SFAS No. 130 will
have an immaterial impact on the consolidated financial statements.
In February 1997, the FASB issued 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. Neither basic nor dilutive EPS as
calculated in accordance with SFAS No. 128 would be materially different from
primary EPS as presented in these financial statements.
In January 1997, the Securities and Exchange Commission issued Financial
Reporting Release No. 48 which expands disclosure requirements for certain
derivative and other financial instruments. The Corporation adopted the
sensitivity analysis approach effective in the fourth quarter of fiscal 1997.
The sensitivity analysis approach presents the hypothetical change in fair value
resulting from hypothetical changes in market rates. See Notes A and I for a
description of the Corporation's use of derivative and other financial
instruments and the related market risk.
- --------------------------------------------------------------------------------
OPERATING EXPENSES
Dollars in billions, excluding restructuring charges
[BAR CHART]
- --------------------------------------------------------------------------------
EMPLOYEES
Thousands of employees
[BAR CHART]
- --------------------------------------------------------------------------------
U.S. DOLLAR RELATIVE TO MAJOR FOREIGN CURRENCIES
Fiscal 1991 equals 1.00
[BAR CHART]
30 Digital Equipment Corporation
<PAGE> 33
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING FOR
OPERATIONS
- --------------------------------------------------------------------------------
Cash, cash equivalents and short-term investments totaled $2.5 billion, $2.0
billion and $1.6 billion at the end of fiscal 1997, 1996 and 1995, respectively
(see Note A).
<TABLE>
<CAPTION>
Cash flows from (in billions)
- --------------------------------------------------------------------------------
Fiscal year 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities $ 1.0 $ 0.6 $(0.3)
Investing activities (1.2) (0.5) 0.6
- --------------------------------------------------------------------------------
Operating and investing
activities (0.2) 0.1 0.3
- --------------------------------------------------------------------------------
Financing activities (0.2) 0.2 0.1
- --------------------------------------------------------------------------------
Total cash flows $(0.4) $ 0.3 $ 0.4
- --------------------------------------------------------------------------------
</TABLE>
Net cash generated from operating activities was $1.0 billion in fiscal 1997,
compared with $602 million in fiscal 1996 and net cash used of $348 million in
fiscal 1995. The $424 million improvement in cash generated from operating
activities in fiscal 1997 was principally due to a $293 million decrease in
accounts receivable in fiscal 1997 compared with an increase of $4 million in
fiscal 1996 and a $318 million decrease in inventories in fiscal 1997 compared
with a decrease of $181 million in fiscal 1996. The $950 million improvement in
cash generated from operating activities in fiscal 1996 was principally due to a
$181 million decrease in inventories in fiscal 1996 compared with an increase of
$272 million in fiscal 1995, and a lower level of restructuring related
expenditures in fiscal 1996 compared with fiscal 1995.
Net cash used for investing activities was $1.2 billion in fiscal 1997, compared
with $492 million in fiscal 1996 and net cash generated (including divestments)
of $638 million in fiscal 1995. The increase in cash used for investing
activities was due principally to short-term investment activities (see Note A).
The Corporation increased its short-term investments by $913 million, $177
million and $31 million in fiscal 1997, 1996 and 1995, respectively. In fiscal
1997, the sale of property, plant and equipment and other assets generated
proceeds of approximately $120 million. Capital spending in fiscal 1997 was $396
million compared with $431 million and $366 million in fiscal 1996 and 1995,
respectively. In fiscal 1996, the Corporation sold its learning services
business and several small businesses generating proceeds of $156 million and
the sale of property, plant and equipment generated an additional $73 million in
cash. In fiscal 1995, the Corporation sold all of its shares of Ing. Olivetti &
C. S.p.A. common stock, portions of its storage business, its relational
database business, a software distribution subsidiary, a contract manufacturing
business, a semiconductor facility, property, plant and equipment and other
assets generating approximately $1.1 billion in cash proceeds (see Note J).
Net cash used for financing activities was $254 million in fiscal 1997, compared
with net cash generated of $150 million and $100 million in fiscal 1996 and
1995, respectively. The principal financing activity for fiscal 1997 was the
open market purchase of 10 million shares of the Corporation's common stock for
$354 million and the payment of dividends on preferred stock, partially offset
by the issuance of stock under the Corporation's employee stock plans. In July
1997, the Corporation's Board of Directors authorized the repurchase, as
conditions warrant, of up to 15 million shares of the Corporation's common
stock.
Long-term debt was $743 million at the end of fiscal 1997, compared with
approximately $1.0 billion at the end of fiscal 1996 and 1995. During fiscal
1997, $250 million of five-year notes due in November 1997 were reclassified
from long-term debt to current portion of long-term debt. At the end of fiscal
1997, substantially all of the Corporation's available lines of credit and
accounts receivable securitization facilities were unused (see Note F).
For fiscal 1997, cash expenditures for restructuring activities were $184
million, net of proceeds of $67 million from the sale of properties. Future cash
expenditures for currently planned restructuring activities are estimated to be
$360 million for fiscal 1998 and beyond, the majority of which will be used in
fiscal 1998. While expected total cash expenditures for restructuring actions
remain unchanged, actual cash outlays have been delayed due to the timing of
certain employee separations, principally in Europe (see Note E).
The Corporation's need for, cost of and access to funds are dependent on future
operating results, as well as conditions external to the Corporation. The
Corporation historically has maintained a conservative capital structure, and
believes that its cash position and its sources of and access to capital markets
are adequate to support current operations.
Digital Equipment Corporation 31
<PAGE> 34
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 "Act"). The Corporation cautions investors that there can be no
assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including but not limited to the
following:
* The Corporation's future operating results are dependent on its ability to
develop, produce and market new and innovative products and services. There
are numerous risks inherent in this complex process, including rapid
technological change, the Corporation's ability to access components and
related technical information from other companies and the requirement that
the Corporation bring to market in a timely fashion new products and
services which meet customers' changing needs.
* Historically, the Corporation has generated a disproportionate amount of
its operating revenues toward the end of each quarter, making precise
prediction of revenues and earnings particularly difficult and resulting in
risk of variance of actual results from those forecast at any time. In
addition, the Corporation's operating results historically have varied from
fiscal period to fiscal period; accordingly, the Corporation's financial
results in any particular fiscal period are not necessarily indicative of
results for future periods.
* The Corporation offers a broad variety of products and services to
customers around the world. Changes in the mix of products and services
comprising revenues could cause actual operating results to vary from those
expected.
* The Corporation's success is partly dependent on its ability to
successfully predict and adjust production capacity to meet demand, which
is partly dependent upon the ability of external suppliers to deliver
components at reasonable prices and in a timely manner; capacity or supply
constraints, or unexpected increases or decreases in the prices of
components, could adversely affect future operating results.
* While the Corporation believes that the materials required for its
manufacturing operations are presently available in quantities sufficient
to meet demand, the failure of a significant supplier to deliver certain
components or technical information on a timely basis or in sufficient
quantities could adversely affect the Corporation's future results of
operations.
* The Corporation operates in a highly competitive environment which includes
significant competitive pricing pressures and intense competition for
skilled employees. Particular business segments may from time to time
experience unanticipated intense competitive pressure, possibly causing
operating results to vary from those expected.
* The Corporation offers its products and services directly and through
indirect distribution channels. Changes in the financial condition of, or
the Corporation's relationship with, distributors and other indirect
channel partners, as well as fluctuations in end-user sales by indirect
sales channel partners, could cause actual operating results to vary from
those expected.
* The Corporation does business worldwide in over 100 countries. Global
and/or regional economic factors and potential changes in laws and
regulations affecting the Corporation's business, including without
limitation, currency fluctuations, changes in monetary policy and tariffs,
and federal, state and international laws regulating the environment, could
impact the Corporation's financial condition or future results of
operations.
* 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.
32 Digital Equipment Corporation
<PAGE> 35
REPORT OF MANAGEMENT
- --------------------------------------------------------------------------------
The Corporation's management is responsible for the preparation of the financial
statements in accordance with generally accepted accounting principles and for
the integrity of the financial data included in this annual report. In preparing
the financial statements, management makes informed judgments and estimates of
the expected effects of events and transactions that are currently being
reported.
Management maintains a system of internal accounting controls that is designed
to provide reasonable assurance that assets are safeguarded and that
transactions are executed and recorded in accordance with the Corporation's
policies. This system includes policies which require adherence to ethical
business standards and compliance with all laws to which the Corporation is
subject. The internal controls process is continuously monitored by direct
management review and an internal audit program under which periodic independent
reviews are made.
The Corporation's independent accountants annually review the accounting and
control systems of the Corporation. Their audit includes a review of the
internal control structure to the extent they consider necessary and selective
tests of transactions to support their report.
The Board of Directors, through its Audit Committee, which is composed of four
Board members who are independent of management, is responsible for determining
that management fulfills its responsibility with respect to the Corporation's
financial statements and the system of internal accounting controls.
The Audit Committee meets regularly with representatives of management, the
independent accountants and the Corporation's internal auditors to review
audits, financial reporting and internal control matters, and when appropriate,
meets with the Corporation's outside counsel on relevant matters. The
independent accountants and the internal auditors have full and free access to
the Audit Committee and regularly meet privately with the Audit Committee.
Coopers & Lybrand L.L.P., independent accountants, have been engaged by the
Audit Committee of the Board of Directors, with the approval of the
stockholders, to audit the Corporation's financial statements. Their report
follows.
/s/ Robert B. Palmer
- ----------------------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
/s/ Vincent J. Mullarkey
- ----------------------------------------------------
Vincent J. Mullarkey
Vice President, Finance and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Stockholders and Directors,
Digital Equipment Corporation
We have audited the accompanying consolidated balance sheets of Digital
Equipment Corporation as of June 28, 1997 and June 29, 1996, and the related
consolidated statements of operations, cash flows, and stockholders' equity for
each of the three fiscal years in the period ended June 28, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Digital Equipment
Corporation as of June 28, 1997 and June 29, 1996, and the consolidated results
of its operations and cash flows for each of the three fiscal years in the
period ended June 28, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note J to the consolidated financial statements, the Corporation
changed its method of accounting for certain investments in debt and equity
securities in fiscal 1995.
/s/ Coopers & Lybrand L.L.P.
