<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the quarterly period ended December 28, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-5296
DIGITAL EQUIPMENT CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2226590
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
111 Powdermill Road, Maynard, Massachusetts 01754
(Address of principal executive offices) (Zip Code)
(508) 493-5111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. Number of shares of Common
Stock, par value $1, outstanding as of December 28, 1996: 157,263,714.
<PAGE> 2
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<CAPTION>
Three-Month Period Ended
--------------------------
December 28, December 30,
1996 1995
----------- ----------
REVENUES
<S> <C> <C>
Product sales ................................ $1,844,280 $2,346,879
Service revenues ............................. 1,513,467 1,604,498
---------- ----------
TOTAL OPERATING REVENUES ..................... 3,357,747 3,951,377
---------- ----------
COSTS AND EXPENSES
Cost of product sales ........................ 1,208,235 1,583,282
Service expense .............................. 1,045,788 1,079,753
Research and engineering expenses ............ 249,841 263,348
Selling, general and administrative expenses . 817,408 871,735
---------- ----------
Operating income ............................. 36,475 153,259
Other (income)/expense, net .................. (445) (17,036)
---------- ----------
INCOME BEFORE INCOME TAXES ................... 36,920 170,295
Provision for income taxes ................... 5,039 21,513
---------- ----------
NET INCOME ................................... 31,881 148,782
Dividend on preferred stock .................. 8,875 8,875
---------- ----------
NET INCOME APPLICABLE TO COMMON STOCK ........ $ 23,006 $ 139,907
========== ==========
NET INCOME APPLICABLE PER COMMON SHARE (1) ... $ 0.15 $ 0.91
========== ==========
- - ----------
<FN>
(1) Net income applicable per common share is based on the weighted average
number of common shares and common share equivalents outstanding during the
period: 156,229,565 for the three months ended December 28, 1996 and 154,280,589
for the three months ended December 30, 1995. See page 8 of this report.
</TABLE>
Cash dividends on common stock have never been paid by the Corporation.
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 3
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
<CAPTION>
Six-Month Period Ended
--------------------------
December 28, December 30,
1996 1995
----------- -----------
<S> <C> <C>
REVENUES
Product sales ....................................... $3,366,443 $ 4,165,538
Service revenues .................................... 2,902,945 3,056,959
---------- -----------
TOTAL OPERATING REVENUES ............................ 6,269,388 7,222,497
---------- -----------
COSTS AND EXPENSES
Cost of product sales ............................... 2,256,625 2,839,960
Service expense ..................................... 1,996,971 2,040,660
Research and engineering expenses ................... 507,485 519,780
Selling, general and administrative expenses ........ 1,549,583 1,606,169
---------- -----------
Operating income/(loss) ............................. (41,276) 215,928
Other (income)/expense, net ......................... (16,617) (11,144)
---------- -----------
INCOME/(LOSS) BEFORE INCOME TAXES ................... (24,659) 227,072
Provision for income taxes .......................... 9,341 30,119
---------- -----------
NET INCOME/(LOSS) ................................... (34,000) 196,953
Dividends on preferred stock ........................ 17,750 17,750
---------- -----------
NET INCOME/(LOSS) APPLICABLE TO COMMON STOCK ........ $ (51,750) $ 179,203
========== ===========
NET INCOME/(LOSS) APPLICABLE PER COMMON SHARE (1) ... $ (0.33) $ 1.17
========== ===========
- - ----------
<FN>
(1) Net loss applicable per common share is based only on the weighted
average number of common shares outstanding during the period: 154,930,296 for
the six months ended December 28, 1996. Net income applicable per common share
is based on the weighted average number of common shares and common share
equivalents outstanding during the period: 153,002,306 for the six months ended
December 30, 1995. See page 9 of this report.
</TABLE>
Cash dividends on common stock have never been paid by the Corporation.
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
December 28, June 29,
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash, cash equivalents and short-term investments ... $ 2,293,825 $ 2,039,158
Accounts receivable, net of allowances
of $178,821 and $182,033 ............................ 2,947,300 3,223,293
Inventories
Raw materials ....................................... 387,730 536,911
Work-in-process ..................................... 365,932 439,318
Finished goods ...................................... 767,083 844,582
----------- -----------
Total inventories ................................... 1,520,745 1,820,811
Prepaid expenses, deferred income taxes
and other current assets ............................ 334,888 336,836
----------- -----------
TOTAL CURRENT ASSETS ................................ 7,096,758 7,420,098
----------- -----------
Property, plant and equipment, at cost .............. 5,023,643 5,120,110
Less accumulated depreciation ....................... 2,847,547 2,897,190
----------- -----------
Net property, plant and equipment ................... 2,176,096 2,222,920
Other assets ........................................ 372,084 432,363
----------- -----------
TOTAL ASSETS ........................................ $ 9,644,938 $10,075,381
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
<CAPTION>
December 28, June 29,
1996 1996
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and current portion
of long-term debt .................................. $ 271,290 $ 17,896
Accounts payable ................................... 803,518 903,618
Income taxes payable ............................... 75,720 79,528
Salaries, wages and related items .................. 641,518 632,413
Deferred revenues and customer advances ............ 945,326 1,099,328
Accrued restructuring costs ........................ 496,462 619,416
Other current liabilities .......................... 863,127 879,434
---------- -----------
TOTAL CURRENT LIABILITIES .......................... 4,096,961 4,231,633
---------- -----------
Long-term debt ..................................... 749,514 999,131
Postretirement and other postemployment
benefits ........................................... 1,196,120 1,238,411
---------- -----------
TOTAL LIABILITIES .................................. 6,042,595 6,469,175
---------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value (liquidation
preference of $100.00 per share); authorized
25,000,000 shares; 4,000,000 shares of Series A
8-7/8% Cumulative Preferred Stock issued and
outstanding ........................................ 4,000 4,000
Common stock, $1.00 par value; authorized
450,000,000 shares; 157,263,714 and
155,504,284 shares issued and outstanding .......... 157,264 155,504
Additional paid-in capital ......................... 3,822,295 3,764,224
Retained deficit ................................... (381,216) (317,522)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY ......................... 3,602,343 3,606,206
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......... $9,644,938 $10,075,381
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<CAPTION>
Six-Month Period Ended
-----------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) .................................. $ (34,000) $ 196,953
Adjustments to reconcile net income/(loss) to
net cash from operating activities:
Depreciation ....................................... 196,477 197,569
Amortization ....................................... 28,506 32,953
(Gain)/loss on disposition and write-offs of
other assets ....................................... 46,254 (22,280)
Other adjustments to net income/(loss) ............. 32,374 (14,338)
(Increase)/decrease in accounts receivable ......... 275,993 (317,089)
(Increase)/decrease in inventories ................. 288,066 (44,051)
Decrease in prepaid expenses and other
current assets ..................................... 2,078 22,142
Decrease in accounts payable ....................... (100,100) (78,981)
Increase/(decrease) in taxes ....................... (2,959) 42,130
Increase/(decrease) in salaries, wages, benefits
and related items .................................. (33,186) 70,501
Decrease in deferred revenues and
customer advances .................................. (154,002) (196,557)
Decrease in accrued restructuring costs ............ (122,954) (200,202)
Increase/(decrease) in other current liabilities ... (15,514) 139,811
----------- -----------
Total adjustments .................................. 441,033 (368,392)
----------- -----------
Net cash flows from operating activities ........... 407,033 (171,439)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment ........ (190,147) (162,324)
Proceeds from the disposition of
property, plant and equipment ...................... 38,125 57,823
Purchases of short-term investments ................ (1,805,941) (78,209)
Maturities of short-term investments ............... 847,357 80,489
Additions to other assets .......................... (17,641) (34,676)
Proceeds from the disposition of other assets ...... 8,567 120,135
----------- -----------
Net cash flows from investing activities ........... (1,119,680) (16,762)
----------- -----------
Net cash flows from operating and
investing activities ............................... (712,647) (188,201)
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
DIGITAL EQUIPMENT CORPORATION
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
<CAPTION>
Six-Month Period Ended
-----------------------------
December 28, December 30,
1996 1995
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt ................. 5,673 --
Payments to retire debt ............................ (2,430) (6,623)
Purchase of treasury shares ........................ (57,279) --
Issuance of common and treasury shares, including
tax effects ........................................ 80,516 107,210
Dividends on preferred stock ....................... (17,750) (17,750)
---------- ----------
Net cash flows from financing activities ........... 8,730 82,837
---------- ----------
Net decrease in cash and cash equivalents .......... (703,917) (105,364)
Cash and cash equivalents at the
beginning of the year .............................. 1,791,754 1,531,849
---------- ----------
Cash and cash equivalents at end of period ......... $1,087,837 $1,426,485
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
DIGITAL EQUIPMENT CORPORATION
<TABLE>
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
<CAPTION>
Three-Month Period Ended
------------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Net income applicable to common and
common equivalent shares ...................... $ 23,006 $ 139,907
============ ============
Weighted average number of common shares
outstanding during the period ................. 155,141,671 151,334,362
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options ................. 1,087,894 2,946,227
------------ ------------
Total weighted average number of common
and common equivalent shares outstanding
during the period ............................. 156,229,565 154,280,589
============ ============
Net income applicable per common and common
equivalent share .............................. $ 0.15 $ 0.91
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
DIGITAL EQUIPMENT CORPORATION
<TABLE>
COMPUTATION OF NET INCOME/(LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
(Dollars in thousands except per share data)
<CAPTION>
Six-Month Period Ended
-------------------------------
December 28, December 30,
1996 1995
------------ ------------
<S> <C> <C>
Net income/(loss) applicable to common and
common equivalent shares ..................... $ (51,750) $ 179,203
============ ============
Weighted average number of common shares
outstanding during the period ................ 154,930,296 150,538,174
Common stock equivalents from application
of "treasury stock" method to unexercised
and outstanding stock options ................ -- 2,464,132
------------ ------------
Total weighted average number of common
and common equivalent shares outstanding
during the period ............................ 154,930,296 153,002,306
============ ============
Net income/(loss) applicable per common
and common equivalent share .................. $ (0.33) $ 1.17
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 10
DIGITAL EQUIPMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Significant Accounting Policies
Principles of consolidation: The accompanying unaudited financial statements as
of and for the three-month and six-month periods ended December 28, 1996 and
December 30, 1995 have been prepared on substantially the same basis as the
annual consolidated financial statements, reflecting all adjustments of a normal
recurring nature. In the opinion of management, the financial statements reflect
all adjustments necessary for a fair presentation of the results for those
periods and the financial condition at those dates. Certain prior year's amounts
have been reclassified to conform with the current year presentation.
Short-term investments: Investments with maturities greater than three months at
date of acquisition but within one year of the balance sheet date are classified
as short-term investments. Short-term investments are valued at amortized cost,
which approximates market.
<TABLE>
Cash, cash equivalents and short-term investments
<CAPTION>
- - ----------------------------------------------------------------------
December 28, June 29,
(in thousands) 1996 1996
- - ----------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents $1,087,837 $1,791,754
Short-term investments 1,205,988 247,404
- - ----------------------------------------------------------------------
Total cash, cash equivalents
and short-term investments $2,293,825 $2,039,158
- - ----------------------------------------------------------------------
Other (income)/expense,net:
<CAPTION>
Three-Month Period Ended Six-Month Period Ended
- - --------------------------------------------------------------------------------
December 28, December 30, December 28, December 30,
(in thousands) 1996 1995 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest (income) $(27,449) $(20,497) $(52,499) $(38,024)
Interest expense 21,604 25,741 42,769 49,160
Net (gain)/loss on divestments 5,400 (22,280) (6,887) (22,280)
- - --------------------------------------------------------------------------------
Other (income)/expense, net $ (445) $(17,036) $(16,617) $(11,144)
- - --------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
Note B - Restructuring Actions
During the first six months of fiscal 1997, the Corporation incurred costs of
$67 million for approximately 1,400 employee separations and $57 million for
facilities closures and related actions. Cash expenditures for restructuring
activities were $97 million for the first six months of fiscal 1997, net of
proceeds of $34 million from the sale of properties.
Note C - Litigation
Several purported class action lawsuits were filed against the Corporation
during the fourth quarter of fiscal 1994 alleging violations of the Federal
securities laws arising from alleged misrepresentations and omissions in
connection with the Corporation's issuance and sale of Series A 8-7/8%
Cumulative Preferred Stock and the Corporation's financial results for the
quarter ended April 2, 1994. During fiscal 1995, the lawsuits were consolidated
into three cases, which were pending before the United States District Court for
the District of Massachusetts. On August 8, 1995, the Massachusetts federal
court granted the defendants' motion to dismiss all three cases in their
entirety. On September 6, 1995, notices of appeal were filed in two of the
cases. 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.
Note D - Treasury Stock
During the first quarter of fiscal 1997, the Corporation purchased in the open
market 1.5 million shares of its common stock for an aggregate purchase price of
$57.3 million, or $38.19 per common share. During the second quarter of fiscal
1997, all the shares of common stock held in treasury were issued under the
Corporation's employee stock plans.
Note E - Non-Recurring Items
The net effect of the non-recurring items discussed below was immaterial to the
consolidated results of operations of the Corporation for the second quarter of
fiscal 1997.
During the second quarter of fiscal 1997, the Corporation amended its U.S.
postretirement medical plan, changing 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 in the second quarter of fiscal 1997.
Events and circumstances arising during the second quarter of fiscal 1997
indicated that the carrying value of certain intangible assets would not be
recoverable. Accordingly, unamortized balances of $40 million were written off
as a charge to operations.
At the end of the second quarter of fiscal 1997, the Corporation accrued a loss
of approximately $17 million associated with a pending divestment. Approximately
$12 million of the expected loss is included in cost of product sales. The
divestment is expected to be completed in the third quarter of fiscal 1997 and
does not represent a disposition of a significant line of business.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
REVENUES
Total operating revenues for the first six months of fiscal 1997 were $6.3
billion, down 13% from the comparable period last year. Total operating revenues
included product sales of $3.4 billion and service revenues of $2.9 billion.
Operating revenues from customers outside of the United States were $4.2 billion
and $4.7 billion, or 67% and 64% of total operating revenues for the first six
months of fiscal 1997 and 1996, respectively.
Total operating revenues for the second quarter of fiscal 1997 were $3.4
billion, down 15% from the same quarter last year. Total operating revenues
included product sales of $1.8 billion and service revenues of $1.5 billion.
Operating revenues from customers outside of the United States were $2.3 billion
and $2.6 billion, or 68% and 65% of total operating revenues for the second
quarter of fiscal 1997 and 1996, respectively.
The net effect of the translation of local currency revenues into U.S. dollars
was negative for the first six months and the second quarter of fiscal 1997
compared with the same periods last year.
<TABLE>
Revenue
(dollars in millions) Six-Month Period Ended Three-Month Period Ended
<CAPTION>
- - -------------------------------------------------------------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product sales $3,366 $4,165 $1,844 $2,347
% of total revenues 54% 58% 55% 59%
- - -------------------------------------------------------------------------------
Service revenues 2,903 3,057 1,514 1,604
% of total revenues 46% 42% 45% 41%
- - -------------------------------------------------------------------------------
Total revenues $6,269 $7,222 $3,358 $3,951
- - -------------------------------------------------------------------------------
</TABLE>
Product sales for the first six months and the second quarter of fiscal 1997
were down 19% and 21%, respectively, from the comparable periods last year. The
decline resulted in part from discontinuation of the retail personal computer
and certain component products lines, as well as a planned reduction in
inventories in distribution channels. While disruptions in the sales
organization in the first quarter of fiscal 1997 continued to contribute to the
decline in product sales, the organization was more stable in the second quarter
as the Corporation continued to implement changes intended to increase the
extent and effectiveness of account coverage and to achieve greater sales
productivity. To a lesser extent, product sales in the second quarter were
negatively affected by short-term supply constraints and as noted above, the
effects of currency rate movements.