- ----------------------------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
July 24, 1997
Digital Equipment Corporation 33
<PAGE> 36
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands except per share data)
- -------------------------------------------------------------------------------------------------------------
Year ended JUNE 28, 1997 June 29, 1996 July 1, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (Notes A and B)
Product sales $ 7,197,116 $ 8,362,423 $ 7,616,441
Service revenues 5,849,716 6,200,352 6,196,621
- -------------------------------------------------------------------------------------------------------------
Total operating revenues 13,046,832 14,562,775 13,813,062
- -------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES (Notes A, D, G, H and K)
Cost of product sales 4,697,438 5,541,792 5,397,723
Service expense 4,027,690 4,214,412 3,993,970
Research and engineering expenses (Note J) 1,014,044 1,062,253 1,040,028
Selling, general and administrative expenses (Note J) 3,177,428 3,367,806 3,265,743
Restructuring charge (Note E) -- 492,000 --
- -------------------------------------------------------------------------------------------------------------
Operating income/(loss) 130,232 (115,488) 115,598
Other (income)/expense, net (Notes A, F, I and J) (47,818) (47,961) 39,941
- -------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect
of change in accounting principle 178,050 (67,527) 75,657
Provision for income taxes (Note C) 37,175 44,285 18,342
- -------------------------------------------------------------------------------------------------------------
Income/(loss) before cumulative effect of change in
accounting principle 140,875 (111,812) 57,315
Benefit due to cumulative effect of change in
accounting principle, net of tax (Note J) -- -- (64,503)
- -------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) 140,875 (111,812) 121,818
Dividends on preferred stock (Note L) 35,500 35,500 35,500
- -------------------------------------------------------------------------------------------------------------
Net income/(loss) applicable to common stock $ 105,375 $ (147,312) $ 86,318
- -------------------------------------------------------------------------------------------------------------
PER COMMON SHARE (Note A)
Income/(loss) applicable before cumulative effect of change
in accounting principle $ .68 $ (.97) $ .15
Benefit due to cumulative effect of change in
accounting principle -- -- .44
- -------------------------------------------------------------------------------------------------------------
NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (Note A) $ .68 $ (.97) $ .59
- -------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (Note A) 155,458 152,052 146,331
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
34 Digital Equipment Corporation
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------
JUNE 28, 1997 June 29, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note A) $1,358,750 $ 1,791,754
Short-term investments (Note A) 1,160,265 247,404
Accounts receivable, net of allowances of $263,763 and $182,033 2,930,014 3,223,293
Inventories (Note A) 1,503,145 1,820,811
Prepaid expenses, deferred income taxes and other current assets (Note C) 324,122 336,836
- ---------------------------------------------------------------------------------------------------------------
Total current assets 7,276,296 7,420,098
Net property, plant and equipment (Note A) 2,103,647 2,222,920
Other assets (Notes A, C, and D) 312,951 432,363
- ---------------------------------------------------------------------------------------------------------------
Total assets $9,692,894 $10,075,381
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans and current portion of long-term debt (Note F) $ 262,835 $ 17,896
Accounts payable 871,760 903,618
Income taxes payable (Note C) 101,286 79,528
Salaries, wages and related items 637,587 632,413
Deferred revenues and customer advances (Note A) 1,079,003 1,099,328
Accrued restructuring costs (Note E) 382,559 619,416
Other current liabilities 905,900 879,434
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 4,240,930 4,231,633
Long-term debt (Note F) 743,440 999,131
Postretirement and other postemployment benefits (Note G) 1,163,568 1,238,411
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 6,147,938 6,469,175
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note H)
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity (Notes K, L and M):
Preferred stock, $1.00 par value (liquidation preference of $100 per share);
authorized 25,000,000 shares; 4,000,000 shares of Series A 8 7/8%
Cumulative Preferred Stock issued and outstanding 4,000 4,000
Common stock, $1.00 par value; authorized 450,000,000 shares;
157,232,104 shares issued and 155,504,284 shares issued and outstanding 157,232 155,504
Additional paid-in capital 3,835,697 3,764,224
Retained deficit (234,841) (317,522)
Treasury stock at cost; 6,132,201 shares and 0 shares (217,132) -
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,544,956 3,606,206
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $9,692,894 $10,075,381
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Digital Equipment Corporation 35
<PAGE> 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(in thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Year ended JUNE 28, 1997 June 29, 1996 July 1, 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 140,875 $ (111,812) $ 121,818
- -------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income/(loss) to net cash from operating
activities:
Depreciation 406,895 405,859 507,966
Amortization 53,828 74,346 67,624
(Gain)/loss on disposition and write-down of
other assets (Notes A and J) 33,664 (71,941) (57,333)
Other adjustments to income/(loss) 66,668 10,708 (34,576)
(Increase)/decrease in accounts receivable 293,279 (4,211) 42,862
(Increase)/decrease in inventories 317,666 180,761 (272,037)
(Increase)/decrease in prepaid expenses and other current assets 16,447 47,002 (17,862)
Decrease in accounts payable (31,858) (209,542) (49,517)
Increase in taxes (Note C) 15,428 23,609 16,813
Increase/(decrease) in salaries, wages, benefits
and related items (Note G) (69,669) 151,370 31,306
Increase/(decrease) in deferred revenues and customer advances (20,325) (123,028) 544
Increase/(decrease) in accrued restructuring costs (Note E) (236,857) 127,370 (859,029)
Increase in other current liabilities 40,412 101,724 153,911
- -------------------------------------------------------------------------------------------------------------------------------
Total adjustments 885,578 714,027 (469,328)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 1,026,453 602,215 (347,510)
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (395,691) (431,307) (365,551)
Proceeds from the disposition of property, plant and
equipment (Notes E and J) 87,769 73,083 208,505
Purchases of short-term investments (3,684,299) (340,415) (117,050)
Maturities of short-term investments 2,771,438 163,310 85,924
Investment in other assets (16,913) (112,532) (37,687)
Proceeds from the disposition of other assets (Note J) 32,222 155,971 863,468
- -------------------------------------------------------------------------------------------------------------------------------
Net cash flows from investing activities (1,205,474) (491,890) 637,609
- -------------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating and investing activities (179,021) 110,325 290,099
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of debt 6,240 -- 13,253
Payments to retire debt (18,080) (11,241) (29,336)
Purchase of treasury shares (354,111) -- --
Issuance of common and treasury
shares, including tax effects 147,468 196,321 151,643
Dividends paid (35,500) (35,500) (35,500)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (253,983) 149,580 100,060
- -------------------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (433,004) 259,905 390,159
Cash and cash equivalents at beginning of year 1,791,754 1,531,849 1,141,690
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year (Note A) $ 1,358,750 $ 1,791,754 $ 1,531,849
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
36 Digital Equipment Corporation
<PAGE> 39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Total
Preferred Common paid-in Retained Treasury stockholders'
stock stock capital deficit stock equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
July 2, 1994 $ 4,000 $ 142,287 $ 3,390,040 $ (256,528) $ -- $ 3,279,799
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued under stock plans 7,491 143,993 151,484
Restricted stock plans, charge
to operations 10,679 10,679
Dividends declared--preferred stock (35,500) (35,500)
Net income--1995 121,818 121,818
- ------------------------------------------------------------------------------------------------------------------------------------
July 1, 1995 4,000 149,778 3,544,712 (170,210) -- 3,528,280
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued under stock plans 5,726 190,595 196,321
Restricted stock plans, charge
to operations 28,917 28,917
Dividends declared--preferred stock (35,500) (35,500)
Net loss--1996 (111,812) (111,812)
- ------------------------------------------------------------------------------------------------------------------------------------
June 29, 1996 4,000 155,504 3,764,224 (317,522) -- 3,606,206
- ------------------------------------------------------------------------------------------------------------------------------------
PURCHASE OF 10,000,000 SHARES
OF TREASURY STOCK (354,111) (354,111)
SHARES ISSUED UNDER STOCK PLANS
(5,595,619 SHARES ISSUED, OF WHICH
3,867,799 ISSUED FROM TREASURY) 1,728 31,455 (22,694) 136,979 147,468
RESTRICTED STOCK PLANS, CHARGE
TO OPERATIONS 40,018 40,018
DIVIDENDS DECLARED--PREFERRED STOCK (35,500) (35,500)
NET INCOME--1997 140,875 140,875
- ------------------------------------------------------------------------------------------------------------------------------------
JUNE 28, 1997 $ 4,000 $ 157,232 $ 3,835,697 $ (234,841) $ (217,132) $ 3,544,956
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes K, L and M of Notes to consolidated financial statements.
Cash dividends on common stock have never been paid by the Corporation.
The accompanying notes are an integral part of these financial statements.
Digital Equipment Corporation 37
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the
Corporation include the financial statements of the parent and its
majority-owned U.S. and non-U.S. subsidiaries. All significant intercompany
accounts and profits have been eliminated. Certain prior years' amounts have
been reclassified to conform with the current year presentation.
USE OF ESTIMATES The preparation of the Corporation's financial statements
requires management to make estimates and judgments that affect the reported
consolidated statements of operations and consolidated balance sheets and
related disclosures. Actual results could differ from those estimates.
FISCAL YEAR The fiscal year of the Corporation is the 52/53 week period ending
the Saturday nearest the last day of June. The fiscal years ended June 28, 1997,
June 29, 1996 and July 1, 1995 included 52 weeks.
TRANSLATION OF FOREIGN CURRENCIES For non-U.S. operations, the U.S. dollar is
the functional currency. Monetary assets and liabilities of foreign subsidiaries
are translated into U.S. dollars at current exchange rates. Nonmonetary assets
and liabilities such as inventories, property, plant and equipment and deferred
revenues and customer advances are translated at historical rates. Income and
expense items are translated at average exchange rates prevailing during the
year, except that inventories and depreciation charged to operations are
translated at historical rates. Exchange gains and losses arising from
translation are included in current income.
REVENUE RECOGNITION Revenues from product sales are generally recognized at the
time the product is shipped. Provisions for product sales returns and allowances
are recorded in the same period as the related revenue. Service revenues are
recognized ratably over the contractual period or as the services are performed.
WARRANTY Warranty service revenues are recognized ratably over the warranty
period; warranty-related costs are recognized as incurred. The Corporation also
provides warranty coverage as a product attribute on certain products. Estimated
costs to repair such products are accrued as product cost when the product is
shipped.
NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE Per common share amounts are
calculated based on the weighted average number of common shares and common
share equivalents outstanding during periods of net income, after deducting
applicable preferred stock dividends. Common share equivalents are attributable
to stock options. Per share amounts are calculated based only on the weighted
average number of common shares outstanding during periods of net loss, after
deducting applicable preferred stock dividends.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Corporation considers all
highly liquid temporary cash investments with maturities of three months or less
at date of acquisition to be cash equivalents. Cash equivalents are valued at
cost plus accrued interest, which approximates market. Investments with
maturities greater than three months mature within six months of the balance
sheet date and are classified as short-term investments. Short-term investments
are valued at cost plus accrued interest, which approximates market. The
Corporation's practice is to hold these investments to maturity.
INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories are routinely subject to changes in value, resulting from
rapid technological change, intense price competition and changes in customer
demand patterns. While the Corporation has provided for estimated declines in
market value of inventories, no estimate can be made of a range of amounts of
loss that are reasonably possible under various competitive conditions.
<TABLE>
<CAPTION>
(in thousands) JUNE 28, 1997 June 29, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 421,984 $ 536,911
Work-in-process 350,421 439,318
Finished goods 730,740 844,582
- --------------------------------------------------------------------------------
Total inventories $1,503,145 $1,820,811
- --------------------------------------------------------------------------------
</TABLE>
38 Digital Equipment Corporation
<PAGE> 41
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (continued)
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost,
subject to review of impairment for significant assets whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable.
<TABLE>
<CAPTION>
(in thousands) JUNE 28, 1997 June 29, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 193,722 $ 218,659
Buildings 1,381,568 1,384,819
Leasehold improvements 319,264 325,120
Machinery and equipment 2,973,994 3,191,512
- --------------------------------------------------------------------------------
Total property, plant
and equipment 4,868,548 5,120,110
Less accumulated depreciation 2,764,901 2,897,190
- --------------------------------------------------------------------------------
Net property, plant and
equipment $2,103,647 $2,222,920
- --------------------------------------------------------------------------------
</TABLE>
Depreciation expense is computed principally on the following bases:
<TABLE>
<CAPTION>
Classification Depreciation lives and methods
- --------------------------------------------------------------------------------
<S> <C>
Buildings 10 to 33 years (straight-line)
- --------------------------------------------------------------------------------
Leasehold Life of assets or term of lease,
improvements whichever is shorter (straight-line)
- --------------------------------------------------------------------------------
Machinery and 2 to 10 years (principally
equipment accelerated methods)
- --------------------------------------------------------------------------------
</TABLE>
When assets are retired, or otherwise disposed of, the assets and related
accumulated depreciation are removed from the accounts. Gains or losses
resulting from restructuring actions are included in accrued restructuring
costs. Other resulting gains and losses are included in income.