For the first six months and second quarter of fiscal 1997, Alpha-based systems
revenues increased 2% and 1%, respectively. Alpha-based systems revenues
represented 31% and 33% of product sales for the first six months and second
quarter of fiscal 1997, respectively, up from 25% of product sales for the
comparable periods last year. During the first six months and second quarter of
fiscal 1997, an increase in revenues from Alpha-based servers was offset by a
decline in revenues from Alpha-based workstations. Revenues from Intel-based
personal computers represented 28% and 29% of product sales for the first six
months and the second quarter of fiscal 1997, unchanged from the comparable
periods last year. Revenues from the Corporation's other product businesses,
including VAX systems, storage subsystems, networks, software and other
component products were 41% and 38% of product sales for the first six months
and second quarter of fiscal 1997, respectively, compared with 47% and 46% for
the same periods of fiscal 1996.
12
<PAGE> 13
Service revenues for the first six months and the second quarter of fiscal 1997
were $2.9 billion and $1.5 billion, respectively, down from $3.1 billion and
$1.6 billion for the same periods last year. Decreased revenues from the Digital
products maintenance business were partially offset by increased revenues from
multivendor services.
<TABLE>
EXPENSES AND PROFIT MARGINS
Gross margin
(dollars in millions) Six-Month Period Ended Three-Month Period Ended
<CAPTION>
- - --------------------------------------------------------------------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Product sales gross margin $1,110 $1,326 $636 $764
% of related revenues 33% 32% 35% 33%
- - --------------------------------------------------------------------------------------
Service revenues gross margin $ 906 $1,016 $468 $525
% of related revenues 31% 33% 31% 33%
- - --------------------------------------------------------------------------------------
</TABLE>
Product gross margin was 33% and 35% of product sales for the first six months
and the second quarter of fiscal 1997, respectively, compared with 32% and 33%
for the comparable periods last year. The increase in product gross margin was
due principally to a greater proportion of revenues from sales of
higher-margin Alpha-based servers and a corresponding decline in revenues from
sales of lower-margin desktop products, as well as manufacturing efficiencies.
Service gross margin was 31% of service revenues for both the first six months
and the second quarter of fiscal 1997, compared with 33% for the comparable
periods last year. The decline in service gross margin was due principally to
the continued shift in the mix of maintenance service revenues toward
lower-margin multivendor service offerings.
<TABLE>
Operating expenses
(dollars in millions) Six-Month Period Ended Three-Month Period Ended
<CAPTION>
- - --------------------------------------------------------------------------------------
December 28, December 30, December 28, December 30,
1996 1995 1996 1995
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Research and engineering $ 507 $ 520 $250 $263
% of total revenues 8% 7% 7% 7%
- - --------------------------------------------------------------------------------------
Selling, general and administrative $1,550 $1,606 $817 $872
% of total revenues 25% 22% 24% 22%
- - --------------------------------------------------------------------------------------
</TABLE>
Research and engineering (R&E) expenses totaled $507 million and $250 million
for the first six months and the second quarter of fiscal 1997, respectively,
down from $520 million and $263 million for the same periods of fiscal 1996. The
decrease in R&E expenses was due principally to the Corporation's withdrawal
from certain non-strategic businesses and the elimination of related development
costs. 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 decreased 4% to $1.5 billion
for the first six months of fiscal 1997, compared with $1.6 billion for the
comparable period last year. For the second quarter of fiscal 1997, SG&A
expenses totaled $817 million, down 6% from $872 million for the second quarter
of fiscal 1996. The decline in SG&A expenses reflects the effect of
restructuring actions taken principally in the second half of fiscal 1996 and
the effects of divestments and reductions in discretionary spending, offset by
increased salaries and wages.
During the fourth quarter of fiscal 1996, the Corporation approved a
restructuring plan intended to increase sales productivity, further consolidate
manufacturing plants and distribution sites, improve
13
<PAGE> 14
service delivery and further reduce overhead in support areas. The Corporation
expects to meet the objectives of the plan and the total estimated costs of
planned restructuring actions is unchanged (see Note B).
Employee population decreased by 3,200 from the end of fiscal 1996 to
approximately 55,900, and by 1,100 from the end of the first quarter of fiscal
1997.
As noted above, the net effect of currency exchange rate movements on revenues
was negative in the first six months and the second quarter of fiscal 1997 when
compared with the first six months and the second quarter of fiscal 1996. This
effect was partially offset by the effects of currency exchange rate movements
on non-dollar denominated costs and by competitive responses to market
conditions resulting from currency fluctuations.
Net other income for the first six months of fiscal 1997 was $17 million,
compared with net other income of $11 million for the first six months of fiscal
1996. The increase reflects increased interest income resulting from
significantly higher cash and short-term investment balances and a decrease in
interest expense. Gains on divestments were $7 million and $22 million in the
first six months of fiscal 1997 and 1996, respectively. For the second quarter
of fiscal 1997, net other income was less than $1 million, compared with net
other income of $17 million for the same period last year due primarily to a
loss on divestments of $5 million in the second quarter of fiscal 1997 as
compared with a gain of $22 million in the same quarter last year (see Note A).
Income tax expense for the first six months and the second quarter of fiscal
1997 was $9 million and $5 million, respectively, compared with $30 million and
$22 million for the same periods of fiscal 1996. The reduction in income tax
expense in fiscal 1997 is attributable to lower profit levels. Income tax
expense reflects several factors, including incomes taxes provided for
profitable operations, benefits taken from net operating loss carryforwards and
an inability to recognize currently certain tax benefits from operating losses.
In October 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (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 effects on 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.
AVAILABILITY OF FUNDS TO SUPPORT CURRENT AND FUTURE OPERATIONS AND SPENDING
FOR OPERATIONS
Cash and short-term investments totaled $2.3 billion at the end of the second
quarter of fiscal 1997, up from $2.0 billion at the end of fiscal 1996.
Net cash generated from operating activities was $407 million for the first six
months of fiscal 1997, due principally to decreases in accounts receivable and
inventories, partially offset by decreases in accounts payable, deferred revenue
and accrued restructuring costs. Cash expenditures for restructuring activities
were $97 million for the first six months of fiscal 1997, net of proceeds of $34
million from the sale of properties. Future cash expenditures are estimated to
be between $325 million and $375 million for the remainder of fiscal 1997, and
between $125 million and $175 million in fiscal 1998 and beyond (see Note B).
14
<PAGE> 15
Net cash used for investing activities was $1.1 billion for the first six months
of fiscal 1997, due principally to short-term investment activities (see Note
A).
Net cash generated from financing activities was $9 million for the first six
months of fiscal 1997, due principally to the issuance of stock under the
Corporation's employee stock plans, offset by the open market purchase of the
Corporation's common stock and the payment of dividends on preferred stock (see
Note D). During the second quarter of 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.
The Corporation's need for, cost of and access to funds are dependent on future
operating results, as well as conditions external to the Corporation. The
Corporation historically has maintained a conservative capital structure, and
believes that its current cash position and its sources of and access to capital
are adequate to support current and future operations.
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 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 could adversely
affect future operating results.
- - -- The Corporation operates in a highly competitive environment and in a highly
competitive industry, which include 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.
15
<PAGE> 16
- - -- 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 14, 1996, the Corporation held its Annual Meeting of
Stockholders. At the meeting the stockholders elected three Class I Directors
for three-year terms. 122,836,326 votes were cast for nominees for Class I
Directors, 2,774,974 were withheld and there were no broker non-votes.
122,819,361 votes were cast for Frank P. Doyle, a nominee for Class I Director
and 2,791,939 votes were withheld. 122,836,326 votes were cast for Kathleen F.