OTHER ASSETS Other assets include long-term investments, capitalized software
development costs, goodwill, deferred taxes and other intangible assets.
Software development costs are capitalized at the time that technological
feasibility is established. These costs are amortized over no more than three
years from the date the products are available for general use and are subject
to periodic review of net realizable value.
Goodwill and other intangible assets are amortized using the straight-line
method over the estimated useful life of the asset, subject to periodic review
of impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Long-term investments are subject to periodic review of impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.
Events and circumstances arising during fiscal 1997 indicated that the carrying
value of certain intangible and other assets would not be recoverable.
Accordingly, unamortized balances of $40.0 million were written off as a charge
to operations.
<TABLE>
<CAPTION>
OTHER (INCOME)/EXPENSE, NET (in thousands)
- -----------------------------------------------------------------------------------------------------
Year ended JUNE 28,1997 June 29, 1996 July 1, 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $(116,151) $ (76,438) $ (57,497)
Interest expense 86,381 100,418 90,268
Net (gain)/loss on divestments and other assets (18,048) (71,941) 7,170
- -----------------------------------------------------------------------------------------------------
Other (income)/expense, net $ (47,818) $ (47,961) $ 39,941
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE B: GEOGRAPHIC OPERATIONS
- --------------------------------------------------------------------------------
INDUSTRY The Corporation operates in one business segment: the design,
manufacture, sale and service of networked computer systems.
NON-U.S. OPERATIONS Sales and marketing operations outside the United States are
conducted primarily through sales subsidiaries throughout the world; by direct
sales from the parent corporation; and through various distributorship
Digital Equipment Corporation 39
<PAGE> 42
NOTE B: GEOGRAPHIC OPERATIONS (continued)
- --------------------------------------------------------------------------------
arrangements and value-added resellers. The Corporation's non-U.S. manufacturing
operations include plants in Canada, Europe and Asia-Pacific. The products of
these manufacturing plants are sold to the Corporation's sales subsidiaries, the
parent corporation or other manufacturing plants for further processing.
Intercompany transfers between geographic areas are accounted for at prices
which are intended to be representative of unaffiliated party transactions.
Sales to unaffiliated customers outside the United States, including U.S. export
sales, were $8.7 billion, $9.6 billion, and $9.0 billion for fiscal 1997, 1996
and 1995, respectively, which represented 67%, 66% and 65%, respectively, of
total operating revenues.
<TABLE>
<CAPTION>
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES
United States:
Unaffiliated customer sales $ 4,396,636 $ 5,126,405 $ 4,816,024
Inter-area transfers 1,467,175 1,381,671 1,426,305
- ------------------------------------------------------------------------------------------------------------------------
5,863,811 6,508,076 6,242,329
- ------------------------------------------------------------------------------------------------------------------------
Europe:
Unaffiliated customer sales 5,484,767 6,137,495 5,973,188
Inter-area transfers 315,317 703,289 792,277
- ------------------------------------------------------------------------------------------------------------------------
5,800,084 6,840,784 6,765,465
- ------------------------------------------------------------------------------------------------------------------------
Canada, Latin America, Asia-Pacific:
Unaffiliated customer sales 3,165,429 3,298,875 3,023,850
Inter-area transfers 1,224,294 2,138,800 2,081,764
- ------------------------------------------------------------------------------------------------------------------------
4,389,723 5,437,675 5,105,614
- ------------------------------------------------------------------------------------------------------------------------
Eliminations (3,006,786) (4,223,760) (4,300,346)
- ------------------------------------------------------------------------------------------------------------------------
Net revenue $ 13,046,832 $ 14,562,775 $ 13,813,062
- ------------------------------------------------------------------------------------------------------------------------
INCOME/(LOSS)
United States $ 140 $ 45,707 $ (231,180)
Europe 142,280 (137,546) 236,641
Canada, Latin America, Asia-Pacific 35,630 24,312 70,196
Eliminations (47,818) (47,961) 39,941
- ------------------------------------------------------------------------------------------------------------------------
Operating income/(loss) 130,232 (115,488) 115,598
Other (income)/expense, net (47,818) (47,961) 39,941
- ------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes and cumulative effect of
change in accounting principle $ 178,050 $ (67,527) $ 75,657
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
United States $ 3,752,689 $ 3,739,570 $ 3,924,941
Europe 2,985,397 3,174,933 3,321,429
Canada, Latin America, Asia-Pacific 2,058,492 2,002,943 2,335,236
Corporate assets 2,519,015 2,039,158 1,602,148
Eliminations (1,622,699) (881,223) (1,236,602)
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 9,692,894 $ 10,075,381 $ 9,947,152
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
40 Digital Equipment Corporation
<PAGE> 43
NOTE C: INCOME TAXES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income/(loss) before income taxes and cumulative effect of change in accounting principle (in thousands)
- ------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 140 $ 41,204 $(231,180)
Non-U.S 177,910 (108,731) 306,837
- ------------------------------------------------------------------------------------------------------------------
Total $ 178,050 $ (67,527) $ 75,657
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
Reconciliation of U.S. federal statutory rate to actual tax rate
- ------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal statutory tax (benefit) rate 35.0% (35.0)% 35.0%
Tax benefit of manufacturing operations in(1):
Ireland (6.6) (17.9) (40.2)
Singapore (9.4) (4.9) (12.6)
Tax impact due to net loss carryforward position:
U.S. 4.8 (10.2) 106.9
Non-U.S. 11.4 160.2 (93.2)
Non-U.S. tax rates (14.4) (24.9) 27.3
Other 0.1 (1.7) 1.0
- ------------------------------------------------------------------------------------------------------------------
Effective tax rate 20.9% 65.6% 24.2%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The income from products manufactured for export by the Corporation's
manufacturing subsidiary in Ireland is subject to a 10% tax rate through
December 2010. The income from certain products manufactured by the
Corporation's manufacturing subsidiary in Singapore was taxed at 15%
through December 1995 and is taxed at 10% from January 1996 through
December 1998.
<TABLE>
<CAPTION>
Components of provisions for (benefits from) U.S. federal and non-U.S. income taxes (in thousands)
- ------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. federal:
Current $ 8,659 $ 6,104 $ --
Deferred (2,888) (1,971) (7,318)
- ------------------------------------------------------------------------------------------------------------------
Total 5,771 4,133 (7,318)
- ------------------------------------------------------------------------------------------------------------------
Non-U.S.:
Current 32,477 28,636 48,388
Deferred (4,144) 9,309 (26,260)
- ------------------------------------------------------------------------------------------------------------------
Total 28,333 37,945 22,128
- ------------------------------------------------------------------------------------------------------------------
State income taxes 3,071 2,207 3,532
- ------------------------------------------------------------------------------------------------------------------
Total income taxes $ 37,175 $44,285 $ 18,342
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Digital Equipment Corporation 41
<PAGE> 44
NOTE C: INCOME TAXES (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Significant components of deferred tax assets and liabilities (in thousands)
- ---------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996
- ---------------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory-related transactions $ 120,296 $ 5,656 $ 113,663 $ 7,761
Depreciation 60,317 11,038 59,276 33,474
Deferred warranty revenue 93,611 - 96,943 1,343
Postretirement/postemployment benefits 398,757 5,729 468,662 12,528
Restructuring 166,426 31,538 296,296 20,680
Tax loss carryforwards 1,239,826 - 1,426,648 -
Tax credit carryforwards 202,204 - 192,928 -
Intangible assets 40,083 - 48,465 14,269
Research and engineering 659,733 - 503,826 -
Other 224,711 29,936 222,217 50,274
- ---------------------------------------------------------------------------------------------------------------
Gross deferred tax balances 3,205,964 83,897 3,428,924 140,329
Valuation allowance 3,006,425 - 3,179,283 -
- ---------------------------------------------------------------------------------------------------------------
Net deferred tax balances $ 199,539 $ 83,897 $ 249,641 $ 140,329
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The gross deferred tax asset from tax loss carryforwards of $1.2 billion
represents $3.4 billion of net operating loss carryforwards on a tax return
basis which will generally expire as follows: $66.5 million in 1998, $162.2
million in 1999, $151.2 million in 2000, $144.3 million in 2001, $92.9 million
in 2002, $472.0 million in 2007, $577.0 million in 2008, and the remainder
thereafter.
Tax credit carryforwards will generally expire as follows: $20.0 million in
2001, $50.0 million in 2002, $70.0 million in 2003, $20.0 million in 2004, and
the remainder thereafter.
The reduction in the valuation allowance of $172.9 million is primarily
attributed to the reduction in the gross deferred tax balances.
Tax benefit arising from previously unrecognized operating loss carryforwards
amounted to approximately $96.0 million and $190.0 million for fiscal 1997 and
1996, respectively.
The Corporation has recorded net deferred tax assets of approximately $116.0
million at June 28, 1997, reflecting primarily the benefit of net operating loss
carryforwards in certain countries. Realization is dependent on generating
sufficient future taxable income to utilize the assets. Although realization is
not assured, management believes it is more likely than not that the assets will
be realized.
In fiscal 1997, 1996 and 1995, net income taxes paid were approximately $32.1
million, $18.5 million and $3.0 million, respectively.
In general, the Corporation's practice is to reinvest the earnings of its
foreign subsidiaries in those operations, and repatriation of retained earnings
is done only when it is advantageous to do so. The accumulated retained earnings
for foreign subsidiaries aggregated $2.0 billion at June 28, 1997. Applicable
taxes are provided only on amounts planned to be remitted. It is not practicable
to estimate the amount of additional tax that might be payable on the foreign
earnings.
NOTE D: CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS
- --------------------------------------------------------------------------------
Unamortized computer software development costs were $64.0 million and $93.4
million at June 28, 1997 and June 29, 1996, respectively. Amortization expense
was $39.4 million, $48.4 million and $59.3 million for fiscal 1997, 1996 and
1995, respectively. Accumulated amortization was $75.1 million and $160.8
million at June 28, 1997 and June 29, 1996, respectively.
42 Digital Equipment Corporation
<PAGE> 45
NOTE E: RESTRUCTURING ACTIONS
- --------------------------------------------------------------------------------
Accrued restructuring costs and charges include the cost of involuntary employee
separation benefits, facility closures and related costs associated with
restructuring actions. Employee separation benefits include severance, wage
continuation, notice pay, medical and other benefits. Facility closure and
related costs include disposal costs for property, plant and equipment, lease
payments and related costs. Restructuring costs were accrued and charged to
expense in accordance with approved management plans.
As a result of initiatives to increase sales productivity, further consolidate
manufacturing plants and distribution sites, improve service delivery and
further reduce overhead in support areas, the Corporation accrued a
restructuring charge of $492.0 million in the fourth quarter of fiscal 1996.
The cost of employee separations associated with the fiscal 1996 charge included
separation benefits then estimated for approximately 7,000 employees, as well as
employee separation benefits incurred in the fourth quarter of fiscal 1996. The
majority of the remaining employee separations will come from administrative and
overhead functions, located in Europe and the United States. Most other
organizations and functions also will be affected by the planned reduction in
employees. The fiscal 1996 charge also included costs associated with the
closure of an additional 3.5 million square feet of office and manufacturing
space, principally in the United States and Europe.
During fiscal 1997, restructuring actions resulted in approximately 2,100
employee separations. The number of involuntary separations was less than
originally planned due principally to a higher level of voluntary separations.
However, associated cost savings are expected to be offset by an increase in
estimated separation costs for certain non-U.S. employees. The total estimated
cost of restructuring actions is unchanged. The planned employee separations are
expected to be substantially complete in fiscal 1998.
The Corporation's experience in property dispositions has been consistent with
the restructuring plan provided for in fiscal 1996. In the past three fiscal
years, the Corporation has sold 7.4 million square feet of space and reduced
space under lease by 6.9 million square feet.
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 the completion of
planned restructuring actions, there can be no assurance that the estimated cost
of such actions will not change.
<TABLE>
<CAPTION>
Accrued restructuring costs (in thousands)
- ----------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 619,416 $ 492,046 $ 1,351,075
- ----------------------------------------------------------------------------------------------------------------
Charges to operations:
Employee separations - 363,000 -
Facility closures and related costs - 129,000 -
- ----------------------------------------------------------------------------------------------------------------
Total charges to operations - 492,000 -
- ----------------------------------------------------------------------------------------------------------------
Costs incurred:
Employee separations 119,997 153,025 507,816
Facility closures and related costs 104,683 177,593 323,029
Other 12,177 34,012 28,184
- ----------------------------------------------------------------------------------------------------------------
Total costs incurred 236,857 364,630 859,029
- ----------------------------------------------------------------------------------------------------------------
Balance, end of year $ 382,559 $ 619,416 $ 492,046
- ----------------------------------------------------------------------------------------------------------------
Cash expenditures:
Employee separations $ 135,373 $ 175,839 $ 562,629
Facility closures and related costs, net of proceeds 48,816 61,000 (38,850)
- ----------------------------------------------------------------------------------------------------------------
Net cash expenditures $ 184,189 $ 236,839 $ 523,779
- ----------------------------------------------------------------------------------------------------------------
Number of employee separations due to restructuring actions 2,100 2,400 7,400
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Digital Equipment Corporation 43
<PAGE> 46
NOTE F: DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long-term debt, exclusive of current maturities (in thousands)
- ----------------------------------------------------------------------------------------------------------------
Maturity date
(Calendar year) Interest rate June 28, 1997 June 29, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lease obligations 1998-2002 5.31%-10.95%(1) $ 5,337 $ 12,034
Notes(2) 1997 7% -- 250,000
Notes(2) 2002 7 1/8% 250,000 250,000
Debentures(2) 2012 8 5/8% 250,000 250,000
Debentures(2) 2023 7 3/4% 250,000 250,000
Unamortized discount and commissions(2) (12,050) (13,138)
Other debt obligations 153 235
- ----------------------------------------------------------------------------------------------------------------
Total long-term debt, exclusive of
current maturities $743,440 $999,131
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average interest rate of 7.6% at June 28, 1997 and June 29, 1996.
(2) The Notes and Debentures are not redeemable prior to maturity and are not
entitled to any sinking fund. The unamortized discount and commissions
relate to these Notes and Debentures.
Principal payments during the next five fiscal years are as follows: 1998 -
$255.9 million; 1999 - $0.9 million; 2000 - $0.9 million; 2001 - $2.9 million;
2002 - $0.8 million. During fiscal 1997, $250.0 million of five-year notes due
in November 1997 were reclassified from long-term debt to current portion of
long-term debt.
In fiscal 1997, 1996 and 1995, interest paid was $85.9 million, $116.2 million
and $86.2 million, respectively.
The Corporation had available lines of credit totaling $310.3 million and $315.4
million as of June 28, 1997 and June 29, 1996, respectively. Substantially all
of these lines of credit were unused at the end of fiscal 1997 and 1996.
Commitment fees on the unused lines of credit were immaterial.
In June 1994, the Corporation entered into a five-year agreement with a major
financial institution (i) providing for the transfer and sale by the Corporation
to a wholly-owned subsidiary of the Corporation of a designated pool of domestic
trade accounts receivable (the "Receivables"), and (ii) allowing the Corporation
to sell to a group of investors an undivided ownership interest in the
Receivables for proceeds of up to $600.0 million (the "Purchase Limit"). The
agreement includes annual commitment fees up to a maximum of 0.2% of the
Purchase Limit. During the third quarter of fiscal 1995, the Corporation elected
to amend the Purchase Limit under the agreement from $600.0 million to $500.0
million. As of June 28, 1997 and June 29, 1996, no interests in the Receivables
had been sold.
In May 1995, Digital Equipment Co. Limited, a wholly-owned subsidiary of the
Corporation incorporated in the United Kingdom, entered into a five-year
agreement with a major financial institution allowing it to sell an undivided
ownership interest in a designated pool of trade accounts receivable (the "UK
Receivables") to a group of investors for proceeds of up to approximately $133.8
million (80 million pounds sterling). Commitment fees under the agreement are
immaterial. As of June 28, 1997 and June 29, 1996, no interests in the
UK Receivables had been sold.
In October 1996, Digital Equipment France S.A.R.L., a wholly-owned subsidiary of
the Corporation incorporated in France, renewed for a second one-year period its
agreement with a major financial institution allowing it to sell an interest in
a designated pool of trade accounts receivable (the "France Receivables") to a
group of investors for proceeds of up to approximately $43.1 million (250
million French francs). Commitment fees under the agreement are immaterial. As
of June 28, 1997 and June 29, 1996, no interests in the France Receivables had
been sold.
44 Digital Equipment Corporation
<PAGE> 47
NOTE G: POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS
- --------------------------------------------------------------------------------
PENSION PLANS The Corporation and its subsidiaries have defined benefit and
defined contribution pension plans covering substantially all employees. The
benefits are based on years of service and compensation during the employee's
career. Pension cost is based on estimated benefit payment formulas.
It is the Corporation's policy to make tax-deductible contributions to the plans
in accordance with plan provisions and local laws. For the U.S. pension plan,
there were no contributions in fiscal 1997, 1996 or 1995. The assets of the
plans include corporate equity and debt securities, government securities and
real estate.
In December 1995, the Board of Directors approved an amendment to the
Corporation's U.S. pension plan effective March 1, 1996. Pursuant to the
amendment to the plan, the defined pension benefit is based on an account
balance comprised of a percentage of pay for each year of service and interest
credited on the cumulative balance. Prior to March 1, 1996, the benefit plan was
calculated based on a percentage of the employee's earnings during service to
the Corporation.
As a result of the amendment, the vested and accumulated benefit obligations of
the pension plan more closely approximate the projected benefit obligation. The
amendment did not have a material effect on the consolidated statement of
operations or on the consolidated balance sheet. There was no cash flow impact
from the amendment to the U.S. plan.
The decline in pension cost before curtailment and settlement gains in fiscal
1997 reflects the positive effects of increased returns on invested pension
assets and restructuring activities.
The net periodic pension cost for defined contribution pension plans was
$33.7 million, $32.4 million and $6.8 million for fiscal 1997, 1996 and 1995,
respectively. The Corporation initiated contributions to the U.S. 401(k) plan
on July 1, 1995 which resulted in increased costs for the Corporation's defined
contribution plans in fiscal 1996.
The measurement dates for all plans were within 90 days of year-end.
<TABLE>
<CAPTION>
Components of net periodic pension cost (in thousands)
- ----------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 131,008 $ 138,069 $ 156,112
Interest cost on projected benefit obligations 217,637 202,385 182,363
Actual return on plan assets (547,331) (512,244) (344,486)
Net amortization and deferral 258,166 256,324 91,251
- ----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost before curtailment and settlement gains 59,480 84,534 85,240
Curtailment and settlement gains (1,280) (5,159) --
- ----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost for defined benefit pension plans $ 58,200 $ 79,375 $ 85,240
- ----------------------------------------------------------------------------------------------------------------------
Total pension cost for all pension plans $ 92,822 $ 112,769 $ 95,249
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Significant actuarial assumptions for pension plans
- ----------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. pension plan:
Discount rate 7.75% 8.00% 7.50%
Expected long-term rate of return on plan assets 9.50% 9.00% 9.00%
Rate of increase in future compensation levels 5.00% 5.00% 5.00%
- ----------------------------------------------------------------------------------------------------------------------
Non-U.S. pension plans:
Discount rate 3.50-8.50% 4.00- 9.30% 5.00- 9.50%
Expected long-term rate of return on plan assets 4.50-9.50% 4.00-10.00% 6.00-10.00%
Rate of increase in future compensation levels 2.00-6.50% 2.00- 7.00% 3.00- 7.00%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Digital Equipment Corporation 45
<PAGE> 48
NOTE G: POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Funded status of pension plans as of the year-end measurement date (in thousands)
- ---------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (2,695,564) $ (2,433,935)
- ---------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ (2,867,883) $ (2,566,869)
- ---------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ (3,109,380) $ (2,875,815)
Plan assets at fair value 3,637,062 3,305,529
- ---------------------------------------------------------------------------------------------------------------
Over-funded projected benefit obligation 527,682 429,714
Unrecognized net gain (1,006,745) (858,279)
Unrecognized prior service cost 44,747 54,454
Unrecognized net transition asset (71,167) (76,232)
- ---------------------------------------------------------------------------------------------------------------
Pension liability recognized on the balance sheet $ (505,483) $ (450,343)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation has defined benefit
postretirement plans that provide medical and dental benefits for U.S. retirees
and their eligible dependents. Substantially all of the Corporation's U.S.
employees may become eligible for postretirement benefits if they reach
retirement age while working for the Corporation. The majority of the
Corporation's non-U.S. subsidiaries do not offer postretirement benefits other
than pensions to retirees.
The Corporation's postretirement benefit plans other than pensions are funded as
costs are incurred.
Unrecognized net gains in excess of the underlying accumulated postretirement
benefits obligation have been generated due to a shift to managed care and
declining health care cost trends and employee population. Unrecognized gains or
losses are amortized over the average expected service period of plan
participants, provided that the unrecognized gains or losses do not exceed a
certain percentage of the accumulated postretirement benefits obligation, after
which the gains and losses are recognized immediately.
During the second quarter of fiscal 1997, the Corporation amended its U.S.
postretirement medical plan to provide full retiree medical benefits only to
employees working ten years after age 45. As a result of the amendment, the
Corporation recognized a one-time curtailment gain of $52.3 million. The change
to the plan had an immaterial cash flow impact to the Corporation.
46 Digital Equipment Corporation
<PAGE> 49
NOTE G: POSTRETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Components of net periodic postretirement benefits cost/(credit) (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the period $ 11,593 $ 10,987 $ 18,455
Interest cost on accumulated postretirement benefits obligations 27,397 30,707 41,279
Actual return on plan assets -- -- --
Net amortization and deferral (94,274) (16,871) (9,919)
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost before curtailment gains (55,284) 24,823 49,815
Curtailment gains (52,706) (2,230) (20,741)
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefits cost/(credit) $(107,990) $ 22,593 $ 29,074
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Significant actuarial assumptions for postretirement benefits plans (dollars in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996 July 1, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. plans:
Discount rate 7.75% 8.00% 7.50%
Health care cost trend rate, current year 5.50% 5.50% 7.00%
Health care cost trend rate, ultimate year 5.00% 5.00% 5.50%
Trend rate decreases to the ultimate rate in the year 2004 2004 2005
Effect of a 1% increase in the trend rate:
Increase in accumulated postretirement benefits obligation 61,315 $ 64,819 $ 100,617
Increase in net periodic postretirement benefits cost $ 7,262 $ 7,326 $ 13,645
- ---------------------------------------------------------------------------------------------------------------------------------
Non-U.S. plans:
Discount rate 4.50- 8.50% 5.00- 8.50% 5.00- 8.50%
Health care cost trend rate, current year 0.00-12.00% 4.00-12.00% 4.00-11.00%
Health care cost trend rate, ultimate year 0.00- 7.00% 4.00- 7.00% 4.00- 7.00%
Trend rates decrease to the ultimate rates in the years 2003 1996-2004 1995-2006
Effect of a 1% increase in the trend rate:
Increase in accumulated postretirement benefits obligation $ 1,094 $ 2,196 $ 8,072
Increase in net periodic postretirement benefits cost $ 226 $ 407 $ 1,043
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Funded status of postretirement benefits plans as of the year-end measurement date (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------------
Year ended June 28, 1997 June 29, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefits obligations:
Retirees $(267,939) $(273,908)
Fully eligible plan participants (23,025) (6,582)
Other active plan participants (67,152) (142,617)
- ---------------------------------------------------------------------------------------------------------------------------------
Unfunded accumulated postretirement benefits obligation (358,116) (423,107)
Unrecognized net gain (147,972) (212,646)
Unrecognized prior service credit (74,558) (84,929)
- ---------------------------------------------------------------------------------------------------------------------------------
Other postretirement benefits liability recognized on the balance sheet $(580,646) $(720,682)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Digital Equipment Corporation 47
<PAGE> 50
NOTE H: COMMITMENTS, CONTINGENCIES AND RISK FACTORS
- --------------------------------------------------------------------------------
LEASE COMMITMENTS Minimum annual rentals under noncancelable leases (which are
principally for leased real estate, vehicles and equipment) for the fiscal years
listed are as follows:
<TABLE>
<CAPTION>
Fiscal year (in thousands)
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 239,094
1999 268,904
2000 124,968
2001 91,163
2002 71,993
Later years 289,794
- --------------------------------------------------------------------------------
Total minimum lease payments $1,085,916
- --------------------------------------------------------------------------------
</TABLE>
Total rental expense for fiscal 1997, 1996 and 1995 was $199.9 million, $259.3
million and $282.1 million, respectively.