Feldstein, a nominee for Class I Director and 2,774,974 votes were withheld.
122,546,540 votes were cast for Robert B. Palmer, a nominee for Class I Director
and 2,964,760 votes were withheld. At the meeting the stockholders also approved
an amendment to the Corporation's 1968 Employee Stock Purchase Plan ("ESPP") and
the Corporation's 1981 International Employee Stock Purchase Plan ("IESPP").
119,668,805 votes were cast for the proposal to amend the ESPP and 5,480,364
votes were cast against, with 462,131 abstentions and no broker non-votes;
120,356,200 votes were cast for the proposal to amend the IESPP and 4,784,696
votes were cast against, with 470,404 abstentions and no broker non-votes. The
stockholders also ratified the selection of Coopers & Lybrand L.L.P. as the
Corporation's auditors. 124,821,720 votes were cast for ratification and 431,751
were cast against, with 357,829 abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10. Digital Equipment Corporation Cash Account Pension Restoration Plan
27. Financial Data Schedule
(b) Reports on Form 8-K.
None.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGITAL EQUIPMENT CORPORATION
(Registrant)
By: /s/ Vincent J. Mullarkey
-----------------------------------------
Vincent J. Mullarkey
Vice President, Finance and Chief Financial
Officer (Duly Authorized Officer and Principal
Financial Officer)
February 10, 1997
18
<PAGE> 1
EXHIBIT 10
DIGITAL EQUIPMENT CORPORATION
CASH ACCOUNT PENSION RESTORATION PLAN
(formerly known as the Digital Equipment Corporation Restoration Pension Plan)
AS AMENDED AND IN EFFECT AS OF MARCH 1, 1996
<PAGE> 2
TABLE OF CONTENTS
ARTICLE 1 -- Introduction 1
Section 1.1 Definitions 1
Section 1.2 Background and Purpose 1
Section 1.3 Legal Status 1
Section 1.4 Effect of Amendment and Restatement 1
ARTICLE 2 -- Participation 3
Section 2.1 Participation 3
Section 2.2 Establishment of Restoration Account 3
ARTICLE 3 -- Credits and Adjustments to Restoration Accounts 4
Section 3.1 Opening Balance of Restoration Account 4
Section 3.2 Restoration Pay Credits for Plan Years beginning
after June 30, 1996 4
Section 3.2A Restoration Pay Credits for Plan Year ending June
30, 1996 4
Section 3.3 Special Adjustments to Restoration Accounts of
Appendix F Participants 4
Section 3.4 Special Credit to Restoration Accounts Based on
Stock Award 6
Section 3.5 Interest Credits 7
ARTICLE 4 -- Payments 8
Section 4.1 Source of Payments 8
Section 4.2 Vesting and Forfeiture 8
Section 4.3 Determination of Value of Payments to Participants 8
Section 4.4 Timing and Forms of Payments to Participants
Following Termination after February 28, 1997 9
Section 4.4A Timing and Form of Payments to a Participant
following Termination before March 1, 1997 11
Section 4.5 Payments after a Participant's Death 11
Section 4.6 No Adjustments after Payment is Determined 12
Section 4.7 No Assignment or Alienation 12
Section 4.8 Miscellaneous Payment Rules 12
ARTICLE 5 -- Administration 14
Section 5.1 Plan Administration and Interpretation 14
Section 5.2 Claims and Claims Review Procedure 14
Section 5.3 Indemnification 14
ARTICLE 6 -- Special Rules for Participating Subsidiaries 15
Section 6.1 Different Source of Payments 15
Section 6.2 Change in Subsidiary Status 15
<PAGE> 3
ARTICLE 7 -- Amendment and Termination 16
Section 7.1 Amendment or Termination 16
Section 7.2 Effect of Amendment or Termination 16
ARTICLE 8 -- Miscellaneous 17
Section 8.1 No Enlargement of Employee Rights 17
Section 8.2 Liability of the Company 17
Section 8.3 Corporate Successors 17
Section 8.4 Applicable Law and Construction 17
ARTICLE 9 -- Glossary 18
<PAGE> 4
ARTICLE 1 -- INTRODUCTION
SECTION 1.1 DEFINITIONS. Certain capitalized words used in this document
are defined in the glossary in Article 9. Other capitalized words used in this
document have the meanings provided by the glossary of the Qualified Plan.
SECTION 1.2 BACKGROUND AND PURPOSE. The Company maintains the Qualified
Plan, which is a pension plan qualified under Section 401(a) of the Code.
Section 415 of the Code limits the amount of benefits that may be paid from the
Qualified Plan annually to or in respect of a participant. Section 401(a)(17) of
the Code limits the amount of compensation that may be taken into account in
determining benefits (including benefits based on the Qualified Plan Accounts).
The purpose of this Plan is to provide deferred compensation and retirement
income, subject to the conditions set forth in the Plan, to the Employees for
whom benefits under the Qualified Plan are limited by Section 415 or 401(a)(17)
of the Code. In general (and subject to the specific terms of the Plan), the
benefit payable under this Plan with respect to an Employee is equal in value to
the amount by which that Employee's benefit under the Qualified Plan is reduced
because of the application of Section 415 of the Code and Section 401(a)(17) of
the Code.
This Plan was adopted by the Company effective as of May 1, 1992, and was
originally entitled the "Digital Equipment Corporation Restoration Pension
Plan." Effective as of March 1, 1996, the Plan is amended and restated, as
provided in this document, to reflect certain amendments made to the Qualified
Plan and to effect certain other changes. As part of this amendment and
restatement, the name of the Plan is changed to the "Digital Equipment
Corporation Cash Account Pension Restoration Plan."
SECTION 1.3 LEGAL STATUS. The Plan is not qualified under Section 401(a)
of the Code. The Plan is intended to provide for the deferral of income to the
termination of employment (or beyond) and to provide for retirement income, and
to that extent, is a "pension plan" within the meaning of Section 3 of ERISA,
which constitutes "a plan which is unfunded and is maintained . . . for the
purpose of providing deferred compensation to a select group of management or
highly compensated employees" as described in Sections 201(2), 301(a)(3), and
401(a)(1) of ERISA and 29 C.F.R. Section 2520.104-23.
SECTION 1.4 EFFECT OF AMENDMENT AND RESTATEMENT. The changes made by this
amendment and restatement of the Plan apply only with respect to those
Participants whose benefits under the Qualified Plan are determined by the
amendment and restatement of the Qualified Plan that is generally effective as
of March 1, 1996 and/or by subsequent amendments to the Qualified Plan. With
respect to those Participants, the benefits payable under this amendment and
restatement of the Plan are in lieu of (and not in addition to) benefits payable
under the terms of the Plan previously in effect.
1
<PAGE> 5
Persons who were Participants under the Plan immediately prior to March 1,
1996 but whose benefits under the Qualified Plan are not determined by the
amendment and restatement of the Plan generally effective as of March 1, 1996
(the "Pre-Restatement Participants") will continue to be Participants under the
Plan, to the extent provided by the terms of the Plan in effect prior to March
1, 1996 and applicable to them. The benefits (if any) payable under the Plan to
or in respect of each Pre-Restatement Participant will be determined under the
provisions of the Plan previously in effect and applicable by their terms to
that Participant. Notwithstanding any other provision of this Plan, no
Restoration Account will be established for any Pre-Restatement Participant.
2
<PAGE> 6
ARTICLE 2 -- PARTICIPATION
SECTION 2.1 PARTICIPATION. Each Employee who was a Participant under
the Plan as of February 29, 1996 will continue to be a Participant.
In addition, an Employee will become a Participant if he or she is a
"Member" under the Qualified Plan and either: (a) the amount of his or her
Restoration Pay for a Plan Year (or, for the Plan Year ending June 30, 1996, the
sum of his or her Restoration Pay plus his or her Qualified Plan Compensation)
exceeds the Annual Section 401(a)(17) Limit; or (b) the benefit paid to or in
respect of that Employee under the Qualified Plan is limited because of the
Section 415 Limit. Such an Employee will become a Participant in this Plan when
an amount is first credited to his or her Restoration Account in accordance with
Article 3 or, if later, when an amount is first paid to him or her under Article
4.
An Employee who becomes a Participant will continue to be a Participant
until the earliest of: (i) his or her death; (ii) the date that his or her
Restoration Account is reduced to zero (0) in accordance with the terms of the
Plan; or (iii) the date the last payment is made to him or her under the terms
of the Plan.
SECTION 2.2 ESTABLISHMENT OF RESTORATION ACCOUNT. The Company will
establish a book account (the "Restoration Account") under this Plan for each
Participant (other than a Pre-Restatement Participant referred to in Section
1.4) as of the later of March 1, 1996 or the date he or she first becomes a
Participant. The balance of the Restoration Account will thereafter be adjusted
as provided in this Plan. The sole purpose of a Participant's Restoration
Account is to calculate the amount payable to or in respect of that Participant
under this Plan.
3
<PAGE> 7
ARTICLE 3 -- CREDITS AND ADJUSTMENTS TO RESTORATION ACCOUNTS
SECTION 3.1 OPENING BALANCE OF RESTORATION ACCOUNT. As of March 1, 1996,
the Restoration Account of each Participant for whom an Opening Balance is
credited under the Qualified Plan will be credited with an amount equal to:
(a) the amount that would have been such Participant's Opening
Balance under the Qualified Plan (as determined under the provisions
of Appendix G of the Qualified Plan applicable to such Participant)
if the limitation on compensation set forth in Section 401(a)(17)
had not been taken into account; MINUS
(b) such Participant's Opening Balance under the Qualified Plan.
SECTION 3.2 RESTORATION PAY CREDITS FOR PLAN YEARS BEGINNING AFTER JUNE
30, 1996. This Section applies to Plan Years beginning after June 30, 1996. As
of each Pay Credit Date occurring after the date that a Participant's
Restoration Pay for the Plan Year first exceeds the Annual Section 401(a)(17)
Limit, that Participant's Restoration Account will be credited with a
Restoration Pay Credit equal to:
(a) four percent (4%) of the Participant's Credited Restoration Pay
for the Plan Year which has been paid through that Pay Credit Date;
MINUS
(b) the Restoration Pay Credits (if any) credited to the
Participant's Restoration Account under this Section as of each
prior Pay Credit Date within that same Plan Year.
SECTION 3.2A RESTORATION PAY CREDITS FOR PLAN YEAR ENDING JUNE 30, 1996.
This Section applies to the Plan Year ending June 30, 1996. As of each Pay
Credit Date occurring on or after the first date that the sum of a Participant's
Restoration Pay plus his Qualified Plan Compensation exceeds $150,000, that
Participant's Restoration Account will be credited with a Restoration Pay
Credit equal to:
(a) four percent (4%) of the Participant's Credited Restoration Pay
for the Plan Year which has been paid through that Pay Credit Date;
MINUS
(b) the Restoration Pay Credits (if any) credited to the
Participant's Restoration Account under this Section as of all prior
Pay Credit Dates within that Plan Year.
SECTION 3.3 SPECIAL ADJUSTMENTS TO RESTORATION ACCOUNTS OF APPENDIX F
PARTICIPANTS.
(a) If an Appendix F Participant has a Termination after February
29, 1996 and before April 1, 2001 (or dies during that period prior
to having a Termination), the Company will determine the following
amounts as of the Pay Credit Date coincident with or next following
that Termination (or death, if applicable):
4
<PAGE> 8
(i) the sum of the amounts standing to the credit
of that Appendix F Participant's Restoration Account and
Qualified Plan Account; and
(ii) the value of that Appendix F Participant's
benefit under Section F.2 (B) of the Qualified Plan,
(A) determined without taking into account
the limitations of Sections 401(a)(17) or 415 of the
Code, and
(B) expressed as a lump sum payment, based
on the actuarial assumptions that would be used for that
purpose under Appendix F.
As of that Pay Credit Date, the Participant's Restoration Account
shall be adjusted so that it is equal to the remainder of
(I) the greater of the
amount determined under paragraph (a)(i) or
(a)(ii) of this Section, MINUS
(II) the greater of
(x) the value
of that Appendix F Participant's benefit
under Section F.2 (B) of the Qualified Plan
(taking into account the limitations of
Sections 401(a)(17) and 415 of the Code)
expressed as a lump sum payment based on the
actuarial assumptions that would be used for
that purpose under Appendix F, AND
(y) the balance
of that Appendix F Participant's
Qualified Plan Account as of such Pay
Credit Date.
(b) With respect to each Appendix F Participant who does not have a
Termination or die prior to April 1, 2001, the Company will
determine the following amounts as of March 31, 2001:
(i) the sum of the amounts standing to the credit
of that Appendix F Participant's Restoration Account and
Qualified Plan Account; and
5
<PAGE> 9
(ii) the value of that Appendix F Participant's
benefit under Section F.2(B) of the Qualified Plan,
(A) determined without taking into
account the limitations of Sections 401(a)(17) and
415 of the Code; and
(B) expressed as a lump sum payment, based
on the actuarial assumptions that would be used for that
purpose under Appendix F.
As of March 31, 2001, the Appendix F Participant's Restoration
Account shall be adjusted so that it is equal to the remainder of
(I) the greater of the
amount determined under paragraph (b)(i) or
(b)(ii) of this Section, MINUS
(II) the greater of
(x) the value of that Appendix F
Participant's benefit under Section F.2
(B) of the Qualified Plan (taking into
account the limitations of Sections
401(a)(17) and 415 of the Code) expressed
as a lump sum payment based on the
actuarial assumptions that would be used
for that purpose under Appendix F, AND
(y) the balance
of that Appendix F Participant's Qualified
Plan Account as of March 31, 2001.
SECTION 3.4 SPECIAL CREDIT TO RESTORATION ACCOUNTS BASED ON STOCK AWARD.
If in any Plan Year a Participant has both Credited Restoration Pay and Stock
Award Income (as defined below), that Participant's Restoration Account will be
credited with an additional amount equal to four percent (4%) of the Stock Award
Income. This additional amount will be credited as of the earlier of the last
day of that Plan Year or the Payment Determination Date of that Participant (or
his or her Beneficiary, as applicable). For purposes of this Section "Stock
Award Income" means any amounts properly reportable as part of the Participant's
wages (on Internal Revenue Service Form W-2) as a result of vesting under
restricted stock awards received by the Participant under the Company's 1990
Equity Plan (and any successor thereto) and approved by the Compensation and
Stock Option Committee of the Board of Directors of the Company on August 14,
1995.
6
<PAGE> 10
SECTION 3.5 INTEREST CREDITS. As of each day on or after March 1, 1996,
each Restoration Account will be credited with an Interest Credit equal to the
balance of the Restoration Account immediately before that credit is made,
MULTIPLIED BY the Interest Crediting Rate for the Plan Year in which that day
falls.
7
<PAGE> 11
ARTICLE 4 -- PAYMENTS
SECTION 4.1 SOURCE OF PAYMENTS. Nothing in this Plan will be construed to
create a trust or to obligate the Company or any other person to segregate a
fund, to purchase an insurance contract, or in any other way to fund currently
the future payment of any benefits hereunder, nor will anything in this Plan be
construed to give any Participant or any other person rights to any specific
assets of the Company or of any other person. Any amounts which become payable
hereunder will be paid solely from the general assets of the Company (or, in the
circumstances described in Article 6, solely from the general assets of the
relevant Subsidiary), and no Participant or Beneficiary (or any other person)
shall have any right, other than the right of an unsecured general creditor,
against the Company (or the relevant Subsidiary) with respect to amounts payable
hereunder. Nothing in this Plan constitutes a guaranty by the Company or any
other entity or person that the assets of the Company (or the relevant
Subsidiary) will be sufficient to make any payment hereunder.