COMMITMENTS The Corporation has entered into agreements with another company to
provide the Corporation with services in support of its normal operations. The
minimum payments for these agreements approximate $96.0 million in fiscal 1998,
$88.0 million in fiscal 1999 and $67.0 million per annum in fiscal years 2000
through 2005.
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 (the "Series A Preferred Stock") and the
Corporation's financial results for the quarter ended April 2, 1994. During
fiscal 1995, the lawsuits were consolidated into three cases, which were pending
before the United States District Court for the District of Massachusetts. On
August 8, 1995, the Massachusetts federal court granted the defendants' motion
to dismiss all three cases in their entirety. On May 7, 1996, the United States
Court of Appeals for the First Circuit affirmed in part and reversed in part the
dismissal of the two cases, and remanded for further proceedings.
The Corporation and Intel Corporation ("Intel") are involved in litigation
commenced in the fourth quarter of fiscal 1997 in the U.S. District Courts of
Massachusetts and Northern California 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, and
breach of contract and various other unfair or unlawful business practices by
the Corporation. The two lawsuits are in an early stage, with the parties in the
process of answering the respective claims, asserting defenses and filing
counterclaims.
RISK FACTORS The broad diversity of the Corporation's products, service
offerings, customers and geographic operations mitigate the risk that a severe
impact will occur in the near term as a result of changes in its customer base,
competition, or composition of its markets.
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.
NOTE I: FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
FOREIGN EXCHANGE OPTIONS In the ordinary course of business, the Corporation
purchases foreign exchange option contracts to limit potential losses from
adverse exchange rate movements on certain anticipated local currency
transactions. The contracts are primarily in weighted aggregates of European
currencies, Japanese yen and Australian dollars and generally have maturities
which do not exceed three months. Premiums to purchase foreign exchange option
contracts are amortized over the life of the contract and are included in
selling, general and administrative expenses. Unamortized premiums are included
in prepaid assets. Gains on option contracts, if any, are included in product
and service revenues in the period in which the related local currency revenues
are reported.
FOREIGN EXCHANGE FORWARDS In the ordinary course of business, the Corporation
enters into foreign exchange forward contracts to mitigate the effect of foreign
currency movements on the U.S. dollar value of monetary asset and liability
positions of non-U.S. subsidiaries. The contracts are primarily in European
currencies, Japanese yen and Australian dollars and generally have maturities
which do not exceed three months. Gains and losses on contracts are included in
selling, general and administrative expenses in the period in which the exchange
rates change.
With respect to foreign exchange option and forward contracts, there were no
deferred gains or losses at June 28, 1997. The Corporation does not hold or
issue foreign exchange option or forward contracts for trading purposes.
48 Digital Equipment Corporation
<PAGE> 51
NOTE I: FINANCIAL INSTRUMENTS (continued)
- --------------------------------------------------------------------------------
INTEREST RATE SWAPS During the first quarter of fiscal 1994, the Corporation
entered into interest rate swap agreements, with maturities of up to 10 years,
to manage its exposure to interest rate movements by effectively converting a
portion of its long-term debt from fixed to variable rates. The net face amount
of interest rate swaps subject to variable rates as of June 28, 1997 and June
29, 1996 was $250.0 million. These agreements involve the exchange of fixed rate
payments for variable rate payments without the effect of leverage and without
the exchange of the underlying face amount. Fixed interest rate payments are at
a weighted average rate of 5.73%. Variable rate payments are based on six month
U.S. dollar LIBOR. Interest rate differentials paid or received under these
agreements are recognized over the six month period as adjustments to interest
expense. Gains and losses on terminated swap agreements are amortized over the
original life of the agreements as adjustments to interest expense. Unamortized
deferred losses are included in prepaid assets and totaled $12.9 million as of
June 28, 1997. The Corporation does not hold or issue interest rate swap
agreements for trading purposes.
FAIR VALUE The carrying amounts reflected in the consolidated balance sheets for
cash, cash equivalents, short-term investments, accounts receivable, bank loans,
current portion of long-term debt and accounts payable approximate fair value
due to the short maturities of these instruments. The fair values for long-term
debt and hedging instruments are based on dealer quotes for those instruments.
The fair values represent estimates of possible value which may not be realized
in the future.
The face amount of hedging instruments does not necessarily represent amounts
exchanged by the parties and thus is not a direct measure of the exposure of the
Corporation through its use of hedging instruments. The amounts exchanged are
calculated on the basis of face amounts and other terms of the hedging
instruments, which relate to interest rates, foreign exchange rates or other
financial indexes.
The fair value of the Corporation's long-term debt and hedging instruments are
subject to change as a result of potential changes in market rates and prices.
The potential change in fair value for interest rate sensitive instruments is
based on a hypothetical immediate 1% point increase in interest rates across all
maturities; the potential loss in fair value for foreign exchange rate sensitive
instruments are based on a hypothetical immediate 10% increase in U.S. dollar
per local currency exchange rates across all maturities. The Corporation's use
of this methodology to quantify the market risk of such instruments should not
be construed as an endorsement of its accuracy or the accuracy of the related
assumptions. The quantitative information about market risk is necessarily
limited because it does not take into account operating transactions,
anticipated hedging instruments, pensions and other postretirement benefits. The
potential loss for purchased foreign exchange option contracts is limited to the
premium paid.
<TABLE>
<CAPTION>
Fair value of financial instruments (in thousands)
- ---------------------------------------------------------------------------------------------------
Hypothetical loss
in fair value(1)
Face amount(1) Carrying amount(1) Fair value(1) (Unaudited)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 28, 1997
LONG-TERM DEBT $ (755,490) $ (743,440) $ (717,380) $ 54,298
HEDGING INSTRUMENTS:
OPTION CONTRACTS 727,645 4,399 425 (297)
FORWARD CONTRACTS 1,322,236 (17,881) (10,732) (126,309)
INTEREST RATE SWAPS 250,000 12,940 (12,285) (11,313)
- ---------------------------------------------------------------------------------------------------
June 29, 1996
Long-term debt $(1,012,269) $ (999,131) $ (979,892) $ 60,518
Hedging instruments:
Option contracts 691,151 884 494 (385)
Forward contracts 886,015 (267) (1,952) (70,638)
Interest rate swaps 250,000 15,404 (16,540) (12,509)
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Asset/(liability)
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the
Corporation to concentrations of credit risk consist principally of temporary
cash and short-term investments, trade receivables and hedging instruments.
Digital Equipment Corporation 49
<PAGE> 52
NOTE I: FINANCIAL INSTRUMENTS (continued)
- --------------------------------------------------------------------------------
The Corporation places its temporary cash and short-term investments with high
credit qualified financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution.
The Corporation sells a significant portion of its products through third-party
resellers and as a result maintains individually significant accounts receivable
balances from various major resellers. If the financial condition and operations
of these resellers were to deteriorate, the Corporation's operating results
could be adversely affected. Total receivables for the ten largest resellers
approximated 10% of total accounts receivable at June 28, 1997.
Concentrations of credit risk with respect to other trade receivables are
limited due to the large number of customers comprising the Corporation's
customer base, and their dispersion across many different industries and
geographies. The Corporation performs ongoing credit evaluations of its
customers and generally does not require collateral.
The Corporation is exposed to credit-related losses in the event of
nonperformance by counterparties to hedging instruments. The counterparties to
these contracts are major financial institutions. The Corporation continually
monitors its positions and the credit ratings of its counterparties and limits
the amount of contracts it enters into with any one party.
NOTE J: INVESTING AND DIVESTING ACTIVITIES
- --------------------------------------------------------------------------------
During fiscal 1997, the Corporation sold certain software products and other
assets generating $32.2 million of proceeds. The Corporation continues to sell
certain of the software products under royalty agreements. Revenue from sales of
divested software products represented an immaterial amount of the consolidated
operating revenues.
During fiscal 1996, the Corporation sold its learning services business and
several small businesses. During fiscal 1995, the Corporation sold portions of
its storage business, its relational database business, a software distribution
subsidiary, a contract manufacturing business and a semiconductor manufacturing
facility. Prior to sale and in total the divested businesses represented
approximately 8% of fiscal 1994 consolidated operating revenues and did not have
a material effect on the consolidated net loss from operations.
At the end of the second quarter of fiscal 1996, the Corporation sold its
learning services business to Welsh, Carson, Anderson & Stowe for proceeds of
approximately $80.0 million. Approximately 600 employees transferred with this
business.
In addition, during fiscal 1996 the Corporation sold several small businesses
for net proceeds of approximately $76.0 million.
At the end of the fourth quarter of fiscal 1995, the Corporation sold its South
Queensferry, Scotland semiconductor facility and related assets to a subsidiary
of Motorola, Inc. for net proceeds of approximately $128.0 million. Assets sold
included approximately $8.0 million of inventory and $127.0 million of net
property, plant and equipment. Approximately 530 employees were transferred to
Motorola at the time of sale.
At the end of the third quarter of fiscal 1995, the Corporation sold its
contract manufacturing business to SCI Systems, Inc. for net proceeds of
approximately $75.0 million. Assets sold included approximately $47.0 million of
inventory and $20.0 million of net property, plant and equipment, including a
manufacturing plant in Augusta, Maine. Approximately 700 employees were
transferred to SCI Systems, Inc. at the time of sale.
At the beginning of the second quarter of fiscal 1995, the Corporation sold its
magnetic disk drive, tape drive, solid state disk and thin film heads businesses
(the "Business") to Quantum Corporation ("Quantum") for an aggregate purchase
price of $360.0 million, generating net proceeds of $348.0 million. Assets sold
included approximately $180.0 million of inventory and $154.0 million of net
property, plant and equipment, including facilities in Shrewsbury, Massachusetts
and Penang, Malaysia, as well as the Corporation's interest in Rocky Mountain
Magnetics, Inc. Quantum is leasing facilities owned by the Corporation in
Colorado Springs, Colorado and leased by the Corporation in Batam, Indonesia.
Approximately 3,100 employees were transferred to Quantum upon sale of the
Business.
Also during the second quarter of fiscal 1995, the Corporation sold its
relational database business and related assets to Oracle Corporation for net
proceeds of $107.0 million. Approximately 250 employees were transferred to
Oracle Corporation at the time of sale.