SECTION 4.2 Vesting and Forfeiture.
----------------------
(a) A Participant will be vested in his or her interest under this Plan
(and entitled to payment under this Plan) only if he or she is "Vested" in his
or her benefit under the Qualified Plan (as provided in Article 4 of the
Qualified Plan).
(b) A Participant will forfeit his or her rights and interest under this
Plan (and his or her Accounts will be reduced to zero (0)) if he or she forfeits
his or her benefits under the Qualified Plan.
(c) Further, and notwithstanding subsection (a) of this Section or any
other provision of this Plan, no payment will be made under this Plan to, or in
respect of, a Participant (and that Participant will be considered to have
forfeited all rights and interest under this Plan) if the Company determines,
reasonably and in good faith, that Participant (i) committed fraud in respect of
any matter involving the Company, (ii) breached any material contract with, or
other material obligation to, the Company, (iii) misappropriated any asset of
the Company, whether tangible or intangible, (iv) committed gross misconduct in
connection with his or her employment with the Company, or (v) engaged in
conduct that would constitute a felony or other serious crime adversely
affecting the operation or the reputation of the Company. In that event, that
Participant's Accounts will be reduced to zero (0).
SECTION 4.3 Determination of Value of Payments to Participants.
--------------------------------------------------
(a) If a Participant receives payment under this Plan as a lump sum, that
lump sum will have a dollar value equal to the balance of that Participant's
Restoration Account as of his or her Payment Determination Date.
(b) If a Participant receives payment under this Plan in the form of an
Annuity, that Annuity will have an Actuarially Equivalent Value to the balance
of the Participant's Restoration Account as of his or her Payment Determination
Date.
8
<PAGE> 12
(c) The following adjustments to the benefits payable to and in respect of
Participants (other than Participants whose Restoration Accounts have been
adjusted as provided in Section 3.3(a)) under subsection (a) and (b) of this
Section will be made to account for the limitations on benefits under the
Qualified Plan required by Section 415 of the Code, and increases in those
limitations. If any benefit is paid under the Qualified Plan to or in respect of
the Participant and that Qualified Plan payment must be reduced to comply with
Section 415 of the Code, the amount of that reduction (i) will be credited to
the Restoration Account of the Participant as of the date of the payment from
the Qualified Plan or, (ii) if the Participant has no Restoration Account at
that time, will be paid by the Company to the Participant (or the person
entitled to payment of the benefit in respect of the Participant under the
Qualified Plan) within a reasonable time thereafter.
SECTION 4.4 TIMING AND FORMS OF PAYMENTS TO PARTICIPANTS FOLLOWING
TERMINATION AFTER FEBRUARY 28, 1997. The provisions of this Section shall govern
the timing and form of payments to a Participant if his or her Termination
occurs after February 28, 1997.
(a) GENERAL RULES. A Participant may elect to have his or her benefits
under the Plan paid to him or her following his or her Termination as an
Immediate Lump Sum, as a Deferred Lump Sum, or as an Annuity, subject to the
conditions set forth in this Section. Such an election will be valid only if it
is filed with and received by the Company (in a form and manner that is
consistent with procedures prescribed by the Company) at least twelve (12)
months prior to the Participant's Termination. Once it has become valid, such an
election shall be revoked only upon the date (if any) that a subsequently filed
election of the same Participant becomes valid. On the first anniversary of the
date it is received by the Company, that subsequent election will become valid,
and will revoke and supersede any election of that Participant that had
previously become valid, if that Participant has not had a Termination prior to
that first anniversary.
(b) IMMEDIATE LUMP SUM. If, at the time of a Participant's Termination, he
or she has in effect a valid election for an Immediate Lump Sum payment, the
amount standing to the credit of his or her Restoration Account will be
determined within a reasonable time following that Termination (his or her
"Payment Determination Date") and will be paid to the Participant within a
reasonable time thereafter.
(c) DEFERRED LUMP SUM. If, at the time of a Participant's Termination he
or she has in effect a valid election for a Deferred Lump Sum, the amount
standing to the credit of his or her Restoration Account will be determined as
of the first January 31 following the close of the calendar year in which that
Termination occurs (his or her "Payment
9
<PAGE> 13
Determination Date") and will be paid to the Participant within a reasonable
time thereafter.
(d) ANNUITY OPTIONS. A Participant's election for payment in the form of
an Annuity will be valid only if the generally applicable conditions described
in subsection (a) above are satisfied AND as of the end of the calendar quarter
during which the Participant's Termination occurs, the balance of his or her
Restoration Account exceeds $100,000. If as of his or her Termination, a
Participant has in effect an otherwise valid election of an Annuity form but the
balance of his or her Restoration Account does not exceed $100,000 as of the end
of the calendar quarter during which such Participant's Termination occurs, such
Participant's benefit under the Plan will be paid as a Deferred Lump Sum as
described in paragraph (c).
If a Participant is to be paid in the form of an Annuity, the amount
standing to the credit of his Restoration Account will be determined as of a
date within a reasonable time after his Termination (his or her "Payment
Determination Date"), and payment will commence within a reasonable time
thereafter. The Annuity payable will have the Actuarially Equivalent Value to
the balance of the Participant's Restoration Account determined as of his or her
Payment Determination Date.
The forms of Annuity payment available under the Plan are as follows:
(i) Single Life Income Annuity. This form is an annuity
providing monthly payments for the life of the Participant
only, with the final payment made for the calendar month in
which the Participant dies. No payment is made to a
Beneficiary under this form.
(ii) Single Life Income Annuity with Full Cash
Refund. This form provides monthly annuity payments for
the life of the Participant, with a final payment to the
Participant made for the calendar month in which the
Participant dies. If
(A) the sum of the payments made to the
Participant during his or her life under this option,
IS LESS THAN
(B) the balance of the Participant's
Restoration Account determined as of the Payment
Determination Date,
the Plan will make a lump sum payment to the Beneficiary
designated by the Participant (in his or her election of this
optional form) as soon as practicable after the Participant's
death, equal to the difference between the amount described in
paragraph (B) above MINUS the amount described in paragraph
(A) above. The Company may, in its discretion, adopt
procedures under which a Participant may designate a different
Beneficiary for payment under this option, if the Beneficiary
dies before the Participant. If there is no valid Beneficiary
designation in effect with respect to the Participant at the
time of his or her death, the amount (if any) otherwise
payable to the Beneficiary of the Participant after the
Participant's death
10
<PAGE> 14
will instead be paid to all members (in equal shares) of the
first class in which there are living members on the date of
the Participant's death, in the following order of priority:
(I) the Participant's spouse; (II) the Participant's children;
(III) the Participant's parents; (IV) the Participant's
estate.
(iii) Joint with Survivor Income Annuity. This optional form
provides a monthly annuity for the life of the Participant
(with the final payment for the calendar month of the
Participant's death) and, beginning with the calendar month
following the month of the Participant's death, a survivor
income annuity for the life of the Beneficiary designated by
the Participant in his or her election of this optional form.
The amount of the monthly survivor annuity payment for the
life of the Beneficiary will be fifty percent (50%), sixty-six
and two thirds percent (66-2/3%), or one hundred percent
(100%) of the amount of the monthly payment made to the
Participant during his or her life under the applicable
option, as selected by the Participant in his or her election
of this option. If the Beneficiary dies before the Participant
dies, no survivor benefit is paid under this optional form. A
Participant may not designate a different Beneficiary if the
designated Beneficiary dies after the Payment Determination
Date and before the Participant's death.
(e) NO VALID ELECTION. If at the time of a Participant's Termination there
is no valid election in effect under this Section, that Participant's benefit
will be paid as a Deferred Lump Sum, as described in paragraph (c).
SECTION 4.4A TIMING AND FORM OF PAYMENTS TO A PARTICIPANT FOLLOWING
TERMINATION BEFORE MARCH 1, 1997 . The provisions of this Section shall govern
the timing and form of payments to a Participant if his or her Termination
occurs before March 1, 1997.
(a) The benefit payable under this Plan to a Participant shall be paid in
the same form under which that Participant's Qualified Plan benefit is payable.
The Participant's valid election under the Qualified Plan of any optional form
of payment of his or her benefit under the Qualified Plan shall also be
applicable to the payment of benefits to the Participant under this Plan.
(b) Payment of the benefit to such a Participant under this Plan shall
commence as of the same date payment of the Participant's benefit under the
Qualified Plan is to commence. Any valid election under the Qualified Plan by
the Participant with respect to the commencement of the payment of his or her
benefit under the Qualified Plan shall also be applicable to the commencement of
the payment of his or her benefit under this Plan.
SECTION 4.5 Payments after a Participant's Death
------------------------------------
(a) If a Participant dies after payment to him or her under this Plan is
made or commences, payment will be made to a Beneficiary of that Participant
only if, and to the extent that, payment is to be made to a Beneficiary under
the Annuity option applicable to that Participant.
11
<PAGE> 15
(b) If a Participant dies before payment to him or her under this Plan is
paid or commences, the value of the Participant's Restoration Account will be
determined as of the January 31 next following the close of the calendar year in
which the Participant dies (his or her "Payment Determination Date") and paid to
the Participant's Beneficiary as a lump sum within a reasonable time thereafter.
For purposes of this paragraph (b), a Participant's Beneficiary is the person
entitled to receive a death benefit in respect of that Participant under the
Qualified Plan or, in the case of a Participant for whom no death benefits are
payable under the Qualified Plan, the person who would have been entitled under
the Qualified Plan to receive a death benefit in respect of that Participant (if
one had been payable) if the Participant died with no valid beneficiary
designation in effect at the time of his or her death.
SECTION 4.6 NO ADJUSTMENTS AFTER PAYMENT IS DETERMINED. Whenever the
amount of a payment is to be determined under this Article (or any other
provision of the Plan) as of a Payment Determination Date and paid after that
date, that amount will be determined as of the close of business as of that
Payment Determination Date and no adjustment will be made to the amount to be
paid for the period following the date as of which the amount is determined.
SECTION 4.7 NO ASSIGNMENT OR ALIENATION. Except to the extent otherwise
required by applicable law, amounts payable under this Plan will not be subject
to alienation, assignment, garnishment, execution, or levy of any kind, and any
attempt to cause any such amount to be so subjected shall be null, void, and of
no effect and will not be recognized.
SECTION 4.8 Miscellaneous Payment Rules
---------------------------
(a) If any person entitled to a payment under the Plan is deemed by the
Company to be incapable of personally receiving and giving a valid receipt for
such payment, then, unless and until claim therefor shall have been made by a
duly appointed guardian or other legal representative of such person, the
Company may provide for such payment or any part thereof to be made to any other
person or institution then contributing toward or providing for the care and
maintenance of such person. Any such payment shall be a payment for the account
of such person and a complete discharge of any liability of the Company and the
Plan therefor.
(b) All amounts to be paid hereunder may be paid in cash or cash
equivalents (including, without limitation, a check drawn on a bank account of
the Company).
(c) Notwithstanding any provision hereof, there may be deducted and
withheld from any payment to be made hereunder such taxes (including, without
limitation, local, state, or federal income taxes or employment taxes (such as
FICA taxes) or other amounts which the Company reasonably determines should be
deducted and withheld to comply with applicable laws, regulations, orders, or
rulings of any court, agency, or other governmental organization.
12
<PAGE> 16
(d) It is the responsibility of the Participants and the Beneficiaries to
keep the Company informed of their current addresses. The Company will not be
obligated to search for the whereabouts of any person and no payment will be
required to be made under this Plan where the Company has not been informed of
the current address of the Participant or Beneficiary to whom payment would
otherwise be made. If the current address of a Participant or Beneficiary is not
known by the Company at the time payment is to be made, the Company may in its
sole discretion decide to make payment hereunder as if that person had died (in
which case, the obligation to make such payment to such person shall be
considered discharged) or decide to refrain from making any payment at that
time.
(e) As of the date that a payment is made, or is begun to be made, to a
Participant (or his or her Beneficiary) under this Plan, the Restoration Account
of that Participant will be reduced to zero (0).
13
<PAGE> 17
ARTICLE 5 -- ADMINISTRATION
SECTION 5.1 PLAN ADMINISTRATION AND INTERPRETATION. The Company will
have complete control over the administration of the Plan, including authority
to interpret the Plan and to determine, in its sole discretion, the rights and
benefits and all claims, demands, and actions arising out of the provisions of
the Plan of any Participant, Beneficiary, or other person having or claiming to
have any interest under the Plan. The Company's interpretations of, and
determinations under, the Plan shall be conclusive and binding on all parties.
The Company shall have the authority to establish such reasonable rules and
procedures regarding the administration of the Plan as it deems necessary or
appropriate. The Company's authority and responsibility with respect to the
administration of the Plan may be exercised and discharged by the appropriate
Employees of the Company or may be delegated by the Company to persons other
than Employees.
In performing its functions under this Plan, the Company may engage
actuaries and other professionals, and may rely on their advice and conclusions
in making its interpretations of, and determinations under, the Plan.
SECTION 5.2 CLAIMS AND CLAIMS REVIEW PROCEDURE. Claims for payment (and
the denial, appeal, and review of claims) under this Plan will be subject to
such reasonable procedures as are established by the Company.
SECTION 5.3 INDEMNIFICATION. The Company shall indemnify and hold
harmless each Employee who has responsibility in connection with the
administration of the Plan from any and all claims, losses, damages, expenses
(including reasonable counsel fees approved by the Company), and liability
(including any reasonable amounts paid in settlement with the Company's
approval) arising from any act or omission (or alleged act or omission) by such
Employee in connection with the administration of the Plan, except when the same
is judicially determined to be due to the willful misconduct of such Employee.
14
<PAGE> 18
ARTICLE 6 -- SPECIAL RULES FOR PARTICIPATING SUBSIDIARIES
SECTION 6.1 DIFFERENT SOURCE OF PAYMENTS. Except as otherwise
specifically agreed to buy the Company in writing, payments under this Plan from
that portion of a Participant's Account which is attributable to his or her
employment with a Participating Subsidiary will be paid solely from the general
assets of that Participating Subsidiary (and not from the assets of the
Company). The portion of a Participant's Restoration Account which is
attributable to his or her employment with a Participating Subsidiary will be
determined under a reasonable method established by the Company.
SECTION 6.2 CHANGE IN SUBSIDIARY STATUS. If an entity (a "Former
Subsidiary") that was at any time a Participating Subsidiary ceases to be a
Subsidiary, the Participants who are employees of that Former Subsidiary at that
time shall not be considered to have a Termination until their employment with
the Former Subsidiary (and its affiliated companies, if any) terminates, unless
the Company in its sole discretion determines that the Former Subsidiary's
ceasing to be a Subsidiary should be treated as a Termination under this Plan
with respect to those Participants. Such a determination by the Company may, in
the Company's sole discretion, apply to all or any portion of the amounts
standing to the credit of such Participants' Restoration Accounts at that time.
Any determination by the Company under this Section with respect to any Former
Subsidiary will have no effect on the Company's determination with respect to
any other Former Subsidiary.
15
<PAGE> 19
ARTICLE 7 -- AMENDMENT AND TERMINATION
SECTION 7.1 AMENDMENT OR TERMINATION. The Company may amend or
terminate the Plan under the procedures provided for in the vote of the Board of
Directors of the Company dated August 25, 1994.
SECTION 7.2 EFFECT OF AMENDMENT OR TERMINATION. Any amendment or
termination shall be effective as of the date of the Company's action to adopt
the amendment or termination, unless the Company specifies another effective
date occurring after the date of such action. No amendment or termination may
reduce the amount then standing to the credit of any Participant's Restoration
Account or change the timing or form of distribution of any Participant's
Restoration Account balance, determined as of the date the amendment or
termination is adopted, without the written consent of that Participant.