The Corporation adopted Statement of Financial Accounting Standards No.
115--Accounting for Certain Investments in Debt and Equity Securities, effective
July 3, 1994. In fiscal 1995, the Corporation recorded a one-time unrealized
gain of $64.5 million or $.44 per common share related to the value of Ing.
Olivetti & C. S.p.A. ("Olivetti") common stock. Subsequently, in the same year,
the Corporation sold all of its shares of Olivetti stock for approximately
$149.0 million, thereby realizing the gain. The cash flow effect is included in
the (gain)/loss on disposition and write-down of other assets in the Statement
of cash flows.
50 Digital Equipment Corporation
<PAGE> 53
NOTE K: STOCK PLANS
- --------------------------------------------------------------------------------
STOCK OPTIONS AND AWARDS Under its Equity Plans, the Corporation has awarded
restricted stock to certain officers and key employees. Under such Equity Plans
and its Restricted Stock Option Plans, the Corporation has granted options to
certain officers and key employees to purchase common stock at a price
determined by the Board of Directors. Shares purchased under the plans are
either subject to repurchase options and restrictions on sales which lapse over
an extended time period not exceeding 10 years, or become exercisable ratably
over periods of up to five years. At June 28, 1997, 5,515,234 options to
purchase shares were exercisable at prices ranging from $19.25 to $153.00.
The excess, if any, of the fair market value of shares on the measurement date
over the exercise price is charged to operations each year as the restrictions
lapse.
In May 1994, the Board of Directors approved a program to offer employees of the
Corporation (other than executive officers of the Corporation) the opportunity
to exchange their outstanding stock options for new options to purchase a
reduced number of shares of common stock at a per share exercise price equal to
the fair market value of the common stock on the date the program was approved
(the "Regrant Program"). Under the Regrant Program, outstanding options granted
between 1985 and 1993 to purchase up to 11,854,084 shares of common stock with
an average exercise price of $59.43 per share could be exchanged for new options
to purchase up to 4,554,870 shares with an exercise price of $22.88 per share.
The new options vest over four years and have a seven-year term. As of July 3,
1994 options to purchase 5,765,914 shares had been exchanged and cancelled for
new options to purchase a total of 2,328,910 shares. During fiscal 1995, an
additional 4,476,977 shares were exchanged and canceled for new options to
purchase a total of 1,663,430 shares. No further exchanges may occur under this
program. No compensation expense was reversed as a result of the Regrant
Program. Future expense associated with options canceled, and not replaced by
new options under the Regrant Program, will no longer be recognized, resulting
in an expense reduction of approximately $31.0 million over fiscal years 1995 to
1998.
<TABLE>
<CAPTION>
Employee stock options and awards
- --------------------------------------------------------------------------------
Shares Average
reserved for price
future grants Shares per share
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
July 2, 1994 3,037,373 14,934,229 $ 49.59
Additional shares
available for grant 2,134,306 -- --
Options granted (2,781,930) 2,781,930 25.42
Shares awarded (897,680) -- --
Options exercised -- (677,299) 26.58
Options canceled 3,278,129 (3,278,129) 35.73
Options terminated (1,748,323) -- --
Regrant program:
Canceled 4,476,977 (4,476,977) 59.26
Terminated (2,479,767) -- --
Regrant (1,663,430) 1,663,430 22.88
- --------------------------------------------------------------------------------
July 1, 1995 3,355,655 10,947,184 $ 41.01
Additional shares
available for grant 2,246,664 -- --
Options granted (3,197,920) 3,197,920 44.11
Shares awarded (493,635) -- --
Shares forfeited 86,317 -- --
Options exercised -- (1,984,600) 29.62
Options canceled 865,196 (865,196) 41.93
Options terminated (233,542) -- --
- --------------------------------------------------------------------------------
June 29, 1996 2,628,735 11,295,308 $ 43.81
Additional shares
available for grant 3,110,086 -- --
Options granted (3,750,800) 3,750,800 36.30
Shares awarded (654,105) -- --
Shares forfeited 151,114 -- --
Options exercised -- (647,222) 21.01
Options canceled 2,187,519 (2,187,519) 46.88
Options terminated (767,950) -- --
- --------------------------------------------------------------------------------
June 28, 1997 2,904,599 12,211,367 $ 42.17
- --------------------------------------------------------------------------------
</TABLE>
EMPLOYEE STOCK PURCHASE PLANS Under the Corporation's Employee Stock Purchase
Plans (ESPP), all U.S. and certain non-U.S. employees may be granted the
opportunity to purchase common stock at 85% of market value on the first or last
business day of the six-month payment period, whichever is lower. Common stock
reserved for future employee purchases aggregated 7,261,138 shares at June 28,
1997. There were 4,445,406 shares issued at an average price of $30.76 per share
during the year ended June 28, 1997; 3,341,316 shares issued at an average price
of $41.58 per share during the year ended June 29, 1996; and 6,085,154 shares
issued at an average price of $21.96 per share during the year ended July 1,
1995. There have been no charges to
Digital Equipment Corporation 51
<PAGE> 54
NOTE K: STOCK PLANS (continued)
- --------------------------------------------------------------------------------
income in connection with these Plans other than incidental expenses related to
the issuance of the shares. Federal income tax benefits relating to such Plans,
if any, have been credited to additional paid-in capital.
STOCK OPTION PLANS FOR NON-EMPLOYEE DIRECTORS The 1990 Stock Option Plan for
Non-Employee Directors provided for a one-time grant of an option to purchase
5,000 shares of the Corporation's common stock to non-employee directors. The
exercise price of an option is the fair market value per share of common stock
of the Corporation on the date the option is granted. An aggregate of 100,000
shares of common stock were authorized for issuance under the Plan, of which
55,000 are subject to options granted under the plan at an average purchase
price of $48.23 per share. The options become exercisable at the rate of 20% per
year, with credit given for past service. None of these options had been
exercised as of June 28, 1997. No additional options may be granted under this
plan subsequent to adoption of the 1995 Stock Option Plan for Non-Employee
Directors.
The 1995 Stock Option Plan for Non-Employee Directors, which was approved on
November 9, 1995, provides for annual grants to purchase 2,500 shares of the
Corporation's common stock to non-employee directors, who are initially elected
to office subsequent to January 1, 1995. The plan provides for annual grants to
purchase 1,000 shares of the Corporation's common stock to non-employee
directors elected to office prior to January 1, 1995. The exercise price of an
option is the fair market value per share of common stock of the Corporation on
the date the option is granted. An aggregate of 95,000 shares of common stock
are authorized for issuance under the Plan, of which 20,000 are subject to
options granted under the plan at an average purchase price of $45.14 per share.
The options become exercisable ratably over three years. None of these options
had been exercised as of June 28, 1997. Effective on the date of the 1997 Annual
Meeting of Stockholders, non-employee directors will receive an annual stock
option grant to purchase either 6,000 shares or 3,500 shares, depending upon the
age of the non-employee director and on the date of commencement of service as a
non-employee director.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123--Accounting for Stock-Based
Compensation. SFAS No. 123 encourages, but does not require, companies to
recognize compensation costs for all stock-based compensation arrangements using
a fair value method of accounting. Alternatively, SFAS No. 123 permits a company
to continue accounting for these arrangements under Accounting Principles Board
Opinion No. 25--Accounting for Stock Issued to Employees, accompanied by
footnote disclosure of the pro forma net income and earnings per share had the
new rules been applied. The Corporation adopted the alternative approach under
SFAS No. 123 as of the first day of fiscal 1997. Accordingly, no compensation
expense has been recognized for the Corporation's stock-based compensation plans
other than for restricted stock. If the Corporation had elected to recognize
compensation expense based on the fair value of the options at the date of grant
for awards granted in fiscal 1997 and 1996 the Corporation's net income/(loss)
and earnings/(loss) per common share would have approximated the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
(in thousands, except per share data)
- --------------------------------------------------------------------------------
Year ended June 28, June 29,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income/(loss)
applicable to common stock $36,198 $(188,040)
Pro forma net income/(loss)
applicable per common share $ 0.23 $ (1.24)
- --------------------------------------------------------------------------------
</TABLE>
The weighted-average fair value of each option granted in fiscal 1997 and 1996
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Stock Option Employee Stock
Plans Purchase Plans
- --------------------------------------------------------------------------------
Fiscal year 1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Risk-free interest rate 6.3% 6.2% 5.3% 5.4%
Life in years 3.6 3.6 0.5 0.5
Volatility 35% 35% 35% 35%
Dividend yield 0% 0% 0% 0%
- --------------------------------------------------------------------------------
</TABLE>
The weighted average fair value at date of grant for awards granted in fiscal
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Fiscal year 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Stock options $12.63 $15.37
Stock awards $39.64 $47.96
ESPP $ 9.16 $12.62
- --------------------------------------------------------------------------------
</TABLE>
The pro forma net income/(loss) for fiscal 1997 and 1996 may not be
representative of the pro forma net income/(loss) of future years because the
SFAS No. 123 method of accounting for pro forma compensation expense has not
been applied to options granted prior to July 2, 1995.
52 Digital Equipment Corporation
<PAGE> 55
NOTE K: STOCK PLANS (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock options outstanding at June 28, 1997 Options outstanding Options exercisable
- ------------------------------------------ -------------------------------------------- ---------------------------
Weighted
average Weighted Weighted
remaining average average
Range of Shares contractual exercise Shares exercise
exercise prices outstanding life price exercisable price
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$19.25 to $ 19.99 1,097,657 7.28 $19.65 637,603 $19.62
$20.00 to $ 29.99 2,395,118 5.32 $24.20 1,310,980 $22.91
$30.00 to $ 39.99 3,100,105 9.03 $37.52 108,499 $34.05
$40.00 to $ 49.99 3,230,377 7.70 $43.32 1,520,688 $43.68
$50.00 to $ 59.99 401,454 7.01 $55.90 238,820 $57.21
$60.00 to $ 69.99 33,500 8.61 $62.90 11,055 $62.90
$70.00 to $153.00 2,028,156 2.36 $78.03 1,687,589 $78.28
- ---------------------------------------------------------------------------------------------------------------------------
Total 12,286,367 6.63 $42.21 5,515,234 $46.98
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE L: STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
On January 21, 1994, the Corporation filed with the Securities and Exchange
Commission a shelf registration statement on Form S-3 under the Securities Act
of 1933, as amended, covering the registration of debt securities, preferred
stock, depositary shares, and warrants to purchase equity and debt securities,
in an aggregate amount of $1.0 billion. In March 1994, the Corporation issued
and sold 16 million Depositary Shares under the shelf registration statement,
each representing a one-fourth interest in a share of the Corporation's Series A
8 7/8% Cumulative Preferred Stock (the "Series A Preferred Stock"), par value
$1.00 per share. Dividends on the Series A Preferred Stock accrue at the annual
rate of 8 7/8%, or $35.5 million per year. At June 28, 1997, there were declared
and unpaid dividends of $8.9 million. These dividends were paid on July 15,
1997.
The Series A Preferred Stock was offered to the public at $100 per share ($25
per Depositary Share) for a total of $400.0 million, leaving a balance of $600.0
million available for future issuance under the shelf registration. The net
proceeds of $387.0 million from the Series A Preferred Stock offering was used
for working capital and other general corporate purposes. The Series A Preferred
Stock is not convertible into, or exchangeable for, shares of any other class or
classes of stock of the Corporation. The Series A Preferred Stock is not
redeemable prior to April 1, 1999. On or after April 1, 1999, the Corporation,
at its option, may redeem shares of the Series A Preferred Stock, as a whole or
in part, for cash at the redemption price per share of $100 ($25 per Depositary
Share), plus accrued and unpaid dividends to the redemption date. Upon
dissolution, liquidation or the winding up of the affairs of the Corporation,
the holders of the Series A Preferred Stock will be entitled to receive $100 per
share ($25 per Depositary Share), plus accrued and unpaid dividends, before any
distribution to holders of the Corporation's common stock.
The Corporation adopted a Stockholder Rights Plan in December 1989 pursuant to
which the Corporation authorized the distribution of one Common Stock Purchase
Right ("Right") for each share of outstanding common stock. Under certain
conditions, each Right may be exercised for one share of common stock at an
exercise price of $400, subject to adjustment. Under circumstances defined in
the Plan, the Rights entitle holders to purchase stock having a value of twice
the exercise price of the Rights. Until they become exercisable, the Rights are
not transferable apart from the common stock. The Rights may be redeemed by the
Corporation at any time prior to the occurrence of certain events at $.01 per
Right. The Plan will expire on December 21, 1999, unless the Rights are earlier
redeemed by the Corporation.
The Corporation purchased on the open market 10 million shares of its common
stock at an aggregate purchase price of $354.1 million. All of the acquired
shares were held as common stock in treasury, of which 3.9 million shares were
subsequently issued to employees under stock plans. The difference between the
average acquisition cost of the shares and the proceeds from issuance is charged
to retained earnings.
Digital Equipment Corporation 53
<PAGE> 56
NOTE M: SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
In July 1997, the Board of Directors authorized the repurchase, as conditions
warrant, of up to 15 million shares of the Corporation's common stock.
- --------------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA (unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Income/
(loss) Income/
Total before Net (loss) per
operating Gross income income/ common
(in millions except per share data)(1) revenues profit taxes (loss) share(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED JUNE 28, 1997
FOURTH QUARTER $ 3,463 $1,199 $ 141 $ 124 $ .75
THIRD QUARTER 3,314 1,106 62 51 .27
SECOND QUARTER 3,358 1,104 37 32 .15
FIRST QUARTER 2,912 912 (62) (66) (.48)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL YEAR $13,047 $4,322 $ 178 $ 141 $ .68
- ------------------------------------------------------------------------------------------------------------------------
For the year ended June 29, 1996
Fourth quarter $ 3,719 $1,212 $(432) $(433) $(2.87)
Third quarter 3,621 1,252 138 124 .74
Second quarter 3,951 1,288 170 149 .91
First quarter 3,271 1,054 57 48 .26
- ------------------------------------------------------------------------------------------------------------------------
Total year $14,563 $4,807 $ (68) $(112) $ (.97)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts may not be additive due to rounding.
(2) The sum of the quarters' earnings per share does not equal the year-to-date
earnings per share due to changes in the weighted average share
calculations.
54 Digital Equipment Corporation
<PAGE> 57
OPERATING MANAGEMENT AND STAFF OFFICERS
- --------------------------------------------------------------------------------
*Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer
*Bruce L. Claflin
Senior Vice President
Worldwide Sales and Marketing
Bobby A. F. Choonavala
Vice President; President, Asia-Pacific
Hans W. Dirkmann
Vice President; President, Europe
Michael Gallup
Vice President; President, North America
Graham Long
Vice President, Global Accounts
Luis M. Zuniga
Vice President, Latin America
*Harold D. Copperman
Senior Vice President
DIGITAL Products Division
R.E. Caldwell
Vice President and General Manager,
DIGITAL Semiconductor
Howard Elias
Vice President and General Manager,
NT Systems Business Unit
Donald Z. Harbert
Vice President, Internet Products Business Unit
Ellen J. Lary
Vice President and General Manager,
Storage Products Business Unit
Jesse Lipcon
Vice President and General Manager,
UNIX and OpenVMS Systems Business Unit
John F. McClelland
Vice President, Manufacturing and Distribution
Mahendra R. Patel
Vice President, Systems Engineering
Robert J. Rennick
Vice President and General Manager,
Network Product Business Unit
Richard J. Fishburn
Vice President and Chief Information Officer
Charles B. Holleran
Vice President, Communications
*Ilene B. Jacobs
Vice President, Human Resources
*Vincent J. Mullarkey
Vice President, Finance and Chief Financial Officer
*Alexis Makris
Vice President and Corporate Controller
*Paul J. Milbury
Vice President and Treasurer
*John J. Rando
Senior Vice President
DIGITAL Services Division
Timothy M. Leisman
Vice President and General Manager,
Operations Management Services
Peter A. Mercury
Vice President and General Manager,
Multivendor Customer Services Business Unit
Kannankote S. Srikanth
Vice President and General Manager,
Network and Systems Integration Services
*Thomas C. Siekman
Vice President and General Counsel
Gail S. Mann
Vice President, Assistant General Counsel,
Secretary and Clerk
*William D. Strecker
Vice President, Corporate Strategy and Technology
and Chief Technical Officer
Samuel H. Fuller
Vice President and Chief Scientist
Robert M. Supnik
Vice President, Corporate Research and
Advanced Development
*"Executive Officer" under the Securities Exchange Act of 1934.
Digital Equipment Corporation 55
<PAGE> 58
DIRECTORS
- --------------------------------------------------------------------------------
Robert B. Palmer
Chairman of the Board,
President and Chief Executive Officer,
Digital Equipment Corporation
Vernon R. Alden
Director and Trustee of several organizations,
Former Chairman, The Boston Company, Inc.
Colby H. Chandler
Director of several corporations, Retired Chairman
of the Board and Chief Executive Officer,
Eastman Kodak Company
Arnaud de Vitry
Engineering consultant and Director and
Trustee of several organizations
Frank P. Doyle
Director of several corporations,
Retired Executive Vice President,
General Electric Company
Kathleen F. Feldstein
President of Economics Studies, Inc.
and Director of several corporations
Thomas P. Gerrity
Dean, Wharton School of the University of
Pennsylvania and Director of several corporations
Thomas L. Phillips
Director of several corporations,
Retired Chairman of the Board
and Chief Executive Officer,
Raytheon Company
Delbert C. Staley
Director of several corporations,
Retired Chairman of the Board
and Chief Executive Officer,
NYNEX Corporation
56 Digital Equipment Corporation
<PAGE> 59
COMMITTEES OF THE BOARD
- --------------------------------------------------------------------------------
AUDIT COMMITTEE NOMINATING COMMITTEE
Colby H. Chandler, Chairman Arnaud de Vitry, Chairman
Vernon R. Alden Vernon R. Alden
Frank P. Doyle Colby H. Chandler
Kathleen F. Feldstein Thomas L. Phillips
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE STRATEGIC DIRECTION COMMITTEE
Thomas L. Phillips, Chairman Robert B. Palmer, Chairman
Thomas P. Gerrity Frank P. Doyle
Delbert C. Staley Thomas P. Gerrity
Delbert C. Staley
- --------------------------------------------------------------------------------
[Photograph of members of Digital's Board of Directors]
Board of Directors, Digital Equipment Corporation (left to right):
VERNON R. ALDEN, KATHLEEN F. FELDSTEIN, ROBERT B. PALMER, COLBY H. CHANDLER,
ARNAUD DE VITRY, THOMAS L. PHILLIPS, DELBERT C. STALEY, THOMAS P. GERRITY, FRANK
P. DOYLE.
Digital Equipment Corporation 57
<PAGE> 60
CORPORATE CONSULTING ENGINEERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Andrew Birrell Alan G. Nemeth
Corporate Consulting Engineer Corporate Consulting Engineer
Corporate Research and Advanced Development UNIX and OpenVMS Systems
Corporate Strategy and Technology DIGITAL Products Division
Daniel W. Dobberpuhl Mahendra R. Patel
Senior Corporate Consulting Engineer Corporate Consulting Engineer
DIGITAL Semiconductor Vice President, Systems Engineering
DIGITAL Products Division DIGITAL Products Division
Richard B. Gillett Jeffrey A. Schriesheim
Corporate Consulting Engineer Corporate Consulting Engineer
UNIX and OpenVMS Systems Technology Strategy
DIGITAL Products Division Corporate Strategy and Technology
Richard B. Grove Robert E. Stewart
Corporate Consulting Engineer Corporate Consulting Engineer
UNIX and OpenVMS Systems NT Systems
DIGITAL Products Division DIGITAL Products Division
Richard J. Hollingsworth William D. Strecker
Senior Corporate Consulting Engineer Senior Corporate Consulting Engineer
Vice President, Semiconductor Manufacturing Vice President, Corporate Strategy and Technology
and Technology Chief Technical Officer
DIGITAL Products Division
Robert M. Supnik
William A. Laing Senior Corporate Consulting Engineer
Corporate Consulting Engineer Vice President, Corporate Research
Corporate Research and Advanced Development and Advanced Development
Corporate Strategy and Technology Corporate Strategy and Technology
Richard F. Lary Richard T. Witek
Corporate Consulting Engineer Corporate Consulting Engineer
Systems Architecture and Storage Products DIGITAL Semiconductor
DIGITAL Products Division DIGITAL Products Division
Jesse Lipcon
Corporate Consulting Engineer
Vice President and General Manager,
UNIX and OpenVMS Systems Business Unit
DIGITAL Products Division
Maurice P. Marks
Senior Corporate Consulting Engineer
Technical Director, DIGITAL Semiconductor
DIGITAL Products Division
</TABLE>
58 Digital Equipment Corporation
<PAGE> 61
INVESTOR INFORMATION
- --------------------------------------------------------------------------------
INFORMATION ON COMMON STOCK
The Corporation's common stock (Ticker Symbol "DEC") is listed and traded on
the:
Chicago Stock Exchange
New York Stock Exchange
Pacific Stock Exchange
Swiss Exchange
German Stock Exchanges of Frankfurt, Munich and Berlin
Common stock price composite:
There were 53,911 shareholders of record as of June 28, 1997. The high and low
quarterly sales prices for the past three fiscal years were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal quarter High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1997
FOURTH 38 1/2 25
THIRD 38 3/4 27
SECOND 41 1/2 28 3/8
FIRST 46 7/8 30 1/2
- --------------------------------------------------------------------------------
1996
Fourth 63 1/4 41 1/2
Third 76 1/2 50 1/8
Second 65 40 3/4
First 45 7/8 35 1/8
- --------------------------------------------------------------------------------
1995
Fourth 49 1/2 37 3/8
Third 38 7/8 31 1/8
Second 36 5/8 24 7/8
First 29 1/4 18 3/8
- --------------------------------------------------------------------------------
</TABLE>
Transfer Agent and Registrar for common stock:
First Chicago Trust Company of New York is the principal stock transfer agent
and registrar, and maintains the stockholder accounting records. For questions
on change of ownership, lost stock certificates, consolidation of accounts and
change of address, please contact:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, New Jersey 07303-2500
Telephone: (201) 324-0498
(800) 519-3111
For change of address, send a signed and dated note or postcard to First Chicago
Trust Company of New York and include the name in which the stock is registered,
account number and social security number, as well as the old and new addresses.
Employee investor services:
Digital Equipment Corporation is also a stock transfer agent and registrar, and
maintains employee stockholder accounting records. Inquiries of an
administrative nature relative to employee stockholder accounting records and
employee purchases should be directed to:
Investor Services
Digital Equipment Corporation
111 Powdermill Road MSO1-1/L12
Maynard, Massachusetts 01754
(978) 493-3703, (978) 493-5213
Eliminate duplicate mailings:
To maintain more than one account, but eliminate duplicate mailings of annual
reports to the same address, send a copy of the label from a Corporate mailing
to the Investor Services Department (address above), indicating the names you
wish to keep on the mailing list and the names you wish to delete.