However, any amendment or termination may (without limitation) change the method
for determining amounts to be credited to Restoration Accounts (or eliminate
such credits) for Plan Years ending after the effective date of the amendment or
termination, or change the method of adjusting Restoration Accounts under
Article 3 for periods after the effective date of the amendment.
16
<PAGE> 20
ARTICLE 8 -- MISCELLANEOUS
SECTION 8.1 NO ENLARGEMENT OF EMPLOYEE RIGHTS. No Participant or
Beneficiary will have any right to a benefit under this Plan except in
accordance with the terms of the Plan. Establishment of the Plan will not be
construed to give any Participant the right to be retained in the service of the
Company.
SECTION 8.2 LIABILITY OF THE COMPANY. Subject to obligations of the
Company (or the Participating Subsidiaries) to pay the amounts credited to the
Participants' Accounts, as and to the extent specifically provided in this Plan,
and the indemnification provided by the Company under Section 5.3, neither the
Company, the Participating Subsidiaries, nor any person acting in behalf of the
Company (or the Participating Subsidiaries) shall be liable to any Participant
or any other person for any act performed or the failure to perform any act with
respect to the Plan.
SECTION 8.3 CORPORATE SUCCESSORS. The Plan shall not be automatically
terminated by a transfer or sale of assets of the Company or by the merger or
acquisition or consolidation of the Company into or with any other corporation
or other entity, but the Plan shall be continued after such sale, merger, or
consolidation only if and to the extent that the transferee, purchaser, or
successor entity agrees to continue the Plan. In the event that the Plan is not
continued by the transferee, purchaser, or successor entity, the Plan will then
terminate subject to the provisions of Section 7.2 hereof.
SECTION 8.4 Applicable Law and Construction:
-------------------------------
(a) Except to the extent preempted by federal law, the provisions of the
Plan shall be interpreted in accordance with the laws of the Commonwealth of
Massachusetts.
(b) The titles of Articles and Sections are for reference only. In the
event of a conflict between a title and the content of an Article or Section,
the content shall control. Whenever used, the masculine pronoun shall include
the feminine pronoun and the singular number shall include the plural number
unless the context of the Plan requires otherwise.
17
<PAGE> 21
ARTICLE 9 -- GLOSSARY
Whenever used in this Plan, the following terms shall have the following
meanings, unless the context clearly requires a different meaning:
"ACTUARIALLY EQUIVALENT VALUE" has the meaning provided in the Qualified Plan.
"ANNUAL SECTION 401(a)(17) LIMIT," for any Plan Year, means the annual limit on
compensation that may be taken into account under the Qualified Plan as required
by Section 401(a)(17) of the Code, for that Plan Year. The Annual Section
401(a)(17) Limit is determined without reference to any proration of the annual
limit that may be required under Treasury Regulation [section]1.401(a)(17).
"ANNUITY" means one of the forms of benefit payments described as Annuity
options under Article 4.
"APPENDIX F PARTICIPANT" means a Participant who is also an "Appendix F Member"
within the meaning of the Qualified Plan.
"BENEFICIARY" means the person who is to receive benefits after a Participant's
death, as determined under the applicable rules of Article 4.
"CODE" means the Internal Revenue Code of 1986, as amended, and any successor
code.
"COMPANY" means Digital Equipment Corporation.
"CREDITED RESTORATION PAY" with respect to a Participant for a Plan Year
beginning after June 30, 1996 means that portion of that Participant's
Restoration Pay for such Plan Year which exceeds the Annual Section 401(a)(17)
Limit applicable for that Plan Year. "Credited Restoration Pay" with respect to
a Participant for the Plan Year ending June 30, 1996 means that portion of the
Restoration Pay paid to such Participant for such Plan Year after the sum of
that Participant's Restoration Pay for such Plan Year and Qualified Plan
Compensation for such Plan Year equals at least $150,000.
"EMPLOYEE" means any person who is an employee of the Company or an employee
of a Participating Subsidiary.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"INTEREST CREDITING RATE" has the meaning provided by the Qualified Plan.
"OPENING BALANCE" has the meaning provided in the Qualified Plan.
"PARTICIPANT" means a person described in Section 2.1.
18
<PAGE> 22
"PARTICIPATING SUBSIDIARY" means any Subsidiary which has adopted the Qualified
Plan and which adopts this Plan with the permission of the Company.
"PAY CREDIT DATE" has the meaning provided by the Qualified Plan. There are no
Pay Credit Dates prior to March 31, 1996.
"PAYMENT DETERMINATION DATE" means the date as of which payment of benefits
under this Plan is made or commences.
"PLAN" means this Digital Equipment Corporation Cash Account Pension Restoration
Plan, as set forth in this document, and as amended from time to time hereafter.
Prior to this amendment and restatement, the Plan was named the "Digital
Equipment Corporation Restoration Pension Plan."
"PLAN YEAR" means the twelve (12) consecutive month period beginning July 1 and
ending on the next following June 30.
"PRIOR BENEFIT FORMULA" has the meaning provided in the Qualified Plan.
"QUALIFIED PLAN" means the Digital Equipment Corporation Cash Account Pension
Plan, as amended from time to time.
"QUALIFIED PLAN ACCOUNT" means the account maintained under the Qualified Plan
for purposes of calculating benefits payable under the Qualified Plan.
"QUALIFIED PLAN COMPENSATION" of a Participant means his or her "Compensation"
within the meaning of the Qualified Plan for the period July 1, 1995 through
February 29, 1996 which is taken into account for purposes of determining the
benefits accrued by the Participant under the Prior Benefit Formula, as provided
in Section 3.10 of the Qualified Plan and the other applicable provisions of the
Qualified Plan.
"QUALIFIED PLAN MEMBER" means an Eligible Employee who is a member under the
Qualified Plan.
"RESTORATION ACCOUNT" means the account so designated and established under
Section 2.2 on behalf of a Participant.
"RESTORATION PAY" of a Participant means that Participant's "Pay" as determined
under the Qualified Plan (including, without limit, Sections 3.5 and 3.6A of the
Qualified Plan), except that for purposes of this Plan a Participant's Pay shall
be determined without regard to the Annual Section 401(a)(17) Limit.
"SECTION 415 LIMIT" means the limit on benefits payable by a defined plan under
Section 415 of the Code.
"SUBSIDIARY" means any entity in which the Company owns (directly or indirectly)
a greater than fifty percent (50%) voting interest or economic interest.
19
<PAGE> 23
"TERMINATION" means a Participant's termination of employment (for reasons other
than death) with the Company and all Subsidiaries.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DIGITAL EQUIPMENT CORPORATION FOR THE
SIX MONTHS ENDED DECEMBER 28, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT FOR THE PERIOD ENDED DECEMBER 28, 1996
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-28-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> DEC-28-1996
<EXCHANGE-RATE> 1
<CASH> 1,087,837
<SECURITIES> 1,205,988
<RECEIVABLES> 3,126,121
<ALLOWANCES> 178,821
<INVENTORY> 1,520,745
<CURRENT-ASSETS> 7,096,758
<PP&E> 5,023,643
<DEPRECIATION> 2,847,547
<TOTAL-ASSETS> 9,644,938
<CURRENT-LIABILITIES> 4,096,961
<BONDS> 749,514
0
4,000
<COMMON> 157,264
<OTHER-SE> 3,441,079
<TOTAL-LIABILITY-AND-EQUITY> 9,644,938
<SALES> 3,366,443
<TOTAL-REVENUES> 6,269,388
<CGS> 2,256,625
<TOTAL-COSTS> 4,253,596
<OTHER-EXPENSES> 2,057,068
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,769
<INCOME-PRETAX> (24,659)
<INCOME-TAX> 9,341
<INCOME-CONTINUING> (34,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (34,000)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> 0
</TABLE>