Digital Equipment Corporation 59
<PAGE> 62
INVESTOR INFORMATION (continued)
- --------------------------------------------------------------------------------
INFORMATION ON PREFERRED STOCK
The Corporation's Depositary Shares, each representing one-fourth of a share of
the Corporation's Series A 8 7/8% Cumulative Preferred Stock (the "Preferred
Stock") (Ticker Symbol DEC PRA), is listed and traded on the New York Stock
Exchange. The Preferred Stock carries an 8 7/8% cumulative annual dividend
payable quarterly on January 15, April 15, July 15, and October 15 of each year.
Depositary for the Series A 8 7/8% Cumulative Preferred Stock:
Citibank N.A.
Address correspondence to:
Citicorp Data Distributor
404 Sette Drive
Paramus, New Jersey 07653
(800) 422-2066
STOCKHOLDER COMMUNICATIONS
The Investor Relations Department is available to assist stockholders. Investor
inquiries regarding financial information are welcome by letter, telephone or
the Internet. The annual report on Form 10-K for the fiscal year ended June 28,
1997, including schedules thereto, which is filed with the Securities and
Exchange Commission, will be sent without charge upon written request to:
Investor Relations
Digital Equipment Corporation
111 Powdermill Road MSO2-3/B17
Maynard, Massachusetts 01754
Telephone: (978) 493-7182
Fax: (978) 493-7633
DIGITAL Shareholder Direct:
Financial results, quarterly and annual reports and news
on the Corporation's products and services is available via voice, fax or mail
by calling 1-800-998-9332 (U.S., Canada and Latin America only).
DIGITAL on the Internet:
Access to Corporate and financial information is also available through the
Corporation's home page on the Internet: http://www.digital.com and the Digital
Financial News & Investor Information home page at
http://www.digital.com/info/finance.
AUDITORS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 478-5000
60 Digital Equipment Corporation
<PAGE> 63
DIGITAL believes the customer, market and product information in this
annual report is accurate as of its publication date. This information
is subject to change without notice. DIGITAL is not responsible for
any inadvertent errors.
DIGITAL will conduct its business in a manner that conserves the
environment. As a company we have a tradition of achievement in
protecting the environment and in ensuring the health and safety of
our fellow employees. A copy of our Environmental Health and Safety
Progress Report is accessible through DIGITAL's EHS homepage:
www.digital.com/info/ehs.
The following are trademarks of Digital Equipment Corporation:
AllConnect, Alpha, AlphaPowered, AlphaStation, AlphaServer, AltaVista,
ClientWORKS, DIGITAL, DIGITAL Logo, DIGITAL UNIX, FX!32, GIGAswitch,
HiNote, Millicent, OpenVMS, Powerstorm, Prioris, StorageWorks,
TruCluster, VAX, Venturis, and VLM.
The following are third-party trademarks:
Amazon.com is a trademark of Amazon.Com, Inc. Arbor is a registered
trademark of Kenan Systems Corporation. CELLworks is a registered
trademark of Fastech Integration, Inc. 1st Quote is a trademark of
Virtual Telecom, Inc. NetDay is a trademark of NetDay. NetPC is a
trademark of Hewlett-Packard Company. NetWare is a registered
trademark of Novell, Inc. Oracle, Oracle7, and Oracle8 are
trademarks of Oracle Corporation. Pentium Pro and Pentium II are
trademarks of Intel Corporation; Intel and Pentium are registered
trademarks of Intel Corporation. PointCast is a registered trademark
of PointCast Incorporated. Road Runner is a trademark of Time
Warner Entertainment Company, L.P. SAP is a trademark of SAP
Aktiengesellschaft. Solaris is a registered trademark of Sun
Microsystems, Inc. StrongARM is a trademark of Advance RISC Machines
Limited. Tandem is a registered trademark of Tandem Computers
Incorporated. UNIX is a registered trademark in the United States
and other countries, licensed exclusively through X/Open Company,
Ltd. Windows95 and Windows CE are trademarks and Windows, Windows NT,
BackOffice, and Microsoft are registered trademarks of Microsoft
Corporation.
All other trademarks are the property of their respective owners.
Printed in USA EA-B7894-87/97 09 19 200.0
Copyright 1997 Digital Equipment Corporation
All rights reserved
Printed on recycled paper
<PAGE> 64
[Outside Back Cover: Photograph of three business people engaged
in a discussion.]
DIGITAL EQUIPMENT CORPORATION
111 Powdermill Road
Maynard, Massachusetts
01754-1418
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
The following is a list of the Corporation's consolidated subsidiaries as
of June 28, 1997. The Corporation owns, directly or indirectly, 100% of the
voting securities of each subsidiary, unless marked with an asterisk.
<TABLE>
<CAPTION>
State or
Jurisdiction of
Name Organization
---- ------------
<S> <C>
AltaVista Internet Software, Inc. Delaware
AltaVista Internet Software B.V. Netherlands
Digital Colombia Ltda. Colombia
Basys Automation Systems, Inc. Delaware
CASE & CAD Engineering Produktveckling i Stockholm Sweden
Computer Insurance Company Rhode Island
DEC Digital Equipment Corporation A.G./S.A. Switzerland
Digital Computer Taiwan Limited Taiwan
Digital Equipment AB Sweden
Digital Equipment Asia Pacific Pte. Ltd. Singapore
Digital Equipment (BCFI) AB Sweden
Digital Equipment B.V. Netherlands
Digital Equipment Betriebliche Altersversorgung G.m.b.H. Germany
Digital Equipment of Canada Limited/Digital Equipment
du Canada Limitee Canada
Digital Equipment Caribbean, Inc. Delaware
Digital Equipment Centre Technique (Europe) S.A.R.L. France
Digital Equipment Chile Limitada Chile
Digital Equipment China Incorporated Peoples Republic
of China
Digital Equipment China Ltd. Delaware
Digital Equipment do Brazil Ltda. Brazil
Digital Equipment Co. Limited United Kingdom
Digital Equipment Corporation A/S Norway
Digital Equipment Corporation A/S Denmark
Digital Equipment Corporation (Australia) Pty. Ltd. Australia
Digital Equipment Corporation (Consultancy) Limited States of Jersey
Digital Equipment Corporation (Thailand) Ltd. Thailand
Digital Equipment Deutschland (Holding) GmbH Germany
Digital Equipment Corporation Espana, S.A. Spain
Digital Equipment Osterreich Aktiengesellschaft Austria
Digital Equipment Corporation International Massachusetts
Digital Equipment Corporation International (Europe) Switzerland
Digital Equipment Corporation Japan Japan
Digital Equipment Corporation OY Finland
Digital Equipment Corporation (New Zealand) Limited New Zealand
AOZT Digital Equipment Corporation Russia
Digital Equipment Corporation Services-Europe S.A./N.V. Belgium
Digital Equipment (Cyprus) Ltd. Cyprus
Digital Equipment s.r.o. Czech Republic
Digital Equipment (DEC) Limited Israel
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Digital Equipment (DEC) Technical Center (Israel)
Limited Israel
Digital Equipment Distribution (Ireland) Limited Republic of Ireland
Digital Equipment Enterprises Espana, S.A. Spain
Digital Equipment Filipinas Incorporated Philippines
Digital Equipment Finance Corporation Delaware
Digital Equipment France France
Digital Equipment GmbH Germany
Digital Equipment Group B.V. Netherlands
Digital Equipment Gulf W.L.L. Bahrain
Digital Equipment Hellas S.A. Greece
Digital Equipment Hong Kong Limited Hong Kong
Digital Equipment (Hungary) Computing Technology Ltd. Hungary
*Digital Equipment (India) Ltd. India
Digital Equipment International B.V. Netherlands
Digital Equipment International Betriebliche
Altersversorgungsgesellschaft G.m.b.H. Germany
Digital Equipment International G.m.b.H. Germany
Digital Equipment International Limited Switzerland
Digital Equipment Ireland Limited Republic of Ireland
Digital Equipment Korea, Incorporated Korea
Digital Equipment (Malaysia) Sdn. Bhd. Malaysia
Digital Equipment Maroc S.A.R.L. Morocco
Digital Equipment de Mexico, S.A. de C.V. Mexico
Digital Equipment Portugal, Limitada Portugal
Digital Equipment PRC Limited Hong Kong
Digital Equipment Properties Limited United Kingdom
Digital Equipment Romania s.r.l. Romania
Digital Equipment S.A./N.V. Belgium
Digital System Services AB Sweden
Digital Equipment Slovakia s.r.o. Slovakia
Digital Equipment SME Limited United Kingdom
Digital Equipment S.p.a. Italy
Digital Equipment Scotland Limited United Kingdom
Digital Equipment Services, Inc. Delaware
Digital Equipment Singapore (PTE) Limited Singapore
Digital Equipment Corporation C.I.S. B.V. Netherlands
Digital Equipment (Thailand) Ltd. Thailand
Digital Equipment Turkiye A.S. Turkey
Digital Equipment de Venezuela (D.E.V.) C.A. Venezuela
Digital Growth, Inc. Massachusetts
Digital Incorporated Delaware
Digital International Sales Corporation Delaware
Digital Realty Corporation Delaware
Digital Receivables Financing Corporation Delaware
Digital Sales and Services South Africa (Pty.) Limited Republic of
South Africa
Digital Sociedade de Previdencia Privada Brazil
Computer Insurance Company Limited Bermuda
Serrata Consulting Limited Canada
SIPAC S.p.a. Italy
Societe Civile Immobiliere (SCI) Parc du Bois Briard France
*TracePoint Technology, Inc. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8) and related prospectuses of the Digital Equipment Corporation 1985
Restricted Stock Option Plan (No. 33-970), 1990 Equity Plan (No. 33-37631), 1990
Stock Option Plan for Nonemployee Directors (No. 33-37628), 1968 Employee Stock
Purchase Plan (No. 333-17049) and 1981 International Employee Stock Purchase
Plan (No. 333-17049), the 1995 Equity Plan (No. 33-64223), the 1995 Stock Option
Plan for Nonemployee Directors (No. 33-64223), and the Registration Statement on
Form S-3 (No. 33-51987) and related prospectuses, of our reports dated July 24,
1997 on our audits of the consolidated financial statements and financial
statement schedule of Digital Equipment Corporation as of June 28, 1997 and June
29, 1996, and for each of the three fiscal years in the period ended June 28,
1997, which reports are incorporated by reference or included in this Annual
Report on Form 10-K.
/s/Coopers & Lybrand L.L.P.
----------------------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
September 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINAANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DIGITAL EQUIPMENT CORPORATION FOR THE YEAR
ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL
REPORT ON FORM 10-K FOR THE PERIOD ENDED JUNE 28, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> JUN-28-1997
<EXCHANGE-RATE> 1
<CASH> 1,358,750
<SECURITIES> 1,160,265
<RECEIVABLES> 3,193,777
<ALLOWANCES> 263,763
<INVENTORY> 1,503,145
<CURRENT-ASSETS> 7,276,296
<PP&E> 4,868,548
<DEPRECIATION> 2,764,901
<TOTAL-ASSETS> 9,692,894
<CURRENT-LIABILITIES> 4,240,930
<BONDS> 743,440
0
4,000
<COMMON> 157,232
<OTHER-SE> 3,383,724
<TOTAL-LIABILITY-AND-EQUITY> 9,692,894
<SALES> 7,197,116
<TOTAL-REVENUES> 13,046,832
<CGS> 4,697,438
<TOTAL-COSTS> 8,725,128
<OTHER-EXPENSES> 4,191,472
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,381
<INCOME-PRETAX> 178,050
<INCOME-TAX> 37,175
<INCOME-CONTINUING> 140,875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 140,875
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0
</TABLE>
